14. What is an issuer allowed to do during the “Pre-Filing Period” (and the exceptions)?
During the pre-filing period, no offers to sell or offers to buy securities are permitted. There is a limited exception to this rule under SEC Rule 135, which allows for the announcement of an upcoming offer. The issuer can have discussions with underwriters or with an underwriting syndicate. This allows the company to undertake the procedural arrangements and financing of the offering. In any event, the communications or announcement of the upcoming offer cannot have the purpose or effect of “conditioning of the market”. That is, it cannot cause a market reaction for the pending IPO that is commensurate with the effect of an actual offering. This is a poorly defined standard, which does not provide a great deal of guidance to issuers. There are some other notable exceptions to the general prohibition against offers to sell during the pre-filing period that are worthy of note.
• Emerging Market Company Exception – The JOBS act makes an exception and eliminates the “conditioning the market” restriction for “emerging market companies”. So, if a company meets the criteria to be an emerging market company, the announcement of the upcoming issuance faces few limitations aside from waiting to consummate the sale until the post-effective period.
• Section 5(b) Exception – This provision allows oral or written communication with qualified institutional buyers (QIBs) and accredited investors that are institutions, prior to filing of the registration statement. This is a limited exception that allows issuers with connections with potential purchasers who have the knowledge and sophistication that warrants a lower level of protection under the securities laws.
• Public Company Exception – Public filers can (must) continue their periodic disclosure (quarterly and annual reports) and Rule 168 permits forward-looking information. This means that a public company that is planning to issue more securities on the market must disclose this intended action to the market and existing shareholders. The prohibition against conditioning the market is trumped by the need for full disclosure.
• Free-Writing Prospectus Exception – Under Rule 163, WKSIs can use a “free-writing prospectus” during the pre-filing period, so long as it is filed with SEC prior to distribution. Per Rule 405, a free-writing prospectus is a written communication (including electronic/graphic) that constitutes an “offer to sell” that does not fall under a statutorily defined format (such as preliminary prospectus defined in section 10(b) or Rule 430 “red herring” prospectus).
There are other limited exceptions to the ability to make offers of securities at the pre-filing stage; however, these are the most commonly recognized.
• Discussion: What do you think is the reason for restricting the sale of securities prior to filing a registration statement? Do you think that requiring the filing of a registration statement achieves the underlying objectives? Why or why not? Why do you think the securities law allows for these exceptions?
• Practice Question: What are the limitations on an issuer of securities prior to filing a registration statement? What are the primary exemptions from these limitations?