This memo describes the legal restrictions on publicity and other communications by companies that are in the process of registering their securities for sale to the public. The "registration process" consists of three distinct periods: (i) the period from the beginning of the registration effort (typically the first meeting with underwriters) to the filing of a registration statement with the Securities and Exchange Commission ("SEC") (the "Pre-Filing Period"); (ii) the period between the filing of the registration statement and the time it is declared effective by the SEC (the "Waiting Period"); and (iii) the period after the registration statement is declared effective (the "Post-Effective Period"). The legal restrictions on publicity and communications differ in each of the three periods of the registration process.
II. The Pre-Filing Period
The restrictions on publicity and communications are strictest during the Pre-Filing Period. Generally, the securities laws prohibit any offers or sales of a company's securities in the Pre-Filing Period, and the SEC liberally interprets as an "offer" any publicity, press or other public dissemination of information that may arouse investor interest in the company's securities. These improper communications are known as "conditioning the market" or "jumping the gun." The theory behind the general prohibition on gun-jumping is to prevent a company from artificially inflating the offering price of its securities through unregulated (and potentially unsubstantiated) statements outside the specific disclosure requirements of a prospectus.
The SEC evaluates suspicious publicity in the Pre-Filing Period based upon the content of the publication, the scope of its distribution, the length of time between publication and the subsequent filing of the registration statement, and the relationship of the company to the person responsible for the publication. Examples of publicity which the SEC has found impermissible include brochures discussing the prospects of the company's industry in "glowing generalities"; advertisements which were "a thinly veiled attempt to arouse interest in the issuer's securities rather than its product or services"; and speeches by corporate executives which contained financial forecasts and projections, which are generally impermissible in the Pre-Filing Period.
Notwithstanding the prohibition on conditioning the market, the SEC does not seek to impede purely factual pre-offering communications about a company, its business or even the facts regarding a proposed financing. Thus, the SEC has adopted a "safe harbor" rule which allows the issuance during the Pre-Filing Period of a notice or press release stating the name of the issuer, the amount and basic terms of the securities proposed to be offered, the anticipated time of the offering and a brief statement regarding the manner and purpose of the offering. (However, the names of the underwriters may not be mentioned in the notice.) The safe harbor rule also requires the inclusion of a statement that the offer of securities will be made only by means of a prospectus.
Aside from the safe harbor, the SEC permits companies in the Pre-Filing Period to communicate ordinary factual information regarding the company's business, advertise its products or services and issue periodic reports, so long as all such communications occur in a manner consistent with past practices. Also, a company in the Pre-Filing Period may respond to unsolicited factual inquiries from securities analysts, the media and stockholders regarding the conduct of the company's business (as opposed to matters relating to the proposed offering). The rule of thumb on Pre-Filing Period communications is: if a communication could not reasonably be construed to be part of the selling effort, it should be permissible.
1. General
Neither the Company nor its representatives should initiate any publicity for the purpose of facilitating the sale of its securities. Any information which the Company releases should be factual and should not include such things as predictions, projections, forecasts or opinions with respect to the value of the Company's securities, sales revenues, income or earnings per share. The Company also should not release any forecasts, projections, predictions, estimates or opinions relating to industry growth prospects and profit potential. Before the proposed offering is announced, the Company should not disclose its plans to outsiders on a selective basis. All references to the offering should be extremely limited and should be confined solely to basic factual information, such as the number and type of securities being offered. During the Pre-Filing Period, the Company should not, directly or indirectly, announce the names of its managing underwriters.
2. Responses to Inquiries
The Company generally should respond to unsolicited inquiries concerning only factual matters from stockholders who have a legitimate interest in the Company's affairs. The Company should be more circumspect in responding to inquiries from the press or investment analysts, but in all cases limiting responses to factual information.
III. The Waiting Period
During the Waiting Period, a company may begin to offer (but not sell) its securities. Offers may be oral, or they may be made by means of the "red herring" prospectus that is filed with the SEC. All of the Pre-Filing Period prohibitions generally continue to apply in the Waiting Period as to written communications, and the Company should therefore continue all Pre-Filing Period precautions against public dissemination of information (other than the prospectus) in the Waiting Period (subject to an exception that permits publication of "tombstone" newspaper advertisements).
IV. The Post-Effective Period
In the Post-Effective Period, a company may offer and sell its securities both orally and in writing. For 25 days following the date of effectiveness of the registration statement, all written communications regarding the securities must be accompanied or preceded by a final prospectus, and no sale may be confirmed or closed unless and until the investor has received a final prospectus. So long as the Company (or its underwriters) satisfies these prospectus delivery requirements, the Company may adopt a more liberal policy regarding its communications during the Post-Effective Period. However, from that point forward, the Company should bear in mind that it is a public company and will be liable for material misstatements of fact or exaggerations as to its condition or prospects, whether made orally or in writing. The Company should also refrain from communications which contradict or are inconsistent with its prospectus and other publicly filed reports and documents.
