Free Writing

Steven Thel

Fordham University School of Law

July 17, 2007

Fordham Law Legal Studies Research Paper No. 1001210

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.

Number of Pages in PDF File: 46

Keywords: free writing, prospectus, free writing prospectus

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Date posted: July 20, 2007 ; Last revised: April 27, 2014

Suggested Citation

Thel, Steven, Free Writing (July 17, 2007). Fordham Law Legal Studies Research Paper No. 1001210. Available at SSRN: https://ssrn.com/abstract=1001210

Contact Information

Steven Thel (Contact Author)
Fordham University School of Law ( email )
140 West 62nd Street
New York, NY 10023
United States
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