After much anticipation by the securities bar and the corporate finance community in general, the SEC in November released two rulemaking proposals intended to modernize registration under the Securities Act of 1933 (the "Securities Act") and the regulation of takeovers, primarily under the Securities Exchange Act of 1934 (the "Exchange Act"). The proposals, which are considered to be the most ambitious attempts at restructuring the corporate finance regulatory framework in recent memory, were designed to increase the quality and quantity of information available to investors while easing the burden on the issuers engaged in such transactions. The proposals regarding registration reform, compiled in a tome known as the "Aircraft Carrier," set forth quantum changes intended to streamline the rules and procedures for the registration of securities offerings. The Aircraft Carrier Release was accompanied by a companion release of similar magnitude relating to merger, acquisition and tender offer transactions known as the "M-A Release." The Aircraft Carrier Release and M-A Release are the result of evolving global market forces and the SEC’s apparent shift in policy with respect to those forces on the securities markets. Although described separately below, there is significant overlap between the two proposals, particularly with respect to changes in permitted communications and business combinations.

The Aircraft Carrier Release proposes significant reforms in the overall registration process by recommending changes in:

• Registration system reform
• Prospectus delivery
• Communications apart from the prospectus
• Increased flexibility between public and private offerings
• Increased director participation in Exchange Act reporting

The Aircraft Carrier Release proposes a major simplification of the registration process by eliminating most of the current forms and implementing a simplified registration system consisting of three new forms. If approved, Forms A and B (the availability of each form depends upon the size and nature of the issuer) will be the new forms used in cash offerings, and Form C will be the form used for business combination transactions. The reforms associated with the implementation of Form C relate directly to the proposals contained in the M-A Release.

The proposed rule changes seek to eliminate five existing registration forms which would be replaced by Forms A and B. Form B will be used by issuers who are larger, seasoned and well-followed, and where offerings are made to relatively informed or sophisticated investors. A company is "seasoned" under the proposals if it has at least one year of reporting history including at least one annual report. Form A would replace Form S-1 as the standard form of the registration statement, and would be used for offerings made by smaller or unseasoned companies as well as for initial public offerings. In short, Form A would be used by all issuers not eligible to use Form B.

Because Form B would be available for seasoned issuers, greater flexibility regarding disclosure could be afforded to those issuers utilizing the form. Notwithstanding such flexibility, however, issuers, underwriters and auditors would continue to be responsible for the accuracy of such disclosure including the portions incorporated by reference. The Form B eligibility requirements would be similar to those now required for the use of Form S-3, with some important exceptions. Form B is available for issuers with a public float of at least $250 million or a public float of $75 million plus average daily trading volume of shares worth $1 million. The SEC estimates that approximately 25% of all public companies, and approximately 38% of all companies whose shares are listed on a stock exchange would be eligible to use Form B.

In contrast to the current regulatory scheme, offerings on Form B would not be reviewed by the SEC staff. Such offerings would be declared effective by the SEC upon filing or a date designated by the issuer. The SEC would screen the Form B registration statements after receipt for anti-fraud purposes and to determine whether the issuer properly utilized the form. The purpose of these reforms is to provide issuers in registered transactions the same advantages of offering securities through a private placement or Rule 144A transaction.

Issuers registering offerings on Form A would be required to file the registration statement prior to offering the securities. The SEC would review all initial public offerings and selected repeat offerings by smaller, unseasoned issuers. Medium-sized, seasoned issuers would control the timing of effectiveness of their offerings.

Form C is intended to be used by all issuers to register business combination transactions currently registered on Forms S-4 or F-4. Form C would also serve as the required proxy or information statement for a merger or acquisition transaction. If adopted, the SEC would review the Form C prior to effectiveness in a similar manner to how it currently reviews Form S-4.

Also proposed is a revised definition of "small business issuer" which is intended to increase the number of companies who may benefit from the less stringent disclosure requirements offered to such small business issuers. Under the new definition, the existing revenue ceiling would be doubled from $25 million to $50 million. In addition, the public float requirement would be eliminated. Additional proposals would provide an earlier date by which small business issuers could incorporate by reference the disclosure contained in their periodic reports.

There would be no prospectus delivery requirements for offerings on Form B. However, the delivery of a "securities term sheet" outlining the key features of the securities to be offered would be required.

In offerings by unseasoned issuers using Form A, underwriters and dealers who participate in the offering would be required to deliver a preliminary prospectus no less than seven (7) days prior to the date the securities are to be priced. Seasoned issuers, their underwriters and dealers would be required to deliver a preliminary prospectus at least three (3) days before the date the securities are to be priced. Material changes would be communicated to investors no later than 24 hours before the securities are priced.

Perhaps most significantly, there would be no prospectus delivery requirement for final prospectuses in most offerings. Although a final prospectus would need to be filed with the SEC, most issuers would be exempt from any prospectus delivery requirement provided that a preliminary prospectus had been delivered.

The Securities Act restricts the timing and contents of communications that an issuer may make during the process of registering its securities in a public offering. The proposed rule changes would significantly curtail the current restrictions on communications before and during the period in which the issuer is in registration and essentially eliminate the "quiet period" in many offerings. The rationale behind this proposal is to facilitate capital raises while providing increased information to investors on a more timely basis. The extent to which the restrictions on communications are relaxed depends upon the type of offering.

For offerings on Form B, there would be no restrictions on offering communications before the filing of the registration statement, however, the anti-fraud and civil liability provisions will continue to apply to such communications. Any communications during the offering period (which begins thirty days before filing) must be filed with the SEC.

For offerings on Form A, the prohibition against offers being made prior to the filing of a registration statement would remain in effect. However, the SEC would formulate rules which would require restrictions on communications regarding upcoming offerings during the thirty days prior to the filing of the registration statement. During this thirty-day period, it is proposed that issuers could disclose factual business information and other forward-looking information. Once the prospectus is filed with the SEC, the restrictions on written communications would cease.

Perhaps one of the more practical aspects of the Aircraft Carrier Release is the provision of flexibility to issuers who wish to switch from a public offering to a private offering and vice versa. Although the concept of integration would not be eliminated, the proposals include safe harbors that would allow an offering previously registered but not completed to be converted to a private offering without integrating the two offerings. Relief from integration would be even easier to effect if the investors in the private offering are all qualified institutional buyers.

The two principal changes to the periodic reporting requirements under the Exchange Act include heightened director participation in the reporting process and greater promptness with which certain filings are made.

The Aircraft Carrier Release clearly reflects the SEC’s dissatisfaction with the current level of director involvement in the periodic reporting process and the disclosures made by registrants in quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K. The proposals contain provisions that will, in essence, require outside directors to "sign off" on these disclosures. Under the current system, outside directors are not required to sign Forms 10-Q and 8-K; Form 10-K must be signed by a majority of the board, but not by all directors. Under the proposed system, each director would acknowledge that he or she has reviewed and approved the disclosure. While these proposals are designed to increase director involvement in the periodic reporting process, possibly in an attempt to address "earnings management" and other concerns that have been noted by the SEC, we expect this aspect of the proposals to be deemed overly burdensome and subject to considerable debate.

In addition to requiring increased director involvement, the proposals also seek to require more prompt disclosure by an issuer of annual and quarterly financial results and more rapid reporting of Form 8-K triggering events. Also expanded are the types of events giving rise to the requirement for filing a Form 8-K, including material defaults on senior securities, departures of executives, or modifications to the rights of security holders.

The M-A Release includes proposals intended to modernize the rules and regulations applicable to mergers, acquisitions, tender offers and shareholder communications. These proposals were prompted by the need to accommodate the current environment for takeover activity. The goals underlying this proposal are consistent with the objectives of the Aircraft Carrier Release, i.e., that it is important for companies to have increased flexibility in conducting business operations, including the flexibility to announce and discuss a proposed acquisition. Unlike the Aircraft Carrier Release, the M-A Release does not distinguish between transactions based on size, or issuers based on their seasoned status.

The M-A Release would relax many of the current restrictions on communications with security holders regarding business combinations involving the registered offerings of securities. In particular, the proposals permit free communication prior to the filing of a registration statement in connection with either an exchange offer or a stock merger transaction and before the filing of a proxy statement, regardless of whether the transaction is a takeover. The proposals would also allow free communication about a proposed tender offer without triggering the commencement of the offer.

Proposals to address the disparate rules governing cash and stock tender offers are also addressed in the M-A Release. Under present law, exchange offers generally cannot begin until the registration statement for the securities to be offered becomes effective. If the SEC opts to review and comment during the waiting period, this period can become quite lengthy. Cash offers, however, may begin as soon as the required information is filed with the SEC and disseminated to security holders. In response to these disparities in regulatory treatment between exchange offers and cash tender offers, the SEC has proposed that exchange offers would be permitted to begin at the same time as cash tender offers. The SEC is attempting to eliminate the delay which handicaps bidders offering securities in takeover transactions so that they might better compete with all-cash bidders in acquiring targets, particularly when the value of the total consideration offered is equal to or greater than the value offered in a competing cash offer.

Because many takeover transactions involve a combination of tender offer, proxy solicitation and registration issues, participants in a merger or acquisition may be required to comply with several regulatory schemes. Unfortunately, compliance with multiple regulatory schemes can significantly increase the participants’ burdens and costs. The proposals address this dilemma and seek to simplify the regulatory structure for takeovers by integrating the various disclosure requirements for tender offers, going-private transactions, and other extraordinary transactions by using combined forms and uniform disclosure regulation. A "plain English" summary term sheet would also be required in all cash tender offers, cash mergers and going-private transactions. In addition, reforms to financial statement requirements for takeover transactions are also proposed.