In Part I, appearing in MCC's November 2005 issue, we discussed transactions
such as spin-offs structured to avoid Securities Act registration of the stock
of the subsidiary. In this Part II, we examine the steps required for
registration of the stock of the subsidiary and the related restrictions on
issuer communications and increased obligations as a public company.
Form S-1
If the conditions of Staff Legal Bulletin No. 42,
are not satisfied, the Securities Act registration of the spin-off or
subsidiary IPO would be required. Such registration would typically be effected
on a registration statement on Form S-1. The preparation of a Form S-1 involves
significant time and effort on the part of a large working group. The Form S-1
must include, among other information, detailed information regarding the
subsidiary's business, the risks involved in investing in its stock,
management's analysis of the subsidiary's financial condition and results of
operations, use of proceeds, dilution, executive officers and directors,
executive compensation and certain relationships and related party transactions
(especially with the parent company). In addition, it must include audited
balance sheets for the last two fiscal years, audited income statements
and statements of cash flows for the last three fiscal years and unaudited
financial statements for any subsequent interim period. If the subsidiary has
recently acquired another business, the registration statement also may be
required to include financial statements for such business as well as pro
forma combined financial information.
Communications During Phases Of The Registration Process
The SEC has adopted new offering rules, effective December 1, 2005, which
relax current restrictions on issuer communications prior to and during a public
offering. Unfortunately for entities engaging in an IPO, most of the new rules'
benefits are available only to seasoned issuers with a history of SEC
filings.3
As before, the securities offering process is divided into three phases, each
of which has its own set of restrictions.
Pre-Filing. During the first phase, which occurs before the
registration statement is filed, an issuer (i.e., the subsidiary to be spun-off)
may not offer or sell any of the offered securities or otherwise engage in any
communications deemed to "condition the market". The new SEC rules will exempt
communications that are made by or on behalf of the issuer (which includes the
parent of the subsidiary to be spun-off) more than 30 days prior to the filing
of the registration statement, so long as they do not refer to a registered
securities offering and the issuer takes reasonable steps within its control to
prevent further distribution or publication during the 30-day period. In
addition, the new rules will exempt communications that constitute "factual
business information" (as defined in the new rules) made during the 30-day
period. Communications that constitute "forward-looking information" (as defined
in the new rules) are generally not permitted.
Post-Filing, Pre-Effectiveness. After filing the Form S-1, the
registration statement will go through the SEC review process, which may include
several rounds of comments. Generally, a subsidiary will need to file several
amendments to the registration statement before satisfying the SEC that it has
responded to all of the SEC's comments. In the case of an underwritten
subsidiary IPO, NASD Regulatory Services and Operations also may review the
deal's terms with a view to reasonableness of the underwriter's compensation.
The parties generally should expect that the registered spin-off or subsidiary
IPO will take about four to six months from start to finish.
During the review phase, an issuer may make oral offers regarding the
securities as well as written offers in the form of a statutory prospectus.
Effective December 1, 2005, issuers will also be able to deliver a "free writing
prospectus," which includes any written communication that constitutes an offer
to sell or a solicitation of an offer to buy a security that does not satisfy
the requirements for a statutory prospectus and does not fall within an
exception to the Securities Act's definition of prospectus. Issuers will,
however, need to deliver a copy of the most recent statutory prospectus filed
with the SEC to any recipient of a free writing prospectus, but the delivery
requirement will not apply if the free writing prospectus is provided to the
recipient by someone other than the issuer who receives no compensation from the
issuer for its distribution or if the issuer has already provided the most
recent statutory prospectus. The free writing prospectus will need to contain a
required legend and will need to be filed with the SEC.4
Issuers and other offering participants will need to retain all free writing
prospectuses that they have used for three years after the relevant offering.
Under the new rules, written communications will include "graphic
communications" (such as e-mails) and communications by website, CD-ROM, widely
distributed telephone messages, facsimile, videotape or audiotape. The new rules
also contain special provisions for information contained in an electronic road
show or available online. Delivery obligations of an issuer and other offering
participants will be independent of each other.
Post-Effectiveness. The final and most permissive phase begins once
the SEC has declared the registration statement effective. During this phase,
the issuer or other offering participant may offer and sell the registered
securities, as long as delivery of the security occurs simultaneous with or
after delivery of a final prospectus. Under a new "access equals delivery"
approach effective December 1, 2005, the final prospectus delivery requirement
will be satisfied if the issuer has filed a registration statement that has been
declared effective, has filed a final prospectus, neither the registration
statement nor the prospectus is the subject of any pending proceeding or
examination under Securities Act Sections 8(d) or (e), and none of the issuer,
an underwriter or participating dealer is the subject of any pending proceeding
under Securities Act Section 8A. In lieu of delivery of a final prospectus, an
underwriter, broker or dealer participating in an offering will be able to
satisfy its delivery obligation by delivering, within two days after completion
of the sale, a notice that the sale was made pursuant to an effective
registration statement in which a final prospectus would have been required to
have been delivered, but for the exemption provided by Rule 172 permitting a
notice of sale instead of delivery of a final prospectus. A purchaser who
receives the notice instead of a final prospectus may request a copy of the
final prospectus from the person responsible for sending the
notice.5
Liability
Issuers engaged in a public offering are subject to liability for material
misstatements or omissions contained in the prospectus and registration
statement. Commencing December 1, 2005, a free writing prospectus will fall
within the definition of a "prospectus" under the Securities Act and, therefore,
issuers will be subject to liability for material misstatements or omissions
therein under Securities Act Section 12(a)(2). Since it will not be deemed part
of the registration statement, however, they will not be subject to liability
under Securities Act Section 11. Section 12(a)(2) provides for a due diligence
defense to liability, with the burden of proof placed on the defendants. Under
Securities Act Section 11, which applies only to material misstatements and
omissions contained in a registration statement, this defense is not available
to the issuer. Additionally, communications related to an offering that are
neither a prospectus nor an offer to sell or solicitation of an offer to buy are
subject to Regulation FD. Regulation FD prohibits selective disclosure of
material non-public information by or on behalf of an issuer to analysts,
institutional investors and others unless the issuer disseminates the same
information to the public by filing a Form 8-K, issuing a press release or using
another disclosure method reasonably designed to provide broad, non-exclusionary
distribution. If a disclosure is intentional (involving knowledge or
recklessness in not knowing), the issuer must publicly disclose the information
simultaneously with the disclosure. If the disclosure is unintentional, the
issuer must publicly disclose promptly (but in no event later than 24 hours or
commencement of next day trading on the NYSE).
Obligations Of Public Companies
In most spin-offs, the subsidiary's stock will also be required to be
registered under Exchange Act Section 12, subjecting it to the Exchange Act's
periodic reporting, proxy, insider reporting and short-swing profit liability
provisions. If the issuer wishes to list its stock on an exchange (as most
will), it will be required to prepare an applicable listing application and to
comply with the relevant exchange or association's quantitative and qualitative
criteria for listing and continued listing (including substantive corporate
governance requirements).
Upon filing a Securities Act registration statement (even if the spin-off is
never completed) or otherwise becoming an Exchange Act reporting company, the
subsidiary will become subject to the full panoply of the provisions of the
Sarbanes-Oxley Act of 2002. The subsidiary must comply with all of Sarbanes'
requirements, especially those relating to personal loans to insiders and
director independence, prior to launching the transaction. Going forward, the
subsidiary also will be subject to all of the regulations applicable to public
companies generally, including, among other things, the requirement to file
annual, quarterly and current reports and Regulation FD's prohibition on
selective disclosure. In addition, all financial statements will need to conform
to standards of the SEC and the Public Company Accounting Oversight Board.
Overall, once a registration statement is filed or the subsidiary becomes an
Exchange Act reporting company, the subsidiary will need to deal with the
transparency now being demanded of all public companies.
Published March 1, 2006.
