Rule 139: Safe Harbor for Research Reports

Rule 139, established under the U.S. Securities Act of 1933, provides a safe harbor for broker-dealers. It permits the publication and distribution of research reports about companies that are in the process of a registered securities offering. Without this provision, such reports could be considered an “offer” or “prospectus” under the Securities Act, which would be an illegal act of conditioning the market, often called “gun-jumping”. The rule balances the free flow of analytical information to investors with regulations designed to prevent undue influence on the market during an offering.

General Conditions for the Safe Harbor

For any research report to gain protection under Rule 139, it must satisfy certain foundational requirements. A “research report” is defined broadly as a publication that contains information, opinions, or recommendations concerning an issuer or its securities. The primary condition is that the report must be published and distributed in the “regular course of business” of the broker-dealer.

This “regular course of business” requirement means the broker-dealer cannot initiate coverage on a company simply because it is involved in an offering. The firm must have a history of publishing or distributing research. This history demonstrates that the report in question is part of an ongoing, systematic research practice rather than a one-off promotional piece timed to coincide with a securities sale. The intent is to ensure the research is genuine and not a disguised attempt to solicit interest in the new securities.

The broker-dealer must show that the form and content of the report are consistent with past publications. The method of dissemination should also align with the firm’s established practices. For example, if a firm has always distributed its research through a specific client portal, a sudden mass-email campaign of a report during an offering period might fail this test.

Rule 139b: Research on Investment Funds

In 2018, the SEC expanded the safe harbor by adopting Rule 139b to address research reports on certain investment funds. This rule, mandated by the Fair Access to Investment Research Act of 2017, extends similar protections to research concerning “covered investment funds.” This category includes business development companies (BDCs), registered investment companies, and certain funds based on commodities or currencies.

Requirements for Industry Reports

When a research report covers an entire industry or a specific sector, it can fall under a particular safe harbor within Rule 139, provided it meets specific criteria. The report must include similar information about a substantial number of companies within that industry. This ensures that the report is a legitimate industry analysis rather than a veiled promotion for one specific issuer.

A condition for these industry reports is that the information about the company in registration cannot be given materially greater space or prominence than that given to other companies in the report. For instance, if a report on the biotechnology sector dedicates five pages to a company currently in an offering while all other companies receive only a single paragraph, it would likely fail this test. Prominence can be measured not just by page count but also by layout, such as using larger fonts, more detailed charts, or placing the company’s analysis at the very beginning of the report.

Requirements for Company-Specific Reports

The conditions for protecting a research report focused on a single company engaged in an offering are more stringent, with requirements varying based on the issuer’s size and reporting history. The most established companies, known as “well-known seasoned issuers” (WKSIs), have greater flexibility. A WKSI is a company with a public float of at least $700 million or one that has issued at least $1 billion in certain non-convertible securities in the past three years.

For other issuers, the company must be eligible to use Form S-3 or Form F-3 for its offering. These issuers have a history of filing reports with the Securities and Exchange Commission, ensuring a level of market following and information availability. To qualify for Form S-3, a company must have timely filed all required reports for at least the previous 12 months and have a public float of at least $75 million. These requirements ensure that there is already a significant amount of public information about the company, reducing the risk that a single research report could improperly influence the market.

The broker-dealer distributing the report also faces strict conditions. The firm must have a history of publishing or distributing research on that particular issuer in the regular course of its business. This means the report cannot be the first one the broker-dealer has ever written about the company. This requirement demonstrates a consistent and ongoing analytical relationship with the company, separate from the offering process.

If the research report includes projections of the issuer’s sales or earnings, these forecasts must have a reasonable basis. The report must also disclose the material assumptions underlying the projections. To provide context and demonstrate consistency, the report is expected to include similar projections for past periods, allowing investors to compare the new forecasts with historical estimates and actual results.