Chapter 3 - § 3.4 • THE PROSPECTUS

• Jurisdiction: Colorado

§ 3.4 • THE PROSPECTUS

§ 3.4.1—The Statutory Prospectus

The registration statement includes a "prospectus" that is both the selling document and the issuer's (and underwriter's) insurance policy. A prospectus must meet the requirements of § 10(a) of the 1933 Act, and may only be used to make offers after the filing of a registration statement. Many other documents can be considered a "prospectus" that, if used in connection with an offer or sale of a security, may result in a violation of § 5. In addition, prospectuses within a registration statement that are not properly or carefully prepared may also fail to meet the requirements of § 10.

For example, in In re Texas Glass Manufacturing Corp.,⁶⁰ the SEC imposed a stop order against an issuer when a filed (but not yet effective) registration statement contained a prospectus that "contained many deficiencies, some of which were highly material, and some of which, while relatively less important, were indicative of a general lack of care in the preparation of the registration statement."

In In re Seahawk Deep Ocean Technology, Inc.,⁶¹ an administrative law judge issued a stop order after finding that a registration statement was "materially false and misleading." The SEC was concerned that the shipwreck recovery firm overvalued its significant assets (artifacts), and the firm failed to cooperate with the SEC in the inquiry. Typically, the SEC will seek a stop order only in the most egregious cases. The SEC may also issue a "bed bug" letter that advises the issuer that, if it proceeds with the registration process without significant changes to the registration statement, a stop order proceeding will likely result.

It is important to note that the registration statement must be accurate when filed and when it becomes effective. The fact that the registration statement may become accurate as a result of a subsequent event will not protect the issuer. For example, in Pommer v. Medtest Corp.,⁶² in the context of a private offering, the court found that statements that were inaccurate when made did not become acceptable merely because the events "happen[ed] to come true." In that case, the offering document advised that the issuer owned certain patents that, in fact, had not yet been issued. The patents were subsequently obtained.

On the other hand, cautiously worded predictions of future events are acceptable and, as discussed in Chapter 6, are mandatory. In Warshaw v. Xoma Corp.,⁶³ the district court found that a statement that "FDA approval was imminent" was not actionable because the statement was considered to be one of "general optimism" and did not include any specific timing. On appeal, the Ninth Circuit reversed the district court, finding that "optimistic statements that contravened the unflattering facts in [the company's] possession" were actionable.⁶⁴

§ 3.4.2—Issuer Communications

The 1933 Act restricts the type of communications that issuers or other parties offering securities (such as an underwriter) may use in the process of completing a registered offering, although the restrictions depend on the class of issuer involved. After the filing of a registration statement for an initial public offering, issuers are generally advised by their counsel to eliminate all publicity of their operations other than through distribution of the prospectuses and preliminary prospectuses (which can be used prior to the effective date). The reason for this caution is that press releases and other announcements may be deemed to constitute "prospectuses" and an "offer" to sell securities. Based on the statutory requirements, the restrictions are as follows:

• Before the registration statement is filed, all offers, in whatever form, are prohibited except by well-known seasoned issuers,⁶⁵
• Between the filing of the registration statement and its effectiveness, offers made in writing (including by e-mail or Internet, by radio, or by television) are limited to a statutory prospectus that conforms to the information requirements of 1933 Act § 10 or a free writing prospectus meeting the requirements of Rule 433.
• Even after effectiveness of a registration statement, offering participants still may make offers only through a statutory prospectus, although additional written materials can be used if accompanied or preceded by a statutory prospectus or (in the case of seasoned or well-known seasoned issuers) if the statutory prospectus has been filed with the SEC.

A communication in violation of these rules is generally considered to be "gun jumping." SEC Release No. 33-8591 changed the gun-jumping analysis significantly. It was clear that the gun-jumping rules were never intended to interrupt a company's normal and routine communications into the market while it is engaged in a securities offering. Their interpretation was never sufficiently clear, however. The rules that became effective December 1, 2005, were intended to establish a communications framework designed to operate along a spectrum based on the type of company, its reporting history, and its equity market capitalization. These rules established varying level of restrictions applying to different categories of issuers. Generally:

• Well-known seasoned issuers are permitted to engage at any time in oral and written communications, including use at any time of a free writing prospectus,⁶⁶ subject to enumerated conditions (including, in specified cases, filing with the SEC).⁶⁷
• Since the 1970s, the SEC has maintained a position that issuers can continue to release factual communications (such as press releases) during the offering process to the extent they had done so before the offering process commenced.⁶⁸ Rule 169 (effective December 1, 2005) confirms this position by providing that all issuers, including non-reporting issuers, may continue to publish regularly released factual business information so long as the information does not reference an offering or forward-looking information. This includes factual information about the issuer's business, products, and services.⁶⁹
• Rule 168, available only to reporting issuers and some non-reporting foreign issuers,⁷⁰ permits the publication of forward-looking information (such as projections of financial results) in addition to factual business information. Issuers may rely on this safe harbor without regard to whether the communication is being directed to investors or potential investors.

Note that the requirements under Rules 168 and 169 are that the issuer "continue to publish" factual information (or in the case of a reporting issuer, forward-looking information), and such publications are exempt from the definition of a "prospectus" in 1933 Act § 2(a)(10) and the communications restrictions of 1933 Act § 5(c). If the issuer has not previously published such information, it cannot commence such publication during the offering process.

• Communications by issuers more than 30 days before filing a registration statement are not considered to be prohibited offers so long as the communications did not reference a securities offering.⁷¹ The issuer (other than well-known seasoned issuers) must take reasonable steps to prevent further distribution or publication of the communication during the 30-day period immediately before it files the registration statement.
• Issuers and other offering participants are permitted to use free writing prospectuses after the filing of the registration statement, subject to enumerated conditions (including, in specified cases, filing with the Commission).⁷²

§ 3.4.3—Other Forms Of Communication

Rule 135c permits an issuer required to file reports under the 1934 Act⁷³ to make certain notifications of an unregistered offering that the issuer "proposes to make, is making or has made" if the notification meets the requirements of Rule 135c, including:

• The notification is not used for "conditioning the market" for the unregistered offering in the United States.
• The notice states that securities have not been and will not be registered under the 1933 Act and cannot therefore be offered in the United States absent registration or an applicable exemption from the registration requirements.
• The notice contains very limited additional information (such as the name of the issuer).

Rule 135c is very important for publicly held companies that file reports under the 1934 Act but may also be raising funds privately. Absent Rule 135c, the public disclosure requirements of the 1934 Act would often conflict with the need to avoid "general advertising" that is inconsistent with most unregistered offerings.

Rule 135e permits foreign private issuers to hold press conferences and make other public notifications of pending offerings if the disclosure occurs entirely offshore of the United States and provided the disclosure does not refer to an offering being conducted only in the United States.

In Exploration, Inc.,⁷⁴ the staff determined that a video presentation to be used in conjunction with preliminary prospectuses to assist in selling the offering did not constitute a "prospectus" as defined in § 10(a) if it met certain parameters:

• The videos merely described or highlighted disclosure in the § 10(a) prospectus.
• The videos would be used only in due diligence meetings to registered representatives, and security measures were instituted to ensure that the videos were not viewed by the general public.
• The screening of the videos was accompanied or preceded by the delivery of a § 10(a) preliminary prospectus.
• The video contained appropriate caveats, including the Rule 134(b) warning at the beginning and the end of the presentation.

§ 3.4.4—Communications By Broker-Dealers

Participation by a broker-dealer in an offering by an issuer also imposes certain limitations on the broker-dealer's ability to provide information to the market about that issuer. As with Rules 134 and 135, the rules exclude the publications from the term "offer"...