Background
In November 1998, the Securities and Exchange Commission proposed a set of changes to the regulation of securities offerings so broad in scope that it is code-named the Aircraft Carrier Release. The SEC is soliciting comments on these proposals both in general and with regard to securitization. The SEC is also separately formulating a different set of proposals, which are expected to be released in late 1999, relating exclusively to asset-backed and mortgage-backed securities. Consequently, the ABS/MBS industry should expect and prepare for significant changes in the way ABS/MBS are offered and sold.
Current Registration Process
Currently, securities are offered to investors in either exempt transactions or registered public offerings. Section 4(2) of the Securities Act of 1933, exempts transactions by an issuer not involving a public offering -- that is, private placements. In addition, Regulation D under the Securities Act affords private placement treatment to offerings sold to 35 or fewer non-accredited investors and an unlimited number of accredited investors, whose ranks include virtually all categories of institutional investors. However, because this exemption is limited to sales of securities by an issuer, any resales of securities purchased in a Section 4(2) offering must qualify independently for an exemption from registration. Rule 144A provides such an exemption for resales, provided that they are made to "qualified institutional buyers" as defined in Rule 144A.
If a securities offering does not qualify for an exemption, Section 5 of the Securities Act requires the issuer to file a registration statement with the SEC describing the registrant and the securities being offered. The SEC must declare the registration statement effective before the securities may be sold. Many issuers of ABS/MBS use shelf registration statements, which, provided that certain eligibility requirements are met, permit registration of securities for offerings to be made on a continuous or delayed basis in the future. The advantage of shelf registration is that, when an issuer intends to offer a series of similar securities over time, there is no need to file a separate registration statement for each offering. Investment-grade ABS/MBS are currently eligible for shelf registration on Form S-3.
Section 5 of the Securities Act also requires the delivery to investors of a prospectus containing information relating to the issuer and transaction. For ABS/MBS offerings that are conducted on a shelf basis, industry practice is to update the prospectus filed as part of the registration statement with a prospectus supplement. After the registration statement is declared effective by the SEC, an issuer may offer securities without further SEC review, so long as (i) each offering conforms generally to the terms of the registration statement and (ii) the transaction-specific details of the offering are included in a supplement filed with the SEC within two business days following its first use.
How Aircraft Carrier Changes the Registration Process
The SEC proposes to change the registration process by adopting three new registration forms -- Forms A, B and C. These forms would replace current Forms S-1, S-2, S-3, S-4 and S-11 and their counterparts for foreign issuers. Form A is intended for smaller or unseasoned issuers. Form B is designed for larger, seasoned, well-followed issuers and for some offerings currently made in reliance on Regulation D and Rule 144A. Form C would apply to business combinations and exchange offers.
Proposed Form B
To qualify as a Form B issuer, an issuer must have either a $75 million public float and $1 million in average daily trading volume or a $250 million public float. Form B issuers would have the ability to effect sales on a "file-and-go" basis without SEC review. They would be permitted to file a registration statement at any time before the first sale and cause the registration statement to become effective at their discretion. This ability to control effectiveness is a significant departure from the current system in which there is always potential for extensive SEC review and delay.
The proposed Form B registration statement includes (i) a cover page with a registration fee table, (ii) a prospectus that includes offering information, an incorporation by reference of periodic reports under the Securities Exchange Act of 1934, a securities term sheet (which would have to be delivered to all investors) and undertakings to furnish investors at their request with the information incorporated by reference but not delivered, (iii) signatures and (iv) exhibits.
Proposed Form A
Proposed Form A will be available for those issuers who fail to qualify for Form B. With the exception of Form A seasoned issuers, Form A registration will be subject to SEC review and become effective pursuant to a request for acceleration.
To qualify as a Form A seasoned issuer, an issuer must have been reporting under the Exchange Act for 24 months and either have a public float of $75 million or have filed at least two annual reports. Proposed Form A seasoned issuers will qualify for the same "file-and-go" privileges available to Form B issuers so long as its Exchange Act annual report incorporated into Form A had been fully reviewed by the SEC and amended in accordance with SEC comments. Delayed shelf registration would be unavailable to Form A issuers.
The contents of a Form A registration statement would be similar to those of current Form S-1 registration statement. Seasoned issuers would be able to incorporate by reference some of the required disclosure. All Form A issuers, including seasoned issuers, would be required to deliver along with the prospectus their latest annual report filed under the Exchange Act and the information in Part I of its subsequent quarterly reports on Form 10-Q.
How the Aircraft Carrier Changes the Offering Process
Currently, Section 5(c) of the Securities Act prohibits offers to sell and solicitations of offers to buy a security prior to the filing of a registration statement. Dealers are prohibited from making offers to buy securities. Underwriters and issuers are prohibited from making offers to sell securities to dealers. While negotiation of the financing is permitted, marketing by underwriters and dealers during the pre-filing period is also prohibited.
Proposal for Form B Registrants
The SEC is proposing to remove restrictions on offering communications during the pre-filing period for Form B issuers for which there is abundant public information and market following --that is, a company that has filed all its periodic reports under the Exchange Act for at least one year on a timely basis and at least one annual report and that has a public float with a market value of at least $250 million or a public float of at least $75 million and an average daily trading volume for its equity shares of at least $1 million. The SEC is also proposing to allow dealers to make offers to buy, issuers and underwriters to make offers to sell to dealers, and underwriters and dealers to market the securities during the pre-filing period.
Proposal for All Other Registrants
For all other issuers, the SEC is proposing a communications safe harbor. Form B issuers about whom there is not abundant public information and market following may communicate freely before the offering period begins -- that is, 15 days in advance of the first offer. Form A issuers may communicate freely at any time before the 30-day period preceding the date of filing the registration statement. In order to fall within the safe harbor, the issuer, underwriter and/or dealer "must take all reasonable steps within their control to prevent further distribution or re-publication of the communication during those periods in which free communication is not permitted." For example, an issuer would be required to remove offering-related information from its internet site during this period. The SEC is also proposing safe harbors for factual business communications and regularly released forward-looking information.
Communications During the Waiting Period
Currently, oral offers are permitted, while written offers are prohibited unless they comply with Section 10 of the Securities Act. The SEC is proposing to eliminate this distinction. Companies would be allowed to make offers and disseminate offering information in any form without each communication having to meet the requirements of Section 10. Any written communications made during this period, however, would have to be filed as part of the registration statement.
Prospectus Delivery Requirements
Currently, Section 5 of the Securities Act requires an issuer to send a final prospectus to an investor no later than the time of sale. Although issuers frequently deliver a preliminary prospectus both for marketing purposes and to accelerate the effectiveness of a registration statement, there is no requirement to deliver a preliminary prospectus except for an initial public offering, where the preliminary prospectus must be delivered at least 48 hours before confirmation of sale.
In a departure from current practice, the SEC is proposing that the preliminary prospectus be delivered while the investor is still considering making an investment -- that is, prior to pricing. In addition, brokers and dealers will be required to make available to their sales associates copies of the preliminary and final prospectus.
Proposed Rule 173 will exempt most issuers, dealers and brokers from delivering a final prospectus for most offers provided that (1) investors have received a preliminary prospectus, (2) at or before the time they can receive confirmation of sale, investors are informed where they can acquire the prospectus information that constitutes a final prospectus, free of charge and (3) the security being delivered is not issued by an investment company.
Two proposals are being considered for the form of Form B preliminary prospectus. The first proposal requires a securities term sheet to be delivered to investors. The term sheet would itemize the material terms of the securities in summary format, identify a contact person to whom questions and requests for final documents may be directed, name any other person other than the issuer that is selling the securities and briefly identify any material relationship between such person and the issuer within the past three years and include a legend advising investors to read the issuer's documents filed with the SEC before making a decision. The securities term sheet would have to be delivered to an investor before the investment decision is made and filed with the SEC before the first sale is made. The second proposal requires a preliminary prospectus to be delivered to investors which would contain all the disclosure required on current Forms S-3/F-3.
Small or unseasoned issuers (including all Form A and some Form B issuers) would be required to deliver the prospectus required under current Section 10 (not including pricing information) in advance of the investment decision. For an initial public offering, this prospectus would have to be delivered in a manner reasonably designed to be received by each investor no later than seven calendar days before the date of the pricing in a firm commitment underwritten offering or the day an investor signs a subscription agreement or other document in which it commits to purchase securities in a best efforts offering. Seasoned issuers (those whose initial public offering took place at least a year before the effective date of the registration statement in question) would be required to deliver a prospectus (and any incorporated reports) in a manner reasonably designed to be received by each investor no later than three calendar days before pricing or the day an investor signs a subscription agreement or other document in which it commits to purchase the securities. Finally, investors would have to be informed or sent notice of any material events or changes occurring after preparation of the prospectus in a manner reasonably designed to be received by each investor no later than 24 hours before pricing or the day an investor signs a subscription agreement or other document in which it commits to purchase the securities.
Status of ABS/MBS under Aircraft Carrier
As proposed, neither Form A nor Form B is explicitly designated for use in registering offerings of ABS/MBS. This omission is presumably intentional, because the SEC has long planned to issue comprehensive regulations expressly addressing ABS/MBS offerings. Public statements made by various SEC officials indicate that the ABS/MBS regulation project has been left to the SEC's Structured Finance Branch, which is drafting regulations with knowledge of the Aircraft Carrier proposal but with the particular nuances of securitization in mind as well. It is expected that the ABS/MBS regulations will be published for comment prior to the date on which the Aircraft Carrier proposal, as revised to reflect public comments received, is released for comment.
Conclusion
The question remains open whether, and to what extent, the registration and offering schemes embodied in the Aircraft Carrier proposal will be followed in the ABS/MBS regulations. For example, if all ABS/MBS offerings are relegated to Form A, delayed shelf registration will no longer be possible. Even if Form B were available for some or all ABS/MBS offerings, the SEC is considering eliminating the shelf registration option in its entirety for new registrations. The SEC is also considering whether the rating assigned to the ABS/MBS should affect the choice of form. Thus, it is possible that an issuer would have to register concurrently on two forms -- for example, Form A for classes of non-investment grade ABS/MBS and Form B for all other classes. Moreover, it is unclear which communications and prospectus delivery requirements will govern ABS/MBS issuances. It is conceivable that, depending upon the structure of the deal, two sets of rules could govern communications and prospectus delivery requirements. This could make offering investment grade and non-investment grade securities in one offering more expensive and complicated. It will take time before securities counsel and industry groups identify the full range of consequences that these proposals would engender if adopted. A lengthy period of comment and discussion on the Aircraft Carrier proposal, the ABS/MBS proposal and the relationship of the two appears certain. *