Offering Communications: Gun-Jumping Safe Harbors

What is gun-jumping?

Gun-jumping refers to the violation of restrictions surrounding offering communications that issuers or other parties are subject to under the Securities Act during a registered public offering.

A gun-jumping violation can have serious consequences, including the SEC Staff delaying effectiveness of the registration statement or refusing to allow the offering to proceed or an SEC enforcement action. Gun-jumping can also result in rescission rights for the purchasers under Section 12(a)(1) of the Securities Act.

Why did the SEC adopt Rule 168 and Rule 169 as safe harbors?

The SEC wanted to encourage issuers to continue to provide ordinary-course factual business information during the offering process, so that markets can have the benefit of issuer-specific disclosure, whether or not the company is offering securities. Because the SEC sought to continue to permit the release of ordinary-course factual business communications, both Rule 168 and Rule 169 apply to communications at any point of the offering process. 

Prior to the adoption of Rule 168 and Rule 169, the SEC had historically viewed ordinary-course factual business communications that an issuer regularly releases to not be considered an offer of securities.  In Guidelines for Release of Information by Issuers Whose Securities Are in Registration, Securities Act Release 33-5180 (August 16, 1971), the SEC stated “The Commission hereby emphasizes that there is no basis in the securities acts or in any policy of the Commission which would justify the practice of non-disclosure of factual information by a publicly held company on the grounds that it has securities in registration under the Securities Act of 1933 . . .”

The SEC has also noted that the safe harbors under Rule 168 and Rule 169 do not affect the Securities Act analysis regarding whether ordinary-course business communications that are not within the safe harbors are considered offers. Whether communications outside of the safe harbors are offers depend on the specific facts and circumstances.

Overview of Rule 168 and Rule 169

What is “factual business information”?

Factual business information means “factual information about the issuer, its business or financial developments, or other aspects of its business” and “advertisements of, or other information about, the issuer’s products or services.”  Under Rule 168, for reporting companies and certain foreign private issuers, it also includes factual business information filed with the SEC and dividend notices.

What is “forward-looking information”?

Rule 168, but not Rule 169, also provides a safe harbor for forward-looking information for reporting issuers. Forward-looking information is defined to include (i) projections, (ii) statements about management’s plans and objectives for future operations, including plans or objectives relating to products or services, (iii) statements about the issuer’s future economic performance, including statements of the type contemplated by “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” as described in Item 303 of Regulation S-K, and (iv) assumptions underlying or related to the foregoing information.

The SEC reasoned that a reporting issuer that regularly releases forward-looking information in the ordinary course is doing so for the purpose of keeping the market informed about its prospects and thus is not releasing such information for the purpose of offering securities or conditioning the market. The SEC did not want reporting issuers to suspend their ordinary course communications.

What is meant by “regularly released”?

The requirement for both factual business information and, in the case of a reporting issuer, forward-looking information to be regularly released is intended to ensure that such disclosures are not made to condition the market ahead of a registered offering.

Information is considered “regularly released or disseminated” if the issuer has previously shared the same type of information in the ordinary course of business, and the timing, manner, and format of the release are materially consistent with past disclosures.

The rule does not mandate a specific duration over which similar information must have been released. The SEC intentionally avoided a rigid standard to allow flexibility. However, the adopting release clarifies that the safe harbor requires “some track record of releasing the particular type of information.” Issuers should assess the frequency and consistency of past disclosures. If information is released on an unscheduled basis, the SEC looks to the nature of the event triggering the communication and whether the issuer previously provided communications for similar events.

Examples:

• A company releases a new non-GAAP metric and includes the non-GAAP metric in its projections shortly before a registered offering. Since this financial metric and projections are new and given the nature of the information, the company would likely not be considered to have had a sufficient track record of releasing this type of information to fit under the safe harbor.If the company was a non-reporting company, regardless of the facts, any projections would not be protected by the safe harbor since it would be considered forward-looking information.
• The economy has significantly improved and the company now expects to exceed its prior guidance. The company regularly provides guidance in its quarterly earnings release and has over the past few years occasionally revised the guidance up or down based on macroeconomic and company developments in the prior quarter. Providing the updated guidance would likely have met the requirement to have been regularly released in the ordinary course of business since the company had previously updated guidance for similar events.
• A company releases advertisements regarding a new product it is rolling out. Even though the company hasn’t previously released information on the new product, if it has a prior pattern of rolling out prior products in a similar manner, such advertisements would likely be considered to have met the requirement to have been regularly released in the ordinary course of business.
• A company previously had released product advertisements in traditional print media. It has now pivoted to releasing its newest product solely on social media. This would likely be considered to have met the requirement for the issuer to have regularly released the information in the ordinary course of business. The SEC has stated that merely using new or different technologies will not be necessarily inconsistent with the conditions of the rule and the issuer should look to whether its use of new technology is consistent in material respects with how the issuer is already releasing and disseminating its communications. For example, the issuer will have to consider whether the new technology makes a material difference in the breadth of dissemination to investors or other factors in determining whether the manner or form is consistent in material respects.
• A company preparing for an initial public offering wants to present at a new conference that discusses the role of artificial intelligence in the pharmaceutical industry. The company has only attended this conference once the prior year. This would be a facts and circumstances determination on whether it would be permissible. Factors that may cause it to be impermissible include whether the conference is heavily attended by investors, the company has not participated in similar panels before and the content of the panel seems to be aimed toward investors.
• A company releases an advertisement for a new product and the advertisement emphasizes the company’s strength and growth. In the past, the company has not included statements with respect to the company’s strength and growth in product advertisements. This would be a facts and circumstances determination based on the specific language used, but could potentially indicate it doesn’t satisfy the requirement for the manner and form of advertisement to be consistent with past practice.

What does it mean for the information to be “by or on behalf of” an issuer?

The rules indicate a communication is by or on behalf of the issuer if the “issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves such release or dissemination before it is made.”

The SEC intentionally did not provide who is an agent or representative of the issuer (other than to exclude underwriters and dealers). For example, an authorized agent or issuer could include an advertising agency or public relations firm hired on behalf of the issuer that regularly releases communications. The SEC similarly did not require an agent or representative to have been both approved and authorized for the communication.

Examples:

• An underwriter on the issuer’s offering has interviewed the issuer’s CEO annually. They want to release that video this year immediately ahead of an offering. Rule 168 and Rule 169 would not provide a safe harbor for this communication for the underwriter because underwriters are excluded from the safe harbors.
• Fast Company writes an article interviewing the CEO. This communication could be considered by or on behalf of the issuer since the CEO consented to an interview.

Why is the communication not allowed to contain information about the offering or be released as part of offering activities?

Inclusion of information about the offering or releasing the information as a part of offering activities goes against the purpose of the safe harbor which is to permit the continued release of ordinary course factual business information and, in the case of reporting issuers, forward-looking communications. The SEC declined to define “offering-related” and “part of offering activities.” It speaks again to the importance of the manner of dissemination and the SEC is focused on facts and circumstances determinations. For example, releasing an earnings release over the wire and posting it on a company’s website would fall under the safe harbor, but distributing the earnings release as part of marketing activities would not fall under the safe harbor.

For non-reporting issuers under Rule 169, what does it mean for the same issuer employees or agents who historically have been responsible for providing the information for intended use by customers and suppliers must communicate the information?

The focus of this restriction under Rule 169 is to look at the intended audience of the communication. The safe harbor can still be available even if the communication is received by or made available to investors. For example, a widely disseminated press release regarding a product launch is not disqualified from the protection of the safe harbor if it was intended for use by a non-investor audience even if investors read or receive the press release.

Does the SEC Staff comment on gun-jumping activity?

The SEC Staff regularly reviews registration statements and offering communications to determine whether issuers are complying with the securities laws. When the Staff identifies circumstances indicating that an issuer may have engaged in gun-jumping, it may issue comments addressing the issue during the course of the Staff’s review.  Communications that the SEC has identified in comment letters have included statements that an issuer includes on its website, statements included in SEC filings, articles published in industry and other media outlets, and other similar communications.