Free Writing Steve Thel*

Thel Final9/18/2008 1:11 PM2008] Free Writing 977it was to exempt free writing in 1933. Moreover, in many public offerings delivery of asection 10(a) prospectus is an empty formality anyway, inasmuch as it consists of littlemore than a statement that the issuer‟s filings under the Securities Exchange Act areincorporated by reference. 174 Accordingly, the SEC should extend its access equalsdelivery model to free writing. Once a registration statement is effective and a finalsection 10(a) prospectus is available, a free writing prospectus should be exempt fromsection 12(a)(2), even if the recipient is not sent a section 10(a) prospectus first.Even before a section 10(a) prospectus is available, free writing prospectuses thatare not broadly disseminated should also be exempt from section 12(a)(2). 175 Whatevergood is accomplished by subjecting free writing prospectuses to section 12(a)(2) liability,doing so undeniably constrains communication and imposes costs on those seeking toraise capital. 176 One of these costs is the denial of information to investors, but a moreimportant one may be the expense that issuers and other market participants incur toavoid sending anyone a free writing prospectus. The risk of inadvertently sending a freewriting prospectus is great, inasmuch as even an isolated e-mail message or letter sent toa potential investor during a public offering may be a prospectus. The Commissionrecognized this in the 2005 reforms when it adopted rules excluding a variety of issuercommunications from the definition of offer. 177 By establishing that suchcommunications are not offers, the Commission immunized them from section 12(a)(2)even when they are written. However, the Commission also recognized that these reformsdid not go far enough, and that they left communications overly restricted, especiallyduring the offering process. 178 Once the offering process begins, offering participants goto great lengths to avoid inadvertently publishing a prospectus. Permitting the use of freewriting prospectuses was supposed to prevent this wasted expense. However, the shorthistory of the reforms has already shown that the threat of section 12(a)(2) liabilityconstrains the use of free writing prospectuses. This constraint is costly and the cost isunproductive. If markets are now efficient enough to assume—as the SEC does—thatinvestors get the advantages of registration statements without seeing them, there is noreason to impose section 12(a)(2) liability on the basis of misrepresentations in freewriting prospectuses that are not broadly disseminated. 179As the Commission noted when it adopted its 2005 reforms, many commentatorshad expressed concern about the burden of section 12(a)(2) liability on free writing174. See supra note 42 (discussing form S-3).175. The Commission‟s rules themselves distinguish between free writing prospectuses that are used in amanner reasonably designed to lead to “broad unrestricted dissemination” and those that are not. Rule433(d)(1)(ii), 17 C.F.R. § 230.433(d)(1)(ii) (2007) (describing filing requirements).176. See supra note 47 and accompanying text (explaining the motivation to make sellers careful aboutwhat they say).177. See Rules 163A, 168, 169, 17 C.F.R. §§ 230.163A, 230.168, 230.169 (2007) (specifying the excludedissuer communications).178. See Securities Offering Reform, supra note 1, at 44,744 (noting that communications were stillrestricted).179. A former SEC Commissioner has forcefully challenged the use of abbreviated prospectuses for thesale of mutual fund securities, but he emphasizes that the efficient market hypothesis is inapplicable to mutualfund transactions. See Bevis Longstreth, The Profile: Designer Disclosure for Mutual Funds, 64 BROOK. L.REV. 1019, 1032-33 (1998) (asserting that the efficient market hypothesis cannot extend to mutual fundsbecause there is no active trading market).