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C. Scope of Rule 165
us SEC - C&DI - Proxy Rules and Schedules
Question 1
Q: What is the scope of Rule 165 in circumstances where the issuer contemporaneously engages in a business combination and capital-raising transaction?
A: Rule 165 creates an exemption from Sections 5(c) and 5(b)(1) for written communications that offer to sell or solicit offers to buy securities in connection with or related to a business combination transaction so long as those communications are filed upon first use in accordance with Rule 425. Rule 165 does not protect communications in connection with capital-raising transactions, which are still fully subject to the Section 5 restrictions on communications before and after the filing of a registration statement. In situations where an issuer contemporaneously engages in a business combination transaction and a capital-raising transaction, whether or not an issuer can rely on Rule 165 for a specific communication depends on analysis of the facts and circumstances surrounding the communication. Absent the protection of the exemption provided in Rule 165, the dissemination and filing of a communication in connection with the business combination transaction may result in "gun jumping" or illegal free writing in connection with the contemporaneous capital-raising transaction. The preliminary note to Rule 165 states that the exemption does not apply to communications that may be in technical compliance with the rule, "but have the primary purpose or effect of conditioning the market for another transaction, such as a capital- raising transaction" (emphasis added). Thus, in the event of contemporaneous transactions, issuers and their counsel must analyze the proposed communication to determine whether its primary purpose or effect relates to the capital-raising transaction. If so, the communication will not be covered by Rule 165. Factors to be considered in determining whether the primary purpose or effect of the communication is capital-raising include, but are not limited to, the following:
- The audience or targeted audience for the communication. (For example, does the audience consist primarily of potential investors or existing shareholders?)
- The context in which the communication is made. (For example, is the communication part of a larger package of communications that relate to the business combination transaction?)
- The content of the communication. (Is the substance of the communication primarily aimed at informing an investment decision in the capital-raising transaction or a voting decision in the business combination transaction?)
We recognize that the purpose of some capital-raising transactions is to finance a contemporaneous business combination. For example, an issuer may offer and sell either debt or equity to pay the purchase price in an acquisition. Under these circumstances it will be difficult for the issuer to establish that the communication for the business combination transaction does not also have the primary purpose or effect of conditioning the market for the capital-raising transaction. Notwithstanding the foregoing analysis, where the net proceeds from a capital-raising transaction are to be used exclusively to finance a contemporaneous acquisition and the acquisition is conditioned upon the success of the capital-raising transaction, any communication that is related to either the business combination transaction or the financing transaction will not be deemed to have as its primary purpose or effect creating interest in the capital-raising transaction. Therefore, Rule 165 is available.
When the transactions are not contemporaneous, this analysis does not apply. For example, communications about the financing transaction that are made after the completion of the business combination transaction will be viewed as relating to the capital-raising transaction, and Rule 165 will not be available.
This is a work of the U.S. Government
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