Quick Answer
The three research report safe harbors protect a broker-dealer's research, published in the regular course of business, around a registered offering. They work two ways: one keeps the firm out of the underwriter definition, and the other two keep the report from counting as an offer. All three deny a blank check, shell, or penny stock issuer.
A broker-dealer's research business does not stop just because the firm, or one of its competitors, is underwriting a registered offering for an issuer it covers. These three safe harbors answer the same underlying question from three different angles: does publishing research around a registered deal turn a broker-dealer into an underwriter of that deal?
How Do the Safe Harbors Actually Work?
They do not all work the same way, and the exam can test which one is which.
- The non-participant safe harbor says the words "offers," "participates" and "participation" in the definition of an underwriter do not reach the publication. The firm is never pulled into the distribution in the first place.
- The different-class and continuing-coverage safe harbors say something else: that a qualifying report does not constitute an offer for sale or an offer to sell the security being registered.
Exam Tip: Gotchas
- One rule works on the underwriter definition and two work on the meaning of an offer. A question that credits the non-participant safe harbor with the "not an offer" wording, or the other two with the underwriter wording, has swapped them.
What Do the Three Research Report Safe Harbors Have in Common?
All three safe harbors define a research report the same way: a written communication containing information, opinions, recommendations, or an analysis about an issuer or a security, whether or not it gives a reader enough information to base an investment decision on.
Every version of the safe harbor also requires:
- The broker-dealer publishes or distributes the report in the regular course of its business, not as a one-time promotional push tied to the offering
- The issuer is not, and neither the issuer nor any of its predecessors was at any point in the past three years, a blank check company, a shell company (other than one related to a completed business combination), or a penny stock issuer
Each safe harbor then adds its own words to the regular-course condition, and the additions differ:
- The different-class safe harbor requires the firm to publish regularly on the types of securities in question, not just to publish research in general.
- The continuing-coverage safe harbor requires, for an issuer-specific report, that the publication not be an initiation or a restart of coverage, and, for an industry report, that the firm already be including similar information about the issuer in similar reports.
- The non-participant safe harbor adds nothing.
Exam Tip: Gotchas
- "Regular course of business" is doing the real work here. A report that only appears because a deal is in progress is a promotional push, not research, and none of these three safe harbors protects it.
- The three-year lookback reaches a predecessor. A clean issuer that merged with a penny stock issuer two years ago is still disqualified.
How Do the Three Research Report Safe Harbors Differ?
The three safe harbors split apart based on whether the broker-dealer is part of the registered distribution, and if so, what the research covers.
| Safe harbor | Broker-dealer's role in the offering | What the report may cover | Added issuer condition |
|---|---|---|---|
| Non-participant | The distributing broker-dealer and any affiliate, plus the publisher and its affiliates where the publisher is someone else, have not participated, are not participating, and do not propose to participate, and are not compensated by or acting under any arrangement with the issuer, a selling security holder, any other participant in the distribution, or anyone else interested in the securities | Any of the issuer's securities | None beyond the shared conditions above |
| Different-class | Is participating, or may participate, in the distribution | A report relating solely to one side while the offering involves solely the other. One side is the issuer's common stock, or debt or preferred stock convertible into it; the other is the issuer's non-convertible debt or non-convertible, non-participating preferred stock. Either direction qualifies | Issuer has filed all Exchange Act periodic reports required during the preceding 12 months, or such shorter time as it was required to file them, or meets an equivalent closed-end-fund or foreign-private-issuer standard |
| Continuing-coverage | Is participating, or may participate, in the distribution | The issuer, or any of its securities, including the ones being distributed, or an industry report that either covers a substantial number of issuers in the industry or sub-industry or lists all the securities the firm currently recommends, in either case giving this issuer no materially greater space or prominence than the others | An issuer-specific report needs the Form S-3 or F-3 registrant requirements, plus one of three alternatives (the form's minimum float, the alternative standard for non-convertible securities other than common equity, or well-known seasoned issuer status), plus the current-periodic-reports condition. An industry report has its own, lower bar: the issuer must still be a reporting company, or meet the foreign-private-issuer standard |
Two payments do not break the non-participant safe harbor, even though they look like the compensation it forbids: the regular price the firm pays for independent research, and the regular subscription or purchase price for the research report itself.
Exam Tip: Gotchas
- The non-participant research safe harbor needs no issuer-eligibility test beyond the shared disqualifiers. It is open only to a broker-dealer that is not participating in the distribution. The different-class and continuing-coverage research safe harbors cover a broker-dealer that is part of the distribution, so the issuer must clear a reporting bar before the safe harbor applies.
Which Safe Harbors Extend to Private Resales and Regulation S Offerings?
Only the different-class and continuing-coverage research safe harbors reach past a registered offering, and they do it two different ways. For a qualified institutional buyer (QIB) private resale, a qualifying research report is not an offer, and is not general solicitation or general advertising. For an offshore offering, it is neither directed selling efforts nor inconsistent with the offshore-transaction requirement.
Why does the extension reach only two of the three research safe harbors? The different-class and continuing-coverage research safe harbors are the two built on whether a qualifying report is an offer, and the extension carries that same question into a QIB private resale and into an offshore offering. The non-participant research safe harbor answers a different question: it keeps the words "offers," "participates" and "participation" in the underwriter definition from reaching a qualifying publication, and it does that only while every one of its conditions holds. Do not describe the non-participating broker-dealer as having no underwriter exposure. Removing that exposure is the whole job of that safe harbor, and the exposure comes back the moment one of its conditions fails.
Exam Tip: Gotchas
- Do not credit the non-participant research safe harbor with the QIB private resale and Regulation S extension. That extension appears only in the different-class and continuing-coverage research safe harbors.
Can a Broker-Dealer Start Covering an Issuer Under the Continuing-Coverage Research Safe Harbor to Support a Deal?
No. The continuing-coverage research safe harbor's issuer-specific protection is unavailable if the report would be the broker-dealer's first-ever report on that issuer, or a resumption of coverage after the broker-dealer had stopped publishing on it. The broker-dealer must already be covering the issuer in the regular course of its business before the offering begins.
The industry-report side of the safe harbor carries no such bar.
Exam Tip: Gotchas
- A broker-dealer cannot initiate coverage of an issuer under the continuing-coverage research safe harbor to support a registered offering it is underwriting. The safe harbor protects continuing research, not a report that starts, or restarts, coverage around the time of the deal.
Is a Projection a Research Report?
Yes. A projection of an issuer's sales or earnings is an analysis, and it falls inside the research report definition.
A firm publishing one under the industry report side of the continuing-coverage safe harbor must meet three conditions:
- It already publishes projections on a regular basis.
- It is publishing projections on that issuer at the time.
- The projections cover the same or similar periods for a substantial number of the industry's issuers, or for substantially all the securities on its recommended list.
What Should You Check on Exam Day?
- Identify whether the broker-dealer is participating in the distribution before choosing among the three research report safe harbors.
- Check whether the safe harbor sets a class test at all: the different-class one needs the report and the offering on opposite sides, and the continuing-coverage one sets none.
- Confirm the blank check, shell company, and penny stock disqualifiers apply to all three safe harbors, with a three-year lookback that also reaches a predecessor.
- Read which words the safe harbor uses: the underwriter definition for the non-participant one, and the meaning of an offer for the other two.
- Remember only the different-class and continuing-coverage research safe harbors extend to QIB private resale and Regulation S offerings, and that new or resumed coverage fails the continuing-coverage one.