gun-jumping rules

Gun-Jumping Rules

Post-effective period• Going effective• “Prospectus delivery”• Updating prospectus

(last updated 07 Feb 13)

Gun-Jumping(controlled disclosure during registration)

Filing date

Effectivedate

Pre-filing period Waiting period Post-effective period

No sales [§ 5(a)(1)]

No deliveries [§ 5(a)(2)]

No prospectus, unless comply § 10 [§ 5(b)(1)]

No delivery w/o

§10 prospectus [§ 5(b)(2)] No offers - §8 proceeding / stop order [§ 5(c)]

No offers [§ 5(c)]

Hypothetical #1

Although Smartway (the online last-minute ticket marketer) has no analysts following it, word of its IPO gets around. Its registration statement is not yet effective.

Lan, a reporter for the Wall Street Journal, hears of the Smartway IPO and writes about Smartway’s IPO as part of a story on high-flying IPOs. (Nice coverage!) The story includes projections of Smartway’s future profitability.

Any gun-jumping?

Securities Act § 2(a)(3)

The term "sale" or "sell" shall include every contract of sale or disposition of a security or interest in a security, for value. The term "offer to sell", "offer for sale", or "offer" shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. …

Securities Act § 4

The provisions of section 5 shall not apply to--

(1) transactions by any person other than an issuer, underwriter, or dealer.

Hypothetical #2

Lavina, a research analyst for Silverman Brothers, writes a research report on Smartway, giving the company’s IPO a “neutral” recommendation.

Silverman, which is not participating in the Smartway IPO, publishes Lavina’s report – and sends it to its own brokers, and its retail and institutional clients. It’s the first time it said anything about Smartway.

Any gun-jumping?

Securities Act § 5 (b) Necessity of prospectus meeting

requirements of section 10 of this Act. It shall be unlawful for any person, directly or indirectly--

(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security with respect to which a registration statement has been filed under this title, unless such prospectus meets the requirements of section 10; or

Securities Act § 2(a)(10) The term "prospectus" means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security;

Securities Act § 4 The provisions of section 5 shall not apply to--

(1) transactions by any person other than an issuer, underwriter, or dealer.(3) transactions by a dealer … except when selling or offering securities in the post-effective period]

Securities Act § 2(a)(11) The term "underwriter" means any person who has purchased from an issuer with a view to … the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, …

Securities Act § 2(a)(10) The term "dealer" means any person who engages … as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

Rule 137 (exemption from definition of “offer” and “participates” as underwriter)

A securities firm not participating in the distribution may publish research report on securities in registration if:

(1) the securities firm has received no special compensation related to the distribution.

(2) the recommendation is in the regular course of the firm's business [compare this to Rule 139, which prevents participating securities firm to initiate coverage of issuer]

Hypothetical #3

Grace is a research analyst at Sparrow Securities, the managing UW for Smartway’s IPO.

Grace writes a research report on Smartway giving it a “buy” recommendation. (Sweet!) Sparrow publishes a summary of her report with the buy recommendation in its monthly newsletter sent out prior to the effective date of the IPO. Previously, Sparrow had not covered Smartway.

Any gun-jumping?

Rule 139 (exemption from defn of “offer”)

A securities firm that participates in the distribution may issue a report recommending the securities either:

(1) issuer-specific: issuer is seasoned reporting company eligible for Form S-3 or WKSI, or

(2) industry reports: issuer is reporting company, and the recommendation is included in a report that includes other securities, receives no special prominence, is part of the securities firm’s regular business, and issuer has been in similar reports.

Free writing prospectus (Rule 164)• allows free writing prospectus (FWP),

deemed to satisfy §10(b) if Rule 433 conditions satisfied

• available to issuer, UW or participant

Conditions (Rule 433) • info may not conflict with RS or SEC filings, • FWP must be legended (read prospectus,

how obtain) • must be accompanied by (or linked to)

preliminary/final prospectus (only applies to non-reporting and unseasoned issuers)

• must file with SEC (on date of first use)– issuers must file FWP and issuer info (press

interview)– participants must file FWP that is “broad

unrestricted dissemination”

How does RS become effective?

Going effective

Section 8(a) Effective date of registration statement

Except as hereinafter provided, the effective date of a registration statement shall be the twentieth day after the filing thereof or such earlier date as the Commission may determine, …. If any amendment to any such statement is filed prior to the effective date of such statement, the registration statement shall be deemed to have been filed when such amendment was filed;

How can the SEC realistically review the RS

in 20 days?

Going effective

Section 8(a) Effective date of registration statement

Except as hereinafter provided, the effective date of a registration statement shall be the twentieth day after the filing thereof or such earlier date as the Commission may determine, …. If any amendment to any such statement is filed prior to the effective date of such statement, the registration statement shall be deemed to have been filed when such amendment was filed;

Rule 473 Delaying Amendment

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.

When do investors get prospectus?

Prospectus delivery

Section 5(b) Necessity of prospectus meeting requirements of section 10 of this Act.

It shall be unlawful for any person, directly or indirectly--

(2) to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10.

You get prospectus only with delivery of securities.

Isn’t this a bit late?

Prospectus delivery

Rule 134(d): to obtain written indication of interest, must send preliminary prospectus

Rule 15c2-8(b): participating brokers must have sent investor prospectus at least 48 hours before confirming sale

Section 2(a)(10): defines "prospectus" to include written communication which confirms the sale of any security; except that a communication sent or given after the effective date shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of section 10 at the time of such communication was sent or given to the person to whom the communication was made,

How long does prospectus delivery requirement last?

The provisions of section 5 shall not apply to …

Section 4(1): … transactions by any person other than an issuer, underwriter, or dealer.

Section 4(4): … brokers' transactions executed upon customers' orders … but not the solicitation of such orders.

Section 4(3): … transactions by a dealer (including an underwriter no longer acting as an underwriter) except–

(B) transactions … forty days [90 days for IPOs or shorter period specified by SEC] after the effective date of such registration statement …

(C) transactions as to securities constituting the whole or a part of an unsold allotment to … such dealer as a participant … or order.


Section 4(1): … transactions by any person other than an issuer, underwriter, or dealer.

Section 4(4): … brokers' transactions executed upon customers' orders … but not the solicitation of such orders.

Section 4(3): … transactions by a dealer (including an underwriter no longer acting as an underwriter) except–

(B) transactions … forty days [90 days for IPOs or shorter period specified by SEC] after the effective date of such registration statement …

(C) transactions as to securities constituting the whole or a part of an unsold allotment to … such dealer as a participant … or order.

Rule 174:• Zero days for Exchange Act reporting issuer• 25 days for listed securities on exchange or NASDAQ• 40 days for all other offerings, except IPO• 90 days for IPO

How do underwriters and brokers selling allotment deliver prospectus?


Rule 172 (“access = delivery”)

Exemptions:• Confirmation deemed not a

“prospectus”under § 5(b)(1)• Prospectus delivery deemed

met under § 5(b)(2)

Conditions:• RS effective• No pending proceedings• Issuer has filed final prospectus

[available on EDGAR] or will within 15 days after effective date (this condition not necessary for brokers)

Rule 173 (prospectus or notice)

Applicable to:• Underwriters selling allotment• Brokers selling allotment• Issuer selling directly

Requirements:• not later than 2 business days

after sale give investor final prospectus OR notice sale was made pursuant to RS in which prospectus required, absent exemption

• Investor may request prospectus




“prospectus”under § 5(b)(1)• Prospectus delivery deemed

met under § 5(b)(2)

Conditions:• RS effective• No pending proceedings• Issuer has filed final prospectus


Rule 173 (prospectus or notice)

Applicable to:• Underwriters selling allotment• Brokers selling allotment• Issuer selling directly

Requirements:• not later than 2 business days

after sale give investor final prospectus OR notice that sale was made pursuant to RS in which prospectus required, absent exemption

• Investor may request prospectus

Hypothetical #4

Smartway’s IPO becomes effective on June 1. One of the underwriters, VillageBank was allocated 400,000 shares.

By June 3 VillageBank has sold all but 100,000 of its allocated shares. VillageBank sells shares to Kevin and with the confirmation mails a copy of the final prospectus.

Delivery OK? And who cares if he gets a prospectus now – it’s really too late for Kevin! The prospectus merely lets him know whether he bought a security or a lawsuit.


The term "prospectus" means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security; except that (a) a communication sent or given after the effective date of the registration statement … shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of section 10 at the time of such communication was sent or given to the person to whom the communication was made,

Hypothetical #5

Smartway goes public and its shares are listed on Nasdaq. Secondary market trading follows.

A week later Marx Securities, a securities dealer not participating in Smartway’s offering, sells some of its Smartway common stock inventory.

Marx mails stock certificates to purchasing investors but does not send a statutory prospectus

Delivery OK?

Broker-dealers

Section 5 applies to dealers• selling from inventory and

not acting as broker filling customer orders

• subject to prospectus delivery requirements for securities sold on NASDAQ (for 25 days from time of effectiveness)



“prospectus”under § 5(b)(1)• Prospectus delivery deemed met

under § 5(b)(2) Conditions:• RS effective• No pending proceedings• Issuer has filed final prospectus


Broker-dealers

Section 5 applies to dealers• selling from inventory and

not acting as broker filling customer orders

• subject to prospectus delivery requirements for securities sold on NASDAQ (for 25 days from time of effectiveness)



“prospectus”under § 5(b)(1)• Prospectus delivery deemed met

under § 5(b)(2)Conditions:• RS effective• No pending proceedings• Issuer has filed final prospectus


Don’t forget Rule 173 notice!

Hypothetical #6

Villagebank issues an analyst report on Smartway on June 10 – 9 days after the effective date.

Villagebank still holds 50,000 shares from its allotment. The report covers a number of high-growth companies, including Smartway. The report recommends Smartway as a “buy” and talks glowingly about Smartway’s future growth prospects.

Advise how Villagebank can send the report to its customers.

Rule 139 (exemption from defn of “offer”)

A securities firm that participates in the distribution may issue a report recommending the securities either:

(1) issuer-specific: if issuer is a seasoned reporting company eligible for Form S-3 or WKSI, or

(2) industry reports: if the issuer is a reporting company, and the recommendation is included in a report that includes other securities, receives no special prominence, is part of the securities firm’s regular business, and issuer has been in similar reports.


The term "prospectus" means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security; except that (a) a communication sent or given after the effective date of the registration statement … shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of section 10 at the time of such communication was sent or given to the person to whom the communication was made,

Hypothetical #7

Jack, a coffee importer from Brazil, decides to purchase some Smartway stock on the secondary market.

He contacts his broker, Joel, at Villagebank and instructs him to purchase 1,000 shares at the prevailing market price.

Joel executes the order for Jack on June 10, sending him a written confirmation two days later, but does not include the statutory prospectus.

Confirmation OK?

Securities Act § 4(4):

The provisions of section 5 shall not apply to

… brokers' transactions executed upon customers' orders … but not the solicitation of such orders

The end

Finally …

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