AMERICAN SECURITIZATION FORUM SUNSET SEMINAR SEC 1933 ACT REFORM PROPOSALS: SECURITIZATION ISSUES AND IMPACTS

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AMERICAN SECURITIZATION FORUMSUNSET SEMINARSEC
1933 ACT REFORM PROPOSALSSECURITIZATION ISSUES
AND IMPACTS

• Anna H. GlickJordan M. Schwartz
• Cadwalader, Wickersham Taft LLP
• Michael H. Mitchell
• Orrick, Herrington Sutcliffe LLP
• December 20, 2004

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Introduction

• The SEC has released new proposed rules which
  would significantly revise the registration and
  offering processes under the Securities Act.
  According to the SEC, the new rules are
  appropriate in light of
• advances in technology, that increase the
  markets demand for information and the issuers
  ability to provide it, and
• the enhanced quantity and quality of information
  contained in issuers Exchange Act reports.
• The proposed rules address three principal
  topics
• communications related to registered offerings,
• registration and other procedures in the offering
  process, and
• delivery of information to investors and
  timeliness of delivery.
• The proposed rules in the current release follow,
  and sometimes modify, the SECs April 2004
  proposed rules relating to ABS.

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Categories of Issuers

• Four categories of issuers
• Well Known Seasoned Issuer (WKSI)
• Four conditions
• eligible to use Form S-3 or F-3,
• required to file Exchange Act reports (i.e., not
  a voluntary filer),
• current and timely in its Exchange Act reporting
  obligations for the past twelve months, and
• has either an outstanding minimum 700 million of
  common stock held by non-affiliates or issued 1
  billion aggregate amount of debt securities in
  registered offerings during the past three years
  and registers only debt securities
• an ABS issuer cannot qualify as a WKSI
• certain other classes of issuers (e.g., shell
  companies and blank check companies) are also
  ineligible
• Seasoned Issuer - an issuer that is eligible to
  use Form S-3 or F-3
• an ABS issuer registered on Form S-3 is a
  seasoned issuer

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Categories of Issuers (continued)

• Unseasoned Issuer - an issuer that is not
  eligible to use Form S-3 or F-3, but is required
  to file Exchange Act reports
• Non-Reporting Issuer - an issuer that is not
  required to file Exchange Act reports
• an ABS issuer registered on Form S-1 is a
  non-reporting issuer

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Communication Proposals

• The Current Gun-Jumping Rules
• before the registration statement is filed no
  offers (oral or written)
• before the registration statement is declared
  effective no written offers other than by means
  of a preliminary prospectus
• after the registration statement has been
  declared effective additional written offering
  materials may be delivered only with or after a
  final prospectus
• current exceptions include tombstone ads,
  structural and collateral term sheets and
  computational materials

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Communication Proposals (continued)

• New and Expanded Categories of Permitted Written
  Communications Four categories of permitted
  written communications (other than preliminary
  and base prospectuses) relevant to an ABS issuer
• free writing prospectuses,
• tombstone ads,
• research reports, and
• certain other communications (including regularly
  released factual information or forward-looking
  information)

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Communication Proposals (continued)

• Free Writing Prospectuses Rule 164 and Rule 433
• Definition
• any written communication that constitutes an
  offer to sell or a solicitation of an offer to
  buy securities relating to a registered offering
  made by means other than
• a preliminary, base or final prospectus, and
• written information accompanied or preceded by a
  final prospectus
• definition would include structural and
  collateral term sheets and computational
  materials
• talking to the press - a media publication for
  which an issuer or offering participant provided
  information orally or in writing would be
  considered a free writing prospectus prepared by
  or on behalf of the issuer or such offering
  participant
• electronic road show - an electronic road show is
  a free writing prospectus (compliance with
  conditions in the road show no action letters
  would no longer be required)

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Communication Proposals (continued)

• issuers web sites - an offer of an issuers
  securities that is contained on an issuers web
  site or hyperlinked by the issuer from the
  issuers site to a third partys site is a free
  writing prospectus
• exception for historical information - historical
  issuer information that is identified as such and
  located in a separate section of the issuers web
  site will not be considered an offer, and
  therefore not a free writing prospectus, unless
  it is included in a prospectus or otherwise used
  or identified in connection with the offering
• Content may not contain information that is
  inconsistent with any prospectus contained in the
  current registration statement unless the
  information in such prospectus has been
  superseded or modified by the issuers Exchange
  Act reports

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Communication Proposals (continued)

• Prospectus Delivery and/or Availability
• WKSI or seasoned issuer free writing prospectus
  (including collateral term sheets and
  computational materials) may be used at any time
  after the filing of a registration statement that
  contains a statutory prospectus (in the case of
  an issuer using a shelf registration statement, a
  base prospectus)
• unseasoned issuer or non-reporting issuer free
  writing prospectus must be accompanied or
  preceded by a statutory prospectus
• a hyperlink to the statutory prospectus contained
  in an electronic free writing prospectus would be
  sufficient
• Exception for talking to the press if a media
  publication is a free writing prospectus, but the
  publication was neither prepared by nor paid for
  by the issuer or any offering participant, then
  it may be used at any time after a registration
  statement containing a statutory prospectus has
  been filed, as long as the written communication
  is filed (with the required legend) within one
  business day after publication

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Communication Proposals (continued)

• Filing
• an issuer is required to file a free writing
  prospectus if it
• is prepared by or on behalf of the issuer,
  regardless of who used it,
• is used by the issuer, regardless of who prepared
  it, or
• contains only the final terms of the issuers
  securities
• an issuer is required to file any material
  information about the issuer or its securities
  contained in a free writing prospectus prepared
  by any other person that has been provided by or
  on behalf of the issuer and is not already
  contained or incorporated in the registration
  statement
• an offering participant other than the issuer is
  required to file a free writing prospectus that
  it distributed in a manner reasonably designed to
  lead to its broad unrestricted dissemination
  (e.g., posted on an unrestricted website or sent
  out as a press release)

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Communication Proposals (continued)

• exception for electronic road show - neither the
  road show nor its script are required to be filed
  if the issuer
• makes at least one version of a bona fide
  electronic road show readily available
  electronically to any potential investor at the
  same time as the electronic road show, AND
• files any issuer information provided at an
  electronic road show, unless such information is
  already included in the registration statement
• filing is not required if the free writing
  prospectus is substantially the same as, and does
  not contain substantial changes or additions to,
  a previously filed free writing prospectus
• deadline - filing is required on or before the
  date of first use, except that a free writing
  prospectus containing only the final terms of the
  securities may be filed two days after the later
  of (i) the date of first use or (ii) the date
  such terms become final
• this timing requirement is more demanding than
  the timing required for filing of informational
  and computational materials under current
  practice and the April 2004 ABS release
• Rule 164 provides cure for unintentional or
  immaterial failure to file

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Communication Proposals (continued)

• Liability
• a free writing prospectus that is filed is not
  deemed part of the issuers registration
  statement (unless the issuer elects to so treat
  them)
• no strict liability under Section 11
• free writing prospectuses are subject to
  liability under Section 12(a)(2) (which provides
  for a due diligence defense)
• Legend
• a free writing prospectus must contain a legend
  that
• indicates the precise address on EDGAR where a
  statutory prospectus is available,
• provides a toll free number through which an
  investor can request a copy of the statutory
  prospectus,
• recommends that potential investors read the
  statutory prospectus, and
• states that the communication constitutes a
  written offer pursuant to a free writing
  prospectus

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Communication Proposals (continued)

• impermissible legends
• disclaim accuracy or completeness or
• indicate that the communication is not a
  prospectus
• Rule 164 provides cure for unintentional or
  immaterial failure to include legend
• Record Retention
• copies of all free writing prospectuses must be
  retained for a period of three years following
  commencement of the offering

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Communication Proposals (continued)

• Ineligible Issuer
• free writing prospectuses may not be used if the
  offering involves an ineligible issuer, which
  is defined as
• a reporting issuer that is not current in its
  Exchange Act reports
• a limited partnership offering and selling its
  securities other than in a firm commitment
  underwriting
• an issuer that has received a going concern
  opinion from its auditor for the most recent
  fiscal year
• an issuer that has filed for bankruptcy or
  insolvency during the past three years

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Communication Proposals (continued)

• an issuer that has been or is the subject of
  refusal or stop orders under the Securities Act
  or
• an issuer that, or whose subsidiaries, have been
  found to have violated the federal securities
  laws, have entered into a settlement with any
  government agency involving allegations of
  violations of federal securities law, or have
  been made the subject of a judicial or
  administrative decree or order prohibiting
  certain conduct or activities regarding the
  federal securities laws during the past three
  years

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Communication Proposals (continued)

• Expanded Rule 134
• proposed Rule 134 expands the list of items
  permitted in a tombstone advertisement
• significant additional items include
• contact information of the issuer,
• the identity of the key parties, such as sponsor,
  depositor, issuing entity, servicer and trustee,
  the asset class of the transaction and the
  identity with any credit enhancement or other
  support,
• the final (or, if not known, probable) maturity
  and interest rate provisions,
• a description of the marketing events,

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Communication Proposals (continued)

• a description of the procedures by which the
  underwriters will conduct the offering (including
  procedures regarding account-opening and
  submitting indications of interest and
  conditional offers to buy),
• the names of securities exchanges or other
  securities markets where the securities are, or
  will be, listed, and
• information disclosed in order to correct
  inaccuracies contained in prior tombstone
  advertisements

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Communication Proposals (continued)

• The current rule allows for a brief description
  of the general type of business of the issuer.
  In the past, members of the ABS community have
  taken the position that, by analogy to this
  provision, a description of the structural
  details of an ABS transaction were likewise
  permitted. However, since the proposed revision
  to Rule 134 now specifically addresses ABS
  transactions under the section dealing with the
  business of the issuer, it may be difficult to
  justify adding additional items to a tombstone
  beyond the SECs specified list.
• The SEC has expressly indicated that detailed
  term sheet information should instead be included
  in a free writing prospectus.

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Communication Proposals (continued)

• Research Reports
• The current rules include safe harbors for the
  delivery of research reports applicable to all
  securities.
• Rule 137 relates to research reports by
  broker-dealers who are not participating in the
  securities offering
• this safe harbor would be expanded to cover
  reports on non-reporting issuers as well as
  reporting issuers
• Rule 138 relates to broker-dealers
  participating in offerings of securities of the
  issuer other than those which are the subject of
  the research report
• this safe harbor would be expanded to any
  reporting company that is current in its Exchange
  Act filings so long as the broker-dealer
  publishes reports on similar types of securities
  (but not necessarily the specific security
  subject to the report) in its regular course of
  its business

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Communication Proposals (continued)

• Rule 139 relates to broker-dealers
  participating in offering of the securities that
  are the subject of the research report
• this safe harbor would be modified to allow the
  broker-dealer to publish such a report if it is
  in a publication distributed in the ordinary
  course of its business and the broker-dealer has
  issued prior reports about the issuer
• Issuer specific reports would only be permitted
  for issuers with one year of reporting history
  under the Exchange Act who are current in their
  reports and are eligible to use Form S-3 or Form
  F-3
• with respect to industry reports, the safe harbor
  would only apply to reporting companies, but
  would no longer be limited to those eligible to
  use Form S-3 or Form F-3

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Communication Proposals (continued)

• the proposed rule would eliminate the restriction
  that the report cannot have a more favorable
  recommendation of the subject security than the
  recommendation in its last report
• The SECs April 2004 ABS release proposed Rule
  139a a separate safe harbor for ABS research
  reports, based on current Rules 137, 138 and 139.
  The new release indicates that any changes
  actually adopted with respect to the general safe
  harbors would be made with respect to the
  proposed ABS safe harbor as well.

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Communication Proposals (continued)

• Other Permitted Communications
• Rule 168 and 169 - safe harbor for the regular
  release of factual business information by all
  issuers, subject to the following conditions
• the issuer must have previously released
  information of this type in the ordinary course
  of its business,
• in the case of a reporting issuer, the
  information is released in the ordinary course of
  the issuers business and the timing, manner and
  form in which the information is released is
  materially consistent with similar past
  disclosures,

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Communication Proposals (continued)

• in the case of a non-reporting issuer, the
  information is released to persons, such as
  customers and suppliers, other than in their
  capacities as investors or potential investors in
  the issuers securities, by the issuers
  employees or agents who regularly and
  historically have provided such information to
  such persons and
• the released information does not include
  information about the registered offering or
  information released as part of the offering
  activities of the registered offering

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Communication Proposals (continued)

• Rule 168 - safe harbor for the regular release of
  forward-looking information by reporting issuers,
  subject to similar conditions
• Rule 163A - safe harbor for communications by or
  on behalf of an issuer (other than an ineligible
  issuer) more than 30 days prior to the filing of
  a registration statement, subject to the
  following conditions
• the communication may not reference a securities
  offering, and
• the issuer must take steps to prevent further
  distribution or publication of the information
  during the 30-day period
• Rule 163 - safe harbor for oral or written offers
  made by or on behalf of a WKSI (other than an
  ineligible issuer) at any time prior to the
  filing of a registration statement

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Communication Proposals (continued)

• a written offer made under this rule would be
  considered a free writing prospectus

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Liability Proposals

• Rule 159 - liability under Sections 12(a)(2) and
  17(a)(2) attaches based on the information
  delivered at or before the contract of sale
  (which is viewed by the SEC as the time the
  investor makes its investment decision).
• Any information delivered after that point (such
  as in a final prospectus) is not considered for
  purposes of determining liability under these
  sections.
• Strict liability under Section 11 would not be
  affected by the proposed rules. Liability under
  Section 11 would be determined when the
  registration becomes effective which, with
  respect to a prospectus supplement, is the date
  that the prospectus supplement is deemed to be
  part of the registration statement.

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Liability Proposals (Continued)

• The plain language of Section 12(a)(2) left some
  uncertainty as to whether an issuer is a seller
  for purposes of Section 12(a)(2) under certain
  underwriting arrangements. Rule 159A provides
  that the issuer in a primary offering of
  securities is a seller for purposes of Section
  12(a)(2) with regard to
• the issuers registration statement, preliminary
  prospectus and prospectus supplement,
• a free writing prospectus prepared by or on
  behalf of an issuer,
• information about the issuer or its securities
  provided by or on behalf of the issuer in any
  other free writing prospectus or
• any other communication made by or on behalf of
  the issuer.

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Registration Proposals

• Shelf Registration Procedures Rule 430B
• the base prospectus included in the registration
  statement may omit information that is unknown or
  not reasonably available to the issuer
• any information omitted from the base prospectus
  may be included in the registration statement by
  a prospectus supplement, a post-effective
  amendment or an Exchange Act report incorporated
  by reference
• the proposed rules make clear that the
  information contained in a prospectus supplement
  is deemed part of the registration statement for
  purposes of liability under Section 11

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Registration Proposals (continued)

• The prospectus supplement would be deemed part of
  the registration statement as of the earlier of
  (i) the date it is first used or (ii) the date
  and time of the first contract for sale of
  securities in the related offering.
• However, the proposed rules would provide that
  information contained in a prospectus supplement
  and deemed to be part of a registration statement
  cannot modify or supersede any information that
  is contained in that registration statement for
  purposes of a prior takedown.
• The proposed rules would eliminate the provision
  that limits the amount of securities registered
  to an amount that is intended to be offered or
  sold within two years of the effective date.
• However, the proposed rules would require that
  shelf registration statements could only be used
  for three years after the initial effective date,
  with unused fees and unsold securities carried
  forward to the new registration statement.

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Registration Proposals (continued)

• Automatic Shelf Registration For Well Known
  Seasoned Issuers
• a WKSI can register unspecified amounts of
  different types of securities on an automatically
  effective Form S-3 registration statements
• filing fees can be paid in advance or on a
  pay-as-you-go basis
• the registration statement is become effective
  upon filing, without staff review
• a new automatic shelf registration statement is
  required every three years with unused fees and
  unsold securities carried forward to the new
  registration statement

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Registration Proposals (continued)

• Unseasoned Issuers
• a reporting issuer that has filed at least one
  annual report and that is current in its
  reporting obligations can incorporate by
  reference into its Form S-1 registration
  statement information from its previously filed
  Exchange Act reports
• the issuer is required to make its Exchange Act
  reports available on its website and list all
  reports incorporated by reference in its
  prospectus
• incorporation of Exchange Act reports filed after
  the effective date of the registration statement
  is permitted

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Prospectus Delivery Proposals(continued)

• Under the current rules, after the effective date
  of a registration statement,
• no issuer, underwriter or participating dealer
  may send a written communication that offers a
  security for sale or confirms the sale of a
  security unless preceded or accompanied by a
  final prospectus
• no issuer, underwriter or participating dealer
  may deliver a security unless preceded or
  accompanied by a final prospectus
• no dealer (whether or not participating) may
  deliver a security during a specified period (up
  to 90 days) following commencement of an offering
  unless preceded or accompanied by a final
  prospectus
• no dealer affiliated with an issuer (and, in the
  case of ABS, a servicer) may deliver a security
  unless preceded or accompanied by a final
  prospectus.

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Prospectus Delivery Proposals(continued)

• Access Equals Delivery
• Rule 172 - a final prospectus is deemed to
  precede or accompany
• a written confirmation of sale or a notice of
  allocation of securities sold or to be sold, or
• a security delivered for sale,
• as long as the final prospectus is filed as part
  of the registration statement by the required
  filing date
• Note that this rule would not apply to a written
  communication that is not a confirmation. If
  such a written communication is sent, the written
  communication is a free writing prospectus and
  subject to Section 12(a)(2) liability unless it
  is accompanied or preceded by a final prospectus.
• Rule 173 the issuer or underwriter is required
  to send each purchaser not later than two
  business days after the completion of the sale,
  in lieu of the final prospectus, a notice
  providing that the sale was made pursuant to a
  registration statement
• the investor can request a final prospectus, but
  the final prospectus would not have to be
  provided before settlement

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Exchange Act Proposals

• all annual reports on Form 10-K must include
  plain english risk factors, which have to be
  updated quarterly