Free Writing Steve Thel*

Thel Final9/18/2008 1:11 PM2008] Free Writing 963New Rule 159A(a) 104 imposes section 12(a)(2) liability on issuers in somecircumstances when an offering participant uses a misleading issuer-prepared free writingprospectus, even if the security sold does not pass directly from the issuer to the plaintiffpurchaser. 105 Rule 159A(a) provides that if securities are offered or sold to a person bymeans of certain communications, including free writing prospectuses, prepared by or onbehalf of an issuer, then[f]or purposes of section 12(a)(2) of the Act only, in a primary offering ofsecurities of the issuer, regardless of the underwriting method used to sell theissuer‟s securities, seller shall include the issuer of the securities sold to aperson as part of the initial distribution of such securities, and the issuer shallbe considered to offer or sell the securities to such person . . . . 106B. Free Writing About Free Writing ProspectusesThe thesis of this Article is that section 12(a)(2) liability should not attach to manyfree writing prospectuses, and that, rather than undertaking to expand the scope of thesection, the SEC should have immunized those prospectuses from liability. Beforeexplaining why this is so, it is of course appropriate to establish that the SEC hasauthority to provide this immunity. As discussed below, the Commission has ampleauthority to do so. Remarkably, however, an examination of the authority upon which theCommission relied in adopting its reform agenda also shows that the Commission wasnot very careful in grounding its new rules in its Securities Act rulemaking authority.1. Issuer LiabilityThe intent behind new Rule 159A(a) is tolerably clear: issuers that prepare false freewriting prospectuses that are used in firm commitment underwriting are liable undersection 12(a)(2) even when the plaintiff purchases from an underwriter. What isremarkable is the way the Commission undertook to accomplish its goal. TheCommission has extensive rulemaking authority under the Securities Act, but it does nothave authority to create private causes of action. As the Rule‟s caption—“Definition ofseller for purposes of section 12(a)(2) of the Act,”—and language indicate, 107 in adoptingrule 159A(a) the Commission was relying upon its authority, under section 19(a) of theAct, to make rules “defining accounting, technical and trade terms” used in the SecuritiesAct. 108 Rule 159A(a) defines the word “seller” in section 12(a)(2) to include the issuer incertain cases, and presumably this makes the issuer liable in those cases. But the wordaction by a buyer against his or her immediate seller. That is to say, in the case of the typical „firm commitmentunderwriting,‟ the ultimate investor can recover only from the dealer who sold to him or her.”).104. Rule 159A(a), 17 C.F.R. § 230.159A(a) (2007).105. See Securities Offering Reform, supra note 1, at 44,769 (explaining liability of the issuer as “seller”).106. Rule 159A(a), 17 C.F.R. § 230.159A(a) (2007).107. Id.108. The Commission usually offers only vague explanations of its statutory authority to adopt rules, and itdid so in this case as well. See Securities Offering Reform, supra note 1, at 44,798 (stating generally that itadopted the new rules “pursuant to” a variety of Securities Act, Securities Exchange Act, and InvestmentCompany Act provisions).