Company: Private Financial Network

Public Availability Date: March 12, 1997

WSB File No. 031097020

Fiche Locator No. 2729F6

WSB Subject Category: 032

       
Reference:
        Securities Act of 1933, Section 2(10)
       
       

March 12, 1997

Mr. Brian J. Lane
Director
Division of Corporation Finance
U.S. Securities and Exchange
Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Private Financial Network

Dear Mr. Lane:

        Wilmer, Cutler & Pickering requests your advice concerning the applicability of Section 2(10) of the Securities Act of 1933 (the "1933 Act") to limited audience, video transmissions of "road show" meetings concerning public offerings of certain securities. The road shows will be transmitted on the Private Financial Network ("PFN"), which is a wholly-owned subsidiary of MSNBC Interactive LLC, a joint venture of the National Broadcasting Co., Inc. and Microsoft Corporation.
       
        We seek your assurance that the Staff of the Division of Corporation Finance (the "Division") would not recommend enforcement action to the Commission if PFN transmitted road shows to its subscribers as described herein and operated on the basis that such transmissions were not prospectuses under Section 2(10) of the 1933 Act.
       
Current Operations of PFN

        PFN was launched approximately three years ago as a companion to the "First Call" textual research service owned by Thompson Financial Services, Inc. First Call distributes textual research summaries from more than 55 brokerage firms to more than 1,400 investment firms; PFN provides a companion video component.
       
        PFN currently has fewer than 100 subscribers, principally registered broker-dealers and investment advisers. Each PFN subscriber enters into a user contract, pursuant to which it acquires the right to receive and display this programming on their workplace computer screens and television monitors. Current PFN programming includes interviews, such as with chief executive officers; coverage of analysts' meetings; coverage of news conferences and product announcements by major companies; and coverage of brokerage conferences. PFN does not currently transmit road shows.
       
        PFN is distributed to its subscribers by KU satellite, by T1 telephone circuits, and by fiber optic or other cable. Reception of satellite transmission requires a decoder made available only to PFN subscribers. Distribution by telephone lines or cable is also secure and directed to a particular personal computer or other receiver.
       
How Road Shows Are Conducted

        A "road show" typically consists of a series of individual presentations by an issuer and its underwriters, intended to develop potential investors' interest in a public offering by showcasing the issuer, its management, and the securities being offered. Stephen J. Schulte, IPO Road Shows: A Primer for the Practitioner in 26th Ann. Ins. on Sec. Reg., ch. 20, at 529 (1994). These presentations are typically held in various cities during the "waiting period" before the registration statement is declared effective, which allows underwriters to help assess demand for the offering and price the securities. Id. at 531-32; 1 Louis Loss & Joel Seligman, Securities Regulation 337 (3d ed. 1989).
       
        Each road show presentation generally lasts about two hours, usually over the course of a breakfast or lunch. Schulte, supra, at 534. Depending on the projected size of an offering, the issuer's industry, and the investors targeted, the road show may be held over a number of days, or stretch into weeks, and may be held on a regional, national, or international basis. Id. at 529. Attendees at road show presentations include potential investors, securities firms, securities trading and sales personnel, portfolio managers, and analysts. Id.; see also Larry W. Sonsini, Richard J. Char, Gail Clayton Husick, The Regulation of the Registration and Distribution Process Under the Securities Act of 1933 in 26th Ann. Ins. on Sec. Reg., ch. 21, at 624 (1994); Gregory M. Priest, Practical Aspects of the Initial Public Offering, 861 PLI/Corp 617, 625 (1994). Each attendee is provided with a copy of the preliminary prospectus filed with the Commission. Schulte, supra, at 558.
       
        During a road show meeting, the issuer's management and underwriters make presentations, generally lasting about 30 minutes, to explain the issuer's business and industry and review the basic terms of the offering. Schulte, supra at 553-34; Tom Pratt, On the Road Again . . ., Investment Dealers' Digest, Sept. 20, 1993. After these presentations, speakers may address matters that may be of particular interest or concern to an audience and will also respond to questions from attendees. Schulte, supra, at 534. Visual aids, such as slides, charts, and videotapes, are often used. Id. at 536-37. Closed-circuit television may also be used to accommodate large audiences. See id. at 554-55.
       
Proposed Video Transmissions of Road Shows

        PFN proposes to transmit road shows for public offerings to its subscribers, either live as the shows occur or on a delayed basis. PFN will not transmit a single road show to any subscriber more than two times. As compensation, PFN will receive only its regular subscription fees and a flat fee for the product and transmission of the road shows.
       
        In practice, PFN transmissions of road shows will help issuers channel timely and consistent information about themselves and their securities to potential investors who otherwise could attend the shows but might find it expensive or difficult to do so. And, as discussed more fully below, each PFN transmission of a road show will have three features that will help ensure compliance with the 1933 Act: (1) video transmissions will be available only to PFN subscribers, who will agree not to videotape, copy or further distribute the transmissions; (2) before a road show is transmitted, each PFN subscriber will receive a filed prospectus from the issuer or the underwriter; and (3) issuers and underwriters will be required to take reasonable steps to ensure that information disclosed in the road show is not inconsistent with the filed prospectus; and (4) each transmission will include visual statements or "crawls" emphasizing the importance of the filed prospectus and the prohibition against videotaping, copying or further distribution.
       
        Restricted Audience. The audience for the video transmissions will be restricted to PFN subscribers. Transmissions will be available only to PFN subscribers.
       
        Primacy of Filed Prospectus. The issuer and/or the underwriter will be contractually required to distribute prospectuses to all PFN subscribers before any road show airs. If road shows are transmitted during the waiting period, a Section 10(b) preliminary prospectus (the so-called "red herring") will be distributed to all subscribers in advance of the transmission. If road shows are transmitted after the effective date of the relevant registration statement, a Section 10(a) statutory prospectus will be distributed to all subscribers in advance. ¹ PFN subscribers will be required to agree and acknowledge in their contracts that they must receive the relevant prospectus before viewing any road show that PFN transmits.
       
        Content. The road shows themselves will not be edited for content. Subscribers generally will see the road shows in their entirety. ² Although issuers and underwriters will have exclusive control over the content of the road show transmissions, they will be contractually required to take reasonable steps to ensure that information discussed in the road show is not inconsistent with the filed prospectus.
       
        Transmissions of road shows will begin and end with the following visual statement emphasizing the primacy of the filed prospectus:
       
A prospectus has been furnished to each subscriber, and subscribers should refer to the prospectus and/or the registration statement for more complete information about the offering.

        If the registration statement is not effective when a road show is transmitted, the transmission also will include visual statements of the Rule 134(b) legend, to the effect that the securities may not be sold and offers to buy cannot be accepted before the effective date. ³ Additionally, the viewers will be reminded by crawls at least three times during a transmission that reception is restricted to PFN subscribers who have received a prospectus and that transmissions cannot be videotaped or copies or used in any manner to sell securities to the general public.
       
Legal Analysis

        Section 2(10) of the 1933 Act defines prospectus, in pertinent part, to include "any . . . communication, written or by radio or television, which offers any security for sale or confirms the sale of any security. . . ." For the reasons discussed below, we believe that PFN's limited audience transmissions of road shows would not be prospectuses requiring compliance with Section 10.
       
        Clearly, road shows and other such selling efforts during the waiting period are not themselves "prospectuses" because they are oral and visual -- not "written." Russell B. Stevenson, Jr., The Waiting Period and SEC Processing, C951 ALI-ABA 133 (July 28, 1994). ⁴ Video transmissions of essentially the same material would be prospectuses only if such transmissions constituted "radio" or "television" within the meaning of Section 2(10). We do not believe that they would.
       
        The reference in Section 2(10) to "radio" or "television" is to broadcasting, not to the use of radio or television technology for closed-circuit or other controlled retransmission of non-prospectus materials. That Congress intended to reach only radio and television broadcasts in Section 2(10) is clear from Section 10(f) of the 1933 Act, which provides that "in any case where a prospectus consists of a radio or television broadcast, copies thereof shall be filed with the Commission under such rules and regulations as it shall prescribe." (Emphasis added). By limiting the reach of Section 10(f) to broadcasts, Congress made clear that it was concerned with mass communications to the public, and that the only sort of radio and television transmission that could be deemed a prospectus was a broadcast. ⁵
       
        In 1933, "radio" meant broadcasts scattered over a 360-degree radius, not person-to-person transmissions. When Congress added "television" to Section 2(10) in 1954, it sought only to "eliminate any possible doubt . . . that might arise through amendment of the act at this time without express recognition of technical advances in the radio industry." S. Rep. No. 1036 at 12; H.R. Rep. No. 1542 at 21, 83rd Cong., 2d Sess. (1954). Thus, Congress equated television as it existed in 1954 with radio as it existed in 1933. Importantly, television in 1954 -- like radio then and in 1933 -- was used only for broadcasts scattered over a 360-degree radius. As the word "broad"cast itself implies, anyone with a television set or radio in the viewing or listening area could pick up a broadcast signal. Once the signal was sent, there was no way to tell who received it. There was also no way to ensure that everyone who received it previously had received a prospectus meeting the requirements of Section 10.
       
        The mere fact that video transmissions are associated with television technology does not make them "television" within the meaning of Section 2(10). Indeed, the Division has taken at least two no-action positions that appear to be based on this distinction. In Exploration, Inc., SEC No-Action Letter, 1986 SEC No-Act. LEXIS 2891 (Nov. 10, 1986), the Division took a no-action position regarding videotapes shown on television monitors at road shows and distributed to prospective underwriters and selling group members. And in Producers Funding Corp., SEC No-Action, 1982 WL 30515 (March 9, 1982), the Division took a no-action position regarding cable telecasts of "backers' auditions," or condensed versions, of Broadway plays, which would conclude with tombstone advertisements to encourage investment in the plays.
       
        The United States Supreme Court recently recognized that "when the 1933 Act was drawn and adopted, the term 'prospectus' was well understood to refer to a document soliciting the public to acquire securities from the issuer." Gustafson v. Alloyd Co., Inc., No. 93-404, slip op. at 13 (U.S. Feb. 28, 1995) (emphasis added). Thus the Court concluded that when Congress employed this "term of art" in Section 2(10), it intended to reach only those documents or communications that are widely disseminated to an undifferentiated public rather than to a discrete, "invited" audience.
       
>From the terms "prospectus, notice, circular, advertisement, or letter," it is apparent that the list in Section 2(10) refers to documents of wide dissemination. In a similar manner, the list includes communications 'by radio or television' but not face-to-face or telephonic communications. Inclusion of the term "communication" in that list suggests that it too refers to a public communication.

        Id.; see also id. at 14 ("The term 'written communication' includes communications held out to the public at large . . . .")
       
        In sum, references to radio and television in Section 2(10) were intended to prevent mass communications to the public unaccompanied by the sort of disclosure required by Section 10. In 1954, Congress simply did not consider the possibility that the distribution or reception of television could be restricted to recipients of a prospectus by mechanisms like secure person-to-person video transmissions. Video transmissions like those proposed by PFN are video teleconferences and to closed circuit television transmissions to overflow attendees at a road show. See Schulte, supra, at 554-55 (concluding closed circuit television should be permissible at road shows "because it is tantamount to a 'live' presentation where management is interacting face-to-face").
       
        Moreover, PFN will take various steps to ensure that its video transmissions advance, rather than undermine, the goals of the 1933 Act. Issuers and underwriters will be required to take reasonable steps to ensure that information disclosed in a road show is not inconsistent with the prospectus on file with the Commission. They will have every incentive to do so, since the road shows will not be edited for content and the transmissions will create a record that could later be scrutinized. Perhaps most importantly, all PFN subscribers will receive a prospectus before a road show is transmitted. Such advance distribution is critical to the disclosure regime established by the 1933 Act. Indeed, the Division initially declined to take a no-action position in Products Funding Corp. when no such distribution was proposed in connection with cable telecasts of backers' auditions. Producers Funding Corp., SEC No-Action, 1982 WL 30065 (Dec. 28, 1981). The Division reversed its position, however, after Producers Funding filed a supplemental request providing that the filed prospectus would be distributed electronically to every viewer. Producers Funding Corp., SEC No-Action, 1982 WL 30515 (March 9, 1982). Similarly, in Exploration, Inc., the Division took a no-action position based in part on the contemporaneous distribution of preliminary prospectuses. Exploration, Inc., SEC No-Action Letter, 1986 SEC No-Act. LEXIS 2891 (Nov. 10, 1986).
       
Conclusion

        Permitting video transmissions under the controlled conditions proposed above will help American companies and the financial industry benefit from technology not available (and certainly not of concern to Congress) in 1954 -- even as they comply with the disclosure and other requirements of the federal securities laws. As our discussion demonstrates, Congress did not consider video transmissions to a limited audience when it included "radio" and "television" in the term "prospectus." Under the circumstances presented here, PFN transmissions will be nothing more than electronic extensions of road shows and should not be deemed prospectuses.
       
        In accordance with the foregoing, we request that you advise us that the Division would not recommend enforcement action to the Commission if PFN transmitted road shows for the purposes and pursuant to the procedures outlined above and operated on the basis that such transmissions were not prospectuses within the meaning of Section 2(10) of the 1933 Act.
       
        In accordance with Release No. 33-6269, we are enclosing seven copies of this letter with the original. Should you have any questions regarding this request, please contact me at 202-663-6278.
       
Sincerely,

Stephen M. Cutler
for Wilmer, Cutler & Pickering

Enclosures

 

       
March 12, 1997

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Private Financial Network ("PFN")
Incoming letter dated March 12, 1997

        Based on the facts presented, the Division will not recommend any enforcement action to the Commission if PFN transmits a company's road show presentation to PFN's subscribers for the purposes and pursuant to the procedures described in your letter in reliance on your opinion as counsel that such transmissions are not prospectuses within the meaning of Section 2(10) of the Securities Act of 1933.
       
        Because this position is based on the representations made to the Division in your letter, it should be noted that any different facts or conditions might require another conclusion. Further, this response represents the Division's position on enforcement action only and does not purport to express any legal conclusion on the questions presented.
       
Sincerely,

Martin P. Dunn
Chief Counsel


¹Under these circumstances, the transmissions would be expressly excluded from the definition of prospectus under ¤2(10)(a), which exempts from the definition of a prospectus any "communication sent or given after the effective date of the registration statement if prior or at the time of such communication a written prospectus meeting the requirements of sub(a) of section 10 . . . was sent or given to the person to whom the communication was made." 15 U.S.C. ¤77b(10(a). See Morris Cheston and Alex Seldin, Gun-Jumping and Free Writing: Communications Hazards to Avoid When Going Public, in 8 Insights 11 (May 1994).

²PFN reserves the right, in connection with delayed transmissions, to edit out "dead time" arising from logistical or similar problems at the road shows and to give the issuer and/or underwriter the opportunity to edit out misstatements or mistakes.

³The Rule 134(b) legend in its entirety provides as follows:

A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This transmission shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

⁴Of course, such oral communications, while not prospectuses, remain subject to the antifraud provisions of the 1933 Act and the Securities Exchange Act of 1934. Schulte, supra, at 547; Sonsini, et al., supra, at 625.

⁵Section 10(f) has remained essentially unchanged since 1933, other than the 1954 addition of "television." See Pub. L. No. 22, ¤10(d), 73rd Cong., 1st Sess. (May 27, 1933); see also S. Rep. No. 1036 at 18; H.R. Rep. No. 1542 at 26, 83rd Cong., 2d Sess. (1954) (noting technical amendments to then ¤10(d)).



 

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