CHAPTER 11 DISCLOSURE REQUIREMENTS OF THE FEDERAL SECURITIES LAWS

• Jurisdiction: United States

Mineral Financing
(Nov 1982)
CHAPTER 11
DISCLOSURE REQUIREMENTS OF THE FEDERAL SECURITIES LAWS
George W. Bermant
Gibson, Dunn & Crutcher
Denver, Colorado

Section 5 of the Securities Act of 1933¹ makes it unlawful to offer or sell any security by means of interstate commerce or the mails unless a registration statement with respect to such security is in effect and unless a prospectus meeting the requirements of Section 10 of the Securities Act accompanies or precedes the delivery of the security. Section 10 of the Securities Act provides that a prospectus shall contain the information (subject to certain exceptions) set forth in Schedule A to the Securities Act.² The Commission may by rules or regulations designate any of the information set forth in Schedule A as "not being necessary or appropriate in the public interest or for the protection of investors." The absolute strictures of the applicability of Section 5 are ameliorated by certain exemptions from the registration and prospectus delivery requirements provided in Section 3 of the Securities Act (as to so-called exempt securities) and Section 4 of the Securities Act (as to so-called exempt transactions). Barring such exemptions, the sale of all securities is subject to the registration and prospectus delivery requirements of Section 5.

Once it has been determined that Section 5 of the Securities Act is applicable, then the content of the registration statement and prospectus is substantially controlled by the registration forms promulgated by the SEC, Regulation S-K, Regulation S-X and Regulation C adopted by the SEC under the Securities Act.³ In addition, with respect to securities offered by certain types of companies, the SEC has adopted specific industry guides⁴ which contain specific disclosure requirements applicable to those companies. These industry guides are particularly important to companies in the natural resources area and to their counsel.

DISCLOSURE PHILOSOPHY

Unlike most state securities laws, the fundamental philosophy of the Federal securities laws is disclosure, not regulation. In 1933, at the time of the adoption of the

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Securities Act, the Congress in the preamble to the Act stated that its purpose was "to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mail..." Consequently the oft stated goal of Federal securities regulation is "full and fair disclosure". To this end the Division of Corporation Finance, the staff of the SEC charged with the implementation of the Securities Act, has almost from its inception reviewed registration statements filed under the Securities Act, given comments with respect thereto and generally processed the registration statements through a hands-on type of administrative action. Following filing of a registration statement the staff makes a review thereof and gives typically written comments to the registrant for suggested changes or additional information to be provided either in the registration statement or supplementally. To the extent the registrant believes the information requested is either inaccurate or unnecessary, procedures are available to discuss the matter with the staff and work out compromise positions. In the typical first offering situation, including the offering of most oil and gas and mineral offerings including tax shelters, the staff employes a full review mechanism. As the volume of filings has increased, procedures have been adopted from time to time to streamline the process with respect to certain larger or more established companies whereby no review at all is given by the SEC; instead the SEC relies upon the company and its counsel and the underwriter and its counsel to assure compliance with the disclosure obligations of the Act.

DISCLOSURE IN REGISTERED OFFERINGS

Once an issuer has decided to have a securities offering, the first determination must be whether an offering will be a registered public offering or an offering pursuant to some exemption, such as the private placement or an intrastate offering. The first portion of this paper will deal with the disclosure obligations of oil and gas and mining offerings involving a registered public offering.

Choice Of Form: S-1 v. S-18

The determination of the applicable form⁵ will determine the nature, quality and quantity of disclosure required. In Spring and Summer 1982 the SEC revamped its Securities Act forms as part of its general "integration project". The integration referred to is that between the disclosure and regulatory aspects of the Securities Act with that of the Exchange Act. In addition the SEC amended Form S-18 so as to permit a wider and more universal use of that form an act directly impacting the oil and gas and mineral industry.

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For oil and gas and mining operations, including limited partnerships offering oil and gas or mining investments (typically tax shelters) the registrant has a limited choice between two applicable forms. Form S-18 is available to issuers who are not at the time of the filing required to file reports under the Exchange Act. Thus typically it is available only to first-time issuers. Until 1982 Form S-18 was not available to entities other than corporations (thus making it unavailable to limited partnership offerings) and was not available to corporations a material portion of whose business was in oil and gas operations. When these restrictions were lifted in 1982 Form S-18 became available for all kinds of business organizations, including tax shelter limited partnerships and available for corporations actively involved in oil and gas and mineral operations. Form S-18 however is unavailable for offerings in excess of $5 million, and not more than $1.5 million may be sold for the account of anyone other than the issuer. One of the principal advantages of Form S-18 is that it may be filed and processed in the applicable regional office of the Commission which is generally thought to provide faster and more responsive service to registrants in the review process.⁶

One significant provision of Form S-18, oddly enough not found in Form S-1, is found in Item 21(h). This provision specifically requires that with respect to limited partnership offerings the balance sheet of the general partners are required to be filed as part of the registration statement and prospectus. The lack of this requirement in Form S-1 is generally recognized as a historical anomaly arising from more careful attention to the drafting of the Form S-18 for use by limited partnerships than has been previously given to the Form S-1. It may be confidently expected that within the foreseeable future the Form S-1 will be changed to parallel Form S-18. As noted below, however, limited partnership offerings on Form S-1 will usually include the financial statements of the general partners.

If an offering is to be of more than $5 million in total or includes more than $1.5 million of securities by other than the issuer, or if the issuer is already a reporting company under the Exchange Act the filing must be made on Form S-1. Form S-1 is the residual form promulgated by the SEC where no other form is required to be used. Form S-1 is filed in Washington and processed there at the SEC's principal office.

Now that companies engaged in material oil and gas operations and limited partnerships may use Form S-18 for offerings up to $5 million, it is instructive to note the structure of disclosure under both Form S-18 and Form S-1. Forms S-18 and S-1 are each divided into two parts. Part 1 is information to be included in the prospectus; part 2 is

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information to be included in the registration statement filed with the SEC but not included in the prospectus. The information is both parts is divided into specific items relating to the various matters required by the SEC to be disclosed. In many, but not all cases in the S-18 form, and in all cases in the Form S-1, cross reference is made to Regulation S-K.⁷ In addition, in General Instruction III-D to Form S-18 and General Instruction to Form S-1 attention is directed to the disclosure provisions set forth in the Industry Guides.⁸ In offerings other than oil and gas programs (Industry Guide 4)⁹ , the Industry Guides relating to oil and gas and mineral interests supplement but essentially do not replace the disclosures provided in the specific Items of Form S-18 and Form S-1. For example, Industry Guide 2 (disclosure of oil and gas operations) requires the inclusion of the special industry disclosure under "appropriate captions".

Industry Guide 4, entitled "Prospectuses Relating to Oil and Gas Programs", substantially supplants the Items of the applicable form. An examination of prospectuses for publicly offered oil and gas drilling programs shows a uniform method of disclosure and virtually the same language on many disclosure issues from prospectus to prospectus changing only as the deals themselves are different. Because tax shelter offerings of oil and gas partnerships are a principal focus of current securities offerings involving oil and gas and mineral interests, the disclosure obligations in these prospectuses will be first discussed herein.

Oil and Gas Program Offerings¹⁰

In oil and gas program public offerings the cover page of the prospectus identifies the program, sets forth the dollar amount of securities offered and the price per unit, contains the required legend applicable to all registered offerings and invariably contains a statement substantially as follows:

THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK¹¹

Item 1 of Industry Guide 4 "Summary of Program" also is a cover page requirement. The Summary is in fact just that. It sets forth in relatively brief terms the terms of the offering including whether or not there is a provision for additional assessments; any minimum sales requirements...