Restrictions on publicity in connection with an IPO generally divide into three time periods:
- the period beginning when the issuer reaches an understanding with an underwriter or underwriters to pursue an IPO and ending upon the filing of the registration statement with the SEC, commonly referred to as the ‘pre-filing period’;
- the period between the filing of the registration statement and the time that the registration statement is declared effective by the SEC, commonly referred to as the ‘waiting period’; and
- the period beginning when the registration statement is declared effective by the SEC and ending 25 days later, commonly referred to as the ‘post-effectiveness period’.
The period before the filing of the registration statement
Under the Securities Act an issuer is generally not allowed to ‘offer to sell’ any of its securities before filing a registration statement. The SEC construes an ‘offer to sell’ broadly. The phrase includes the publication of information and publicity efforts made in advance of a proposed offering that have the effect of ‘conditioning the public mind’ or ‘arousing public interest’ in the issuer or in its securities. The SEC may construe a communication as an ‘offer to sell’ even if it does not make reference to the securities being offered or the offering. Unauthorised efforts to offer securities before filing are generally labelled ‘gun jumping’. Among other things, gun jumping may cause the SEC to delay the effectiveness of the registration statement, thereby creating practical marketing problems and delaying the transaction. In addition, the SEC will occasionally respond to gun jumping by forcing the company to add disclosure to its prospectus stating that investors in the IPO may have a rescission right against the company, whereby they can force the company to repurchase whatever securities the investors bought in the offering at the IPO price for up to a year after the offering.
While the SEC’s rules permit an issuer, subject to a number of significant limitations, to continue to release factual (but not forward-looking) information about its business in a manner consistent with past practice to persons (such as customers) other than in their capacities as investors or potential investors in the issuer’s securities, issuers are advised to take steps during the pre-filing period to ensure that their public relations and other departments do not inadvertently issue announcements, releases or other information that the SEC might construe as an attempt to stimulate the market for the issuer’s stock. Communications by an issuer made more than 30 days prior to filing the registration statement that do not reference the proposed offering are generally permissible, provided that the issuer takes reasonable steps to prevent further distribution or publication of the communication within this 30-day period. During the pre-filing period issuers may also issue a very limited press release regarding the proposed offering (a Rule 135 Release) stating only the approximate size, purpose and timing of the issuer’s plans to go public (and not naming any potential underwriters). Commencing 30 days prior to the initial filing of the registration statement, communications must be more limited. Issuers may continue to advertise their products and services, but they should carefully avoid any publicity that might be construed as gun jumping. For example, a company extolling the virtues of its latest product in a way to stimulate demand for that product where the audience is potential customers is generally permissible as long as these efforts are consistent with the issuer’s prior operating conduct. Conversely, an issuer giving interviews talking about how much revenue it will generate or the margins it will achieve from its new product may be problematic, since this is information of more interest to an investor than a customer.
A limited exception to these gun-jumping rules is available for emerging growth companies (EGCs), which, as discussed in further detail below, generally are companies with less than US$1.07 billion in annual revenue. The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) added section 5(d) to the Securities Act, which permits an EGC or its representatives to communicate with certain institutional investors, either prior to or following the date of filing of the registration statement, in order to determine whether such investors might have an interest in a contemplated securities offering. Any such testing the waters should be carefully vetted in advance by counsel. The anti-fraud provisions of the federal securities laws apply to the content of testing-the-waters communications. As with traditional roadshow materials, any testing-the-waters communications should be reviewed to ensure consistency with the contents of the registration statement. Testing-the-waters communications are subject to review by SEC staff. On 19 February 2019, the SEC proposed a new rule that, if enacted, would permit all issuers, and not just EGCs, to test the waters prior to the filing of a registration statement.
The period between the filing of the registration statement and its effectiveness
During the waiting period, the same principles discussed above generally continue to apply, with some exceptions. Most importantly, written offers may be made, but through the use of the preliminary (or red herring) prospectus only. (While SEC rules permit written offers other than the traditional prospectus, referred to as ‘free-writing prospectuses’, in certain circumstances, IPO issuers are subject to significant constraints on the use of these non-traditional offering documents and counsel should be consulted if consideration is being given to the use of any such documents.) In contrast to the general rule applicable to the pre-filing period, oral offers can be made during the waiting period. In addition, indications of interest may be solicited from prospective purchasers, provided specified conditions are met. However, an offer cannot be accepted until after the registration statement becomes effective. In addition, issuers may issue a somewhat more detailed press release during this period (which must contain an SEC-mandated legend) that names the underwriters and provides more information about the offering (a Rule 134 Release). It is important to note that any communications regarding the issuer or the offering, oral or written, during this period should be consistent with the information disclosed in the prospectus.
The period after effectiveness of the registration statement
Generally, for 25 days after the pricing of an IPO, securities dealers are required to deliver a prospectus in connection with any trades they make in the issuer’s common equity. The issuer will have an obligation under the underwriting agreement to update the IPO prospectus for any material developments occurring while securities dealers are subject to this prospectus delivery requirement. Accordingly, during this period, many issuers take a conservative approach and limit publicity during this period to ordinary-course business activities, consistent with past practice.
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