As a lawyer, you understand the importance of effective communications, but your clients should as well. This is especially true when filing documents with the Securities and Exchange Commission (SEC) as the agency scrutinizes disclosures, both in terms of substance as well as style and format. The SEC has even published a handbook on how to use plain language. In some cases, the SEC has required amended disclosures based on such things as font size and poorly structured sentences. Clarity of communication is important for the SEC and also for investors who rely heavily on disclosures when making investment decisions. You can help your clients save the time and expense of having to amend disclosures by getting it right the first time. Read on to learn more about compliance with the SEC’s plain English disclosure rules.
What Does the SEC Require?
In 1998, the SEC adopted plain English disclosure rules impacting the drafting and formatting of every prospectus submitted by domestic and foreign issuers for registered public offerings. The rules do not apply to annual meeting proxy statements or periodic reports, even if the periodic report is incorporated by reference into a registration statement.
Specifically, when drafting the front and back cover pages as well as the summary and risk factor sections, the SEC expects issuers to substantially comply with the following six principles of plain English:
- Use short sentences;
- Use definite, concrete, everyday language;
- Use an active voice;
- Use tabular presentation or bullet lists when possible;
- Avoid legal jargon or highly technical business terms; and
- Avoid double negatives.
Regarding the prospectus as a whole, the rules require that it be "clear, concise and understandable." In addition to the plain English principles above, this generally requires avoiding:
- Reliance on glossaries or defined terms (terms should be defined in a separate section but only if the meaning is unclear from the context and this would facilitate understanding of the disclosure);
- Vague boilerplate explanations that are open to different interpretations;
- Use of complex information directly from legal documents without a clear and concise explanation of the provisions; and
- Repetitive disclosures that increase the size of the document without enhancing the quality of the information.
In addition to the general writing guidelines above, the SEC has more specific rules for the front of a prospectus which are not necessarily intuitive. For example:
- The cover page cannot exceed 1 page;
- The table of contents must be on the inside front cover if delivered electronically;
- Pictures, graphs, charts and other designs must be understandable and not misleading;
- Any legends must be prominent and easy to read;
- The cover page need only identify the amount of the option not overallotment option terms, maximum-minimum information or the expense footnote;
- The summary must be brief with no lengthy descriptions of business and strategy;
- The SEC's phone number and Internet address must be included; and
- The Underwriting section must include a table showing all underwriting compensation and disclosure regarding offering expenses, maximum-minimum information on any overallotment option, any finder's fees or commissions paid by persons other than the issuer, the expense footnote and the stabilization legend.
In addition, the rules permit issuers to summarize an exhibit's key provisions instead of copying directly from the exhibit, but the issuer must present the summarized information clearly and explain what it means to investors. For example, in a high yield debt prospectus, an issuer may no longer copy key provisions of the indenture into the "Description of the Notes" without also including a more concise explanation of those provisions. Under the rules, the issuer can draft the "Description of the Notes" as a summary of the key terms of the securities. However, this may not currently be acceptable to institutional buyers. Alternatively, the issuer can keep the long-form description, but it must then also provide a clear and concise summary of the provisions.
The SEC has the authority to deny processing if an issuer has not made a bona fide effort to create a disclosure that is reasonably concise and understandable. Because of this, it’s important to ensure that your corporate clients have the proper internal procedures in place when preparing filings with the SEC. At a minimum, a compliance official should be responsible for reviewing all outgoing disclosures to ensure quality control and compliance. If your clients require additional guidance, the SEC provides a sample summary prospectus online.
For more information on SEC requirements and on representing corporate clients in general, FindLaw's Corporate Counsel section has a wealth of free information and resources available to you. Check it out today.