Implications on Automatic Shelf Registration Statements for Well-Known Seasoned Issuers Following SEC Settlement

For public companies, the ability to file shelf registration statements as a Well-Known Seasoned Issuer (WKSI) can provide significant advantages. However, a settlement with the SEC can have implications on this ability, particularly in relation to a company's classification as an "ineligible issuer".

To provide some context, a WKSI enjoys the privilege of filing shelf registration statements that are instantly effective without undergoing review by the SEC Staff. Rule 405 of the Securities Act stipulates the criteria for maintaining this WKSI status. According to the rule, an issuer or a WKSI cannot be an "ineligible issuer" to retain this privilege.

An ineligible issuer is defined as an issuer, or whose subsidiaries, within the three years prior to the evaluation date, has been subjected to a judicial or administrative decree or order. This includes a settled claim or order involving allegations or violations of, or prohibiting future violations of, the federal securities laws' anti-fraud provisions. Thus, a WKSI may lose its privileged status following an SEC settlement, depending on the nature of the allegations and violations involved.

However, the regulation provides a pathway for an issuer to seek an exemption from ineligible issuer status. To secure this waiver, the issuer must establish "good cause" by demonstrating that it is not necessary for it to be considered an ineligible issuer given the circumstances. The concept of "good cause" involves an analysis of the issuer's unique situation and the implications of denying the waiver on its operations.

In terms of the administrative aspect, the SEC has vested the Division of Corporation Finance with the authority to grant waivers from ineligible issuer status. The Division, while considering a waiver, takes into account several factors including who within the issuer was responsible for the misconduct, the remedial measures implemented by the issuer, and the impact of denying a waiver on the issuer's operations.

However, the process of obtaining a waiver and demonstrating "good cause" has become increasingly stringent, especially if the underlying conduct implicating the issuer involves a violation that required the presence of "scienter" or an intention to deceive, manipulate, or defraud.

In summary, an SEC settlement can have far-reaching implications on a WKSI's ability to file automatic shelf registration statements due to the potential for the company to be classified as an "ineligible issuer". While there are pathways for a company to seek exemption from this status, the process requires a compelling demonstration of "good cause", which has become increasingly difficult in recent times. Consequently, issuers must carefully consider these potential consequences when navigating the regulatory landscape surrounding SEC settlements.

Regulatory Restrictions on Certain Offerings Following an SEC Settlement

One of the crucial aspects of a company's relationship with the SEC revolves around the offerings of securities under Rule 506 of Regulation D. This rule authorizes a company to raise unlimited capital, provided the securities are sold only to accredited investors and up to 35 additional purchasers who meet sophisticated investor criteria. However, an SEC settlement can have significant implications on a company's ability to avail itself of this rule due to certain disqualification provisions.

Joseph Lucosky

According to the provisions of the Dodd-Frank Act, the SEC was mandated to establish disqualification regulations applicable to the offerings and sales of securities under Rule 506. Under these regulations, a company's eligibility to rely on Rule 506 can be negated if certain individuals or entities, such as directors and officers who partake in the offering, have experienced a disqualifying event. Notably, disqualifying events encompass a range of incidents, including enforcement orders issued by the SEC or court judgments related to antifraud provisions of the federal securities laws, where intent to deceive, manipulate or defraud was present.

However, it is important to note that these disqualification provisions do not render a company permanently ineligible to conduct offerings under Rule 506. The regulation outlines a process through which a company can apply to secure an exemption from disqualification. Specifically, Regulation D allows a company to be exempted from disqualification if the regulatory order, which triggered the disqualification, includes a written statement indicating that the disqualification "should not arise."

In essence, a company has the opportunity to negotiate with the SEC to include such a statement in the regulatory order, thereby preventing the disqualification from taking effect. Furthermore, Regulation D offers another recourse for issuers, where they may seek a waiver by demonstrating "good cause." The waiver indicates that denying the exemption is not necessary under the circumstances. To make this request, the company must apply to the Division of Corporation Finance within the SEC.

The process of granting these waivers has been a topic of debate within the SEC and among legislators. The primary point of contention pertains to the appropriate standard for granting these waivers and the circumstances under which a company should be permitted to continue conducting offerings under Rule 506 following a disqualifying event.

Joseph Lucosky

It is also worth mentioning that the SEC retains the discretion to impose conditions on these waivers, thereby ensuring that the company meets certain regulatory requirements despite the waiver.

In conclusion, an SEC settlement can potentially disqualify a company from conducting offerings under Rule 506 of Regulation D. However, the regulations provide pathways for the company to seek exemption from this disqualification. Despite the controversy surrounding the granting of waivers, they represent an important mechanism that can allow a company to continue its capital-raising activities in the aftermath of an SEC settlement.

Implications on Safe Harbor for Forward-Looking Statements Following an SEC Settlement

The safe harbor provisions for forward-looking statements, as provided in Section 27A of the Securities Act and Section 21E of the Exchange Act, play a significant role in enabling issuers to communicate their financial expectations and business strategies to the public. These provisions offer protection from private litigation alleging that certain forward-looking statements were materially false or incomplete. However, an SEC settlement can potentially impact an issuer's ability to avail itself of these safe harbors.

Forward-looking statements are an essential tool for issuers as they allow for the communication of future plans, projections, and strategies. However, they can be a subject of contention if they turn out to be materially false or incomplete. To provide some degree of protection to issuers, the Securities Act and the Exchange Act contain safe harbor provisions which grant immunity from private litigation in such cases.

However, these provisions do not extend to all issuers indiscriminately. Specifically, an issuer cannot take advantage of the safe harbor provisions if, within the three years preceding the forward-looking statement, it has been subject to a judicial or administrative decree or order arising from a government action. This includes prohibitions on future violations of anti-fraud provisions of the securities laws or determinations that the issuer violated the anti-fraud provisions of the securities laws.

These restrictions effectively serve as deterrents against fraudulent activities, ensuring issuers maintain the highest level of integrity and transparency in their dealings. Nonetheless, the securities laws provide a mechanism for disqualified issuers to regain their eligibility for the safe harbor provisions.

Specifically, a disqualified issuer may apply to the Commission for an exemption, allowing it to once again avail itself of the safe harbor provisions. This ensures that issuers have the opportunity to demonstrate their commitment to compliance and regain the protections offered by these provisions.

In conclusion, the ability to use the safe harbor provisions for forward-looking statements can be significantly impacted by an SEC settlement. However, the securities laws provide a pathway for disqualified issuers to regain this crucial protection, highlighting the importance of maintaining strict adherence to the securities laws and regulations.