Free Writing Steve Thel*

Thel Final9/18/2008 1:11 PM956 The Journal of Corporation Law [Vol. 33:4B. Congress Was Wise to Exempt Free Writing from Section 12(a)(2)Given the circumstances that led to enactment of the Securities Act, one might haveexpected Congress to have prohibited free writing instead of privileging it. 72 Part of thereason for excepting statutory free writing from section 12(a)(2) is that, by definition,free writing must be preceded by a prospectus that meets the requirements of section10(a). Thus anyone receiving free writing probably has a complete statutory prospectusas well (at least one has to have been sent to her, and prior to 1954 she had to havereceived one). 73 An investor with a statutory prospectus is less likely to be misled by falsefree writing, and thus might reasonably be deprived of the benefit of section 12(a)(2)‟sexceptional remedy. This is an important insight, but it does not alone explain the specialtreatment of free writing in section 12(a)(2). To understand the exemption of free writingfrom section 12(a)(2), one has to explain why free writing is allowed at all.The special status of free writing—under section 5 as well as under section12(a)(2)—makes sense in light of the peculiar fact that the Securities Act does not requirethat statutory prospectuses be provided to security buyers. A central purpose of the Actwas to regulate promotional activities and to make the statutory prospectus the centralelement of whatever promotion occurs, 74 and it has become conventional to speak ofprospectus delivery requirements. 75 However the Securities Act requires only that issuersfile a statutory prospectus as part of a registration statement; it does not require them touse it. The Securities Act was enacted in a different constitutional era, and perhapsbecause of this it foregoes legislative command and simply attaches conditions to the useof interstate commerce. 76 The statute simply provides that if a written offer is made, the72. See H.R. REP. NO. 73-85, at 8 (1933).[H]igh-pressure technique has assumed an undue importance in the eyes of the present generationof securities distributors . . . and must be discarded because the resulting injury to anunderinformed public demonstrably hurts the Nation. It is furthermore the considered judgment ofthis committee that any issue which cannot stand the test of a waiting inspection over a month‟saverage of economic conditions, but must be floated within a few days upon the crest of a possiblymanipulated market fluctuation, is not a security which deserves protection at the cost of the public. . . .Id.73. Until 1954, free writing was excepted from the definition of prospectus only if the user proved that asection 10 prospectus had been received by the recipient from the sender of the free writing or his principal.Securities Act section 2(10), 48 Stat. 74, 75 (1933) (current version at 15 U.S.C. § 77b (2000)).74. Securities Offering Reform, supra note 1, at 44,782 n.552 (“„Congress intended that the prospectusprovide investors with „the means of understanding the intricacies of the transaction * * *.‟”) (quoting H.R.REP. NO. 73-85, at 8 (1933)); 1 LOSS & SELIGMAN, supra note 13, § 2.B.2.d.75. See, e.g., Securities Offering Reform, supra note 1, at 44,782 (“Current Prospectus DeliveryRequirements[:] The Securities Act requires delivery of a prospectus meeting the requirements of Securities ActSection 10(a), known as a „final prospectus,‟ to each investor in a registered offering.”).76. See H.R. REP. NO. 73-85, at 10 (1933).The constitutionality of the imposition of liabilities of the character provided by [sections 11 and12 of the Securities Act] raises no serious question. Even though the activities of the particularpersons concerned may be actually intrastate in character, they are, nevertheless, an integral part ofa process calling for the interstate distribution of securities. Liability is imposed upon them as acondition of the acquisition of the privilege to do business through the channels of interstate orforeign commerce.