In the complex world of securities offerings, communication is strictly regulated to protect investors and ensure the integrity of the financial markets. A key component in this regulatory framework is the free writing prospectus (FWP). For companies preparing for an Initial Public Offering (IPO) or other registered offerings, understanding what an FWP is, when it can be used, and its implications is crucial for compliance and effective communication.

1. WHAT IS A FREE WRITING PROSPECTUS (FWP)?

An FWP is a written communication used in connection with a registered offering of securities, other than the statutory prospectus required by Section 10 of the Securities Act of 1933. It is a flexible tool that can include a wide range of written communications, such as presentations, press releases, emails, interviews, or any other material that can be captured in writing. The key purpose of an FWP is to provide additional information about the offering to potential investors.

An FWP can be used to supplement the information provided in the prospectus filed with the SEC, offering more detailed or updated information about the offering or the issuer. However, it must not conflict with the information in the prospectus or the registration statement. Unlike the traditional prospectus, an FWP allows for more dynamic and responsive communication, which can be critical during the marketing phase of an offering.

2. ELIGIBILITY AND RESTRICTIONS ON THE USE OF FWPS

Not all issuers are eligible to use FWPs. The eligibility is determined based on the issuer's status and the nature of the offering:

• Eligible Issuers: Generally, WKSIs and seasoned issuers can use FWPs. A WKSI is an issuer that meets certain criteria, such as having a public float of at least $700 million or having issued at least $1 billion in non-convertible securities in the last three years.
• Ineligible Issuers: This includes companies that are or have been in the past three years, a blank-check company, shell company, penny stock issuer, or have filed for bankruptcy. Additionally, companies that are delinquent in their SEC reporting requirements or business development companies are also ineligible.

3. REQUIREMENTS AND GUIDELINES FOR USING FWPS

The use of FWPs is governed by SEC Rules 164 and 433. These rules outline the conditions under which an FWP can be used, including content requirements, legend requirements, and filing obligations.

• Content and Legend: FWPs must include a legend specifying that a registration statement has been filed with the SEC and where it can be accessed. The legend also advises investors to read the registration statement and the prospectus for complete information.
• Filing with the SEC: Generally, an FWP must be filed with the SEC on or before the first day of use. There are exceptions, such as for FWPs that do not include substantive changes from a previously filed FWP or for certain roadshow presentations.

4. DIFFERENCES BETWEEN FWPS AND TRADITIONAL PROSPECTUSES

While both FWPs and traditional prospectuses provide information about a securities offering, they serve different purposes and have different regulatory requirements:

• Traditional Prospectus: This document provides a comprehensive overview of the offering, including financial statements, risks, and detailed descriptions of the issuer and the securities being offered. It must comply with Section 10 of the Securities Act and is filed with the SEC as part of the registration statement.
• FWP: This is a supplementary document that can provide additional or updated information about the offering. It is more flexible and can include content like multimedia presentations or responses to market conditions. However, it must not contradict the information in the statutory prospectus.

5. STRATEGIC USE OF FWPS IN MARKETING OFFERINGS

FWPs are a vital tool in the marketing of securities offerings, allowing issuers to communicate more dynamically with potential investors. They are especially useful during the roadshow phase, where issuers meet with potential investors to discuss the offering. By providing timely and detailed information, FWPs can help address investor questions and concerns, facilitating a more informed investment decision.

However, issuers must exercise caution to ensure that all communications are consistent with the registration statement and comply with SEC rules. Failure to adhere to these regulations can result in violations of Section 5 of the Securities Act, leading to severe penalties.

CONCLUSION

The use of FWPs offers issuers a flexible and powerful tool for communicating with the market during a securities offering. However, it is essential to navigate the regulatory landscape carefully, ensuring compliance with SEC rules and avoiding potential pitfalls. For companies and legal practitioners involved in securities offerings, a thorough understanding of FWPs is crucial for successful and compliant offerings.