Research Safe Harbors During a Distribution

Research and distribution coexist inside the same firms. Without safe harbors, every research report on an issuer in registration would be a written-offer violation by the broker-dealer publishing it.

Why Does Research Need a Safe Harbor?

The definition of "offer" in the registration statute sweeps in any communication that may condition the market for the securities. A research report on a company whose IPO is in registration, published by a broker-dealer that is also a syndicate member, would on its face be a written offer outside the prospectus framework.

Four research safe harbors carve out specific categories of research from the offer definition.

Each safe harbor has eligibility conditions. The issuer typically must meet certain reporting or size eligibility (such as being eligible to use a primary shelf registration form, or qualifying as a covered foreign issuer), and industry reports must conform to prior practice.

Exam Tip: Gotchas

• The non-participating safe harbor protects the broker-dealer that is NOT participating or proposing to participate in the syndicate. Participating broker-dealers (managers, co-managers, syndicate members) must rely on one of the other three safe harbors.
• The other-class safe harbor lets the participating firm publish research on a specifically paired DIFFERENT class of the issuer's securities. The classic case: the firm is underwriting an investment-grade debt offering and continues to publish equity research on the same issuer.

What Does the Non-Participating Broker-Dealer Safe Harbor Require?

The non-participating safe harbor is the broadest. It protects the ordinary-course research that a broker-dealer publishes about a company even when that company is in registration, provided the publishing broker-dealer is not in the underwriting syndicate.

• The broker-dealer (and any affiliate) has not participated, is not participating, and does not propose to participate in the distribution
• The broker-dealer is not receiving, and has not received, consideration from the issuer, a selling securityholder, or any other interested party for the report, and is not acting under any arrangement or understanding with them
• The research is published in the ordinary course of the broker-dealer's research function
• The issuer is not, and was not in the past 3 years, a blank-check company, a shell company, or a penny-stock issuer

The safe harbor recognizes that research is a continuous activity, not a deal-driven activity. A research analyst who covers a sector cannot stop publishing research every time one of their covered companies files a shelf supplement.

Exam Tip: Gotchas

• The safe harbor turns on syndicate participation, not on whether the broker-dealer has a banking relationship with the issuer. A broker-dealer that has banked the issuer in the past but is not in this distribution can still rely on the non-participating safe harbor.
• The participating-broker-dealer line is the syndicate roster. Manager, co-manager, selling-group member: participating. Everyone else: non-participating.
• Nonparticipation alone is not enough. The broker-dealer also cannot be paid by or coordinating with the issuer, a selling securityholder, or another interested party for the report, and the issuer cannot be a blank-check, shell, or penny-stock company.

What Does the Other-Class Research Safe Harbor Allow?

The other-class safe harbor lets a participating broker-dealer publish research on a class of the issuer's securities different from the class being distributed.

• The broker-dealer is participating in the distribution of one class of the issuer's securities
• The research covers a specifically paired different class: common stock, convertible debt, or convertible preferred research pairs against an offering of non-convertible debt or non-participating preferred stock, or the reverse pairing
• The broker-dealer publishes or distributes research reports on that type of security in the regular course of its business, not as a one-off tied to this deal
• The issuer meets applicable reporting and timely-filing conditions (generally, current on Form 10-K, 10-Q, or 20-F filings for the preceding 12 months, or a comparable foreign-private-issuer or investment-company standard) and is not a blank-check, shell, or penny-stock issuer

The economic logic: research analysts who cover different asset classes inside the same firm are organizationally separate from the syndicate desk handling a deal in one of those classes. Letting them keep publishing avoids a forced research blackout that would harm investors in the unaffected class.

Exam Tip: Gotchas

• The other-class safe harbor is not "any different class." It is limited to the specific equity/convertible-security versus non-convertible-debt/non-participating-preferred pairing, in either direction, plus the issuer-eligibility conditions and the broker-dealer's own regular-course-of-business publication history in that security type.
• This is one of the four research safe harbors, but it is narrower than the regularly-published safe harbor because it depends on the specific class pairing.

What Does the Regularly-Published Research Safe Harbor Require?

The regularly-published safe harbor lets a participating broker-dealer publish research on the same class of the issuer's securities, provided the research is part of the broker-dealer's regular publication pattern.

• The broker-dealer is participating in the distribution
• The research is regularly published in the ordinary course of business, and does not represent the initiation or reinitiation of coverage
• May be issuer-specific or industry-wide
• Industry reports must cover a substantial number of issuers in the industry or sub-industry (or a comprehensive recommended-securities list), and may not give the offering issuer materially greater space or prominence than other covered issuers
• Issuer eligibility conditions apply (similar to the non-participating safe harbor)

This is the broadest of the participating-broker-dealer safe harbors. A firm with a continuous research practice on a covered name can keep publishing research on that name even while the firm is underwriting an offering of the same class.

Exam Tip: Gotchas

• "Regularly published" is the test, not "objective" or "favorable." A firm that publishes research on the covered name twice a year cannot suddenly initiate coverage at the time of the offering and rely on this safe harbor.
• Industry reports under this safe harbor must cover a substantial number of issuers (or a comprehensive list) and cannot give the offering issuer extra space or prominence. Suddenly tilting an industry report to highlight the offering issuer takes the report outside the safe harbor.

What Does the Asset-Backed Securities (ABS) Research Safe Harbor Require?

A fourth safe harbor covers research on Form SF-3 asset-backed securities (ABS), published by any broker-dealer, whether or not it is or will be a participant in the distribution.

• The broker-dealer must have previously published or distributed, with reasonable regularity, research involving ABS backed by substantially similar collateral
• While the registered ABS are proposed to be offered, offered, or unsold, the research cannot identify the registered securities, give their specific structural or collateral attributes greater prominence than it gives comparable attributes of other ABS it discusses, or include their ABS informational and computational material
• Sufficient information must be available from public sources to support the view expressed

Exam Tip: Gotchas

• The ABS safe harbor is the only one of the four that requires a prior history of similar-collateral coverage, not just ordinary-course publication generally.
• The outline cites this safe harbor under the number "139," even though its rule number is 139a. Both labels point to the same asset-backed-securities safe harbor.

Think of it this way: the four research safe harbors sort by syndicate role and subject matter. Non-participating broker-dealers can publish on any class, subject to the no-compensation and issuer-eligibility conditions. Participating broker-dealers can publish on a specifically paired different class (other-class safe harbor), on the same class if they were already regularly publishing (regularly-published safe harbor), or on asset-backed securities backed by similar collateral with a prior coverage history (ABS safe harbor).

Exam Tip: Gotchas

• Knowing which safe harbor governs a particular research report is testable. The exam will give you the broker-dealer's syndicate role, the class of securities, and whether ABS are involved; you map to one of the four safe harbors.
• All four safe harbors require ordinary-course (or, for ABS, "reasonably regular") publication. A research report dropped specifically to coincide with an offering is the classic counter-example and falls outside every safe harbor.

What Should You Check on Exam Day?

• Check for asset-backed securities first, since that safe harbor applies regardless of syndicate role; otherwise, check syndicate role to pick the non-participating, other-class, or regularly-published safe harbor.
• If the broker-dealer is participating (and ABS is not involved), check the class: a specifically paired different class fits other-class, the same class needs a regularly-published history.
• Test for "ordinary course" (or, for ABS, "reasonably regular") publication history before applying any participating-broker-dealer safe harbor.
• Confirm the issuer is not a blank-check, shell, or penny-stock issuer, and meets the applicable reporting or size eligibility conditions.