Free Writing Steve Thel*

Thel Final9/18/2008 1:11 PM2008] Free Writing 9652. Section 10(b)Even if Rule 159A(a) is flawed, it is only a peripheral part of the 2005 reforms. 116The rules allowing the use of free writing prospectuses, in contrast, are at the heart of thereforms, and the Commission‟s assumption of regulatory authority with respect to them iseven more problematic. This Article focuses on the application of section 12(a)(2) to freewriting prospectuses that contain false statements. However, careful analysis of thegrounds on which the SEC placed its new rules suggests that those who use free writingprospectuses, even entirely accurate ones, may be exposed to liability under section12(a)(1), which entitles a security buyer to rescind her purchase if a security is offered orsold to her in violation of section 5(b)(1) of the Securities Act.Section 5(b)(1) makes it unlawful to transmit a prospectus in interstate commerceafter a registration statement has been filed, “unless such prospectus meets therequirements of section 10.” 117 If the reform rules work, it is because free writingprospectuses meet the requirements of section 10(b), and they are supposed to. In thelanguage of the SEC‟s rules, a free writing prospectus is “a section 10(b) prospectus forpurposes of section 5(b)(1) of the [Securities] Act,” 118 and “a prospectus permitted undersection 10(b) of the Act for purposes of section[] . . . 5(b)(1).” 119 The language theCommission used in the rules does not match that of section 5(b)(1), which demands aprospectus that meets the requirements of section 10. This mismatch obscures thesubstantial possibility that free writing prospectuses will not meet the requirements ofsection 10, so that their use will in fact violate section 5(b)(1).Section 10(b) is expressed in terms of permissible prospectuses, but, as the languageof section 5(b)(1) reflects, it has requirements, and free writing prospectuses do not seemto meet them. Section 10(b) authorizes (in fact directs) the SEC to adopt rules that permitthe use of a prospectus for purposes of section 5(b)(1) that “omits in part or summarizesinformation in the prospectus specified in subsection [10](a).” 120 Thus by its termssection 10(b) authorizes the SEC to permit prospectuses that omit or summarize some orall of the information in a section 10(a) prospectus, but not prospectuses that containinformation that is not contained in a section 10(a) prospectus. Section 10(b) does notauthorize the SEC to permit whatever prospectus it wants, but only allows it to whittleaway from the registration-statement based prospectus of section 10(a).Free writing prospectuses do much more than summarize or omit parts of a section10(a) prospectus. The SEC‟s rules contemplate prospectuses that entirely omit theinformation in the section 10(a) prospectus and, more importantly in this connection, thatcontain information that is not contained in the registration statement at all. Indeed, so farthe most commonly used free writing prospectuses are term sheets that contain nothingbut information that is not in the section 10(a) prospectus. 121 In any event, the rules116. Indeed, it has something of an add-on quality, as though the Commission said while we are permittingsome new forms of communication, we will expand the scope of liability for all communications.117. 15 U.S.C. § 77e (2000).118. Rule 164(a), 17 C.F.R. § 230.164(a) (2007).119. Rule 433(a), 17 C.F.R. § 230.433(a) (2007).120. 15 U.S.C. § 77j(b) (2000).121. See Anna T. Pinedo & James R. Tanenbaum, Afraid of Revolution—Liability Concerns HaveImpoverished the Use of Free-Writing Prospectuses Under U.S. Offering Reforms, INT‟L FIN. L. REV., at 24,Oct. 2007 (noting that most prospectuses “are being sued principally for term sheets”); Joseph McLaughlin,