Many companies embarking on an initial public offering are surprised to learn that the federal securities laws place limitations on the kinds of publicity and communications the company may engage in leading up to, during and after the IPO. A company needs to continue business, after all, and most companies need to engage in publicity, marketing and communications to promote their products and services, reach customers and generate sales. In tension with this practical goal is the desire of the SEC to regulate the informa- tion provided to potential investors to generate interest in the company’s public offering. Recently, the SEC reformed certain of its regulations governing communications during an IPO to help decrease some of the tension between a company’s need to communicate information for business purposes and the SEC’s regulation of information provided to investors.
The federal securities laws regulate the kind of information a company may use to of- fer stock in its initial public offering and the manner in which the company may provide the information. To ensure that the company conveys information about the IPO primar- ily through a written prospectus meeting federal disclosure requirements, the SEC closely regulates the kinds of communications a company may make leading up to the filing of its registration statement, between the filing and the time the registration statement is declared effective, and after effectiveness. Consequently, the types of communication a company conducting an IPO may make will vary at different stages of the IPO process. In 2005, the SEC adopted the Securities Offering Reform rules, which clarified, and in some cases significantly changed, the communications permitted during the IPO process.
The Pre-Filing Period—Don’t Jump the Gun
During the pre-filing period of the IPO, a company may not make a written or oral of- fer to sell, or solicit an offer to buy, its securities. The “pre-filing period” is the period after the company becomes “in registration” and before the company has filed its registration statement. There is no bright line as to when a company first becomes “in registration” but, at latest, a company is in registration once it reaches an understanding with a manag- ing underwriter to lead its public offering.
A company’s publicity or other business communications can inadvertently constitute a prohibited written or oral offer of its stock during the pre-filing period. The reason is that the SEC has broadly interpreted what constitutes a written or oral “offer” to include com- munications that “condition the public mind or arouse public interest in particular securi- ties.” For example,company-generated publicity touting the company could be viewed as conditioning the market to be receptive to its stock in the IPO. As a result, the SEC could view company-generated publicity during the pre-filing period as an illegal “offer” prior to the filing of the registration statement, a problem known as “gun-jumping.” The recent Securities Offering Reform, however, has created a number of safe harbors that help clarify what kinds of business communications before and during an IPO would not be considered illegal “gun-jumping.”
Rule 163A provides a safe harbor with respect to company communications more than 30 days before the filing of the registration statement. Company communications made more than 30 days prior to the filing of a registration statement will not violate the gun-jumping provisions of the Securities Act, if (1) the communication does not refer to a
securities offering that will be covered by a registration statement, (2) the communication is made by or on behalf of the company going public, and (3) the company takes reason- able steps within its control to prevent redistribution or republication of the communica- tion during the 30 days before filing the registration statement.
The first two requirements are straightforward, but what does it mean for a company to take “reasonable steps within its control” to prevent dissemination of the communica- tion during the30-day pre-filing period? There is no recipe for what actions would consti- tute reasonable steps, but the SEC did offer some helpful guidance in a few areas:
Website information. Is a company required to remove all its website information 30 days before filing to avoid gun-jumping? The SEC does not expect a pre-IPO company to necessarily remove information from its website, so long as the information is appropri- ately dated, otherwise identified as historical material and not referred to in the offering activities.
Timing of Publication of Interviews. While the SEC does not expect a company to be able to control the republication or accessing of press releases that were issued before the 30-daypre-filing period, it does expect the company to control its own involvement in communications that may be distributed or published during the 30-day period. For ex- ample, the SEC has made it clear that a company that gives an interview to the press prior to the 30-day period cannot rely on the Rule 163A safe harbor if it is published during the 30-day period.