Releasing Research Reports: What Can You Do?


We frequently are asked by our investment banking clients whether their colleagues in the research department can issue a research report on a company about to launch a financing. In many instances, the bankers view the continued release of research as critical to maintaining a necessary stability in their client's trading securities. This, of course, raises some significant legal issues that must be addressed before releasing any reports. Although research questions typically can be answered simply by referencing the relevant rules we discuss below, in other instances they require a more complex analysis. When evaluating the issue, factors to consider include: What restrictions apply under the securities laws to the distribution of research reports? When can an investment bank issue a research report if it is also engaged in a securities offering? This article discusses these and related issues.

Q: ABC Securities, Inc. has been engaged to underwrite XYZ, Inc.'s common stock in a registered public offering. When can ABC Securities issue a research report on XYZ?

A: From the time of its engagement until up to 90 days after the issuance of its client's securities, ABC Securities' issuance of a research report could constitute prohibited selling efforts. For this reason, it is advisable to rely upon the so-called "Rule 138/139" safe harbors discussed below.

The Securities Act generally prohibits an issuer (or anyone acting on its behalf) from making an offer to sell its securities unless a registration statement has been filed with the SEC. The SEC has an expansive view of what constitutes an "offer," and has stated that information, opinions or recommendations by a broker-dealer about securities of an issuer proposing to register securities under the Act may constitute an offer to sell such securities, particularly when the broker-dealer is to participate in the distribution as an underwriter or selling group member. Publishing such information may therefore result in a violation of the Act.

Certain statutory safe harbors allow a broker-dealer to publish research reports about an issuer or its securities without that publication constituting an offer. There are two safe harbor rules available for broker-dealers participating in a public offering that permits them to publish research reports regarding an issuer that is about to file, has filed or has an effective registration statement. Rule 138 relates to research reports on a class of securities distinct from the class being offered. Rule 139 relates to research reports released in the ordinary course of the broker-dealer's business, either in respect of issuers that meet certain criteria or industry reports that conform to prior practice.

The first safe harbor, Rule 138, applies to research reports on reporting companies (See Footnote 1) (and certain foreign issuers that meet other conditions) that meet certain size and related eligibility requirements. Assuming that the eligibility requirements are met, if the company is issuing nonconvertible debt securities or nonconvertible, nonparticipating preferred stock, Rule 138 allows a broker-dealer to publish research reports relating to the company's common stock, debt convertible to common stock or preferred stock convertible to common stock. Conversely, if the company is issuing common stock, debt convertible to common stock or preferred stock convertible to common stock, Rule 138 allows a broker-dealer to publish research reports relating to such company's nonconvertible debt or nonconvertible, nonparticipating preferred stock. The notion is that the publication of research reports on one class of security is unlikely to have a market impact on, and should not be considered an offer to sell, an entirely unrelated class of security that happens to be offered.

Rule 139, like Rule 138, applies only to reporting companies (and certain foreign issuers that meet other conditions) that are about to file, have filed or have an effective registration statement relating to their securities. Unlike Rule 138, the research issued under this safe harbor is not security specific.

Rule 139 consists of two parts. Subsection (a) allows company-specific research reports distributed with reasonable regularity in the normal course of business of a broker-dealer so long as the issuer meets certain requirements. (See Footnote 2.) Subsection (b) allows the publication of an industry-wide research report so long as: (1) the publication is distributed with reasonable regularity in the normal course of a broker-dealer's business; (2) the report includes similar information with respect to a substantial number of companies in the issuer's industry or sub-industry, or contains a list of securities currently recommended by the broker-dealer; (3) the information on the issuer is not given materially more space or prominence in the publication than that given to other companies; and (4) the opinion or recommendation on the issuer or its securities is not any more favorable than that given in the last prior report that included the issuer or its securities. Additional requirements must be met if the report includes projections.

The Act also prohibits U.S. and foreign dealers from offering or selling unsold allotments of securities in the United States at any time absent compliance with the registration requirements of the Act, and other securities included in the offering that they acquire in the market, until, generally speaking, 40 days after the commencement of the offering. Since a research report with respect to a company's securities may constitute an offer of those securities, the Act may prevent the distribution of research reports in the United States during the 40-day post-offering period. Broker-dealers participating in the offering generally refrain from distributing research reports in the U.S. during the 40-day post-offering period, except in circumstances where there was a significant pre-existing trading market for the securities and the report can be said to relate to the securities already trading in that market.

The issuance of research reports also may be restricted by the trading rules contained in Regulation M (which imposes requirements designed to prevent market manipulation by an issuer, its affiliates and broker-dealers). The publication of research reports could constitute a prohibited attempt to induce someone to bid for or purchase a security being offered in a distribution, if made during the applicable "restricted period." (See Footnote 3.) In general, Regulation S offerings by ABC Securities for its clients would constitute distributions for purposes of Regulation M.

Regulation M excludes from its prohibitions the publication or dissemination of any information, opinion or recommendation if the conditions of Rule 138 or 139 are met. However, by their terms, since those rules apply only to issuers that propose to file, have filed or have an effective registration statement with respect to the security to be distributed, they are not applicable to, and thus do not provide an explicit safe harbor for, a Regulation S offering.

The restrictions imposed by Regulation M do not apply to the distribution of actively traded securities (See Footnote 4) or investment grade, nonconvertible debt securities; investment grade, nonconvertible preferred securities or investment grade, asset-backed securities. (See Footnote 5.) Of course, most high yield securities will not be actively traded for purposes of Regulation M and, by definition, will not be investment grade. Similarly, the securities of a company recently gone public, especially in the media, telecom or Internet sectors, are unlikely to be actively traded for purposes of Regulation M.

Q: Suppose ABC Securities has been engaged to place XYZ Corp.'s securities in a Rule 144A offering (assuming that XYZ Corp. is not a reporting company). When can it issue a research report on XYZ Corp.?

A: There are no safe harbors for the issuance of research reports during the pendency of a Rule 144A offering. Rules 138 and 139 by their terms only apply to an issuer that proposes to file, has filed, or has an effective registration statement. Moreover, the SEC has provided no guidance as to when the issuance of research reports on a company whose securities are being offered pursuant to a Rule 144A offering is permissible. Many banks have imposed a "quiet period" of between 25 and 40 days after the offering has been completed.

Secondary offers and sales of XYZ Corp.'s securities will be exempt from registration requirements pursuant to Rule 144A only if they are made without any "general solicitation or general advertising." It is unclear whether the publication of a research report by a broker-dealer participating in the Rule 144A transaction would constitute a general solicitation. (See Footnote 6.)

The SEC's policy concerns in this area focus on the objective of ensuring that securities placed without registration pursuant to Rule 144A do not flow into the public trading markets without first being registered or held for a prescribed period of time. On the matter of whether a general solicitation has occurred, we believe that research reports distributed to a limited number of qualified institutional buyers should not constitute a general solicitation, and that the longer the "quiet period" the better insulated the transaction may be from question. To the extent that the marketing efforts for deals may differ, it is critical to assess the nature of the market (i.e., is it a "targeted" deal or will the offering be made to a large universe of QIBs?) to ensure that the initial issuance of the securities will constitute a valid private placement.

Q: Suppose ABC Securities has been engaged to underwrite XYZ Corp.'s initial public offering and that XYZ Corp. already ia a reporting company, as a result of an earlier Rule 144A offering with an A/B exchange. When can ABC issue a research report on XYZ Corp.?

A: Most banks have concluded that ABC can immediately issue a research report on the newly public company without any waiting period. Since XYZ Corp. was already a "reporting company" as a result of its Rule 144A offering, once the syndicate for its IPO breaks, the underwriters have no further prospectus delivery requirements. Without a post-closing "quiet period," in which only a prospectus meeting the requirements of the Securities Act may be distributed, the prevailing view is that written research materials can be freely disseminated without the worry that they might be considered a "prospectus" that did not meet the requirements of the Securities Act.

Q: Suppose ABC Securities is engaged to underwrite XYZ Corp.'s securities in a Regulation S offering. When can ABC Securities' research department issue a research report?

A: The safe harbor from registration provided by Regulation S is available only if no "directed selling efforts" are made in the U.S. by the issuer or any underwriter, dealer or other person participating in the offshore distribution. The prohibition on "directed selling efforts" applies to a broker-dealer participating in the offering until it has disposed of its allotment.7/ "Directed selling efforts" are activities undertaken that serve to condition the U.S. market for any of the securities offered under Regulation S. Examples include mailing material to U.S. investors, conducting promotional seminars in the U.S., and advertising on the radio or television in the U.S. or in publications with a general circulation in the U.S.

Dissemination in the U.S. of information, opinions or recommendations concerning the issuer or any class of its securities could constitute directed selling efforts. However, the publication in the U.S. of a research report concerning a reporting company does not constitute directed selling efforts if the report (1) is contained in a publication that is distributed with reasonable regularity in the broker-dealer's normal course of business, and includes similar information, opinions or recommendations in that publication with respect to a substantial number of companies in the issuer's industry or sub-industry, or contains a comprehensive list of securities recommended by the broker-dealer; (2) is given no materially greater space or prominence in such publication than that given to securities of other issuers; and (3) is no more favorable to the issuer than that published by the broker-dealer in its last publication addressing the issuer or its securities. These conditions are identical to those imposed under Rule 139(b). Unfortunately, the adopting release does not address the question of whether broker-dealers may rely on the more liberal provisions of Rule 139(a) or Rule 138 in the context of a Regulation S offering.

Significantly, the SEC has also stated that the analysis might be different with respect to a non-reporting issuer, since the effect on the market could be expected to be more significant due to the possible absence of other publicly available information about the issuer. Participants in the offering should exercise even greater caution in publishing or distributing information, opinions or recommendations concerning non-reporting issuers or their securities than they would in regard to reporting issuers.


1/ For purposes of this article, a reporting company is any company required to file periodic reports (e.g., Form 10-Ks, Form 10-Qs and Form 8-Ks) with the SEC. return

2/ The issuer must satisfy the registrant requirements of Form S-3 or Form F-3 and the minimum float or investment grade provisions of the instructions to such respective form (or be a foreign issuer meeting the registrant requirements of Form F-3 (other than the reporting history requirements), the minimum float or investment grade securities requirements of the instructions to such form, and whose securities have been trading for at least 12 months on a designated offshore securities market). return

3/ The applicable restricted period for such a participant commences either five days before pricing or one business day before pricing, depending upon the trading volume and public float of the issuer and, in either event, ends upon such participant's completion of its participation in the distribution. return

4/ To be considered an actively traded security for these purposes, the worldwide average trading volume during the two full calendar months immediately preceding, or any 60 consecutive calendar days ending within the 10 calendar days preceding pricing of the offering must have been at least $1 million, and the issuer must have a public float of common equity securities of at least $150 million (exclusive of securities being issued). return

5/ To be considered investment grade, such securities must have been rated as such by at least one nationally recognized statistical rating agencies for the purpose of Rule 15c3-1. return

6/ The SEC has never explicitly defined solicitation of offers to buy. However, "solicitation," in the context of broker-dealer regulation is generally understood to include any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates. return