I’m finding a lot of good segues recently – flowing from my discussion on the definition and implications of shell company status in a reverse merger (see HERE) is the topic of a free writing prospectus (“FWP”). In particular, what is a free writing prospectus, when and how is it used, and what companies are eligible for its use.
Communications during a registered offering are strictly regulated, including communications before the filing of a registration statement, after filing and before effectiveness, and after effectiveness – for more on communications during the offering process see HERE. An FWP is a written communication other than the prospectus filed with the SEC, used to make offers, or to market an offering.
An FWP is one of the few writings, beyond the prospectus itself, that may be used to market an offering. However, its use is limited to eligible companies, or in securities law parlance – those that are not ineligible. Accordingly, when planning an IPO or other registered offering, it is important to determine early on whether a company is FWP eligible and how that will impact the roadshow and other marketing efforts.
As a preface to the FWP rules it is important to remember that Section 5 of the Securities Act requires that all offerings be registered unless there is an available exemption (such as a private offering under Regulation D). Since an FWP is not used in exempt offerings, we will skip to registered offerings. Section 5 also governs the when and how of communications during a registered offering process. As an FWP is a written communication during the registered offering process, the failure to comply with the rules regarding its use, can result in a Section 5 violation with very serious consequences.
What is a Free Writing Prospectus?
Securities Act Rule 405 defines a free writing prospectus (FWP) as “any written communication as defined in this section that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed” but which does not include: (i) a prospectus satisfying the requirements of Section 10(a), Rule 430, Rule 430A, Rule 430B, Rule 430C, Rule 430D or Rule 431; (ii) a written communication in reliance on Rule 167 and Rule 426; (iii) a written communication that constitutes an offer to sell or solicitation of an offer to buy such securities that falls within the exception from the definition of prospectus in clause (a) of Section 2(a)(10) of the Act; or (iv) a written communication used in reliance on Rule 163B or Section 5(d) of the Securities Act.
An FWP can take almost any form including a supplement to a prospectus, a deck or other presentation, press release, email, interview, or any other communication that can be reduced to writing. An FWP would not include a purely oral communication such as a live road show without concurrent written materials. Even then however, as discussed below, if the issuer is not eligible to use an FWP, it should limit the contents of an oral communication, to the information contained within the filed registration statement. For more on road shows, see HERE.
A free writing prospectus can be used by a well-known seasoned issuer (WKSI) whether or not a registration statement has been filed. A confidential submission does not constitute a filed registration statement under the Rule’s definition of FWP.
That’s a lot of rules to unpack! Let’s start with the central concept – i.e. “an offer to sell or a solicitation of an offer to buy the securities.” Section 2(a)(3) of the Securities Act broadly defines an “offer to sell”, “offer for sale”, or “offer” to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. An offer does not include discussions between a company and potential or actual underwriter. Research reports are also exempted from the definition.
The term “offer” is meant to be broad and encompassing such that once a company files a registration statement with the SEC for an offering, subject to certain exceptions (such as ordinary course of business communications), all communications will be deemed an “offer” and if not exempted, will also be deemed an FWP.
What Isn’t an FWP? Exemptions Listed in the Rule
As noted above, an FWP does not include a prospectus satisfying the requirements of Section 10(a), rule 430, Rule 430A, Rule 430B, Rule 430C, Rule 430D or Rule 431. A Section 10(a) prospectus is one that contains the information required by a registration statement. Accordingly, as long as the information or communications used to offer securities is simply a repetition of information contained in the filed (and as noted above, public) registration statement, it may be used without regard to the separate FWP rules.
Similarly, Rules 430, 430A, 430B, 430C, Rule 430D and Rule 431 allow for certain modified prospectus to meet the requirements of Section 10(a). Rule 430 allows the omission of pricing and pricing related information prior to effectiveness. Rule 430A allows for a prospectus to be declared effective without pricing information as long as it is updated with such information prior to use. Rule 430B allows for the omission of certain information at the time of effectiveness as long as prospectus supplement updates are filed when such information becomes available (generally in association with an S-3 or F-3 shelf which is updated by supplements for shelf take-downs). Rule 430C is a catch all for situations that do not fit 430A or 430B. Rule 430D is for asset-backed offerings. Finally Rule 431 is for use by investment companies.
Requirements for Use – Rules 164 and 433
The use of an FWP is governed by Securities Act Rule 164 and 433. The two rules work in conjunction with one another. Rule 164 provides that, once a registration statement has been filed, an issuer or an underwriter may use an FWP if, among other things, the issuer is an eligible issuer, the offering is an eligible offering, and the additional conditions of Rule 433 are met. Rule 164 provides that an FWP meeting the requirements of Rule 433 will be considered a Section 10(b) prospectus, able to be used to make offers after a registration statement has been filed. Rule 164 also provides certain good faith outs to violations of the Rule 433 legend and SEC filing requirements for immaterial or unintentional failures to comply.
Rule 433 in turn provides for specific FWP content rules, notice legends and SEC filing requirements for any FWP. In addition, Rule 433 distinguishes the use of an FWP by seasoned and unseasoned issuers and by whether the FWP is being used in connection with an offering that is an initial public offering (IPO) or not.
Seasoned and well-known seasoned issuers (WKSIs) may use an FWP after a registration statement has been filed for pretty well any offerings including follow on offerings on Forms S-1 or F-1 and offerings on Forms S-3 or F-3. A “seasoned issuer” is any issuer that is Form S-3/F-3 eligible (see HERE) and a “well-known seasoned issuer is an issuer or its one of its subsidiaries that:
- Is S-3/F-3 eligible;
- (a) Has a worldwide market value of outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or (b) has issued at least $1 billion in non-convertible securities, other than common equity, for cash and will continue to do so;
- Is not an ineligible issuer;
- Is not an asset backed issuer; and
- Is not an investment company.
Accordingly, by definition, the use of an FWP by a seasoned issuer or WKSI would not be in conjunction with an IPO.
A non-reporting or unseasoned issuer must meet the following conditions to use an FWP in a registered offering, including in an IPO: (i) a Section 10(b) prospectus must have been filed with the SEC that includes a price range for the offering; (ii) the most recent prospectus must be delivered contemporaneously or prior to the FWP; and (iii) after effectiveness of the final prospectus, such final prospectus must be delivered contemporaneously or prior to the FWP. Provided however, that the requirement to have a price range in the prospectus does not apply in the case of a media FWP that was not published in exchange for payment and contains the required Rule 433 legend.
Regardless of the type of offering or issuer, an FWP may include information which is not in the registration statement as long as such information does not conflict with the information in the registration statement or any SEC reports that are incorporated by reference into the registration statement.
All FWP’s must contain the following legend:
The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-8[xx-xxx-xxxx].
The legend also may provide an e-mail address for requesting documents and may indicate that the documents also are available by accessing the issuer’s website.
Subject to certain exceptions, all FWP’s must be filed with the SEC no later than the date of first use and must include the registration statement file number if known. The exceptions to filing include: (i) if the FWP does not contain substantive changes or additions to a previously filed FWP it need not be filed; (ii) if the FWP contains non-final terms of the offering if need not be filed; (iii) if the FWP contains only a description of the final offering terms, it can be filed within two days of first use instead of the first date of use; (iv) when the FWP is used in connection with a business combination subject to Rule 425, the filing requirements in Rule 425 prevail; (v) if the FWP is a pre-recorded road show for an IPO, it need not be filed if at least one version is publicly available without restriction; (vi) if the FWP is a pre-recorded road show for a follow on offering, it need not be filed; and (vii) in the case of a non-compensated media FWP, the issuer must file it with the SEC, with the required legend, within four (4) business days of becoming aware of the publication.
Rule 433(f) provides that any written offer that includes information provided, authorized or approved by the issuer or any other offering participant that is prepared and disseminated by an unaffiliated media third party will be deemed to be an issuer FWP. Nevertheless, the requirements for prospectus delivery, legending and filing on the date of first use that would otherwise apply to FWPs will not apply if: (i) no payment is made or consideration giving for the publication; and (ii) the publication is filed with the SEC with a legend, within 4 days of publication.
As mentioned above, Rule 164 also provides certain good faith outs to violations of the Rule 433 legend and SEC filing requirements for immaterial or unintentional failures to comply. In particular, the Rule provides that an “immaterial or unintentional failure…” to comply with the SEC filing requirement or legend associated with an FWP will not result in a violation of Section 5 if: (a) a good faith and reasonable effort was made to comply with the filing/legend requirement; (b) the FWP is filed as soon as practicable after the failure to file is discovered or amended to include the legend as soon as practicable; and (c) in the case of the failure to include the legend, the amended legended FWP is delivered to all of the recipients of the unlegended version.
Eligible/Ineligible Issuer
An FWP may not be used by an ineligible issuer. The following entities are ineligible to use an FWP: (i) companies that are or were in the past three years a blank-check company; (ii) companies that are or were in the past three years a shell company; (iii) penny-stock issuers; (iv) companies that conducted a penny-stock offering within the past three years; (v) business development companies; (vi) companies that are delinquent in their Exchange Act reporting requirements; (vii) limited partnerships that are engaged in an offering that is not a firm commitment offering; and (viii) companies that have filed or have been forced into bankruptcy in the last three years.
The eligibility of the issuer must be determined as of the date of filing the registration statement or in the case of a delayed or continuance offering (such as the filing of a base S-3 or F-3) at the time of making an actual offer through the filing of a registration statement, prospectus supplement or FWP.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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