Free Writing

I. Maurice Wormser Professor of Law, Fordham Law School. I am grateful to Richard Squire, Hillary Sale, Dan Richman, Adam Pritchard, Alex Notopoulos, Don Langevoort, Bob Hillman, Sean Griffith, Jill Fisch, Bill Farrar, Meredith Cross and Julie Constantinides for their help with this article.

I. Introduction

In 2005 the Securities and Exchange Commission (SEC) effectively ended most restrictions on the use of written offering materials in public distributions of securities. Previously, the only written offering materials that could be used in such distributions were terse announcements and dense statutory prospectuses that constituted the bulk of the registration statements that issuers had to file with the SEC. These restrictions did not depend on the accuracy of the information in the communications, so other written communications could not be used even if completely accurate. Less formal written offering material, known as free writing, could be distributed at the end of the offering process, but even then only to investors who had previously been sent a copy of the final statutory prospectus.

Under the Commission's new regime, all sorts of written material may be distributed much earlier in the offering process, and participants in most public offerings are relieved of any obligation to deliver statutory prospectuses. The SEC adopted its new rules to simplify the offering process and to eliminate delays in the dissemination of information to investors.1 To accomplish these ends, it created a new disclosure device-modeled on free writing-which it calls the free writing prospectus. Participants in a public offering may now, from a very early date, widely 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.

Although these reforms eliminated the prohibition on distributing informal written offering materials before a registration statement becomes effective, few market participants are using free writing prospectuses that differ substantially from communications they were using before the reforms were adopted. This is not because they do not know about the new regime. On the contrary, the securities industry and its lawyers were keenly interested in the SEC's reform agenda. From the time the reforms were first floated, however, they warned that reform would have limited traction if security buyers were permitted to rescind their purchases under section 12(a)(2)2 of the Securities Act of 19333 in the event the newly permitted communications contained false statements. Nonetheless, the Commission insisted that such liability would attach, and in fact acted to make issuers liable under section 12(a)(2) for some misleading free writing prospectuses used by other market participants. Not surprisingly, the specter of liability for inadvertent and third party misrepresentations has kept security sellers from using the newly permitted free writing prospectuses widely. Since the reforms were adopted, the techniques of disclosure have changed, but the content of disclosure has remained largely the same. Indeed, the greatest practical change resulting from the reforms is an almost universal practice of offering participants agreeing among themselves to restrict the use of free writing prospectuses by any of them. Accordingly, the reforms have fallen short of their stated goals of facilitating communication, simplifying the registration process, and reducing the cost of raising capital.

In this Article, I argue 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. Outside that context, such liability serves no good end, but simply complicates the offering process, impedes the flow of information, harms market participants, including innocent investors, and burdens the capital formation process generally. These conclusions do not depend on any particularly controversial view of market efficiency or morality, but follow from the very premises that led the SEC to permit free writing prospectuses in the first place. Moreover, Congress recognized as much in 1933.

As noted above, Congress-not the SEC-created the concept of free writing when it permitted those selling securities to distribute statutory free writing after a registration statement became effective. A limiting clause in section 12(a)(2)-one that has seldom been noted and, when noted has generally been misunderstood-exempts statutory free writing from the section. As this Article shows, exempting free writing that contains false statements from section 12(a)(2) led to the broad dissemination of accurate information in the far more powerful form of the statutory prospectus. The same exemption should b...

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