The public offering process is divided into three periods: (1) the quiet or pre-filing period, (2) the waiting or pre-effective period, and (3) the post-effective period. Communications made by the company during any of these three periods may, depending on the mode and content, result in violations of Section 5 of the Securities Act of 1933 (the “Securities Act”). Communication related violations of Section 5 are often referred to as “gun jumping.” All forms of communication could create “gun jumping” issues (e.g., press releases, interviews, and use of social media). “Gun jumping” refers to written or oral offers of securities made before the filing of the registration statement and written offers made after the filing of the registration statement other than by means of a prospectus that meet the requirements of Section 10 of the Securities Act, a free writing prospectus or a communication falling within one of the several safe harbors from the gun-jumping provisions.
Section 5(a) of the Securities Act prohibits the sale of securities before the registration statement is deemed effective. Thus, no sales can be made during the pre-filing period unless an exemption applies.
In 2005, in order to modernize the offering process, the SEC adopted the “Securities Offering Reform,” which included adding a number of communication safe harbors from enforcement of Section 5, as discussed in more detail below. The JOBS Act enacted in 2012 added additional provisions allowing for communications during the offering process.
Communications during the quiet or pre-filing period
The quiet or pre-filing period is that time frame between the decision to proceed with a public offering and the actual filing of a registration statement with the Securities and Exchange Commission. During this period, a potential registrant is in the “quiet period” and is subject to restrictions on public disclosure relating to the offering.
The pre-filing period begins when the company, and the underwriters where applicable, agree to proceed with a public offering. During this period, key management personnel generally will make a series of presentations covering the company’s business and industry, market opportunities and financial matters to the investment community. The underwriters will use these presentations as an opportunity to ask questions and establish their due diligence.
Statements made within 30 days of filing a registration statement that could be considered an attempt to pre-sell the public offering may be considered an illegal prospectus, resulting in a Section 5 “gun-jumping” violation, if no exception or safe harbor applies. This might result in liability for violating securities laws, the SEC’s delaying of the public offering, and/or requiring prospectus disclosures of these potential securities law violations. Press interviews, participation in investment banker-sponsored conferences, and new advertising campaigns are generally discouraged during this period.
Section 5(c) of the Securities Act generally prohibits oral and written offers of a security before a registration statement is filed, which encompasses the quiet and pre-filing period. There are, however, many exceptions and safe harbor rules to this general prohibition.
Rule 163A Exception:
Rule 163A of the Securities Act exempts from Section 5 violations certain communications made by or on behalf of the company more than 30 days before a registration statement is filed. Communications by a company more than 30 days prior to filing a registration statement are permitted as long as they do not reference the securities offering and the company takes reasonable steps to prevent dissemination of the information during the 30-day period before the registration statement is filed.
As with many other communication exemptions, reliance on Rule 163A is not available to (i) blank check companies; (ii) shell companies; (iii) companies engaged in penny stock offerings; (iv) investment companies registered under the Investment Company Act of 1940 (“1940 Act”); or (v) business development companies as defined in the 1940 Act.
Rule 135 Safe Harbor:
Rule 135 allows for the publication of a limited announcement of a proposed public offering before the filing of the registration statement. The Rule 135 notice is often referred to as a “tombstone” ad. Such tombstone notice is limited to: (i) the name of the company; (ii) the title, amount, and basic terms of the securities; (iii) the amount to be offered by any selling shareholders; (iv) the anticipated timing of the offering; (v) , and a brief statement of the manner and purpose of offering, without naming the underwriters; (vi) whether the offering is directed to a particular class of purchaser (such as accredited only); and (vii) state and federal legends as required by law (including that it is not an “offer”). If the “tombstone” notice complies with the above Rule 135 requirements, the notice will not be treated as an “offer.”
Rule 169 Safe Harbor:
Rule 169 provides an exemption for communications of regularly released factual business information for non-reporting issuers. Rule 169 provides that the regular release or dissemination by or on behalf of a company of communications that contain factual business information shall not be deemed to constitute a gun-jumping violation by a company that is in the quiet, pre-effective, waiting or post-effective period of an offering. Factual business information is confined to factual information about the company, its business or financial developments, or other aspects of the company’s business, including advertisements of, or other information about, the company’s products or services. This safe harbor only applies to the release of such information by a company that has historically disseminated or released this type of information in the ordinary course of business and only by employees or others within the company who have historically been responsible for release of such information. The timing, manner, and form of the release of the information must be consistent with prior practices of the company. The released information must be intended for customers, supplies, or other individuals, but not in their capacities as investors. This safe harbor does not apply to any communication that includes information about a registered offering or is disseminated as part of offering activities for a registered offering. Furthermore, Rule 169 does not apply to dividend information or forward-looking statements. Rule 169 is not available to either 1940 Act investment companies or business development companies.
Section 105(c) of the JOBS Act – “Test the Waters” by an Emerging Growth Company:
In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted, which, in part, established a new process and disclosures for public offerings by a new class of companies referred to as “emerging growth companies” or “EGCs.”  An EGC is defined as a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011.
Section 105(c) of the JOBS Act provides an EGC with the flexibility to “test the waters” by engaging in oral or written communications with qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”) in order to gauge their interest in a proposed offering, whether prior to (irrespective of the 30-day safe harbor) or following the first filing of any registration statement, subject to the requirement that no security may be sold unless accompanied or preceded by a Section 10(a) prospectus.  Generally, in order to be considered a QIB, you must own and invest $100 million of securities, and in order to be considered an IAI, you must have a minimum of $5 million in assets.
An EGC may utilize the testing-the-waters provision with respect to any registered offerings that it conducts while qualifying for EGC status.  There are no form or content restrictions on these communications, and there is no requirement to file written communications with the SEC.  The SEC staff has suggested that it may ask to see any written test-the-waters materials during the course of the registration statement review process to determine whether those materials provide any guidance as to information that the SEC staff believes should be included in the prospectus. Marketing generally begins during the waiting period, although an EGC can make test-the-waters communications even before filing the registration statement. It is important to note that anti-fraud provisions, such as Section 12(a)(2) and 10(b), still apply to such communications.
In addition, Section 105(a) of the JOBS Act amends Section 2(a)(3) of the Securities Act to eliminate restrictions on publishing analyst research and communications while IPOs are under way. Under prior law, research reports by analysts, especially those participating in an underwriting of securities of the subject company, could be deemed to be “offers” of those securities under the Securities Act and, as result, could not be issued prior to completion of an offering. Section 2(a)(3) of the Securities Act as amended by Section 105(a) of the JOBS Act provides that publication or distribution by a broker or dealer of a research report about an EGC that is the subject of a proposed public offering of its securities does not constitute an offer of securities, even if the broker or dealer that publishes the research is participating or will participate as an underwriter in the offering. Moreover, the term “research” is defined broadly as any information, opinion or recommendation about a company and includes oral as well as written and electronic communications. This research need not be accompanied by a full prospectus and need not provide information “reasonably sufficient upon which to base an investment decision.” The research need not even be consistent with the prospectus, if there is one. In other words, research providers are free to say just about anything they wish about an IPO candidate, limited only by the general anti-fraud rules.
Section 105(b) of the JOBS Act eliminates existing restrictions on publishing research following an IPO or around the time the IPO lockup period expires or is released. Currently, under SEC and Financial Industry Regulatory Authority (“FINRA”) rules, underwriters of an IPO cannot publish research for 25 days after the offering (40 days if they served as a manager or co-manager), and managers or co-managers cannot publish research within 15 days prior to or after the release or expiration of the IPO lockup agreements (so-called “booster shot” reports). The Act requires FINRA and the SEC to eliminate these restrictions with respect to EGCs. As a result, any research analyst will be able to publish at any time after an EGC IPO, including immediately after the offering. On October 11, 2012, FINRA amended its rules to conform with the requirements under Section 105(b) of the JOBS Act. In particular, it amended NASD Rule 2711 to eliminate all quiet periods.
The Waiting or Pre-Effective Period
The waiting or pre-effective period is that time frame between the filing date and the effective date of the registration statement. Â During this period, the company may generally make oral offers, but may not enter into binding agreements to sell the offered security.
The pre-effective period is the period during which, among other things, the company begins marketing the offering, through real-time oral offers, including calls to potential investors. Section 5(b)(1) of the Securities Act prohibits written offers other than by means of a prospectus that meets the requirements of Section 10 of the Securities Act. Such bans are designed to prohibit inappropriate marketing, conditioning or “hyping” of the security before all investors have access to publicly available information about the company so that they can make informed investment decisions. Thus, other than a free writing prospectus for qualified companies, the only written sales material that may be distributed by the company during this period is the preliminary prospectus, which must satisfy specified SEC requirements. While binding commitments cannot be made during this period, the underwriters will receive indications of interest from potential purchasers, indicating the price they would be willing to pay and the number of shares they would purchase. Once SEC comments are resolved, or it is clear that there are no material open issues, the company may undertake a two- to three-week “road show” during which management will meet with prospective investors.
As with other offering periods, many exemptions and safe harbors exist to allow for communications during the pre-effective waiting period.
Free Writing Prospectus
A free writing prospectus is any written communication that could constitute an offer to sell or a solicitation of an offer to buy securities subject to a registration statement that is used after the filing of a registration statement and before its effectiveness. A free writing prospectus is a supplemental writing that is not part of the filed registration statement. If the writing is simply a repetition of information contained in the filed registration statement, it may be used without regard to the separate free writing prospectus rule.
For purposes of rules related to free writing prospectus, all communications that can be reduced to writing are considered a written communication. Accordingly, radio and TV interviews, other than those published or given to unaffiliated and uncompensated media, would be considered a free writing prospectus and subject to the SEC use and filing rules.
All free writing prospectuses must contain a specific notice legend as set forth in Rule 433 of the Securities Act. A free writing prospectus must be filed with the SEC, using Form 8-K, no later than the date of first use. An after-hours filing will satisfy this requirement as long as it is the same calendar day. Moreover, all free writing prospectuses must be filed with the SEC, whether distributed by the registrant or another offering participant and whether such distribution was intentional or unintentional.
A free writing prospectus may be used by any issuer that is not “ineligible.” The following entities are ineligible to use a free writing prospectus: (i) companies that are or were in the past three years a blank check company; (ii) companies that are or were in the past three years a shell company; (iii) penny stock issuers; (iv) companies that conducted a penny stock offering within the past three years; (v) business development companies; (vi) companies that are delinquent in their Exchange Act reporting requirements; (vii) limited partnerships that are engaged in an offering that is not a firm commitment offering; and (viii) companies that have filed or have been forced into bankruptcy in the last three years.
Once SEC comments are cleared, the company will request that the SEC declare the registration statement “effective” at a certain date and time.
Rule 169 Safe Harbor:
The Rule 169 safe harbor as discussed above is also available during the pre-effective waiting period.
Rule 134 Written Solicitation of Interest:
This rule permits the company to communicate limited factual information about the offering after the Section 10 prospectus is filed. Rule 134 communications are not deemed to be either prospectuses or free writing prospectuses. Rule 134 communications may only be made after a registration statement has been filed with the SEC.
A Rule 134 communication may include one or more of the following information: (i) factual information about the legal identity and business location of the company including name, address, phone number, web address, e-mail address, principal office location, investor relations contact information, country or state of location or organization and similar information; (ii) the title and amount of securities offered, which can include a designation such as “preferred,” “convertible” or “secured”; (iii) a brief statement of the general type of business of the company; (iv) the price of the security, if known; (v) a brief description of the intended use of proceeds; (vi) the type of underwriting (self, firm commitment or best efforts); (vii) names of underwriters and other offering participants; (viii) schedule and timing of the offering, including road show dates, times and locations; (ix) legal opinions as to specified tax treatment; (x) the names of selling security holders; (xi) names of exchanges or other markets where the security currently trades, and (x) the ticker symbol.
The communications must contain the prescribed legend, be preceded or accompanied by a Section 10 prospectus, and state where the statutory prospectus can be obtained.
Section 105(c) of the JOBS Act – “Test the Waters” by an EGC:
Section 105 of the JOBS Act is also available during the pre-effective waiting period.
The Post-Effective Period
The post-effective period is that time frame between the effective date of the registration statement and the completion of the offering as disclosed in the registration statement. Section 5(b)(2) of the Securities Act makes it unlawful to sell or deliver a security after sale unless accompanied by a prospectus that meets the requirements of a Section 10 final prospectus and any amendments or updates.
As with other offering periods, many exemptions and safe harbors exist to allow for communications during the post-effective period.
Rule 168 Safe Harbor:
Rule 168 is only applicable for reporting companies, and it allows the company to communicate regularly released factual business information. Factual business information is confined to factual information about the company, its business or financial developments, or other aspects of the company’s business, including advertisements of, or other information about, the company’s products or services. This safe harbor only applies to the release of such information by employees of the company who are historically responsible for providing such information to persons other than investors. The timing, manner, and form of the release of the information must be consistent with prior practices of the company. The released information must be intended for customers, supplies, or other individuals, but not in their capacities as investors. This safe harbor does not apply to any communication that includes information about a registered offering or is disseminated as part of offering activities for a registered offering. Furthermore, Rule 168 does cover forward-looking statements.
Rule 134 Written Solicitation of Interest:
See discussion above. This rule permits the company to communicate limited factual information about the offering after the Section 10 prospectus is filed. Rule 134 communications are not deemed to be prospectuses. The communications must contain the prescribed legend, be preceded or accompanied by a Section 10 prospectus, and state where the statutory prospectus can be obtained.
Section 105(d) of the JOBS Act:
Section 105 of the JOBS Act is also available during the post-effective period.
Consequences of Violating the Gun Jumping and Offering Communication Rules
A technical violation of the communication rules is enough to establish a violation of Section 5 of the Securities Act; intent is not a consideration. The consequences for violating gun-jumping rules could include a delay in the effectiveness of the company’s registration statement (“cooling off period”), the requirement that the company file the communications made with the SEC as a supplement to the registration statement and thereby make such communication subject to the liability imposed on such filings, administrative penalties, and/or rescission rights for the purchasers of securities.
A famous example is associated with the IPO of Google, Inc. In a pre-IPO interview with founders Sergey Brin and Larry Page, published in Playboy magazine, Brin and Page made favorable comments about Google – of course. The interview did not include any mention of the offering or the securities of the company. Moreover, the statements appeared innocuous, including such generalities as “people use Google because they trust us.”
The SEC determined that the interview resulted in gun jumping and required Google to:Â (1) revise its prospectus to include a risk factor warning that the Playboy interview may have violated Section 5; (2) include the full text of the Playboy article in the prospectus (thus subjecting its contents to the strict liability standards for the truth and accuracy of information filed with the SEC); and (3) address certain discrepancies between statistics in the article and prospectus.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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