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Free Writing Prospectus

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 this article for more on this.

What Is A Free Writing Prospectus?

A Free Writing Prospectus (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 not ineligible. Accordingly, when planning an IPO or other registered offering, it is vital to determine early 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 essential 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, failing to comply with the rules regarding its use can result in a Section 5 violation with dire consequences.

The Securities Act’s Rule 405

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 fall 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, a press release, an email, an interview or any other communication that can be reduced to writing. An FWP would only include purely oral communication, such as a live road show with concurrent written materials. Even then, as discussed below, if the issuer is not eligible to use an FWP, the contents of an oral communication should be limited to the information contained within the filed registration statement. For more on road shows, see this article.

Who is Eligible To Use Them?

A well-known seasoned issuer (WKSI) can use a free writing prospectus 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 a potential or actual underwriter. Research reports are also exempt from the definition.

The term “offer” is meant to be broad and encompassing. 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 contains the information required for 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 before effectiveness. Rule 430A provides for a prospectus to be declared effective without pricing information as long as it is updated with such information before 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 investment companies’ use.

Requirements For Use – Rules 164 And 433

The use of an FWP is governed by Securities Act Rules 164 and 433. The two rules work in conjunction with one another. Rule 164 provides that once a registration statement has is 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 specific good faith outs to violations of the Rule 433 legend and SEC filing requirements for immaterial or unintentional failures to comply.

Rule 433 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 used in connection with an offering that is an initial public offering (IPO) or not.

Seasoned And Unseasoned Issuers Can Use Them

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 our article on the topic) 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, a seasoned issuer or WKSI using an FWP 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 before the FWP; and (iii) after effectiveness of the final prospectus, such final prospectus must be delivered contemporaneously or before the FWP. Provided, however, it was provided 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.

What To Include

Regardless of the type of offering or issuer, an FWP may include information that is not in the registration statement as long as it 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 may also provide an email address for requesting documents and may indicate that the documents are also available by accessing the issuer’s website.

There Are Exceptions

Subject to certain exceptions, all FWPs must be filed with the SEC by the date of first use and 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.

Rules 164 And 433 Govern The Use Of FWPs

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 given for the publication; and (ii) the publication is filed with the SEC with a legend, within four 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 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.

Ineligible And Eligible Issuers

An ineligible issuer may not use an FWP. 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 issuer’s eligibility 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.

Ensure Compliance With FWP Regulations

Stay informed and compliant with the complex rules surrounding Free Writing Prospectuses. Contact NAP for tailored guidance. Reach out now via email or call 877-541-3263 to schedule an appointment.