Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, July 22, 2007

Thel on Free Writing

Free Writing, by STEVEN THEL, Fordham University - School of Law, was recently posted on SSRN.  Here is the abstract:

In 2005 the SEC effectively ended most restrictions on the use of written offering materials in public distributions of securities. Previously, the only written offering materials permitted were terse announcements and dense statutory prospectuses. Less formal written offering material, known as free writing, could be distributed at the end of the offering process but only to people who had previously been sent a copy of the final statutory prospectus

Under the Commission's new regime, all sorts of written offering material may be distributed much earlier in the process. Offering participants are now permitted to communicate with a new disclosure device - modeled on free writing - called the free writing prospectus. They may now, from a very early date, disseminate free writing prospectuses - containing almost any kind of information in whatever form they choose - and often without any requirement that they deliver a statutory prospectus at all.

Free writing is not subject to liability under section 12(a)(2) of the Securities Act, but free writing prospectuses are. This paper shows that the exemption of free writing from liability, generally taken to be a drafting error, operates as a carrot to encourage security sellers to disseminate statutory prospectuses. Noting that security sellers have been reluctant to use free writing prospectuses broadly because of liability concerns, it then argues that free writing prospectuses containing false statements should not be subject to liability under section 12(a)(2) unless they are widely distributed before a final statutory prospectus is available. This conclusion does not depend on any particularly controversial view of market efficiency or morality, but follow from the premises that led the SEC to permit free writing prospectuses in the first place. Moreover Congress recognized as much in 1933 when it exempted free writing. Despite substantial questions about the rulemaking authority that the SEC relied upon to allow the use of free writing prospectuses and to extend liability for their use to issuers in firm commitment offerings, it does have authority to exempt them from section 12(a)(2). The paper concludes with a reexamination of Gustafson v. Alloyd Co.

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