Six months after the Securities and Exchange Commission rewrote the rules for offering securities for sale, one fact is clear: Kiss the days of the dowdy, rigidly regulated prospectus goodbye.

Back in December, in an effort to modernize the offering process, the SEC adopted reforms that, among other things, loosened the rules around what companies can say about initial public offerings and secondary offerings. Previously, any written communication outside of the statutory prospectus was an illegal prospectus. With the reforms, eligible issuers have the ability to use a “free writing prospectus”—that is, a written communication, including in electronic form, that constitutes an offer outside the statutory prospectus.

Anderson

FWPs remain subject to certain conditions, including, in many cases, filing with the SEC. But essentially, “The SEC has said issuers can communicate information to investors in written form outside of the statutory prospectus, which is a huge departure from prior practice,” says Will Anderson, a partner at the law firm Bracewell & Giuliani.

The ability to use an FWP greatly expanded the communications before and during registered offerings of securities, eliminating many concerns about “gun jumping” violations, although FWPs are still subject to anti-fraud rules and can’t contain any material misstatements or omissions.

Murphy

One rapidly growing role for FWPs seems to be marketing. Some companies are creating FWPs “intended to help seal the deal,” according to Thomas Murphy, head of the securities practice at McDermott, Will & Emery. For example, in advance of its IPO in January, Chipotle Mexican Grill created a Web site, www.chipotleipo.com (now defunct), as an FWP to help promote its offering.

“What motivated us to do it is that we believe our culture and our personality is a big part of who we are as a company and a significant key in our success,” Chipotle spokesman Chris Arnold says of the Web site. “Filing a prospectus under the old rules meant pretty dry documents and didn’t a give lot of opportunities to demonstrate our corporate personality and character and other things that are important to us. The new rules let us do that.”

In an interesting twist on digital convergence, Internet telephone giant Vonage promoted its IPO last week by delivering voicemail messages—which qualify as electronic communications—to its 1.6 million customers. The gimmick was Vonage’s 17th FWP in six months (see Spreadsheet in box above right for examples); however, the move somewhat backfired on the company—the voicemail messages did not comply with a Securities Act rule that requires an active hyperlink to the related prospectus, or the name and address of the person from whom a prospectus could be obtained. "As a result," wrote the company in a revised registration statement, "it is possible that the voicemail could be determined to be an illegal offer in violation of Section 5 of the Securities Act, in which case recipients could seek to recover damages or seek to require us to repurchase their shares at the IPO price."

FWP Wildfire

Well-known seasoned issuers—issuers that have been reporting and timely in their Exchange Act filings for one year, and have either $700 million of worldwide public float, or that have issued $1 billion in non-convertible securities other than common equity in registered offering for cash in the preceding three years—can use an FWP at any time. Other eligible issuers and offering participants generally must wait until after the a registration statement has been filed.

At the time the rules were adopted, some questioned how much issuers would avail themselves of the ability to use FWPs, due to liability concerns. At the time the SEC issued the rules, it also issued an interpretation that said liability under Section 12(a)(2) would be determined at time of contract to sale rather than when the final prospectus is delivered, which can happen days later.

“That means, essentially, when you contract to sale, you need to have all of the information conveyed to investors,” says Anderson. He believes the interpretation could actually encourage the use of free writing, since issuers can use FWPs to help create a paper trail of information delivered to investors.

FWP

The definition of a free writing prospectus is outlined in Rule 405 of the Securities Act of 1933, which is a section on "Definitions of Terms":

Free writing prospectus.

Except as otherwise specifically provided or the context otherwise requires, a free writing prospectus is 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 (or, in the case of a well-known seasoned issuer, whether or not such registration statement is filed) and is made by means other than:

A prospectus satisfying the requirements of section 10(a) of the Act, Rule 430 , Rule 430A, Rule 430B, Rule 430C, or Rule 431;

A written communication used in reliance on Rule 167 and Rule 426; or

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.

Source

The Securities Act of 1933, Rule 405, "Definitions Of Terms" (Courtesy The University of Cincinnati College of Law's "Securities Lawyer's Deskbook")

Murphy agrees. “People’s practices have changed,” he says. “They’re more interested in being able to prove what they disclosed and communicated to investors at the time of pricing.”

But the initial use of free writing prospectuses was “slow to catch on,” Anderson says; fewer than 500 FWPs were filed in December, the first month they were available. “Issuers, underwriters and counsel took a cautious approach at first,” he says, but now “the pace is picking up. People are becoming more comfortable using them.”

Are they ever: Since Dec. 1, 2005, issuers have filed more than 700 FWPs with the SEC, according to data supplied by 10K Wizard. Financial services firms account for most of the FWPs, and the vast majority have been term sheets, but experts note that companies are also using them to update information without the need to re-circulate their prospectus, and to market the sale of their securities.

“So far, companies are not really pushing the envelope much,” says Murphy. “The vast majority of FWPs are for compliance purposes.”

Most FWPs on file are simply “term sheets,” a summary of the basic terms of an offering. Murphy traces that trend back to the habit of underwriters using “Bloomberg screens”—electronic communications used primarily in sales, particularly debt deals, to institutional investors—to communicate final pricing terms.

Since electronic communications are deemed written communications under the reforms, Murphy says many people simply create term sheets from the information conveyed on a Bloomberg screen and then file them as FWPs to establish a record of what was communicated to the investor at the time of contract to sale.

Companies are also using FWPs to communicate updated information to investors, such as a change in the expected offering price of an initial public offering or to provide update earnings guidance or financial information.

Edwards

“It’s mostly WKSIs that have been using” FWPs, notes Paul Edwards, chair of the securities law practice group at the firm McDonald Hopkins. “They’re useful for communicating current developments in the midst of an offering without having to re-circulate the prospectus.”

“As time goes on, I think we’ll see more use made of this as a tool for marketing securities,” Edwards adds. “Under the old rules, it was illegal to use marketing material during the waiting period. People need to unlearn that.”

Related provisions, FWP examples, and coverage can be found in the box above, right.