Introduction

The Securities and Exchange Commission (the "SEC") has adopted Rule 155 under the Securities Act of 1933 (the "1933 Act"), which provides a safe harbor for registered offerings following abandoned private offerings, and for private offerings following abandoned registered offerings. In either case, Rule 155 provides companies with the comfort of knowing that if they switch from a registered to a private offering, or vice versa, the two offerings will not be integrated, provided they comply with the requirements of Rule 155.

Rule 155 will significantly enhance a company’s ability to adapt its financial plans to changes in prevailing market conditions. For example, if market conditions are such that a registered public offering will not likely become fully subscribed, the issuer may instead wish to undertake a private offering to raise the needed capital. Conversely, where there is sufficient demand, an issuer may wish to abandon a private offering and undertake a registered offering with a wider distribution. In the past, switching from registered to private, and vice versa, gave rise to integration problems which resulted in delayed or abandoned offerings. This, in turn, spawned a host of no-action letters and SEC staff positions that protected some of such transactions against integration problems. Rule 155, however, provides a more comprehensive and workable safe harbor from integration for these transactions.

Integration

The integration doctrine provides that in certain circumstances multiple securities transactions may be considered part of the same offering for purposes of determining whether registration of the securities is required, or an exemption from registration is available. Where multiple transactions are integrated, an exemption from registration will not be available unless the exemption applies to all offers and sales of securities in all of the transactions. If an exemption is unavailable for each offer and sale, the issuer would not be able to proceed with the transaction. If the offer or sale is completed before discovering the unavailability of an exemption, then the issuer would likely have to deal with the consequences of a defective transaction and might well need to rescind any sales that were completed. The doctrine of integration serves to prevent an issuer from evading the registration requirements of the 1933 Act by dividing a single offering into several parts, each of which would be individually exempt but not exempt when aggregated.

The SEC has cited five factors that are generally considered in determining if offers and sales should be integrated. Any one or more of the following factors could be determinative of whether integration is applied to multiple transactions that:

• are part of a single plan of financing;
• involve the issuance of the same class of securities;
• are made at or about the same time (and this is the factor that is most relevant to the transactions now protected by Rule 155);
• are sold for the same type of consideration; or
• are made for the same general purpose.

Historically, Rule 502(a) of Regulation D, promulgated under the 1933 Act, has provided a safe harbor from the application of the integration doctrine where private offerings are made at least six months apart. Thus, where offers and sales of securities pursuant to Regulation D are made more than six months before the start of a Regulation D offering or more than six months after the completion of the Regulation D offering, Rule 502(a) prevents the integration of such offerings. Because Regulation D only applies to certain private offerings, Rule 155 provides an issuer with significantly greater flexibility where public offerings are involved. Where the Rule 155 safe harbor is not available, issuers will continue to need to review the five factors to determine if a series of transactions constitutes a single integrated offering.

Abandoned Private Offering followed by a Registered Public Offering

In order to avail themselves of the safe harbor under Rule 155, issuers that start a private offering may switch to a registered offering only if:

• no securities are sold in the private offering;
• the issuer stops all activities relating to the private offering before the registration statement is filed; and
• the issuer waits at least 30 days from the last offering activity under the terminated private offering prior to filing the registration statement, unless the private offering was made only to accredited or sophisticated investors.

The prospectus relating to the registered offering must contain information about the abandoned private offering, including the following:

• the size and nature of the private offering;
• the date on which the offering activity under the terminated private offering was terminated;
• a statement that any offers to buy, or indications of interest, were rejected or otherwise not accepted; and
• a statement that the prospectus supersedes any selling material used in the private offering.

The SEC has directed its staff to monitor the use of Rule 155. The SEC staff may request additional supplemental information regarding the termination of offering activity relating to the private offering in order to ensure a clean cutoff between the private offering and the registered public offering. Consequently, issuers who intend to conduct such a transaction in reliance on Rule 155 should exercise care in documenting the termination of their private offerings that precede registered offerings.

Abandoned Registered Offering followed by a Private Offering

Issuers may also abandon a registered offering and follow it with a private offering if certain conditions are met. This will be especially useful to issuers where the general solicitation associated with a typical public offering would violate the prohibitions on solicitation applicable to private offerings. Rule 155 establishes the following conditions for the use of this safe harbor:

• no securities are sold in the registered offering;
• the registration statement is withdrawn;
• the issuer waits at least 30 days following the withdrawal of a registration statement before starting a private offering; and
• the documents used in the private offering must disclose any material changes in the issuer’s business or financial condition that occurred after the issuer filed the registration statement pertaining to the public offering.

An issuer utilizing this safe harbor must also provide a notice to each offeree in the private offering that indicates the following:

• the offering is not registered;
• the securities are "restricted securities" as defined under Rule 144 and may only be resold pursuant to a registration statement or an exemption from registration;
• purchasers of securities in the offering will not have the protection of Section 11 of the 1933 Act, which provides for civil liabilities in connection with false registration statements;
• the registration statement for the abandoned public offering was filed and withdrawn and the date of withdrawal of the registration statement.

The requirements outlined above were designed by the SEC to ensure that the private offering is distinct from the registered offering and that potential investors understand how the risks and benefits associated with the private and registered offerings differ from one another.

Acknowledging that issuers would not ordinarily incur the costs of a registered offering with the intent of withdrawing it and later commencing a private offering, the SEC has nonetheless observed that the use of a registered offering to generate publicity for the purpose of soliciting purchasers for a later private offering would be considered a plan or scheme to evade the registration requirements of the 1933 Act and, as such, the safe harbor would not be available in such a circumstance.

Related Rule Amendments

To help facilitate the withdrawal of a registration statement under the Rule 155 safe harbor, the SEC amended Rule 477 to provide that an application for withdrawal of a registration statement prior to its effectiveness will be deemed granted upon filing unless the SEC objects within 15 days. The SEC also amended Rules 429 and 457 to allow an issuer to use the filing fees associated with a withdrawn registration statement to offset future filing fees.

The new rule and related amendments take effect 30 days after their publication in the Federal Register. The full text of the new rule and related amendments may be found at the SEC’s website: www.sec.gov.