broker-dealers, and the global research analyst settlement,16 had addressed the “veracity and reliability” of research reports, as well as other potential abuses associated with these reports.17
In particular, the SEC stated that it expects
research reports “will better disclose conflicts of interest relating to research of which investors should be aware.”18 In light of these developments, the SEC decided it was “appropriate to make measured revisions to the research rules that are consistent with investor protection but that will permit dissemination of research around the time of an offering under a broader range of circumstances.”19
Rule
137 applies to broker-dealers not participating in a registered offering and therefore not classed as underwriters. In order not to violate the gun-jumping provisions and solicitation prohibitions, the broker-dealer must publish the report in the ordinary course of its business, and may not receive any consideration from, or act under any direct or indirect arrangement with, the issuer of the securities, a selling security holder, any participant in the distribution of the securities, or any other person interested in the securities. Furthermore, the issuer may not be, nor have been in the past three years: a blank cheque company,20
a shell company,21 or a penny
stock issuer.22 Rule 138 applies to broker-dealers participating in the
distribution of a different security from that being discussed in the research reports. Rule 138 permits a broker-dealer that is participating in the distribution of an issuer’s securities to publish and distribute research reports that either: relate solely to the issuer’s common stock, debt securities, or preferred stock convertible into common stock, where the offering involves solely the issuer’s non- convertible debt securities or non-convertible non-participating preferred stock; or relate solely to the issuer’s non-convertible debt securities or non-convertible, non-participating preferred stock, where the offering involves the issuer’s common stock, debt securities, or preferred stock convertible into common stock. In order to take advantage of Rule 138, the broker-dealer must regularly report on the types of securities that are the subject of the research report. The issuer involved must not be a blank cheque company, shell company or penny stock issuer and be either: • a reporting company (foreign or domestic) and current in its Exchange Act filings; or
• a foreign private issuer that meets all of the registrant requirements of the revised Form F-323
(other than the
reporting history provisions of General Instructions IA1 and IA2(a) to Form F-3) and either: – satisfies the $75 million minimum public float threshold in General Instruction I.B.1. of Form F-3,
68 JOBS Act Quick Start
JOBS Act Title I changes Recognising the contribution of research coverage to the market for emerging companies, the JOBS Act attempted to address some logistical issues relating to the diligence
or
– is issuing non-convertible securities other than common equity, and meets the provisions of General Instruction IB2 of Form F-3; and either: has its equity securities trading on a “designated offshore securities market” as defined in Rule 902(b) of the Securities Act, and has had them trading for at least 12 months, or has a worldwide public float of $700 million or more.
Rule 139 applies to broker-dealers participating in the
registered distribution of the same security as that discussed in their disseminated research reports. The broker-dealer must publish or distribute research reports in the regular course of its business, and such publication or distribution cannot represent either the initiation of publication or the re-initiation of publication. The issuer may not be a blank cheque, shell or penny stock issuer, and must: • have filed all required Exchange Act reports during the preceding 12 months;
• meet all the registrant requirements of the revised Form S-3/F-3 (other than the reporting history provisions of General Instructions IA1 and IA2(a) to Form F-3), and either: – satisfies the minimum public float threshold in General Instruction IB1 of Forms S-3/F-3,
– is or will be offering non-convertible securities other than common equity and meet the threshold pursuant to General Instruction IB2 of Form S-3/F- 3,24
or is
a WKSI as defined in Rule 405 of the Securities Act, or a foreign private issuer that satisfies the same requirements as for Rule 138.
Over time, commentators have noted that the SEC’s communications rules are outmoded and need to be revised because they have the effect of inhibiting more information from being made available to the investing public. The IPO Task Force Report recommended that the SEC expand the existing safe harbours in order to permit broker-dealers to initiate coverage and distribute research on IPO issuers without being deemed to have offered securities through the research reports, and include oral (in addition to written) communications within the scope of the safe harbours.
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