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UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
WASHINGTON,D.C.20549
THECHAIRMAN
April6,2011TheHonorableDarrellE.IssaChairmanCommitteeonOversightandGovernmentReformUnitedStatesHouseofRepresentatives2157RayburnHouseOfficeBuildingWashington,DC20515DearChairmanIssa:ThisrespondstoyourletterofMarch22,2011concerningcapitalformation.Asyouknow,facilitatingcapitalformation,alongwithprotectinginvestorsandmaintainingfairandorderlymarkets,
is
themissionoftheSecuritiesandExchangeCommission.Cost-effectiveaccesstocapitalforcompaniesofallsizesplaysacriticalroleinournationaleconomy.Regardlessoftheformorsizeoftheoffering,companiesseekingaccesstocapitalintheU.S.marketsshouldnotbeoverburdenedbyunnecessaryorsuperfluousregulations.Atthesametime,allofferingsmust,ofcourse,providethenecessaryinformationandprotectionstogiveinvestorstheconfidencetheyneedtoinvestinourmarkets.StrikingtherightbalancebetweenfacilitatingaccesstocapitalbycompaniesandprotectinginvestorsinourrulesandordersisacriticalgoaloftheSEC.Ourrequirementsneedtobeperiodicallyreviewedtoensurethattheyareup-to-dateandcostsandbenefitsremainappropriatelycalibrated.Forexample,asdescribedinmoredetailbelow,atmyrequestthestaffistakingafreshlookatourrulestodevelopideasfortheCommissionaboutwaystoreducetheregulatoryburdensonsmallbusinesscapitalformationinamannerconsistentwithinvestorprotection.Inthisreview,wewillseekinputfrommanysources,includinganewAdvisoryCommitteeonSmallandEmergingCompaniesthattheCommissionisintheprocessofforming.Yourlettersetsoutaseriesofquestionsonavarietyofcapitalformation-relatedtopics.Inanefforttorespondtoyourinquiriesinanorganizedfashion,Ihavegroupedmyresponsesinthefollowingcategories:communicationsinconnectionwithsecuritiesofferings,capitalformationandregulatoryenvironment,initialpublicofferings,triggersforpublicreporting,newcapitalraisingstrategies,investmentsinstart-ups,andfuturesteps.Inaddition,youalsoseekcertainstudiesauthoredorco-authoredbycurrentorformerstaffoftheCommission'sOfficeofEconomicAnalysis("OEA"),nowtheCommission'sDivisionofRisk,StrategyandFinancialInnovation("RiskFin"),concerningregisteredandunregisteredequitycapitalformation.AttachedasAppendixAisalistofstudiesresponsiveto
 
TheHonorableDarrellE.IssaPage2thisrequest.IalsoamenclosingadiscBates-numberedSEC_RF_OGR_000001throughSEC_RF_OGR_000452thatcontainsthelistedstudies.Beyondthesestudies,thestaffhasidentifiedanadditionalstudythatappearsresponsivetoyourrequest,butwhichalsoappearstocontainnon-publicinformation.Forthatstudy,wewillseektoprovideittoyouafterreceivingtheapprovaloftheCommission.
CommunicationsinConnectionwithSecuritiesOfferings
Regulationofcommunicationsinconnectionwithofferings,whetherpublicorprivate,beginswiththeSecuritiesActof1933("SecuritiesAct").TheSecuritiesActprovidesthateachofferingofsecuritiesmustberegisteredwiththeCommissionunlessanexemptionfromregistrationisavailable.ThedegreeandmeansbywhichanissuermaycommunicatepubliclyduringtheofferingprocessdependonwhethertheofferingisregisteredunderSection5oftheSecuritiesActorexemptfromregistrationand,ifexempt,theconditionsoftheparticularexemptiononwhichtheissuerisrelying.RegisteredOfferingsUndertheSecuritiesAct,forregisteredofferings,anissuer'sabilitytocommunicatepubliclyvariesasitproceedsthroughtheregistrationprocess,whichhasthreephases:•theperiodpriortothefilingofaSecuritiesActregistrationstatement("pre-filingperiod");
1
•theperiodbetweenthefilingoftheSecuritiesActregistrationstatementandtheeffectivenessofthatregistrationstatement("waitingperiod"or"quietperiod");and•theperiodaftertheeffectivenessoftheSecuritiesActregistrationstatement("post-effectiveperiod").Duringthepre-filingperiod,anissuermaynot"offer"securities?Theterm"offer"isbroadly-definedundertheSecurities
Acr'
andhasbeeninterpretedasgoingwellbeyondthe
I
TheSecuritiesActdoesnotstatewhenthepre-filingperiodbegins.TheCommissionhasstatedthatanissuerwillbeinregistrationatleastfromthetimeitbeginspreparingtherelatedregistrationstatementorthetimeithasreachedanunderstandingwithanunderwriter,evenifallthetermsorconditionsoftheunderwritingarrangementhavenotbeenagreedupon.
See
ReleaseNo.33-5009,
PublicationofInformationPriortoorAftertheFilingandEffectiveDateofaRegistrationStatementUndertheSecuritiesActof
1933(October7,1969);ReleaseNo.33-5180,
GuidelinesforReleaseofInformationbyIssuersWhoseSecuritiesAreinRegistration
(August16,1971).
2
See
SecuritiesAct§5(c).
3
See
SecuritiesAct§2(a)(3)("Theterm'offertosell','offerforsale',or'offer'shallincludeeveryattemptoroffertodisposeof,orsolicitationofanoffertobuy,asecurityorinterestinasecurity,forvalue.").
Seealso
ReleaseNo.33-3844,
PublicationofInformationPriortoorAftertheEffectiveDateofaRegistrationStatement
(October8,1957);ReleaseNo.33-4697,
OffersandSalesofSecuritiesbyUnderwritersandDealers
(May28,1964);ReleaseNo.33-5009,
PublicationofInformationPriortoorAftertheFilingandEffectiveDateofa
 
TheHonorableDarrellE.IssaPage3commonlawconceptof"offer.
,,4
Duringthequietperiod,anissuercanmakeoraloffersbutcannotmakewrittenoffersotherthanthroughtheuseofaprospectusthatcomplieswithSecuritiesActSection10.
5
Theprospectusincludescomprehensive,balancedinformationabouttheissuerandtheofferingwhichfacilitatesinvestmentdecisions.Astheterm"offer"hasbeenbroadlyconstrued,intheabsenceofrulesexemptingparticularcommunications,issuersshouldlimitcommunicationsbeforeandduringofferingstoavoidbeingdeemedtomakeillegaloffers.Failuretocomplywiththeserequirementsissometimesreferredtoas"gun-jumping."Onceinthepost-effectiveperiod,anissuercansellanddeliversecuritiesaslongasafinalprospectusthatcomplieswithSecuritiesActSection10(a)accompaniesorprecedesthedeliveryofthesecurities/'Issuersalsocansendwrittenoffers,suchassupplementalsalesliterature,iftheyareaccompaniedorprecededbyaSectionIO(a)prospectus.Overtheyears,theCommissionhastakenstepstofacilitatecontinuedcommunicationsaroundpublicofferings.Forexample,asearlyas1970,theCommissionadoptedsafe-harborexemptionstomakeitclearthatcontinuedanalystresearchcoveragedoesnotconstituteanunlawfuloffer.
7
In
oneofthemostimportantreformsoftheregistrationandofferingprocess,theCommissionin2005adoptedacomprehensivesetofnewrulesandamendmentstofacilitatecapitalformationandrelaxrestrictionsoncommunicationsbyissuersduringtheregisteredofferingprocess.tThesechangessignificantlyliberalizedanissuer'sabilitytocommunicatepubliclyduringofferings,therebyallowingmoreinformationtoreachinvestors.Theseliberalizationsincluded:
•Pre-FilingCommunications.
Toavoidunnecessarylimitationsoncommunicationsbyissuerspriortoregisteredofferings,theCommissionadoptedSecuritiesActRule163Atoprovideeligibleissuerswithabright-linesafeharborforcommunicationsmademore
RegistrationStatementUndertheSecuritiesActof
1933(October7,1969);ReleaseNo.33-5180,
GuidelinesforReleaseofInformationbyIssuersWhoseSecuritiesAreinRegistration
(August16,1971).
4
See,e.g.,Diskin
v.
Lomasney
&
Co.,
452F.2d871(2d.Cir.1971);
SEC
v.
Cavanagh,
1F.Supp.2d337(S.D.N.Y.1998).
5
See
SecuritiesAct§5(b)(1).
6
See
SecuritiesAct§5(b)(2).
7
See
ReleaseNo.33-5101,
AdoptionofRulesRelatingtoPublicationofInformationandDeliveryofProspectusbyBroker-DealersPriortoorAftertheFilingofaRegistrationStatementUndertheSecuritiesActof
1933(November19,1970).
8
See
ReleaseNo.33-8591,
SecuritiesOfferingReform
(July19,2005),http://www.sec.gov/rules/final/33-8591.pdf.
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