Read Securities Offering Reform - Permissible Use of Free Writing Prospectuses text version

December 1, 2005

Securities Offering Reform

Effective December 1, 2005 Permissible Use of Free Writing Prospectuses1

Questions & Answers

Q. Why is the SEC promulgating this Reform?

A. The SEC stated in the Final Rules that it believes "that written communications during the offering process are unnecessarily restricted, even with the substantial relaxations in restrictions on communications resulting from [the other Reforms]." In addition, the SEC indicated that it intended to resolve the tension that previously existed between ongoing issuer communications and the Securities Act in favor of ongoing communications. As a result, the Final Rules permit what has been termed as "free writing prospectuses" to be used after a registration statement has been filed and if certain other conditions are satisfied without violating the "gun-jumping"2 provisions of Section 5 of the Securities Act3. Note, however, that the concept of gun-jumping has only been substantially reduced, if not eliminated as a practical matter, with respect to WKSIs; it continues to apply, with all its ramifications, with respect to every other issuer of securities, although the parameters relating to the concept have been more clearly defined pursuant to the Final Rules.

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On November 30, 2005, the SEC issued an FAQ relating to free writing prospectuses, which can be found by clicking here. See Annex A hereto for a list of commonly used defined terms. The following discussion does not address specific issues and concerns relating to asset-backed issuers, including the availability or applicability of this Reform to such issuers. "Gun-jumping" is generally the use or dissemination of information of an offering of securities or other conduct in the pre- and post-filing period resulting in the conditioning of the public market or the stimulation of interest in the subject securities to be offered, in each case, where a registration statement has not been filed with the SEC or a prospectus meeting the requirements of the Securities Act is not being used. Section 5 is the principal statutory provisions regulating the offer and sale of securities. There are three principal components of Section 5: (1) restrictions on the sale and delivery of securities that have not been registered; (2) restrictions on the offer to sell or offer to buy securities unless a registration statement has been filed with the SEC; and (3) requirements as to the content of a prospectus, which is contained in a registration statement, relating to any security, including the sale of such security.

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2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

Where can the provisions relating to this Reform be found?

A. The principal provisions relating to this Reform are set forth in the following new rules under the Securities Act: new Rule 163 (entitled Exemption from section 5(c) of the Act for certain communications by or on behalf of well-known seasoned issuers); new Rule 164 (entitled Post-filing free writing prospectuses in connection with certain registered offerings); and new Rule 433 (entitled Conditions to permissible post-filing free writing prospectuses). While not exclusive, the following provisions are also relevant for the implementation and operation of this Reform: amended Rule 408 (entitled Additional information); and amended Rule 418 (entitled Supplemental information). How these rules operate to implement the Reform depend on two aspects: (i) the status of the issuer and (ii) the timing of the communication. Q. What is a free writing prospectus and how is it defined?

A. Generally, a free writing prospectus is written sales literature relating to an offering of a security that is made outside a prospectus meeting the statutory requirements of the Securities Act, or what is commonly referred to as a statutory prospectus.4 There are three basic elements to a free writing prospectus: (i) it embodies an "offer" as defined in the Securities Act, (ii) it is a

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As noted, a "statutory prospectus" is a prospectus satisfying the requirements of the Securities Act. In this discussion, we also refer to a "preliminary statutory prospectus", which is a prospectus used prior to the effective date of a registration statement that satisfies the requirements of the Securities Act for use of such a prospectus during that period. A "final statutory prospectus" is a prospectus used after the effective date of a registration statement that satisfies the requirements of the Securities Act for use of such a prospectus during that period.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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written communication as defined under the Securities Act, and (iii) it is not a statutory prospectus. Specifically, the Final Rules define a free writing prospectus as "any written communication ... that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed (or, in the case of a well-known seasoned issuer, whether or not such registration statement is filed) and is made by means other than [a statutory prospectus or another written communication specifically excepted from this definition]." "Written communication" is, in turn, defined as "any communication that is written, printed, a radio or television broadcast, or a graphic communication." "Graphic communication" is, in turn, defined as "all forms of electronic media, including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voicemail systems, computers, computer networks and other forms of computer data compilation." However, "graphic communication" does not include "a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted through graphic means."5 See Annex B hereto for a chart setting forth examples of oral and written communications and their classification under the Securities Act. Determining whether a particular communication constitutes a free writing prospectus will continue to be based on the facts and circumstances surrounding such communication.6

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Practical Implication: Without this carve-out, a live, in-person road show, where slides or handouts are used, and a live, real-time webcast or video conference road show, where slides or other graphics are used, would each be considered a written communication, giving rise to possible filing, record retention and legend requirements. As a result, this carve-out is necessary in order to avoid disrupting current market practice with respect to the conduct of road shows. The SEC notes that while the definition is broad, it is not intended to cover every communication relating to an offering of securities. By way of non-exclusive example, the SEC states that a "newspaper article about an initial public offering that is based on [a] filed registration statement, on a press release that is filed with or furnished to [the SEC], on a filed free writing prospectus, or on filed issuer information where the issuer and other offering participants have refused to comment and not otherwise been involved, would not be categorized as an offer under the gun jumping provisions."

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2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

How were free writing prospectuses used prior to the promulgation of the Final Rules?

A. Under prior law, notwithstanding the status of any particular issuer, free writing prospectuses were permitted to be used only (i) after effectiveness of a registration statement, and (ii) if accompanied or preceded by a final statutory prospectus. In addition, the free writing prospectus had to contain information that was comparable and consistent with information set forth in the corresponding statutory prospectus. Q. What are the principal changes to the permissible use of free writing prospectuses under the Final Rules?

A. Following the effective date of the Final Rules, free writing prospectuses can continue to be used as they were used under prior law. The two principal changes to the permissible use of free writing prospectuses under the Final Rules are: 1. If the relevant conditions are satisfied, free writing prospectuses can be used prior to the effective date of a registration statement in addition to a preliminary statutory prospectus; and If the relevant conditions are satisfied, free writing prospectuses can be used by certain issuers without being accompanied or preceded by a statutory prospectus.

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Q.

How will the use of a free writing prospectus operate under the Final Rules in light of the requirements of Section 5 of the Securities Act? 7

A. The Final Rules do not create an exemption from Section 5 for the use of a free writing prospectus. Instead, the Final Rules provide that if the specified conditions are met for using a free writing prospectus under the Final Rules, then the free writing prospectus will be deemed to satisfy the prospectus requirements of Section 5. However, gun-jumping continues to remain a significant concern for any issuer or offering participant prior to and during the registration process.

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Please note that a Section 5 violation may result in a requirement to establish a contingency reserve for the full amount of the offering as a result of the rescission offer that will remain outstanding for one year following the consummation of the offering.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

Who can use free writing prospectuses under this Reform?

A. Subject to certain exceptions, all issuers and other offering participants may use free writing prospectuses. However, depending on the category into which such issuers may fall, various conditions will apply to the use of free writing prospectuses. Issuers that will not be eligible to use free writing prospectuses under this Reform include: An "ineligible issuer"8 as defined under the Final Rules;9 A RIC or BDC; and Issuers registering a business combination transaction or an issuer, other than a WKSI, registering an offering on Form S-8. Q. Are there any exceptions for the use of free writing prospectuses by ineligible issuers?

A. Yes. Other than issuers that are or have been in the last three years (including a predecessor) (i) a blank check company, (ii) a shell company, other than a business-combinationrelated shell company, and (iii) an issuer of penny stock, ineligible issuers may use a free writing prospectus that contains only descriptions of the terms of the securities in the relevant offering.10

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In general, an "ineligible issuer" is an issuer that, among other things (i) is required to file periodic reports pursuant to Section 13 or 15(d) of the Securities Act and has failed to file all such reports required to be filed during the preceding 12 months, (ii) is, or has been during the past three years, a blank check company, a shell company, or an issuer in an offering of penny stock, (iii) is an issuer that is a limited partnership offering securities by means other than a firm commitment underwriting, or (iv) has filed for bankruptcy within the past three years. Eligibility is determined (i) at the time of filing of the registration statement covering the offering, subject to (ii) below, and (ii) if the offering is being registered pursuant to Rule 415, the earliest time after the filing of the registration statement relating to the offering at which the issuer, or another offering participant, makes a bona fide offer, including through the use of a free writing prospectus, in the offering. Eligibility status will not be affected during the course of an offering. The timing of this determination, for purposes of using a free writing prospectus, applies to all issuers, including WKSIs. Certain other restrictions apply with respect to offerings of asset-backed securities.

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2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

What level of liability will an issuer or offering participant have with respect to free writing prospectuses?

A. Free writing prospectuses will carry prospectus level liability; that is, the antifraud provisions under the Securities Act11 will apply to the same degree as they do to prospectuses. However, a free writing prospectus filed in compliance with the requirements relating to free writing prospectuses set forth in the Final Rules will not be deemed to be filed as part of the registration statement and, therefore, will not be subject to Section 11 liability under the Securities Act. In turn, an offering participant that does not use an issuer's or another offering participant's free writing prospectus in the sale of securities to which such a free writing prospectus relate will not be subject to cross-liability under Section 11 of the Securities Act. Similarly, an offering participant, other than the issuer, will not have cross-liability under Section 12(a)(2) with respect to a free writing prospectus unless: The offering participant used or referred to that free writing prospectus in offering or selling the securities to which the free writing prospectus relates; The offering participant offered or sold the securities to a purchaser and participated in planning for the use of that free writing prospectus by other offering participants and such free writing prospectus was used or referred to in offering or selling securities to that purchaser by one or more of such other offering participants; and Under the conditions for use of the free writing prospectus in the Final Rules, the offering participant is required to file the free writing prospectus with [the SEC] pursuant to the requirements of the Final Rules. In connection with the foregoing, a person will not be considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed the free writing prospectus with the SEC pursuant to the Final Rules.

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See Sections 11 (relating generally to parts of the registration statement, of which the prospectus is a component), 12(a)(2) (relating specifically to prospectuses) and 17(a)(2) (relating generally to communications in interstate commerce) of the Securities Act. Prospectuses are also subject to liability under Rule 10b-5 (relating generally to misstatements and omissions in the purchase or sale of a security) under the Exchange Act.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

What are the conditions to using free writing prospectuses?

A. The conditions for using a free writing prospectus are set forth in Rule 433 and generally relate to: The delivery or availability of the statutory prospectus at the time the free writing prospectus is used; The information contained in the free writing prospectus; The legend that is to be included in the free writing prospectus; Filing of the free writing prospectus; and Record retention for the free writing prospectus. More specifically, Rule 433 sets forth the conditions that are applicable to each category of issuer ("Issuer Specific Conditions") and several general conditions that are applicable to all issuers ("General Conditions"), irrespective of the category into which they may fall. If the conditions set forth in Rule 433 are satisfied, the free writing prospectus may be used and "may include information the substance of which is not included in the [related] registration statement." Q. What if the conditions for using a free writing prospectus are not properly satisfied?

A. If the conditions for using a free writing prospectus are not properly satisfied, including after any attempts to cure, as discussed in more detail below, the free writing prospectus would be a written communication that was used in violation of Section 5 of the Securities Act.12

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Use of an unauthorized written communication in violation of Section 5 of the Securities Act can result in the issuer having to do any or all of the following: · Offer rescission rights to purchasers of securities pursuant to the unauthorized written communication for a period of 12 months; · Determine whether a contingent liability associated with securities sold pursuant to the unauthorized written communication should be recorded on the financial statements of the issuer during the period for which rescission rights are outstanding; and

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q. A.

What are the Issuer Specific Conditions? The Issuer Specific Conditions can be broken down into the three following categories: 1. Non-Reporting Issuers and Unseasoned Issuers: The Final Rules provide that the use by an issuer or offering participant of a free writing prospectus in an offering of securities of an eligible non-reporting issuer, including an initial public offering, or securities of an eligible unseasoned issuer, is conditioned on (i) the prior filing of the related registration statement for the offering, which, in the case of an initial public offering of equity securities, includes a bona fide price range, and (ii) the free writing prospectus being preceded or accompanied by the most recent preliminary or final statutory prospectus.13 The preliminary or final statutory prospectus need not be provided by the same means as the free writing prospectus; instead, it need only be provided at the required time. Once a preliminary or final statutory prospectus has been provided to an investor, additional free writing prospectuses may be provided without having to further provide an additional preliminary or final statutory prospectus, as the case may be, so long as there is no material change from the previously provided prospectus reflected in the most recent statutory prospectus. Once a final statutory prospectus becomes effective and is available, no earlier statutory prospectus may be provided. The statutory prospectus, as revised or supplemented, must precede or accompany any free writing prospectus provided after such availability, whether or not an earlier statutory prospectus has been previously provided to the investor. The condition that a free writing prospectus be preceded or accompanied by the most recent preliminary or final statutory prospectus will be satisfied if a free

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Include a risk factor discussion in periodic reports filed under the Exchange Act regarding the violation of Section 5 of the Securities Act and the impact this may have on the issuer's financial results of operations. In addition, the SEC may institute an action against the issuer for violation of federal securities laws, which may result in civil and administrative penalties being levied against the issuer.

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The SEC indicated that the rationale for the prospectus delivery requirement was to prevent this category of issuers, and their related offering participants, from engaging in a "blast" broadcast of a free writing prospectus (e.g., an infomercial advertising the sale of securities) without directly linking an investor to the related statutory prospectus. In this regard, absent a track record from which to draw upon in analyzing an issuer conduct, this category of issuer requires more investor protection safeguards.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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writing prospectus in electronic form contains an active hyperlink to the statutory prospectus. We refer to such free writing prospectuses as "Category 1 Free Writing Prospectuses."14 2. Seasoned Issuers and WKSIs: The Final Rules provide that the use by an issuer or offering participant of a free writing prospectus in an offering of securities of an eligible seasoned issuer and eligible WKSI is conditioned on the prior filing of the related registration statement for the offering. The Final Rules do not condition the use of a free writing prospectus on a preliminary or final statutory prospectus preceding or accompanying such free writing prospectus. Instead, a free writing prospectus must set forth, pursuant to a required legend, that a registration statement has been filed with respect to the security being offered and the SEC Web address where the investor receiving such free writing prospectus can obtain the related preliminary or final statutory prospectus. In the case of a shelf registration statement, the base prospectus can, pursuant to new Rule 430B, serve as the required statutory prospectus so as to permit the use of free writing prospectuses. We refer to such free writing prospectuses as "Category 2 Free Writing Prospectuses". 3. WKSIs: The Final Rules provide that a free writing prospectus may be used by or on behalf of an WKSI prior to the filing of a registration statement containing a statutory prospectus so long as the related offering is intended to or will be registered, and such offering does not involve a registered business combination. Any free writing prospectuses so used must be filed promptly upon the filing of the related registration statement, if one is filed, or an amendment, if one is filed, unless such free writing prospectuses were previously filed with, or furnished to, the SEC (e.g., pursuant to a Form 8-K).15

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Practical Implication: Because issuers and offering participants must assure that the most recent preliminary or final statutory prospectus is actually provided to anyone who might receive a free writing prospectus, the use of a broadly disseminated free writing prospectus may not be feasible unless it is provided in electronic form and contains an active hyperlink to the required statutory prospectus. Practical Implication: In light of the new automatic shelf registration process available to WKSIs, it is likely, if not advisable, that WKSIs will always have an automatically effective shelf registration statement on file with the SEC. Therefore, it is unlikely that WKSIs will experience the situation of distributing a free writing prospectus prior to the filing of a registration statement.

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2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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We refer to such free writing prospectuses as "Category 3 Free Writing Prospectuses". Q. What is the information requirement for a free writing prospectus?

A. The Final Rules permit the use of a free writing prospectus without application of line item disclosure requirements and without the inclusion of any particular information. Instead, a free writing prospectus may be used so long as it contains: The required legend, as discussed further below; and In connection with Category 1 Free Writing Prospectuses, a bona fide price range in connection with an initial public offering. In addition, in connection with Category 1 Free Writing Prospectuses and Category 2 Free Writing Prospectuses, a free writing prospectus may include information "the substance of which is not included in the registration statement but such information shall not conflict16 with" (i) information contained in such related registration statement or (ii) information contained in the issuer's periodic reports filed or furnished to the SEC. In relation to the foregoing, the Final Rules "make clear that not including information that is included in a free writing prospectus in a prospectus filed as part of a registration statement will not, solely by virtue of inclusion of the information in a free writing prospectus, be considered an omission of material information required to be included in the registration statement."17 Q. What is the legend requirement?

A. The Final Rules require that each free writing prospectus, including those of seasoned issuers and WKSIs, must contain a legend. The language of such legend, however, depends on

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The determination of what is and is not a conflict will be a facts and circumstances determination. The staff of the SEC has indicated that they considered a "classic" example to be a sales memo about an offering, which would be deemed a free writing prospectus, from an offering participant that also recommends the sale; such a free writing prospectus would not conflict with the registration statement. Practical Implication: If it is determined that a conflict exists, consider filing the free writing prospectus pursuant to Form 8-K, which can, and should, be incorporated by reference into the registration statement at issue. In this manner, the conflict will be eliminated.

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Amended Rule 408 provides, in part, that "unless otherwise required to be included in the registration statement, the failure to include in a registration statement information included in a free writing prospectus will not, solely by virtue of inclusion of the information in a free writing prospectus ... be considered an omission of material information required to be included in the registration statement."

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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the nature of the free writing prospectus at issue. In the case of Category I Free Writing Prospectuses and Category 2 Free Writing Prospectuses, the following legend shall be included in substantially the form provided: The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other document the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the company will arrange to send you the prospectus if you request it by calling toll-free 1-8[xx-xxx-xxxx]. In the case of Category 3 Free Writing Prospectuses, the following legend shall be included in substantially the form provided: The issuer may file a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other document the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the company will arrange to send you the prospectus after filing if you request it by calling toll-free 1-8[xx-xxx-xxxx]. The Final Rules also provide that the legend "may provide an e-mail address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer's Web site, and provide the Internet address and the particular location of the documents on the Web site." The use of the generic legend should facilitate issuer compliance with the inclusion of such legend through automated systems and processes. Q. May the content of a legend be modified or supplemented?

A. In short, the legend may only be modified in certain limited ways. In particular, the SEC stated in the Final Rules that certain issuer modified legends will be considered inappropriate or impermissible, which, likewise, will cause the related free writing prospectus to be an impermissible free writing prospectus. The Final Rules set forth the following non-exclusive list of impermissible modifications of the legend:

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Disclaimers of liability or responsibility that are impermissible in a statutory prospectus or a registration statement; Disclaimers regarding accuracy or completeness or reliance by investors; Statements requiring investors to read or acknowledge that they have read or understand the registration statement or any disclaimers or legends; Language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation of an offer to buy; and For information that must be filed with the SEC, statements that the information is confidential. Q. Can the failure to include the required legend in a free writing prospectus be cured?

A. Yes. The Final Rules permit an issuer or offering participant to cure an unintentional or immaterial failure to include the specified legend in any free writing prospectus so long as a good faith and reasonable effort is made to comply with the condition to use the legend and the free writing prospectus is amended to include the specified legend as soon as practicable after discovery of the omission. If the free writing prospectus has been transmitted to potential investors without the required legend, then the free writing prospectus must be retransmitted with the required legend by substantially the same means as and directed to substantially the same investors to whom the original free writing prospectus was originally transmitted. A failure to include the required legend that is cured pursuant to this provision will not result in a Section 5 violation under the Securities Act. Q. What is the filing requirement?

A. In the case of Category 1 Free Writing Prospectuses and Category 2 Free Writing Prospectuses, no later than the date of first use, each such free writing prospectus is required to be filed in the following circumstances:

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Prepared or Used by Issuer: The issuer must file any "issuer free writing prospectus" ­ meaning any free writing prospectus prepared by or on behalf of, or used or referred to by, the issuer.18 New Issuer Information: The issuer must file any free writing prospectus prepared by or on behalf of or used by an offering participant other than the issuer if such free writing prospectus contains "issuer information"19 ­ meaning material information about the issuer or its securities, which is referred to as "issuer information" that has been provided by or on behalf of20 any issuer and that is not already included or incorporated in the prospectus or a filed free writing prospectus. However, the filing requirement will not be triggered if the free writing prospectus includes information prepared by or on behalf of an offering participant, other than the issuer, on the basis of or derived from "issuer information", but which otherwise does not constitute "issuer information". Final Terms: The issuer must file any free writing prospectus that contains a description of the final terms of the issuer's offered securities, which free writing prospectus has been prepared by or on behalf of21 the issuer or any other offering participant, after such terms have been established for all classes of securities of the offering.22 Broadly Disseminated Information: Any offering participant must file any free writing prospectus used or referred to by an offering participant, other than the

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The Final Rules provide that "[a] written communication or information is prepared or provided by or on behalf of a person if the person or an agent or representative of the person authorizes the communication or information or approves the communication or information before it is used." The Final Rules further provide that "[a]n offering participant other than the issuer shall not be an agent or representative of the issuer solely by virtue of its acting as an offering participant." This condition does not necessarily require the filing of the entire free writing prospectus; instead, the issuer may choose to file only the relevant "issuer information" giving rise to the filing requirement. See footnote 18. See footnote 18. The SEC notes in the Final Rules that such final terms will either be contained in an issuer free writing prospectus or, if included in another party's free writing prospectus, will be issuer information. The Final Rules provide that if the free writing prospectus contains only a description of the final terms of the issuer's securities, the filing may be deferred until two days after the later of (i) the date that the terms became final for all classes of securities of the offering and (ii) the date of first use.

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2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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issuer, if such free writing prospectus is distributed by, or on behalf of,23 such offering participant in a manner reasonably designed to lead to its "broad unrestricted dissemination."24 In the case of Category 1 Free Writing Prospectuses and Category 2 Free Writing Prospectuses, free writing prospectuses are not required to be filed in the following circumstances: Non-Substantive Changes or Additions to Previously Filed Free Writing Prospectus: The condition to file a free writing prospectus shall not apply if the subject free writing prospectus does not contain substantive changes from or additions to a free writing prospectus previously filed with the SEC. Previously Filed Issuer Information: The condition to file issuer information contained in a free writing prospectus of any offering participant other than the issuer shall not apply if such issuer information is included (including through incorporation by reference) in a prospectus or free writing prospectus previously filed with the SEC and that relates to the subject offering. Non-Final Terms: To the extent a free writing prospectus that is required to be filed contains a description of the terms of the issuer's securities that does not reflect the final terms of the issuer's securities, such free writing prospectus is not required to be filed. In the case of Category 3 Free Writing Prospectuses, each such free writing prospectus is required to be filed by the issuer promptly upon the filing of the related registration statement, if one is filed, or an amendment, if one is filed.

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See footnote 18. The staff of the SEC has indicated that the key element of this provision is the term "unrestricted" rather than the term "broad". By way of example, the staff noted that if an email was distributed to 50,000 investors pursuant to a defined blast email list, then such distribution would not constitute "broad unrestricted dissemination." In other words, the use of a defined list of recipients, even if extremely broad, will prevent a communication from being considered to have been disseminated in an unrestricted manner. In this regard, the staff further noted that the Final Rules intended, by this provision, to reach truly unrestricted communications ­ newspapers, websites, etc.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

Can the failure to file a free writing prospectus be cured?

A. Yes. The Final Rules permit the ability to cure any unintentional or immaterial failure to file a free writing prospectus so long as a good faith and reasonable effort is made to comply with the filing condition and the free writing prospectus is filed as soon as practicable after the discovery of the failure to file. A failure to file that is cured pursuant to this provision will not result in a Section 5 violation under the Securities Act. Q. What is the record retention requirement?

A. The Final Rules require that all Category 1 Free Writing Prospectuses and Category 2 Free Writing Prospectuses that have been used, but which have not been filed, shall be retained by issuers and offering participants for a period of three years from the date of the initial bona fide offer of the securities to which such free writing prospectuses relate. The three-year retention period is consistent with the retention period applicable to brokers and dealers with respect to sale confirmations. The SEC notes that the period is appropriate to permit a review of free writing prospectuses used pursuant to the Final Rules and to permit offering participant and purchasers to benefit from the availability of such free writing prospectuses in the post-offering period. Q. Can the failure to retain a free writing prospectus be cured?

A. In a manner, yes. The Final Rules provide that any unintentional or immaterial failure to retain a free writing prospectus will not violate the requirements of the Final Rules so long as a good faith and reasonable effort was made to comply with the record retention requirement. The SEC notes that this exemption is not available for any other record retention obligation of an issuer or other offering participant. Whether or not a good faith and reasonable effort to comply with this requirement was made will be a facts and circumstances determination. A failure to retain a free writing prospectus that falls within the scope of this provision will not result in a Section 5 violation under the Securities Act. Q. Can the SEC review free writing prospectuses?

A. Yes. The Final Rules permit the SEC to request and to review any free writing prospectuses used in connection with an offering.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q.

Should issuers undertake any action in order to realize the benefit of the Reform?

A. Yes. Issuers should establish or conduct a full review of their policies and procedures for the release of communications to investors and prospective investors. In particular, issuers should establish or review existing policies and procedures so as to ensure that communications to be released as free writing prospectuses include the appropriate legend, do not conflict with information set forth in the related registration statement, are filed where required, and are retained for the time period specified in the Final Rules. The review of policies and procedures relating to the foregoing will assist in determining whether a "good faith and reasonable effort" was made by the issuer to comply with the requirements for using free writing prospectuses, thereby allowing an issuer to avail itself of the cure provisions with respect to any failure to comply with the requirements for using permissible free writing prospectuses. Q. How are RICs and BDCs treated under this Reform?

A. As discussed above, this Reform is primarily implemented pursuant to new Rules 163, 164 and 433. In that regard, the new rules will apply to RICs and BDCs in the following manner: Rule 163 ­ Because RICs and BDCs are expressly excluded from the definition of "well-known seasoned issuer", Rule 163 will not be available to those entities. As discussed above, Rule 163 provides an exemption for communications by or on behalf of well-known seasoned issuers. Rule 164 ­ RICs and BDCs are expressly "excluded issuers" from the application of Rule 164. Therefore, RICs and BDCs are unable to avail themselves of this provision.25 Rule 433 ­ Rule 433 states that it is applicable to free writing prospectuses of any issuer subject to Rule 164. Therefore, because RICs and BDCs are expressly excluded from the application of Rule 164, they will likewise be excluded from the application of Rule 433.

25

As discussed above, there are certain exceptions to the unavailability of Rule 164 for "ineligible issuers". In this regard, it is important to note that registered investment companies and business development companies are not per se "ineligible issuers" but are rather expressly excluded issuers from the application of the rules.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Q. Will free writing prospectuses be widely used by issuers and offering participants? A. Despite its more liberal use under the Final Rules, free writing prospectuses are not likely to be widely utilized, at least in the short term. Although the concept of additional written communications seems appealing in the abstract, several significant concerns arise in the practical use of free writing prospectuses. For example, information control is prized by underwriters because it permits them to maintain a consistent and accurate message regarding an offering of securities. As a result, underwriters are unlikely to adopt a policy or practice of liberally using, or permitting the use of, free writing prospectuses during the registration process by offering participants. Moreover, issuers and offering participants will need to institute policies and procedures to ensure compliance with the requirements of using free writing prospectuses. For example, requirements exist with respect to the filing of, the inclusion of legends in, and the retention of, free writing prospectuses, as discussed in more detail above. Notwithstanding the foregoing, the greatest utility of a free writing prospectus may be to convey new information or recent developments to potential purchasers immediately prior to the pricing of an offering.26 Specifically, the Final Rules provide that liability under Section 12(a)(2) of the Securities Act is assessed with respect to information "conveyed" to a purchaser at the "time of sale" of a security (which most practitioners believe is the time of the pricing of an offering), and any information "conveyed" after such time will not be taken into account for this purpose. As a result, material information that is unearthed, or recent developments that occur, immediately before pricing may pose a significant hurdle to the successful completion of the offering. In the past, such information would have simply been included in the final prospectus or on a Form 8-K without much thought. However, given the admonition that any information "conveyed" only after the time of sale will not be taken into account for liability purposes, as well as the natural tension between having an accurate and complete prospectus and the various means of "conveying" information, prior practices may no longer be appropriate. In this regard, the SEC has stated that the determination of whether information has been "conveyed" to a purchaser prior to pricing will be based on the facts and circumstances. However, based on statements made by SEC staff members, it appears that the correct standard to apply is what information was "reasonably available" to the purchaser as opposed to what the purchaser actually knew. Under this standard, information included in a final prospectus, which is delivered to purchasers after the "time of sale," will not have been "reasonably available" to a

26

Practical Implication: Depending on the substance of such a free writing prospectus, the benefit of using a free writing prospectus to convey new information or recent developments may be significantly offset by concerns relating to due diligence obligations and opinion coverage.

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

17

purchaser at the "time of sale" of the security. On the other hand, information included in a Form 8-K that is filed with the SEC via EDGAR may be deemed to have been "reasonably available" to a purchaser, depending on the timing of such filing. For example, if the information is filed on a Form 8-K a week before the pricing of the offering, then it will likely be deemed to have been "reasonably available" to a purchaser at the "time of sale" of the security. Conversely, if the information is filed on a Form 8-K several hours before the pricing of the offering, then it will not likely be deemed to have been "reasonably available" to a purchaser at the "time of sale" of the security. Where the line is drawn between these two alternatives, however, is difficult to predict with any certainty. Now however, as a result of the more liberal use of free writing prospectuses under the Final Rules, issuers and offering participants can distribute free writing prospectuses to potential purchasers immediately prior to the pricing of the offering containing such information. This discussion was prepared by Sutherland Asbill and Brennan LLP's Securities/Corporate Governance Group.

For more information about the matters discussed in this publication, please contact the Sutherland Asbill & Brennan LLP attorney with whom you work. The attorneys in Sutherland Asbill & Brennan LLP's Securities/Corporate Governance Group are listed below. Washington DC Steven B. Boehm James M. Cain Cynthia M. Krus Harry S. Pangas Douglas J. Leary Christopher M. Zochowski Blair E. Flynn John J. Mahon Nina Mojiri-Azad Lisa A. Morgan Marc E. Rivera 202.383.0176 202.383.0180 202.383.0218 202.383.0805 202.383.0703 202.383.0511 202.383.0729 202.383.0515 202.383.0875 202.383.0523 202.383.0866 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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Atlanta James L. Henderson George L. Cohen Charles D. Ganz Thomas C. Herman Mark D. Kaufman Philip H. Moïse Robert J. Pile Herbert J. Short, Jr. Geoffrey W. Edwards 404.853.8086 404.853.8035 404.853.8125 404.853.8089 404.853.8107 404.853.8173 404.853.8487 404.853.8491 404.853.8294 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

New York Robert E. Copps 212.389.5045 [email protected]

2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice.

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