Publication

September 11, 2020Client Alert

SEC Charges Broker-Dealer and Issuer with ATM Shelf Offering Violations; Provides Sought-After Guidance on Delivery of Final Prospectuses

On September 3, 2020, the U.S. Securities and Exchange Commission (SEC) announced charges against National Financial Services LLC a subsidiary of Fidelity Investments; FMR LLC (NFS) and FuelCell Energy, Inc. for failing to deliver final prospectuses in connection with five separate at-the-market (ATM) offerings conducted by FuelCell through NFS.

While a base prospectus was filed in each case, the SEC’s order to each of NFS and FuelCell indicates that they failed to file final prospectus when they conducted takedowns off the shelf. As a statutory underwriter, NFS had an obligation to ensure delivery of the final prospectuses in each case, which would include information on the securities being offered, the plan of distribution and the arrangements with the underwriters, dealers, and sales agents. The SEC found that NFS had no policies or procedures in place at its trading desk to detect the violations, and that they did not take effective corrective action when the violations came to the attention of compliance and legal personnel.

“Without admitting or denying the SEC’s findings, NFS and FuelCell have agreed to cease and desist from committing or causing any future violations of the charged provisions. In addition, NFS has agreed to be censured and has agreed to disgorge $797,905 in commissions, pay prejudgment interest of $163,288, and pay a penalty of $1,500,000. The SEC’s order against FuelCell recognized the company’s cooperation and self-report, both of which the SEC considered in determining not to impose a penalty against the company.”

The NFS order offers a clear summary of what the SEC requires to deliver a final prospectus. The prospectus delivery requirements can be satisfied in two steps:

  • First, pursuant to the “access equals delivery” requirement, the final prospectus must be filed with the SEC meeting the requirements of Section 10(a) of the Securities Act of 1933, usually through a 424 prospectus supplement. Physical or electronic delivery of the final prospectus is not required in every case.
  • Second, a notice must be provided to each purchaser (with the exception of transactions solely between brokers or dealers) that the shares purchased were sold pursuant to the effective registration statement. For retail purchasers, this notification may be included in the trade confirmation.

The SEC notes that this disclosure is especially important in the context of ATM offerings, where without the disclosure the purchaser and the market would not know that the issuer has begun selling shares on the market.

Michael Best’s Securities & Capital Markets team has experts who advise broker-dealers and issuers on compliance with the SEC regulations. Please do not hesitate to contact a member of the Securities & Capital Markets team for additional information on compliance with the prospectus delivery requirement in your ATM or other registered offering.

back to top