Chapter 4

• Jurisdiction: United States

Chapter 4 Registration of Securities Offerings

What Is a "Public Company"?

Most corporations in the United States are privately owned but because of their size, they face difficulty in expanding and in managing a larger enterprise. The concept of a "public company" first appeared in Section 12(a) of the 1934 Securities Exchange Act, which prohibited broker-dealers from effecting transactions on a national exchange unless the security was "registered" and the registration statement had become "effective." Ostensibly, the purpose of registration is to fulfill the promise of the 1933 Securities Act to "let in the light of day" and to require sufficient disclosure so that the purchaser would be sufficiently informed before making a purchase.

Before we discuss registration statements, we should briefly discuss the requirements that companies must meet to register classes of securities with the SEC. Section 12 of the 1934 Securities Exchange Act provides that it is "unlawful for any member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange . . ." In other words, in addition to filing a registration statement with the SEC for a public offering, issuers must also file a registration statement with the exchange on which the security will be offered.

An Exchange Act registration under Section 12 has the effect of making the company responsible for the filing of the reports required by Section 13 of the 1934 Act. Section 12 registration is accomplished pursuant to Section 12(b) by the filing of an application that contains all the detailed information required by Section 12(b)(1)(A-L). A company, excluding banks, bank holding companies, or saving and loan holding companies, may voluntarily register under Section 12(g) and must register, unless exempted, if it has $10 million in assets and the number of its record securities holders is either 2,000 or more worldwide or 500 persons who are not accredited investors. Additional threshold requirements were added by the SEC in 2016 in order to implement the JOBS Act and the FAST Act.¹

Form 10 was the basic form for registration under the 1934 Securities Exchange Act. In 1936, Congress added Section 15(d) requiring periodic disclosures from public companies for at least one fiscal year after the effective date of the registration statement. In 1964, Congress expanded the registration requirements further and required all issuers involved in interstate commerce whose assets and number of shareholders reach a certain level to register with the SEC.²

Under Section 12(g), companies that were not listed on a national exchange, including companies that traded on the NASDAQ, became public companies and NASDAQ became a national exchange.³ The consequence was to increase the number of registration statements being filed. Nevertheless, the number of public companies in the United States has declined, perhaps because of the expense of being a public company. However, the process of "going dark" is very difficult, requiring delisting, ensuring that the company does not meet the "public company" requirements of Section 12(g) and complying with the requirements of Section 15(d) to suspend public company status.⁴

What Must a "Public Company" Disclose?

There are three principal disclosure documents that all U.S. domestic public companies must file with the SEC: Form 10-K, an annual report; and Form 10-Q, a quarterly report, and Form 8-K, which discloses certain specified events that are deemed to be important.⁵ Under the SEC's EDGAR filing system, these documents are publicly available.

The SEC has also created a set of disclosure requirements for these documents, set forth in the applicable Form by reference to certain SEC regulations. For example, Regulation S-K contains a list of non-financial information that must be disclosed, and Regulation S-X contains a list of financial information that must be disclosed. In fact, the SEC's form documents in most cases merely refer to the regulation numbers in those two regulations for required disclosures. For example, Item 11(k) of Form S-1 (the form used by U.S. domestic issuers engaging in a traditional underwritten IPO) requires issuers to disclose information relating to its executive officers and directors. Rather than specify the required information, Item 11(k) simply references Item 401 of Regulation S-K.⁶ The documents and the required disclosures are all inter-related.

Form 8-K requires disclosure of "material definitive agreements" but pursuant to the Supreme Court's opinion in Basic Inc. v. Levinson, 485 U.S. 224 (1988), letters of intent for mergers and acquisitions that would generally be considered "material" need only be disclosed if they impose enforceable obligations, which a letter of intent typically does not do.⁷ A requirement in Section 2 of Form 8-K for the disclosure of off-balance sheet arrangements was added after the Enron scandal of 2001, in which two Enron executives went to prison for off-balance sheet arrangements that resulted in convictions for securities fraud, wire fraud, and insider trading. Companies may also use Form 8-K to disclose anything that they consider relevant to their securities holders.

What Are Public Offerings?

Public offerings ("going public") are sales of securities to the public by corporations or other legal entities ("issuers"), usually through underwriters who agree to buy the securities and resell them for a price.⁸ Note that there is no definitive definition of a public offering. Not all of a company's stock need be offered in an initial public offering, and it would, in fact, be fairly uncommon to do so. Some stock is usually retained by the existing shareholders of the company.

Public offerings are regulated by the 1933 Act and, in very limited circumstances, by state regulatory authorities. Excluding Special Purpose Acquisition Companies (SPACSs) that are discussed further below, the number of initial public offerings has fallen in recent years, just as the number of companies with publicly traded stock has fallen from about 8,000 twenty years ago to about 4,300 today. In 2000, there were 397 initial public offerings of securities in the United States; in 2019, there were only 235. In part this is a reflection of the fact that many companies decide to stay private longer in order to attain higher valuations prior to an IPO. That may be because the primary purpose of a public offering is to raise capital that is not readily available from other sources, or to provide liquidity to existing investors.

As we will see, since the passage of the 1933 Securities Act, public offerings have been highly regulated by the federal government, with very detailed and sometimes very obscure regulatory requirements and with strict civil liability consequences for certain errors. They are difficult and costly to prepare. Because there is no generally acceptable definition of what constitutes a public offering, the SEC, in 2005 issued a lengthy report, titled "Securities Offering Reform" (sometimes also referred to as the "Public Offering Report") that described in some detail new rules that "modify and advance significantly the registration, communications, and offering processes under the Securities Act of 1933."⁹ The new rules involved three main areas: communications relating to registered securities offerings, registration, and other procedures in the offering and capital formation process, and delivery of information to investors. For example,

• Rule 135 is a safe harbor available for the pre-filing public announcement of an offering so long as the announcement made it clear that when an issuer, selling security holder, or a person acting on behalf of either of them "publishes through any medium a notice of proposed offering to be registered under the Act," the notice would not be deemed an offer if certain conditions were met. Those conditions included a statement to the effect that the notice did not constitute an offer and that the notice contained "no more than" certain allowable information contained in a long list set forth in the Rule such as "the name of the issuer," "the amount of the offering," "the anticipated timing of the offer," and a "brief statement of the manner and purpose of the offering, without naming the underwriters." Why does the Rule prohibit naming the underwriters? Why might an issuer need to issue such a press release prior to filing a registration statement related to the offer and sale of securities?¹⁰
• Similarly, Rules 137, 138, and 139 provide a safe harbor for certain research reports written by investment banks (note that research reports are not issuer communications since they are solely the responsibility of the investment bank).
• Rule 163 provides that pre-filing offers by Well-Known Seasoned Issuers (WKSIs) constituting offers to sell or buy securities before a registration statement is filed are exempt from the prohibitions of Section 5(c) on offers to sell provided that certain conditions are met. However, communications on behalf of WKSIs, such as underwriter communications, are not exempt.
• Rule 163A provides that any communication by an issuer made more than thirty days before a registration statement is filed "that does not reference a securities offering that is or will be the subject of a registration statement shall not constitute an offer to sell . . . or offer buy securities" under Section 5(c) provided that certain conditions are met and exemptions are followed, including a requirement "that the issuer takes reasonable steps within its control to prevent further distribution or publication of such communication during the 30 days immediately preceding the date of filing the registration statement." How the issuer is meant to calculate the beginning of the thirty-day period is not entirely clear.

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