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SEC Adopts Plain English Rules
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Business New Haven
2/8/1999
By: Tom Klee
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A new communications mandate adopted by the Securities & Exchange Commission will make prospectuses and other filings easier to read and understand. New registration statements - whether of a small or large business - filed under the Securities Act of 1933 will have to adhere to the rules of “plain English.” These principles apply to four parts of a prospectus: front cover page, summary portion, risk factors section and back cover page.
The SEC changed its rules to limit the length of the cover page to one page and to reduce the amount of required information. It also changed the required legends so they may be presented in any way that makes them prominent and easy to read. Even the familiar formatted distribution table - showing the price of the security, underwriting commissions and amount of proceeds - has been eliminated. Companies may therefore develop their own manner for disclosing this information.
In addition, the SEC has reduced the amount of disclosure that must be included on the inside front cover and the outside back cover. The prospectus summary should be kept brief as well. The risk factors section, for example, now describes risks specific to the particular company, rather than a boilerplate that might apply to any company.
The six basic principles to follow when writing in plain English are:
• Use short sentences.
• Use definite, concrete, everyday words.
• Use the active voice.
• Use tables or bullets whenever possible to present complex material.
• Do not use legal jargon or highly technical business terms.
• Avoid multiple negatives.
To insure that the above principles are followed, the SEC suggests following specific writing techniques in preparing the entire prospectus. For example, use of bullets, descriptive headings and sub-headings is encouraged. Use of legal or highly technical business terms is not.
However, if a company believes it is necessary to use technical terms to fully or accurately describe its business, those terms should be explained in simple language the first time that they are employed.
Further, the rules permit pictures, charts, graphs or other graphic elements to make the prospectus easier to understand. The use of tables, charts, schedules and graphic illustrations is also recommended to present financial data in a more understandable manner. The text and design of the document should highlight important information for investors. White spaces and boxes can help to achieve this goal.
Some people are concerned that the application of plain English rules may lead to increased liability. The SEC does not agree, and makes clear that simplification does not mean omitting important information - only presenting it in a clear way that is more easily understood and invites investors to read it.
For example, a shorter summary section would refer to the full explanation elsewhere in the parts of the prospectus which are not subject to the plain English rules. The SEC suggests that the courts look at the entire document to determine if there was full disclosure and should find disclosure misleading only if it is “buried” in the document.
While the plain English rules do not apply to filings under the Securities Exchange Act of 1934, such as annual and quarterly reports, the SEC encourages the application of the plain English principles to all filings. In particular, proxy statements, which current shareholders are most likely to read, would benefit from application of these rules.
It is the hope of this author that, after a period of adjustment for everyone - including lawyers, investment bankers and SEC staff - prospectuses and other filings will become clearer and easier to read. BNH
Tom Klee is a partner in the business department and ventures and intellectual property practice of Shipman & Goodwin, LLC. With offices in Hartford, Stamford and Lakeville.
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