U.S. Securities Regulation & Offerings: What Corporate Counsel Need to Know

1. U.S. Securities Regulation & Offerings: What Corporate Counsel Need to Know Cleary Gottlieb J.P.Morgan Adam Fleisher NeilaRadin Pamela Marcogliese April 23, 2013

2. Overview • Securities Act of 1933 • Securities Exchange Act of 1934 • Annex A: Spotlight on Financial Statements • Annex B: Sample Timelines

3. Part I: Securities Act of 1933

4. Securities Act of 1933 • Statutory Framework • Introduction • Registration, Exemption or Liability • Exemptions • Publicity &“Gun-Jumping” • Emerging Growth Companies • Deal Mechanics • Timeline • Due Diligence • Key Disclosure Items • Terms of Debt • Underwriting / Purchase Agreements • Comfort Letters • Legal Opinions • SEC Comment Letters

5. Statutory Framework

6. Introduction Securities Act of 1933 Securities Exchange Act of 1934 • Basic rule: registration • Major exceptions • Nature of security • Gov. securities, nonprofits • Short-term commercial paper • Certain exchanges • Fairness hearings • ≤ $50m / 12 mos. (not effective yet) • Nature of transaction • 4(a)(2): private placement by issuer • Rule 144A sale / resale • Rule 144 resale • Regulation S: offshore transactions • 4(a)(1): resale not by issuer, UW or dealer • “4(1½)”: traditional private resale • 4(a)(3): trade by dealer • Continuous reporting system • Reporting by public companies • Reporting by shareholders of public companies

7. Registration, Exemption or Liability • Basic rule: register each offer & sale (including resale) with SEC unless exemption available • Issuer sale (primary) & each resale (secondary) • Even if previously sold in registered offering • What is an offer? • Every attempt or offer to dispose of, or solicitation of offer to buy, a security or interest in a security, for value • What is a security? • Very broadly defined • Liability • Investor put: for failure to register or use of a non-compliant prospectus • SEC enforcement proceedings, criminal sanctions

8. How the Public Market Works: Sections 4(a)(1) & 4(a)(3) • 4(a)(1):exempts resalesother than by issuers, affiliates, UWs or dealers • Affiliate • Facts & circumstances analysis • Control persons • Usually officers, directors, 10%+ stockholders • Underwriter • Traditional underwriters • Statutory underwriters • 4(a)(3): generally exempts trades by dealers not acting as UWs • 4(a)(1)& 4(a)(3):not available for resalesof restricted securities

9. Section 4(a)(2): Private Placements by Issuer • Transactions by issuer not involving “public offering” (not defined) • Securities placed = “restricted securities” • No general solicitation / general advertising • Regulation D safe harbor • Offer only to accredited investors (AIs) + up to 35 sophisticated purchasers • File Form D with SEC; limited disclosure if only AIs • Often used as guidance when not strictly followed

10. Section 4(a)(2): Private Placements by Issuer • Resales after 4(a)(2) private placement • Rule 144 • Safe harbor for public resale • Rule 144A • Safe harbor for privateresale to qualified institutional buyers (QIBs) • “Section 4(1½)” • Private resale to sophisticated purchasers • Regulation S • Offshore transactions • SEC-registered A/B exchange offer or resale shelf • Allows public resale after private placement

11. Rule 144 • Restricted securities • Holding period after issued / last held by issuer / affiliate • 6 months for current reporting issuers • Otherwise 1 year • “Control” securities = securities held by affiliates • Affiliates cannot resell under 4(a)(1) • If affiliate resells privately, buyer takes restricted securities • Holding period starts again • If affiliate complies w/ 144 & resells publicly, buyer takes unrestricted securities • File Form 144; follow volume & (for equity) manner of sale requirements

12. Rule 144 Decision Tree Is the selling person an affiliate of the issuer? Yes No Does the person hold restricted securities or just control securities? Does the person hold restricted securities? No Restricted securities Control securities No restrictions on sale Yes Dribble sales are permitted (i.e., sales subject to current public information, volume, manner of sale limitations for equity securities and notice filing) regardless of the holding period How long have the securities been outstanding and held by non-affiliates? How long have the securities been held? Less than six months Six months or more Six months or more Less than six months Was the person an affiliate during the preceding three months? No sales are permitted under Rule 144 Is the issuer a reporting company with current public information? No sales are permitted under Rule 144 Yes No Is the issuer a reporting company with current public information? No sales are permitted under Rule 144 Yes No Dribble sales are permitted after one-year holding period Dribble sales are permitted Yes No Sales are permitted after one-year holding period No restrictions on sale

13. Rule 144A & Regulation S

14. Publicity & “Gun-Jumping” Prohibitions Any communications that can be considered "offers" under the '33 Act must comply with the statutory prospectus filing requirements of the Act • No offers, absent exemption from registration / exception from definition of “offer” • Problem areas: management speeches, press releases, internet • Do not initiate new publicity, but ok to release factual information if continues past practice • Safe harbor for regularly released forward-looking information by reporting companies – but market still considers risky • Offers permitted, but not sales • Written offers must meet the requirements of statutory prospectus or free writing prospectus (FWP) • Post-filing general rule • Pre-filing general rule • No GS/GA (Rule 144A) • No release of info about any aspect of offering / any other info that could encourage interest in offering • But JOBS Act would permit GS/GA for 144A offers • No DSE (Reg S) • No activities undertaken for the purpose of, or could result in, conditioning market in US • 144A / Reg Sgeneral rule

15. JOBS Act: Emerging Growth Companies (EGCs) Two-prong test to be an EGC Annual gross revenues < $1 billion recent fiscal year (GAAP / IFRS) ≤ $1 billion non-convertible debt securities issued last 3 years • Excludes bank debt & A/B exchange debt When you lose EGC status Last day of fiscal year 5 years after common stock IPO Last day of financial year with annual gross revenues > $1 billion Issue > $1 billion non-convertible debt securities in previous 3 years Becoming “large accelerated filer” ($700m float & reporting 1 year) EGC status is one-way street; cannot be reset Cut-off date IPO on / after Dec. 9, 2011 • IPO includes filing of employee benefit plans on Form S-8

16. Deal Mechanics

17. Timeline Kickoff Diligence Kickoff meeting: discuss timeline & key issues Preliminary offering doc (file w/ SEC / FINRA if registered) Pricing term sheet; confirm sales Purchase / UW agreement; comfort letter Final offering document (file if registered) Pay for & deliver securities Legal opinions, bring-down comfort letter, other docs Launch Pricing Closing • DD: legal, accounting, financial, management Doc. Prep • Purchase / UW agreement & OM / prospectus • If registered, file S-1 (one-off deals) or S-3 (shelf) • Road show

18. Due Diligence – Liability Risk Why conduct duediligence?

19. Key Disclosure Items in Offering Document • Detailed discussion of risks • Business / industry • Securities-related • Results of operations • Liquidity & capital resources • Market risk (current, interest rates, derivatives) • Detailed discussion of D&O compensation • Debt: terms of notes / guarantees, incl. covenants, default, etc. • Equity: authorized shares, voting rights, restrictions on shareholder action • Generally 3 years income & cash flow; 2 years balance sheet • Plus any interim period • Risk Factors • Mgt’sDisc’n & Analysis (MD&A) • Comp Disc’n & Analysis (CD&A) • Description of Securities • Financial Statements (see below)

20. Shelf vs. One-Off Offerings • One-offs • Available to all issuers (Form S-1 / F-1) • Include all disclosure items except final pricing terms • File final terms & any late-breaking information on FWP • Shelf offerings • Eligibility: Generally, issuers with 12 months’ timely reporting and minimum public float (Form S-3 / F-3) • Generally must file new shelf every 3 years • Can carry over unsold securities & unused SEC fees • Base prospectus • General info on securities that may be offered, incl. terms & risk factors • Open-ended use of proceeds & plan of distribution • Incorporate ’34 Act reports by reference (both historical & going forward) • Prospectus supplement • Covers particulars of security offered, amount sold, terms of sale • Includes underwriting section for takedown

21. Terms of Debt • Description of notes (in offering document) • Typically negotiated first; terms then reflected in indenture • UWs advise on terms with view to marketability / pricing • Indenture • Contract b/t issuer & trustee—establishes terms of securities • Bondholders = third-party beneficiaries • Trust Indenture Act (TIA) qualification required for registered offerings

22. Underwriting / Purchase Agreements • Parties • Issuer, UWs / initial purchasers & any selling stockholders or guarantors • Key components • Purchase & sale of securities by UWs from issuer / sellers to market • Describes UW % • Liability / risk allocation through reps & warranties, indemnities • Covenants on conduct of transaction • Expense coverage / reimbursement • Closing conditions (officer certificates, comfort letters & opinions) • Closing mechanics • Lock-up agreements (company, D&O, shareholders)

23. Comfort Letters • Delivery • Pricing & bring-down at closing • Purpose • DD defense (banks, officers & directors) • Content • Whether audited financials comply with Reg. S-X • Alert UWs of adverse changes since last financials • Negative assurance (135-day limit) • No material modification needed to unaudited interim financials to conform with GAAP / Reg. S-X • During “change period,” no material changes to key line items • Change period: date of last financials to 3-5 days before comfort letter (cut-off date)

24. Legal Opinions • Timing, providers & beneficiaries • Usually negotiated before sign UW agreement • Opinion / 10b-5 for UWs • Opinion or “reliance” letter from issuer’s counsel to trustee in debt deals • Providers • Issuer’s counsel: outside, local counsel (if applicable), inside • Underwriters’/ initial purchasers’ counsel • Typical content (among other things) • Valid existence, good standing • Power to own properties / conduct business & enter transaction • Due authorization, execution & delivery of transaction docs & securities • Description of securities & tax disclosure accurate • Validity & enforceability of transaction docs / debt securities • No conflicts with org docs, material contracts or law • Compliance with form requirements (registered) • No registration necessary (unregistered) • Not aware of material misstatements / omissions (10b-5)

25. SEC Comment Letters – Overview • Types of review • Full: examine all disclosure in filing & incorporated documents • Limited: focus on selected issues—e.g., accounting, MD&A • Likelihood of review • Offering context • IPO / first-time ’34 Act registrations: almost alwaysfull review • S-3/F-3 by well-known seasoned issuers (WKSIs): not subject to pre-effective review (b/c automatically effective on filing) • Other cases: depends on how recently ’34 Act reports were reviewed, whether novel / unique securities are offered, industry, “hot button” disclosure issues • Exchange Act context (must be reviewed at least every 3 yrs) • Recent material restatements of financials • Higher stock price volatility • Large capitalization • Disparities in price-to-earnings ratios • Operations affect material sector of the economy

26. Part II: Securities Exchange Act of 1934

27. Securities Exchange Act of 1934 I. Introduction II. Required Filings • Select Required Filings • Select Events Requiring an 8-K Filing III. Watch What You Say! • Material Nonpublic Information • Communications with Analysts • Regulation FD

28. Introduction • Exchange Act Reporting Triggers • List on national securities exchange (NYSE / NASDAQ) • SEC-registered offering • > $10m in assets, & class of equity held by ≥ 2000 persons or ≥ 500 non-AIs • Reporter Categories • Non-accelerated filer (NAF) • Accelerated filer (AF) • Exchange Act reporting for ≥ 12 calendar months • Filed at least one Form 10-K • Market value of common equity held by non-affiliates at most recent June 30 ≥ $75M • Large accelerated filer (LAF) • Same as AF, except market value ≥ $700M

29. Required Filings

30. Select Required Filings 10% HOLDERS + INSIDERS: FORMS 3, 4, 5 5% HOLDERS – SCHEDULES 13D, 13G CURRENT REPORT ON FORM 8-K PROXY STATEMENT QUARTERLY REPORT ON FORM 10-Q ANNUAL REPORT ON FORM 10-K Deadline • 90 daysafter FYE (NAF) • 75 daysafter FYE (AF) • 60 days after FYE (LAF) File 4 business days after event, with certain exceptions To correct unintentional selective disclosure under Reg. FD, deadline is promptly (< 24 hours) Generally, file w/in 10 days of ≥ 5% Disclose intentions, arrangements, financing 13G = short-form annual alternative for certain holders w/o control intent / influence Deadline • 45 daysafter FYE (NAF) • 40 daysafter FYE (AF) • 40 daysafter FYE (LAF) File definitive proxy 120 daysafter FYE if incorporated into 10-K Report ownership on Form 3 w/in 10 days Report trades on Form 4 w/in 2 business days Report other transactions on Form 5

31. Select Events Requiring 8-K Filing Item 1.01 – Entry Material Agreement Material agreements & material amendments to material agreements Generally not required to file agreement as exhibit to 8-K • Can be filed with periodic report for that period Item 1.02 – Termination Material Agreement Other than by expiration on stated termination date No disclosure required for mere negotiations / discussions Item 2.01 –Acquisition / Disposition Assets For “significant amount of assets” Disclose source of funds for acquisition if material relationship to source Report related transactions if significant in aggregate May need to file financials & pro formas (see Annex A) Item 2.02 – Results of Operations & Fin. Condition For earnings releases & updates of earlier announcement / release Not required for slides, transcript or recording of earnings call so long as certain requirements met Info = “furnished”, not “filed”

32. Select Events Requiring 8-K Filing Item 2.03 –Financial Obligations Entry into material direct obligation / direct or contingent liability for material obligation due to off-b/s arrangement Disclose date, amount / max exposure, material terms Item 5.02 – Officers & Directors Directors removed for cause, resign, refuse re-election Directors newly elected, except by vote at shareholder meeting Certain execs resign, retire, terminated Certain execs newly appointed Comp arrangements for certain execs adopted /modified Item 5.03 – Org Docs; Fiscal Year If org docs amended without proposal in proxy statement Required for change in fiscal year other than by vote at shareholder meeting or amendment to org docs Item 5.05 – Code of Ethics Covers code of applicable to CEO, CFO & other finance execs Required for failure to respond to violation (implicit waiver)

33. Select Events Requiring 8-K Filing Item 5.07 – Submission to Vote of Holders Prelim results filed w/in 4 business days of meeting Final results filed w/in 4 business days once known Excludes proxy to vote at stockholders meeting Item 7.01 – Regulation FD Disclosure Information required pursuant to Regulation FD may either be disclosed under this item or under Item 8.01, within 24 hours of the occurrence of the selective disclosure Item 8.01 – Other Events Reg. FD disclosure (filed) Disclosure of important events not otherwise required Reg. FD disclosure (unless filed under 8.01) (furnished) Item 7.01 – Regulation FD Disclosure

34. Watch What You Say!

35. Material Nonpublic Information • No general obligation to disclose MNPI • Exception: disclosure required by securities laws • No obligation to correct / confirm market rumors unless attributable to company • If info disclosed, cannot contain material misstatements or omissions • No selective disclosure of MNPI • Regulation FD • Potential 10b-5 liability

36. Material Nonpublic Information – Typical Examples Pending / proposed transactions - mergers, acquisitions, dispositions, offerings Developments affecting financial stability / liquidity Gain / loss of significant customer / supplier Dividend policy changes Significant product announcements - defects, modifications, recalls Significant contingency / litigation exposure Senior management changes ► ► ► ► ► ► ► Amendments to debt terms ► Defaults Unusual / unanticipated earnings results ► ►

37. Guidelines for Communications with Analysts Designate specified execs to communicate with analysts Do not reconfirm guidance Do not disclose MNPI unless disclosed to public at same time Make each presentation using text reviewed by senior execs & counsel

38. Guidelines for Communications with Analysts Avoid responding to inquiries in nonpublic forum unless certain response does not include MNPI Do not distribute reports or hyperlink to them on company’s website If requested to review report, do not comment except to correct errors of fact. Do not comment on forecasts or judgments If asked about matter not ripe for disclosure, say “no comment”

39. Regulation FD • Prohibits selective disclosure of MNPI to • Market professionals & security holders • Not applicable to communications with someone who • Owes duty of confidentiality • Expressly agrees to maintain info in confidence • Not applicable to “foreign private issuers,” but usually followed • Remedying selective disclosure • If intentional, disclose simultaneously to public • “Intentional” = issuer knows / reckless not knowing MNPI being disclosed • If unintentional, disclose “promptly” to public (w/in 24 hours) • Public disclosure: method(s) reasonably designed to provide broad, non-exclusionary distribution to public • Violations subject to SEC enforcement actions, but not Rule 10b-5 liability or private causes of action

40. Regulation FD – Four Enforcement Scenarios Siebel • Facts - CEO spoke to individuals at invitation-only conference & said, contrary to public statements three weeks earlier, Siebel expected sales to be in line / previous years • Penalty - $250k fine Schering-Plough • Facts - CEO met in private meetings with analysts & portfolio managers, & through words, tone, emphasis & demeanor, disclosed MNPI • Penalty - Schering-Plough $1m fine; CEO $50k fine Office Depot • Facts - At direction of CEO & CFO, IR called analysts before earnings to signal would not meet consensus estimates. Not stated explicitly, but referred to prior statements of officials & other companies with lower-than-expected results • Penalty - Office Depot $1m fine; execs $50k fine each Flowserve • Facts - CEO privately reaffirmed guidance to analysts. Resulted in increase in price & trading volume. IR waited > 53 hours after selective disclosure & nearly 26 hours after analyst’s report before filing 8-K • Penalty - Flowserve $350k fine; CEO $50k fine

41. Reg. FD in Social Media Age • 2008: SEC guidance on use of websites for Reg. FD purposes (Sun Microsystems) • 2010/11: WebMediaBrands comment letter correspondence on CEO tweets about acquisitions, stock option purchases, new services • Company: tweets were not MNPI & were linked to company’s web site • SEC staff dropped matter • 2012: SEC indicates potential enforcement action against Netflix & CEO based on CEO Facebook posting • Post reached 200,000 followers & arguably was not MNPI • April 2013: SEC decides not to proceed further in Netflix & issues report

42. Reg. FD in Social Media Age • New guidance • Permits company & employees to use social media to report material info w/o violating Reg. FD, so long as two conditions are met • Must use “recognized channel of distribution” • Must alert market to channels used & info that may be disclosed using them • Practical Implications • Give market details of social media channels used • Proceed with caution if using personal social media channels • Exercise care in selecting channels & be sure to use them • Consider whether concurrent means of dissemination appropriate • Review communications & social media policies & training materials • Ensure compliance with other communications rules & safe harbors • Implement appropriate disclosure controls & procedures

43. Annex A: Spotlight on Financial Statements

44. Financial Statements • Introduction • Financial Statements and Pro Formas Requirements • High-Level Overview for Acquisitions • Financial Statements & Pro FormasRequirements • Three Tests to Measure Significance of a Business • What Financial Statements of Acquired Business are Required? • What Pro Forma Financial Information is Required?

45. Introduction • Requirements are for registered offerings • 144A: no mandatory requirements but typically same / almost same financials as in registered deal • Regulation S-X • 3 years’ audited income & cash flow statements; 2 years’ audited balance sheet • Generally unaudited interim financial statements for each interim period • Plus any more recently disclosed financial data • Accounting Principles • US GAAP required (U.S. reporting companies) • IFRS now permitted instead of US GAAP (reporting FPIs) • Full US GAAP reconciliation required if non-IFRS • Separate Financial Statements • Pro formas • Acquired company financials • Significant equity investor financials

46. Financial Statements and Pro Formas Requirements –High-Level Overview for Acquisitions How significant is acquisition? 20%-40% No financial statements + No pro formas 1 yr financial statements + any interim period + Pro formas No financial statements + No pro formas 40%-50% No financial statements + No pro formas 2 yrs financial statements + any interim period + Pro formas No financial statements + No pro formas >50% No financial statements + No pro formas 2 yrs balance sheets, 3 yrs income statements and cash flows + any interim period * + Pro formas* 2 yrs balance sheets, 3 yrsincome statements and cash flows + any interim period + Pro formas <20% No financial statements + No pro formas No financial statements + No pro formas No financial statements+No pro formas A significant acquisition of assets is completed File 8-K w/in 4 days A significant acquisition of a business is completed File 8-K w/in 4 days. W/in 75 days of completion also provide… * or before going effective A significant acquisition of a business is probable Before going effective…

47. Financial Statements and Pro FormasRequirements • Threshold question: acquiring or disposing of a “business”? • “Business” defined in Reg. S-X Rule 11-01(d) • Sufficient continuity of operations? • Presumption that separate entity, sub or division is “business” • Lesser component also may be “business,” based on facts & circumstances • Whether nature of revenue-producing activity remains same • Whether aspects of operations remain same—e.g., facilities, employee base, distribution system, sales force, customer base, operating rights, production techniques, trade names • Next question: Is transaction significant? • 3 tests (see below)

48. Three Tests to Measure Significance of a Business As of registrant’s most recent fiscal year… ASSET INVESTMENT INCOME Compare share of acquired business’s total assets to registrant’s consolidated total assets Include ordinary receivables & other working capital amounts not acquired because working capital will be needed after acquisition Compare total GAAP purchase price of the acquired business, with certain adjustments, to registrant’s consolidated total assets Compare equity in acquired business’s income from continuing operations before taxes, extraordinary items & cumulative effect of change in accounting principle to that of registrant

49. What Financial Statements of Acquired Business are Required? If no test exceeds 20% If any exceeds 20% but none exceeds 40% If any exceeds 40% but none exceeds 50% If any test exceeds 50% Financial statements not required If aggregate impact of individually insignificant businesses acquired since date of most recent audited balance sheet > 50%, financial statements covering at least substantial majority of businesses acquired shall be furnished, for most recent fiscal year & any required interim periods In this case, furnish financial statements for most recent fiscal year & any interim periods Furnish consolidated financial statements for most recent fiscal year & any required interim periods Deadline: 75 days after completion Registration statements need not include financial statements if acquisition not yet consummated or if final prospectus/ mailing date is ≤ 74 days after consummation Furnish consolidated financial statements for two most recent fiscal years & any required interim periods Deadline: 75 days after completion Registration statements need not include financial statements if acquisition not yet consummated or if final prospectus/ mailing date is ≤ 74 days after consummation Furnish consolidated balance sheets for two most recent fiscal years, consolidated statements of income and cash flows for three most recent fiscal years & any required interim periods Deadline: 75 days after completion Registration statements must include financial statements of acquired or to-be-acquired business

50. If any significance test exceeds 20% Furnish Pro forma condensed balance sheet as of end of most recent period for which consolidated balance sheet of registrant is required Pro forma condensed statements of income for most recent fiscal year and any required interim period Note that pro formas for acquired business need not be included if separate financial statements not included Test also applies to disposition of significant business Also general catchall if otherwise material What Pro Forma Financial Information is Required?