Free Writing Steve Thel*

Thel Final9/18/2008 1:11 PM958 The Journal of Corporation Law [Vol. 33:4The free writing-as-reward story also explains why false oral statements are coveredby section 12(a)(2). 80 It was reasonable to treat oral and written supplementalcommunications differently in section 12(a)(2) because free writing is a better incentivedevice than free talking would be.The point of the Securities Act was to substitute a registration statement andprospectus regime for the promotional excesses that were thought to have characterizedthe 1920s. Toward this end, the Securities Act forbade all offers until a registrationstatement became effective, on the theory that investors would educate themselves. Thered herring device, which administrators developed as investor self-education provedimpractical, permitted one form of written communication—the prospectus included inthe registration statement—to be used during the period between filing and effectiveness,but left oral offers prohibited. 81 In this context, a reluctance to countenance oralcommunications as the price for getting statutory prospectuses distributed is quiteunderstandable.Aside from the fact that oral communications were particularly suspect when theSecurities Act was adopted, conditioning the use of oral communications on the deliveryof section 10(a) prospectuses would not have been a very effective incentive anyway, andcertainly not as effective as free writing. The effectiveness of an incentive depends on thetargets‟ belief that they will get their reward only if they perform the task demanded ofthem. Offering participants knew that they had to be able to prove that they had sent asection 10(a) prospectus before they delivered any other written offering material. If theycould not, any recipient who kept the written material would be able to rescind asubsequent purchase automatically on account of the violation of section 5(b)(1), and todo so under section 12(a)(1), 82 which does not even require a false statement or provideany good faith defense. Accordingly, offering participants had to deliver a statutoryprospectus to get the free writing reward. On the other hand, market participants mighthave been expected to conclude, as they apparently did in fact conclude, that they werenot likely to be held accountable for making unlawful telephone calls, inasmuch as it isdifficult to prove (or at least was difficult to prove in 1933) that a telephone call had beenmade. 83 They faced little risk of sanction if they made phone calls before sending astatutory prospectus, and could have expected that sending a prospectus might well spoilany subsequent sales pitch. Accordingly, a free talking regime would not have been aneffective mechanism for assuring the distribution of section 10(a) prospectuses.Moreover, unlike statutory free writing, a free-talking exception—the right to makeoral statements free of section 12(a)(2) liability so long as the offering participant sent astatutory prospectus first—would have been too expensive to be an effective incentive toConfirmations are defined as prospectuses, and subject to being qualified as free writing, supra note 78, so thatsellers would be forced to eventually send a statutory prospectus by virtue of state statutes of frauds thateffectively required confirmations.80. Gustafson assumed that written and oral communications should receive parallel treatment, and thusstated without analysis that the “phrase „oral communication‟ [in section 12(a)(2)] is restricted to oralcommunications that relate to a prospectus.” Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 567-68 (1995).81. See 1 LOSS & SELIGMAN, supra note 13, § 2.B.2.b.1 (discussing the so-called red herring prospectus).82. 15 U.S.C. § 77l(a)(1) (2000).83. See 1 LOSS & SELIGMAN, supra note 13, § 2.B.2.c (discussing SEC‟s inability to enforce prohibitionof interstate telephone calls).