What is "Plain English?"
Plain English is a phrase which describes a style of writing which includes short sentences, the active voice and everyday language. The "Plain English Movement" by Peter Tiersma has been seeking for years to compel the use of Plain English in the writing of a variety of legal documents intended for use by consumers. Insurance companies and mortgage lenders have already been subjected to the Plain English wringer. We are next.
Q: Why should securities lawyers care about Plain English?
The SEC recently adopted Securities Act Rule 421(d) as the Plain English Rule of the SEC. This rule requires issuers of securities to write the cover page (front and back, inside and outside), summary and risk factors section of prospectuses in Plain English. The SEC at the same time amended Rule 421(b) to provide further guidance on how to prepare a prospectus to meet the pre-existing rule that a prospectus be "clear, concise and understandable." This second provision does not technically constitute the "Plain English" rule as such but when combined with Rule 421(d), that may become a distinction without a difference. One of my colleagues has described 421(d) as "hard core" Plain English and 421(b) as "soft core" Plain English.
What does the SEC mean by "Plain English?"
According to the rule, the six basic principles of Plain English are:
- Short sentences
- Definite, concrete, everyday language
- Active voice
- Tabular presentation or bullet lists for complex material, whenever possible
- No legal jargon or highly technical business terms
- No multiple negatives
Does the Plain English Rule (Rule 421(d)) apply to anything else?
Technically, no. Rule 421(d) applies only to the cover page, summary and risk factors sections of prospectuses. Because the front cover page is usually the only part of the cover which contains anything of substance, the application of the rule to the rest of the cover is a non-event. It does not apply to any other part of a prospectus. It does not apply to proxy statements. It does not apply to Forms 10-K, 10-Q and 8-K. It does not apply to private placement memoranda. It does apply to proxy statements, however, for mergers in which securities form part of the consideration because the proxy is actually, in that case, a proxy/prospectus. A merger proxy/prospectus is a very appropriate document for Plain English because it is addressed mainly to ordinary investors.
When is the Plain English Rule effective?
It applies to Registration Statements first filed after October 1, 1998 and any prospectus supplement for a shelf offering or any post-effective amendment to add audited financial statements or to update a prospectus under Section 10(a)(3) filed after October 1, 1998.
What about the rest of the prospectus?
At the same time that the SEC adopted Rule 421(d), the Plain English Rule, it also amended Subsection (b) of Rule 421 to specify techniques for writing the entire prospectus and enumerating certain drafting conventions to avoid. Although technically speaking the Plain English Rule applies only to the cover page, summary and risk factors sections of the prospectus, I think it will be difficult to comply with Rule 421(b) for the remainder of the prospectus without incorporating some elements of Plain English into the rest of the prospectus. In that sense, I believe the SEC in a very "un-Plain English way" has "backdoored" Plain English into the entire prospectus. Because of this it is likely over time that Plain English will appear throughout all SEC filings.
It is also likely that private placement memos for debt which will be subsequently exchanged for freely tradable debt pursuant to a prospectus will also be written in Plain English so that the offering documents in the exchange offer and the offering documents in the private placement will contain similar language. In keeping with the distinction previously made about hard and soft core, the parts of the prospectus not subject to 421(d) may have fewer Plain English elements.
What are the principal elements of Rule 421(b)?
- Present information in clear concise sections, paragraphs and sentences. Whenever possible, use short explanatory sentences and bullet lists
- Use descriptive headings and subheadings
- Avoid frequent reliance on glossaries or defined terms as the primary means of explaining information in the prospectus. Define terms in a glossary or other section of the document only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure
- Avoid legal and highly technical business terminology
What drafting conventions does Rule 421(b) say you should avoid?
- Legalistic or overly complex presentations that make the substance of the disclosure difficult to understand
- Vague boilerplate explanations that are readily subject to differing interpretations
- Complex information copied directly from legal documents without any clear and concise explanation of the provision(s)
- Repetitive disclosure that increases the size of the document but does not enhance the quality of information
What is the difference between the requirements of 421(d) and 421(b)?
The SEC describes Rule 421(d) as the Plain English rule and makes it applicable only to the cover page, summary and risk factors. The SEC describes Rule 421(b) as the clear, concise and understandable prospectus requirement and makes it applicable to the entire prospectus. The SEC does not clearly differentiate between the two rules. Theoretically, Rule 421(b) permits long sentences in the passive voice using non-everyday language as long as it is concise. I do not think that is what the SEC had in mind. I think the SEC probably thinks that the two rules should be read together.
Why did the SEC do it this way?
I do not know. Maybe they could not get the votes for a straightforward adoption of Plain English for the entire prospectus. Maybe they wanted to encourage experimentation without the pressure of a rule to force issuers to put Management Discussion and Analysis or the Notes to the Financial Statements in Plain English.
What are the additional requirements for the cover page?
The front cover of the prospectus should be limited to one page. The mandatory legends on the front cover may be presented in any way as long as they are prominent and as long as the typeface is easy to read. The cross-reference to risk factors on the cover page should remain if otherwise appropriate and the cross reference should state the page number on which the risk factors begin.. The distribution table showing price, underwriting commission and proceeds of the offering has been deleted and a reformatted disclosure approved.
What about the summary?
If a summary is included it must be brief and in Plain English. There are no restrictions on its length. There are no restrictions on its content, but the SEC release indicates that we should continue to highlight financial information in the summary.
Where should the table of contents go?
The SEC prefers that the table of contents should immediately follow the cover page but will permit it on either the inside front or outside back cover page of the prospectus. If a prospectus is delivered to investors electronically, the table of contents must be included immediately after the cover page in order to avoid having to scroll to the end of the document in order to find the table of contents.
What about risk factors?
Risk factors, if included, should be written in Plain English. The risk factors should be placed in the context of the specific offering so investors can understand the specific risk as it applies to the issuer and its operation. There are no restrictions on the number of risk factors nor do they have to be prioritized.
What about risk factors incorporated by reference from a 1934 Act filing into a prospectus?
Risk factors incorporated from a 1934 Act filing must be in Plain English. This problem can be fixed by filing a Form 8-K containing the Plain English version of the risk factors and then incorporating those risk factors into the prospectus. The old risk factors in the 10-K which are not in Plain English do not have to be rewritten into Plain English by amendment.
What about junk bond covenants or other complex legal terminology?
Technically, Rule 421(d) — the Plain English rule does not apply; Rule 421(b) — the clear, concise and understandable prospectus rule — does apply, however. Therefore, legal and highly technical terminology and legalistic or overly complex presentations should be avoided. If you cannot adequately summarize the language from an exhibit, such as a trust indenture, in the prospectus then simply include that language in the prospectus. That language, however, should be accompanied by a summary which explains what it means to investors. Although that summary does not have to be in Plain English pursuant to Rule 421(d), it must meet the requirements of Rule 421(b).
What about limited partnership prospectuses?
The SEC believes that limited partnership offerings include unique risks and, as a result, they believe certain risks should be highlighted on the cover page notwithstanding their adoption of the Plain English rule which otherwise just requires a cross-reference to risk factors to appear on the front cover page.
What about legal opinions?
Opinions both with respect to "compliance as to form" and "10b-5" present special issues. The best approach would be to exclude Rule 421(b) and (d) from the opinions. If that is not possible, then I would be more concerned with a "compliance as to form' opinion than a 10b-5 opinion. After all, short sentences do not prevent full disclosure.
What impact will this have on EDGAR filings?
EDGAR filings will still be made but paper copies of the Plain English sections must be supplied upon request so the SEC can see how it looks on paper. The SEC is working to upgrade EDGAR to eliminate this paper-delivery requirement.
What are some useful guidance and formatting comments?
- Eliminate defined terms from the cover page (except possibly pronouns like "we" and "our")
- Don't capitalize common terms for the sake of definition
- Putting text in all capital letters makes it hard to read
- The SEC frowns on right-justified margins
How will this affect the comments process?
Expect Plain English comments from the staff. Furthermore, failure to make a good faith effort to comply could result in a refusal to accelerate effectiveness.
What about the old "Put everything in three times rule"?
The "Three Times Rule" suggested that important information should be placed once in the summary, once in the risk factors and once elsewhere in the prospectus in the relevant descriptive section. This rule was developed, not at the SEC, but by defense counsel responding to judges by saying "We put it in the prospectus three times, your Honor, how many more times did we have to put it in there?" The SEC's Plain English rule does not comment on the "Three times rule." My own personal view is that the "Three Times Rule" is very important on a "Motion to Dismiss" or "Motion for Summary Judgment" and I am reluctant to give it up. Perhaps, the best which can be said here is to still say it three times, but say it in Plain English.
What should we do differently in writing prospectuses?
I do not think we should change the process we now follow in any way. Most of us have been writing prospectuses for years and have developed personal ways to do it, which we are comfortable with. For those of you who have not yet developed a personal approach, I will tell you mine and tell you how I intend to modify it to comply with the new rules.
First, I look for sample prospectuses from comparable companies and read them. Then, I talk to someone from the Company and gain as much company specific information as possible. Then, I prepare an outline using the samples as the framework. I set up each Table of Contents entry in the sample prospectuses as a separate section of the outline. Once the first draft of the outline is prepared I use the samples and information gained from the Company to flesh out the outline as much as possible. Then I reorganize the outline to make it look like the prospectus I want to write. I then keep expanding the outline until I have an entry for virtually every paragraph in the prospectus.
Now at this point, because of the new Rule, I would go through the outline and translate the entire outline into Plain English. Once that is done I would then write or assign the writing of each section of the outline for the prospectus. While writing the prospectus sections, I would be mindful of the Plain English rules. Once the prospectus is written I would go back and edit it to make sure it was consistently written in Plain English. As you can see, I would probably try to write the whole prospectus in Plain English even though the Rule does not require it. The main difference between my old way and my new way is that I will need to make sure that I write in Plain English and that I satisfy the requirements of Rule 421(b) and (d).
How do I learn to write in Plain English if I have never done it before?
Get some samples from a printer or off the Internet and read them. Some samples were done under a pilot project and they are available. More samples will become available as time passes. Also, a little writing handbook called The Elements of Style by Wilford Strunk, Jr. and E.B. White could be helpful. Lastly, write like you talk. Most people, even lawyers, use less legalese in conversation than they do when writing.
Where can I find out more about the Plain English disclosure rules?
Call your friendly printing salesman. They will furnish you with booklets called the "Plain English Disclosure Rules" and "A Plain English Handbook" which contain the SEC's rules and guidelines. You can also get these documents off the Internet, but the booklets from the printers will be easier to use and will contain the proper formatting which does not appear in the Internet versions. Prior to actually doing a prospectus using Plain English, you should absolutely, positively read these two books. This Q&A format only highlights the major issues. The Plain English Rule can be found in SEC Release No. 33-7497.
Is this a good thing?
Two of our colleagues who have already produced Plain English prospectuses have told me that the translation process of converting old time-worn boiler plate and legalese into Plain English was excruciatingly difficult. They also said that the resulting product was far superior in clarity to what they started with.