[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Proposed Rules]
[Pages 3152-3173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1300]
[[Page 3151]]
_______________________________________________________________________
Part III
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 228, 229, 230, and 239 Plain English Disclosure; Proposed
Rules
Federal Register / Vol. 62, No. 13 / Tuesday, January 21, 1997 /
Proposed Rules
[[Page 3152]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 230 and 239
[Release Nos. 33-7380; 34-38164; IC-22464; File No. S7-3-97;
International Series No. 1044]
RIN 3235-AG88
Plain English Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: One of the fundamental protections provided to investors by
our federal securities laws is full and fair disclosure, but investors
must be able to understand these disclosures to benefit from them.
Prospectuses often use a complex, legalistic language that is foreign
to all but financial or legal experts. To address these problems, our
rule proposals would: Require companies to use plain English principles
in writing the front and back cover pages, summary and risk factor
sections of prospectuses; revise current requirements for highly
technical information in the front of prospectuses; and revise the rule
on the preparation of prospectuses to provide companies with more
specific guidance on the clarity required in the entire document.
DATES: Public comments are due March 24, 1997.
ADDRESSES: Please send three copies of the comment letter to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-6009. Comments can be sent
electronically to the following e-mail address: rule-comments@sec.gov.
The comment letter should refer to File No. S7-3-97; if e-mail is used
please include the file number in the subject line. Anyone can inspect
and copy the comment letters in the SEC's Public Reference Room, 450
Fifth Street, N.W. Washington, D.C. 20549. We will post comment letters
submitted electronically on our Internet site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Ann D. Wallace, Senior Counsel to the
Director, Division of Corporation Finance, at (202) 942-2980, or
Kathleen K. Clarke, Special Counsel, Division of Investment Management,
at (202) 942-0724, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: To implement the first step in our plain
English initiatives, we are publishing for comment amendments to Rules
421 1 and 461 2 of Regulation C 3 and Items 101,4
301,5 501,6 502,7 503,8 and 508 9 of
Regulation S-K.10 We also are proposing minor amendments to Forms
S-2,11 S-3,12 S-4,13 S-20,14 F-3,15 and Form
F-4,16 as part of this plain English initiative.
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\1\ 17 CFR 230.421.
\2\ 17 CFR 230.461.
\3\ 17 CFR 230.400 et seq.
\4\ 17 CFR 229.101.
\5\ 17 CFR 229.301.
\6\ 17 CFR 229.501.
\7\ 17 CFR 229.502.
\8\ 17 CFR 229.503.
\9\ 17 CFR 229.508.
\10\ 17 CFR 229.10 et seq. We are proposing similar revisions to
Regulation S-B governing disclosure by small business issuers. 17
CFR 228.10 et seq.
\11\ 17 CFR 239.12.
\12\ 17 CFR 239.13.
\13\ 17 CFR 239.25.
\14\ 17 CFR 239.20.
\15\ 17 CFR 239.33.
\16\ 17 CFR 239.34.
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The Office of Investor Education and Assistance is issuing
simultaneously a draft of the text of A Plain English Handbook: How to
Create Clear SEC Disclosure Documents. The handbook covers proven
techniques and tips on how to create plain English documents. You may
request a copy of the draft handbook by calling 1-800-SEC-0330; or you
may access the document on our Internet site (http://www.sec.gov).
Table of Contents
I. Executive Summary
II. Background
A. Prospectus Disclosure Problems
B. SEC Plain English Initiatives
C. Arguments For Plain English
D. Criticisms of Plain English
1. Plain English Is Imprecise and Unsuited for Complex Material
2. Plain English Will Increase Liability
III. Elements of Plain English
A. Know Your Audience
B. Know What Information Needs To Be Disclosed
C. Use Clear Writing Techniques to Communicate Information
1. Active Voice
2. Short Sentences
3. Definite, Concrete, Everyday Language
4. Tabular Presentations
5. No Legal Jargon or Highly Technical Business Terms
6. No Multiple Negatives
D. Design and Organize Your Document So It Is Easy and Inviting
to Read
IV. Plain English Rule Proposals
A. Proposed Plain English Rule 421(d)
B. Clear, Concise and Understandable Prospectuses--Rule 421(b)
C. Proposed Revisions to Regulation S-K
1. Front of Registration Statement and Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus
3. Prospectus Summary, Risk Factors and Ratio of Earnings to
Fixed Charges
a. Summary
b. Risk Factors
c. Ratio of Earnings to Fixed Charges
D. Proposed Rules for Investment Companies
V. Staff Review. .
A. Plain English Pilot Program
B. Denial of Request for Acceleration
C. Phase-In of Plain English Requirements
VI. Request for Comments
VII. Cost-Benefit Analysis
VIII. Summary of The Initial Regulatory Flexibility Analysis
IX. Paperwork Reduction Act
X. Statutory Authority
XI. Text of The Proposals
Appendix A: Examples of Plain English Disclosure Documents
Appendix B: Chart on Small Business Issuer Rule Proposals
I. Executive Summary
Full and fair disclosure is one of the cornerstones of investor
protection under the federal securities laws. Documents that
communicate clearly and effectively play a crucial role in achieving
the basic protections provided by disclosure. For many years, it has
been recognized that the language and style of disclosure documents
could be improved. Most recently, the Task Force on Disclosure
Simplification 17 criticized prospectuses for their dense writing,
legal boilerplate, and repetitive disclosures. These problems are
magnified by the complex transactions and novel securities that
dominate today's securities market.
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\17\ S.E.C. Report of the Task Force on Disclosure
Simplification (1996), Section II, Presentation of Information. The
staff task force, with Philip K. Howard providing valuable advice,
recommended ways to streamline, simplify and modernize our rules and
forms on capital formation without compromising investor protection.
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As part of our ongoing commitment to give investors more
understandable disclosure documents, we are proposing a rule for public
comment that requires the use of plain English writing principles when
drafting the front of prospectuses--the cover page, summary, and risk
factor sections of these documents. The proposed rule would require
public companies and mutual funds to write this information in everyday
language that investors can understand on the first reading.
The efforts to date of the public companies participating in our
plain English pilot programs support our belief that disclosure
documents can be made more readable without sacrificing substantive
business and financial information. Our proposed plain English rule,
Rule 421(d), would specify six minimum plain English writing principles
that public companies should use in drafting the front of prospectuses:
Active voice, short sentences, everyday
[[Page 3153]]
language, tabular presentation of complex material, no legal jargon,
and no multiple negatives. This proposal would not reduce or eliminate
any of the substantive disclosures public companies must give
investors. The prospectus would continue to contain detailed business
and financial information, which would be available to investors and
others in the marketplace who use this information.
Recognizing that many of our rules have contributed to the
legalistic language and tone of these documents, we also are proposing
to eliminate highly formatted and overly technical information required
on the cover page. The proposed rules move to the body of the document
technical information that may be important to the offering process,
but is not critical for the cover page. In addition, we are proposing
other revisions to Rule 421, the rule on the preparation of
prospectuses, to give companies guidance on how to improve the
readability of the rest of the prospectus.
Because our plain English proposals will change customary drafting
practices, we are continuing our plain English pilot programs to help
companies draft clearer disclosure documents. The documents filed by
pilot participants will provide other companies with examples of plain
English documents. Also, the Office of Investor Education and
Assistance today is issuing a draft of the text of A Plain English
Handbook: How To Create Clear SEC Disclosure Documents to explain the
plain English principles of our proposed rule and other techniques for
producing clearer documents. The staff welcomes your views on the draft
handbook and how it can be improved. Once the staff receives your
comments, the handbook will be finalized and available to the public at
no cost.
We have used a number of the plain English writing techniques in
this release. For example, we have kept sentences and paragraphs short
and avoided defined terms, cross-references, and other legalistic or
formal writing conventions. We also have used the personal pronoun
``we'' when referring to the SEC and ``you'' when referring to public
companies and mutual funds that would need to comply with our plain
English proposals.
We encourage everyone involved in the public offering process--
public companies, lawyers, accountants, underwriters and investment
bankers--to give us their comments on the proposed rules and other ways
we can improve the language in disclosure documents. Most importantly,
we would like investors, financial analysts, brokers, and other users
of these disclosure documents to give us their views on our plain
English proposals and ways to improve the readability of these
documents.
II. Background
A. Prospectus Disclosure Problems
Giving investors full and fair disclosure is one of the
cornerstones of investor protection under the federal securities laws.
The legislative history of the Securities Act of 193318 states
that the purpose of disclosure ``is to secure for potential buyers the
means of understanding the intricacies of the transaction into which
they are invited.'' 19 The prospectus--the traditional offering
document--must describe the company's business, management, and
financial condition to enable investors to make informed investment
decisions.
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\18\ 15 U.S.C. 77a et seq.
\19\ H.R. Rep. No. 85, 73rd Cong., 1st Sess. 8 (1933).
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Investors often complain that prospectuses use arcane, complex, and
incomprehensible language.20 As a result, many investors may skim,
rather than read, prospectuses.21 A recent study on the investment
concerns of senior citizens concluded:
\20\ See, e.g., Letter from American Association of Retired
Persons, the Consumer Federation of America, and the National
Council of Individual Investors on the Private Securities Litigation
Reform Act of 1995 regarding the Act's provision requiring a study
on protections for senior citizens and qualified retirement plans
(May 1, 1996).
\21\ See, Richard C. Wydick, Plain English for Lawyers, 3
(1994).
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The notion that there is ``full disclosure'' to Americans about
their investments is, by and large, a myth * * * [m]ost written
disclosures are too long and too complicated to be of any practical
use to someone other than a securities lawyer or expert
investor.22
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\22\ See, AARP/CFA/NASAA Background Report: The Five Biggest
Problems ``Legitimate'' Investing Poses For Older Investors (March
1995).
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The Task Force's report criticized prospectuses for their dense
writing, legal boilerplate, and repetitive descriptions of the
company's business. Noting that trivial points sometimes receive as
much attention as material ones, the report found that dense disclosure
can often bury the points that are most significant to making an
informed investment decision. The report expressed concern that
prospectuses are filled with legal jargon and over-inclusive
disclosures.
These problems are not new. More than forty-five years ago,
Professor Louis Loss identified prospectus readability as one of the
basic problems with the registration process.23 In 1969, the Wheat
Report found that prospectuses included unnecessary information, and
were often so long or complex that the average investor could not
readily understand them.24
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\23\ Disclosure to Investors: A Reappraisal of Administrative
Policies under the '33 and '34 Acts 77-78 (1969) (Wheat Report)
(citing Loss, Securities Regulation 148--66 (1st. ed. 1951).
\24\ Wheat Report at 77. See also Report of the Advisory
Committee on Corporate Disclosure to the Securities and Exchange
Commission. Appendix to the Report of the Advisory Committee on
Corporate Disclosure, 6, 21-22 (November 3, 1977).
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Over the years, the SEC has attempted to address these problems.
The SEC's concern about prospectuses for employee benefit plans
prompted a 1966 release encouraging issuers to avoid complex legal and
other technical language in the plan prospectus. Most plan prospectuses
either repeated the full text of the legal document adopting the plan
or summarized the legal document using the same legal language. In the
release, the SEC recognized that the chief goal of registration is to
provide investors with disclosures that they can readily understand,
concluding that ``* * * failure to use language that is clear and
understandable by the investor may operate to defeat the purpose of the
prospectus.'' 25
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\25\ Securities Act Release No. 4844 (August 5, 1966) [31 FR
10667].
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When the SEC adopted the integrated disclosure system in 1982, it
encouraged issuers to deliver their more readable glossy annual reports
to shareholders, rather than the legalistic annual report on Form 10-K.
The SEC believed that the more readable annual reports would ``promote
the goal of concise, effective communication in the Securities Act
context.''26
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\26\ Securities Act Release No. 6383 (March 3, 1982) [45 FR
11380].
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Also in 1982, the SEC codified, in Rule 421 of Regulation C, the
requirement for clear, concise and understandable presentation of
information in prospectuses.27 This rule calls for descriptive
captions or headings, and reasonably short paragraphs or sections. The
rule also permits summaries of the information required in the
prospectus, except for financial or tabular information.
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\27\ In 1982, the SEC rescinded the guidelines for the
preparation of prospectuses in Securities Act Release No. 4936
(December 9, 1968) [33 FR 18617] except for the guide requiring
clear, concise prospectus information, which was moved to Rule 421
of Regulation C.
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Several of the existing disclosure items already require companies
to use plain English tools--a table or chart--to improve clarity and
increase the likelihood that investors can grasp the information. For
example, disclosure of managements' compensation must be in
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tables.28 Proxy statements must use a table showing the identity,
background, and security holdings of nominees for the board of
directors,29 and the security ownership of management and
significant owners of an issuer's equity securities.30 Another
provision encourages the use of tables, schedules, charts, and graphic
illustrations to make financial information more understandable.31
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\28\ Item 402(b) of Regulation S-K, 17 CFR 229.402.
\29\ Item 7, Schedule 14A of Regulation 14A and Item 1, Schedule
14C of Regulation 14C Securities Exchange Act, 17 CFR 240.14a-101,
240.14c-101.
\30\ Item 403 of Regulation S-K, 17 CFR 229.403.
\31\ Note to Item 11 of Rule 14a-3 of Regulation 14A, Securities
Exchange Act, 17 CFR 240.14a-3.
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In 1991, the U.S. Congress and others expressed serious concern
about the complexity and length of limited partnership prospectuses,
and particularly the documents used to roll up limited partnerships. In
congressional hearings on the need for legislation to reform the roll-
up process, former SEC chairman Richard Breeden addressed the problem
of unreadable disclosure: ``I have taken a look at some of the
documents filed with us in these roll-up transactions and I would like
to meet the person who can understand all of the disclosures in some of
these documents.'' 32
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\32\ H.R. Rep. No. 102-254, 102d Cong., 1st Sess. (1991).
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To address these concerns, the SEC issued an interpretive release
to advise issuers on the requirements for clear, concise, and
understandable disclosure in limited partnership offerings.33 Even
with the interpretive release, our review staff in the Division of
Corporation Finance continues to see documents that do not clearly
explain the terms of these complex offerings.
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\33\ Securities Act Release No. 6900 (June 17, 1991) [56 FR
28979].
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Beginning in 1994, we renewed our efforts to promote more readable
disclosure documents, which led us to explore alternatives. With the
support and participation of various industry groups and public
companies, we instituted pilot projects to encourage the use of plain
English and to gain practical experience on how to fashion rule changes
that would improve the disclosure to investors. We recognize that
everyone involved in the process--issuers, accountants, lawyers,
underwriters, investment bankers, and the SEC--has a role in creating
more readable documents.
B. SEC Plain English Initiatives
We are committed to providing investors with better and more
understandable disclosure documents. Our ultimate goal is to have all
disclosure documents written in plain English, and we have undertaken
several initiatives to improve the readability of these documents. With
the cooperation of the Investment Company Institute and several large
mutual fund groups, we recently organized a pilot program to permit
mutual funds to use ``profiles'' with their prospectuses. 34 The
``profile'' provides a standard format summary of eleven specific items
of information so that investors can compare funds more easily. We are
developing a proposed rule for public comment that would build on this
experience.
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\34\ Letter from Jack W. Murphy, Associate Director and Chief
Counsel, Division of Investment Management, SEC, to Paul Schott
Stevens, General Counsel, ICI (July 31, 1995). The Division has
permitted the pilot program, with some modifications, to continue
for another year. See, letter from Heidi Stam, Associate Director,
Division of Investment Management, SEC, to Craig S. Tyle, Vice
President and Senior Counsel, ICI (July 29, 1996).
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In the spring of 1996, our Division of Corporation Finance began a
plain English pilot program that encourages companies to draft their
prospectuses and other disclosure documents more clearly. The Division,
together with our Office of Investor Education and Assistance, offers
advice on how to organize these documents, as well as examples of how
to rewrite the legalese in plain English. To companies that undertake
plain English disclosure, the Division offers expedited review of their
documents. 35 The reception to our plain English pilot program has
been positive, and the pilot participants' documents are serving as
examples of clearer disclosure. 36
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\35\ The first companies to participate in this pilot project,
Bell Atlantic and NYNEX, drafted a plain English cover page and
summary for their joint merger proxy statement (File No. 333-11573).
The lawyers involved reported that writing in plain English did not
increase their costs. See B. Fromson, At Last, A Proxy in Plain
English, Washington Post (Sept. 22, 1996), at H4.
\36\ For example, Baltimore Gas and Electric Company (File No.
333-19263) has filed a plain English prospectus for their medium
term note offering; ITT Corporation (File No. 333-7221) filed a
universal shelf offering with the front of the document in plain
English and plain English techniques applied to the entire document;
Unisource Worldwide, Inc. (File No. 1-14482) filed a Form 10
registration statement under the Exchange Act with the front of the
document written in plain English; General Mills, Inc./Ralcorp, Inc.
(File No. 333-18849) filed a merger proxy statement with the front
of the document written in plain English; SCANA (File No. 333-18149)
filed a registration statement covering their dividend reinvestment
plan written in plain English; Antec Corporation/TSX Corporation
(File No. 333-19129) filed a merger proxy statement with the front
of the document written in plain English; and Keyspan Energy Corp.
(File No. 333-18025) filed a merger proxy statement with the front
of the document written in plain English.
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C. Arguments for Plain English
The plain English movement started in the early 1970s with the
simplification of insurance contracts, and gained momentum when more
than half the states enacted statutes requiring plain English insurance
contracts. A number of state bar associations, starting with Michigan,
established plain English committees. Federal agencies, such as the
Federal Communications Commission, the Small Business Administration,
and the Department of the Interior, redrafted some or all of their
regulations, as well as legal documents such as subpoenas, in plain
English. The movement is also active in Canada, England, and Australia.
Plain English has been implemented successfully in many areas. For
example, after Citibank started using a plain English promissory note,
the number of collection lawsuits dropped considerably because
borrowers had a better understanding of their obligations.37 One
law review article on using plain English in contracts under the
Uniform Commercial Code, concluded that ``. . . [p]reparing documents
in plain English will decrease the number of good faith disputes over
the meaning of the words of the agreement.'' 38 Past experience
with plain English suggests that its adoption in the securities area
will increase investors' understanding of the business and financial
condition of companies and lessen misunderstandings that lead to costly
legal disputes. Clearer disclosure also should assist market
professionals in making recommendations to clients and assist the
courts in determining whether a company has made proper disclosure.
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\37\ How Plain English Works for Business, Twelve Case Studies,
U.S. Department of Commerce, Office of Consumer Affairs (March
1984).
\38\ Steven O. Weise, ``Plain English'' Will Set the UCC Free,
28 Loy. L.A.L. Rev. 376 (1994). The article notes that ``[p]arties
to contracts can reduce [inaccurate interpretations] by presenting
courts and juries with documents that permit only one reasonable
interpretation. . . .'' See also Mark Duckworth and Christopher
Balmford, Convincing Business That Clarity Pays, Michigan B. J. 1314
(Dec. 1994).
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D. Criticisms of Plain English
When initially considering the change from a formal, legalistic
writing style to plain English, the following reservations often are
raised: (1) Legal language is more precise and is necessary to make
complex material clear and accurate; and (2) federal securities law
liability provisions particularly the strict liability provisions of
section 11 of the Securities Act 39 requires legal language.
Neither case law nor the experience of
[[Page 3155]]
plain English practitioners appear to support these arguments.
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\39\ 15 U.S.C. 77k.
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1. Plain English Is Imprecise and Unsuited for Complex Material
In using plain English, you are not forced to choose between
clarity and precision. The disclosure obviously must be correct, but
plain English often is more precise than the obscure and complex
writing style that is prevalent in prospectuses. While legal terms like
``hereafter,'' ``hereinafter,'' and ``herein'' may give a legal flavor
to writing, they do not add precision. 40 Needlessly wordy
documents can actually increase ambiguity and usually hide important
facts. Ambiguities and omissions that go unnoticed in long and turgid
documents become more obvious when these documents are written in plain
English, and are more likely to be detected and corrected by those who
review these documents for accuracy. 41
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\40\ David Mellinkoff, The Language of the Law 312-16 (1963).
See also David Mellinkoff, ``The Myth of Precision and the Law
Dictionary,'' 31 UCLA L. Rev. 31 423 (1983).
\41\ See Joseph Kimble, ``Answering the Critics of Plain
Language,'' 5 Scribes J. of Legal Writing 51 (1994-1995).
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Unfortunately, some equate the term ``plain'' with ``simplistic.''
They fear their writing will be reduced to a simple style and
restricted to a limited vocabulary ill-suited to conveying complex
information. But plain English does not mean ``dumbing down'' complex
information. It means writing it well so that it is not needlessly
difficult to understand.
Some in the legal profession have used plain English techniques to
clarify a number of complex legal procedures and statutes. The Judicial
Conference Advisory Committee on the Federal Rules of Appellate
Procedure has proposed revising these rules using elements of plain
English. 42 While these rules are currently being circulated for
public comment, initial reaction to the rewrites appears to be
positive. Such efforts are not limited to the United States. In
Australia, a task force is rewriting Australia's Corporation Law under
a mandate to simplify it. 43 Earlier, the Law Reform Commission of
Victoria, Australia, redrafted Victoria's Takeover Code in plain
English. 44
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\42\ Committee on Rules of Practice and Procedure of the
Judicial Conference of the United States, Preliminary Draft of
Proposed Revision of the Federal Rules of Appellate Procedure Using
Guidelines for Drafting and Editing Court Rules and Preliminary
Draft of Proposed Amendments to Appellate Rules 27, 28 and 32,
(April 1996). See also Bryan A. Garner, Guidelines For Drafting And
Editing Court Rules (Administrative Office of the United States
Courts 1996).
\43\ See Note 41 above at 59.
\44\ Id at 56-57.
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2. Plain English Will Increase Liability
Stemming largely from the misconceptions addressed above, some
practitioners expressed concern that the use of plain English will
expose companies to greater liability under section 11. Liability
should not increase. First, the rule proposals do not reduce the
substantive information that must be given to an investor; plain
English does not mean leaving out anything important or material.
Second, we know of no case that has held anyone liable under Section 11
for clearly disclosing material information to investors. 45 In
all likelihood, liability should decrease with the use of plain English
because it results in less confusing and ambiguous disclosure.
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\45\ The staff's review of the few reported cases finding
section 11 liability indicates that no case required the use of
specific legal language or turned on the use of legal language.
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III. Elements of Plain English
Plain English simply means writing well.46 Plain English, or
plain language, has been described as follows:
\46\ George Hathaway, An Overview of the Plain English Movement
for Lawyers . . . Ten Years Later, Michigan B. J. 26, (Jan. 1994).
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There is no one absolute form of plain language. It does not
consist only of one-syllable words and one-clause sentences. It is
not simplified or reduced English. It is the opposite not of
elaborate language but of obscure language, for it seeks to have the
message understood on the first reading. The plainness of a passage
is defined in terms of the audience for that passage. It is clear,
straightforward language for that audience.47
\47\ Robert D. Eagleson, What Lawyers Need To Know About Plain
Language, Michigan B. J. 44 (1994).
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In summary, plain English requires you to:
Know your audience;
Know what material information needs to be disclosed;
Use clear writing techniques to communicate the
information; and
Design and structure your document so it is easy and
inviting to read.
A. Know Your Audience
Since the purpose of using plain English is to communicate
substantive information clearly to investors and the marketplace, you
must first identify the investor groups to whom you are writing.48
The educational background and financial sophistication of your current
or prospective investors should dictate the language you use.
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\48\ See, Janice C. Redish, How To Write Regulations And Other
Legal Documents In Clear English, 8 (Sept. 1991) (available at
American Institutes for Research Document Design Center, Washington,
D.C. 20007).
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If your company has a mix of sophisticated institutional investors
and less experienced institutional and individual investors, you should
write at a level that the less experienced investors would understand.
While the language may change, the information will not. To serve an
audience of various levels of sophistication such as securities
analysts and others in the marketplace, some issuers present
information in a format that makes it easy for investors to locate the
basic information while providing additional detailed information for
anyone who is interested.49 Where an offering is directed at only
the most sophisticated institutional investors, clear writing still is
necessary for your audience to understand the disclosure and to serve
the needs of the securities markets.
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\49\ See Caterpillar Inc., Third Quarter 1996 Financial Results
(a two part document with statistical highlight and condensed
financial information and a detailed analysis including financial
statements for those who want additional detailed information).
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B. Know What Information Needs To Be Disclosed
You can only communicate clearly when you understand the substance
precisely and accurately.50 A failure common to disclosure
documents is the tendency to indiscriminately combine material and
immaterial information in dense and long sentences, in effect dumping
large amounts of information on the reader. Disclosure documents
typically fail to prioritize information and organize it logically so
the reader can process it intelligently and quickly. All too often,
details are disclosed before investors even know why they are receiving
or reading a document. Plain English requires you to make judgments as
to the importance of this information and the order in which you
present it to investors.
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\50\ Bryan A. Garner, The Elements of Legal Style 4 (1991).
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A standard prospectus cover page--the cover page for an initial
public offering, a merger, or a shelf offering--usually has dense print
running to each of the four corners of the page. The sentences
typically run 60 to 100 words long, with superfluous information and
defined terms that interrupt the readers' attention. The name of the
company, terms of the security, and underwriters' compensation are
repeated two or three times. We believe that the cover page of the
prospectus should invite the investor to read the document and should
highlight key information about the offering. This information includes
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such items as the name of the company, the type of security, price and
amount offered, and whom an investor should contact to purchase the
security. The original cover pages and the plain English rewrites of
the cover page of pilot participants documents in Appendix A give you
examples of how to address this issue.
When a prospectus summary is included in the document, it
frequently runs 10 to 30 pages. These so-called summaries often provide
a long description of the company's business and its business strategy.
Where the prospectus provides a description of the security, it is
often copied from the indenture or other legal document that is filed
as an exhibit to the registration statement.
The summary should not, and is not required to, contain all of the
detailed information in the prospectus. As current Rule 421 states and
as explained in the interpretive release on limited partnerships, the
summary should provide investors with a clear, concise, and coherent
``snapshot'' description of the most significant aspects of the
offering. The summary should be balanced, giving investors both the
pluses and the minuses of investing in your company or participating in
the proposed transaction.
C. Use Clear Writing Techniques To Communicate Information
Although it is impossible to give a precise formula for clear
writing, using the following plain English principles will help you
produce clearer and more readable disclosure documents. Our proposed
rule would require you, at a minimum, to comply substantially with each
of these plain English principles in drafting the front and back cover
pages and the summary and risk factors sections of the prospectus:
Active voice;
Short sentences;
Definite, concrete, everyday language;
Tabular presentation and ``bullet lists'' for complex
material whenever possible;
No legal jargon or highly technical business terms; and
No multiple negatives.
Success in clear writing is, of course, ultimately a question of
how well all the elements are put together, and requires a good faith
effort to achieve clarity. The draft plain English handbook offers
numerous examples of how to use these and other plain English tools to
write more clearly. We provide examples of these requirements only to
illustrate the plain English principle. You should make sure that your
disclosure reflects the facts of your particular situation.
1. Active Voice
The active voice generally is easier to understand than the passive
because the reader can clearly identify the person or the thing
performing the action. The passive voice delays readers' comprehension,
and in some cases, allows the writer to delete who is performing the
action altogether, further hindering comprehension. When the sentence
is long and complicated, the passive voice forces the reader to go back
and start at the beginning. The passive voice usually results in
needlessly longer sentences. Consider the following examples:
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
No person has been authorized to give You should rely only on the
any information or make any information contained in this
representation other than those document or incorporated by
contained or incorporated by reference reference. We have not
in this joint proxy statement/ authorized anyone to provide
prospectus, and, if given or made, you with information that is
such information or representation different.
must not be relied upon as having been
authorized.
The proxies solicited hereby for the You may revoke your proxy at
Heartland Meeting may be revoked, any time up to and including
subject to the procedures described the day of the meeting by
herein, at any time up to and following the directions on
including the date of the Heartland page 18.
Meeting.
------------------------------------------------------------------------
Notice that in the proxy example, the passive legalese is ambiguous
because it never states who can revoke a proxy. Also, when you use a
vague cross-reference, you hinder your readers' ability to locate the
information. The rewrite is clearer because it uses everyday language
and provides the page number where investors can find out how to revoke
their proxies.
2. Short Sentences
The plain English requirement for short sentences addresses one of
the most critical language problems in disclosure documents. It is
fairly common for sentences in prospectuses or other disclosure
documents to be 60 to 100 words or more, with clauses and parenthetical
phrases that increase their complexity. Needlessly complex sentences,
which often mix substantive information with definitions and numerous
qualifications, can overwhelm the reader. You should strive to have
shorter sentences, typically 25 to 30 words. We believe that the
rewrites in the following examples are shorter, clearer and less vague:
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
Machine Industries and Great Tools, We must comply with the
Inc., are each subject to the Securities Exchange Act of
information requirements of the 1934. Accordingly, we file
Securities Exchange Act of 1934, as annual, quarterly and current
amended (the ``Exchange Act''), and in reports, proxy statements, and
accordance therewith file reports, other information with the
proxy statements, and other Securities and Exchange
information with the Securities and Commission.
Exchange Commission (the
``Commission'').
[[Page 3157]]
The Drake Capital Corporation (the The Drake Capital Corporation
``Company'') may offer from time to may offer from time to time up
time its Global Medium-Term Notes, to $6,428,598,500 of Global
Series A, Due from 9 months to 60 Medium-Term Notes, Series A,
Years From Date of Issue, which are that will mature from 9 months
issuable in one or more series (the to 60 years from the date
``Notes''), in the United States in an issued. We will offer our
aggregate principal amount of up to notes, in one or more series,
U.S. $6,428,598,500, or the equivalent in U.S., foreign, and
thereof in other currencies, including composite currencies, like the
composite currencies such as the European Currency Unit. If we
European Currency Unit (the ECU) offer original discount notes,
(provided that, with respect to we will use their initial
Original Issue Discount Notes (as offering prices to calculate
defined under Description of Notes-- when we reach $6,428,598,500.
Original Issue Discount Notes), the
initial offering price of such Notes
shall be used in calculating the
aggregate principal amount of Notes
offered hereunder).
------------------------------------------------------------------------
3. Definite, Concrete, Everyday Language
Language that is vague or abstract begs for further explanation. It
is not enough merely to translate information into clearer language. As
the following example shows, you must reassess the disclosure to
determine whether more information is needed to make it understandable.
You should note that the rewrite reflects an analysis of all of the
information in the prospectus.
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
History of Net Losses. The Company has History of Net Losses. We have
recorded a net loss under generally recorded a net loss under
accepted accounting principles for generally accepted accounting
each fiscal year since its inception principles for each year since
in May 1990, as well as for the nine we started in 1990, and for
months ended June 30, 1995. However, the nine months ended June 30,
these results include the effect of 1995. Our losses were caused,
certain significant, non-cash in part, by the annual write-
accounting charges related to the off of a portion of the
accounting for the Company's goodwill resulting from the
acquisitions and related transactions. ten acquisitions we made
during this period.
------------------------------------------------------------------------
In the rewrite, the reasons for the history of net losses replaces
the general, vague language on the ``significant, non-cash accounting
charges'' causing the loss.
4. Tabular Presentations
A tabular presentation organizes complex material in a manner that
greatly facilitates investor comprehension. For example, an ``if-then''
table highlights for investors the events of defaults and their remedy
under the indenture. An illustration follows:
------------------------------------------------------------------------
Before
-------------------------------------------------------------------------
The following will be ``Events of Default'' under the Indenture:
(i) failure to pay any interest on any Note when it becomes due and
payable, and such failure shall continue for a period of 30 days; (ii)
failure to pay the principal of (or premium, if any) on any Note at its
Maturity (upon acceleration, optional or mandatory redemption, required
repurchases or otherwise); (iii) there shall have been the entry by a
court of competent jurisdiction of (a) a decree or order for relief in
respect of the Company, in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order adjudging the Company
bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company, under any
applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official)
of the Company, or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their affairs,
and any such decree or order for relief shall continue to be in effect,
or any such other decree or order shall be unstayed and in effect, for a
period of 60 consecutive days, the Trustee or the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding
may, and the Trustee at the request of such Holders shall, declare all
unpaid principal of (and premium, if any, on) and accrued interest on
all the Notes to be due and payable immediately, by a notice in writing
to the Company (and to the Trustee if given by the Holders of the
Notes); If an Event of Default specified in clause (iii) occurs, then
all the Notes shall ipso facto become and be immediately due and
payable, in an amount equal to the principal amount of the Notes,
together with accrued and unpaid interest, if any, to the date the Notes
become due and payable, without any declaration or other act on the part
of the Trustee or any holder.
------------------------------------------------------------------------
------------------------------------------------------------------------
After
-------------------------------------------------------------------------
Event of default (If) Remedy (Then)
------------------------------------------------------------------------
Interest payment 30 days late. Trustee or holders of
at least 25% of these notes
outstanding may notify the
company in writing that the
principal, premium, if any,
and accrued interest are
immediately due and payable;
or
Upon written request of the
holders of at least 25% of
these notes outstanding, the
Trustee shall notify the
company in writing that the
principal, premium, if any,
and accrued and unpaid
interest are immediately due
and payable.
Failure to pay principal or Same as above.
premium at maturity, acceleration,
redemption, or repurchase.
Court ordered bankruptcy, Neither the Trustee
insolvency, reorganization, nor holders are required to
liquidation, or similar action act. The principal, accrued
continuing for 60 consecutive days. and unpaid interest will be
immediately payable.
------------------------------------------------------------------------
[[Page 3158]]
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
The Indenture provides that no Holder Before you may take legal or
of any Senior Debt Securities of any any other formal action
series may institute any proceeding, relating to the indenture or
judicial or otherwise, with respect to this series of securities, the
the Indenture or the Senior Debt following must take place:
Securities of such series, or for the You must give the
appointment of a receiver or trustee, trustee written notice of a
or for any other remedy under the continuing event of default;
Indenture, unless: (i) such Holder has The holders of at
previously given to the Trustee least 25% of the principal
written notice of a continuing Event amount of all affected senior
of Default with respect to the Senior debt securities outstanding of
Debt Securities of such series; (ii) this series must make a
the Holders of at least 25% in written request of the trustee
aggregate principal amount of to take action because of the
outstanding Senior Debt Securities of default;
all such series affected shall have The holders must have
made written request to the Trustee to offered indemnification,
institute proceedings in respect of reasonably satisfactory to the
such Event of Default in its own name trustee, against the cost,
as Trustee under the Indenture; (iii) liabilities and expenses for
such Holder or Holders have offered to taking such action;
the Trustee indemnity reasonably The trustee must not
satisfactory to the Trustee against have taken action for 60 days
any cost, liabilities or expenses to after receipt of notice,
be incurred in compliance with such request for action, and the
request; (iv) the Trustee for 60 days indemnification offer; and
after its receipt of such notice, During this 60 day
request and offer of indemnity has period, the holders of a
failed to institute any such majority of the principal
proceeding; and (v) during such 60-day amount of all affected senior
period, the Holders of a majority in debt securities outstanding of
aggregate principal amount of the this series have not asked the
outstanding Senior Debt Securities of trustee to take any action
all such affected series have not inconsistent with the request.
given the Trustee a direction that is
inconsistent with such written
request.
------------------------------------------------------------------------
5. No Legal Jargon or Highly Technical Business Terms
One of the persistent criticisms of the prospectus writing style is
the use of legal jargon and legalese. Here are two examples from debt
offerings replete with legalese:
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
The new debt will rank pari passu with The new debt will rank equally
other senior debt of the company.. with the other senior debt of
the company.
The following description encompasses We disclose information about
all the material terms and provisions our notes in two separate
of the Notes offered hereby and documents that progressively
supplements, and to the extent provide more detail on the
inconsistent therewith replaces, the note's specific terms: the
description of the general terms and prospectus, and this pricing
provisions of the Debt Securities (as supplement. Since the specific
defined in the accompanying terms of notes are made at the
Prospectus) set forth under the time of pricing, rely on
heading ``Description of Debt information in the pricing
Securities'' in the Prospectus, to supplement over different
which description reference is hereby information in the prospectus.
made.
------------------------------------------------------------------------
When you use defined terms and excessive cross-references,
practices common to legal drafting, you force the reader to learn a new
vocabulary--your vocabulary. These writing conventions may be a short
hand for the writer but they inhibit the reader's ability to understand
the information.
6. No Multiple Negatives
Negative sentences and multiple negatives within a sentence hinder
comprehension as the reader deciphers the meaning of the negatives. Ask
yourself which sentences are clearer.
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
No clause can become valid unless A clause becomes valid only if
approved by both parties.. both parties approve it.
Except when an applicant has submitted We will send your money within
a request for withdrawal without the one business day if you
appropriate tax identification number, include your tax
the request will be honored within one identification number in your
business day.. withdrawal request.
------------------------------------------------------------------------
D. Design And Organize Your Document So It Is Easy and Inviting To Read
We believe the dense copy used in the typical prospectus coupled
with its legal tone, discourages investors from reading the document.
By importing into your disclosure documents the design concepts you
already use in your annual reports to shareholders, you can make
disclosure documents visually inviting and easier to read.
Experts believe, generally, that the eye can only comfortably scan
50-70 characters in a line without losing its place.\51\ It is thus
difficult to read dense blocks of text that run across an entire page.
A number of the plain English pilot participants solved the problem by
using two columns. White space also relieves the eye and encourages the
investor to read the document. The use of all capital letters, right-
hand margins that are justified, and tissue-like paper can make the job
of reading a document extremely hard.
---------------------------------------------------------------------------
\51\ Duncan A. MacDonald, Drafting Documents in Plain Language,
Practicing Law Institute, 229 (1979).
---------------------------------------------------------------------------
If your prospectus includes a table of contents with descriptive
captions, subcaptions, and page numbers, an investor will be able to
locate information easily in the prospectus. Captions and descriptive
headings throughout the document also cue the reader as to the subject
matter.
Depending on the type of offering and the audience, a question-and-
answer format can greatly increase the readability of your document. We
have
[[Page 3159]]
encouraged the use of the question-and-answer format for employee stock
purchase plans.\52\ Several of the plain English pilot participants
used a question and answer format to answer common questions raised by
investors.
---------------------------------------------------------------------------
\52\ Securities Act Release No. 4844 (August 5, 1966) (31 FR
10667).
---------------------------------------------------------------------------
Although not part of our proposed rules, another effective tool for
producing plain English documents is to use personal pronouns. Personal
pronouns immediately engage your readers' attention. A familiar writing
style where ``we'' or ``I'' refers to management or the company, and
``you'' refers to the investor, involves your reader and increases
comprehension. If you avoid distant and abstract language like ``the
company'' and ``a shareholder,'' your writing becomes clearer and more
appealing because you are communicating directly with your reader.
Take, for example, a recent offering made by Berkshire
Hathaway.\53\ The cover page of the prospectus contains the following
personal communication: ``Warren Buffet, as Berkshire's Chairman, and
Charles Munger, as Berkshire's Vice Chairman, want you to know the
following (and urge you to ignore anyone telling you that these
statements are `boilerplate' or unimportant).''
---------------------------------------------------------------------------
\53\ Berkshire Hathaway Inc., Form S-3, filed April 2, 1996,
effective May 8, 1996, File No. 333-2141.
---------------------------------------------------------------------------
This introduction is followed by clear warnings regarding the
company's asset growth, share price, and the market for the securities
offered. A similar personal approach, with the frequent use of the
pronoun ``we'' to refer to the company, Warren Buffet, or Charles
Munger, is used in Berkshire Hathaway's 1995 annual report to
shareholders.
Several of the pilot participants used personal pronouns throughout
their documents. Others employed a modified approach in which personal
pronouns were used when referring to the company but a more formal
designation like ``holder'' or ``noteholder'' was used when referring
to the investor.54
---------------------------------------------------------------------------
\54\ Bell Atlantic Corporation used personal pronouns for both
the company and the shareholder in their merger proxy statement. ITT
Corporation and Baltimore Gas and Electric Corporation used the
modified approach. See Appendix A. Bell Atlantic also used personal
pronouns in the management's discussion and analysis section of the
Form 10-Q for the quarter ended September 30, 1996 (File No. 1-
8606).
---------------------------------------------------------------------------
IV. Plain English Rule Proposals
The Task Force on Disclosure Simplification recommended developing
a plain English introduction to the prospectus and, to enhance the
prospectus's readability, eliminating boilerplate ``legalese,''
requiring a summary of key information, and enhancing the disclosure to
include significant financial ratios and other information. The Task
Force also recommended that the Commission issue a plain English
interpretive release. Our proposals include most of the Task Force's
specific recommendations for improving the readability of documents.
This release serves as our interpretative advice on plain English. We
have decided to defer action on the Task Force's recommendation to
provide investors with disclosure on significant financial ratios.
Further study is needed to determine the best format for providing
important financial indicators to investors and the ratios that should
be provided.
A. Proposed Plain English Rule 421(d)
While all prospectuses must be clear and understandable, our
proposals would also require the front of the prospectus to meet the
plain English requirements in proposed Rule 421(d). In addition, we are
proposing to codify our interpretive advice, first given for limited
partnership offerings, to give you more guidance on how to meet the
requirements for clear, concise and understandable disclosure in
prospectuses.
If adopted as proposed, Rule 421(d) would require you, when
drafting the cover page, summary, and risk factors sections, to use the
plain English principles, discussed above in the section, Elements of
Plain English. You should design these sections of the document to make
them inviting and easy to read. This design could take many forms,
including the use of pictures, logos, charts, graphs, or other
features, so long as the design is not misleading and the required
information is clear. The examples from pilot participants' documents,
included in Appendix A, and the staff's draft handbook give you
guidance in this area. We will include on our Internet site examples of
other plain English documents to help you draft more readable
disclosure documents.
Our proposals for plain English cover pages, prospectus summary,
and risk factors sections should improve greatly the readability of the
entire document. We encourage you to use plain English techniques to
draft the entire prospectus. We also encourage you to use these
techniques for drafting your other disclosure documents.
We request your comments on all aspects of the proposed rule. Your
comments should provide any factual support for your position. Please
comment on whether you believe the proposed plain English requirements
will achieve clearer disclosure and improve readability. We also
request your comments as to whether compliance with the proposed rule
changes will cause registrants to highlight key information for
investors and eliminate redundant or uninformative information.
B. Clear, Concise and Understandable Prospectuses--Rule 421(b)
We are proposing the following expansion of Rule 421(b) to give you
guidance on the minimum requirements to meet the current provision for
clear, concise, and understandable disclosure in the prospectus and to
identify drafting problems to avoid. These standards and common
prospectus drafting problems were identified in our interpretive
release on limited partnership offerings. In drafting the disclosure in
the prospectus you should apply the following techniques:
Information must be presented in clear, concise paragraphs
and sentences. If possible, information should be presented in short
explanatory sentences and ``bullet'' lists;
Captions and subheading titles must describe specifically
the information included in the section;
Terms that are not clear from the context generally should
be defined in a glossary or other section of the document. Glossaries
are recommended where they facilitate understanding of the disclosure.
Frequent reliance on glossaries or defined terms as the primary means
of explaining information in the body of the prospectus should be
avoided; and
Legal and highly technical business terminology should be
avoided.
Our proposals also include a Note to Rule 421(b) that lists
drafting conventions that you should avoid in presenting prospectus
information. The proposed Note to Rule 421(b) identifies the following
problems in drafting prospectus disclosure:
Legalistic, overly complex presentations that make the
substance of the disclosure difficult to understand;
Vague ``boilerplate'' explanations that are imprecise and
readily subject to differing interpretations;
Complex information copied directly from legal documents
without any clear and concise explanation of the provision(s); and
Disclosure repeated in different sections of the document
that increases the size of the document, does not enhance the quality
of the information, and does not enlighten the reader.
[[Page 3160]]
Some have suggested that the undue length of many prospectus also makes
them difficult to read. You are encouraged to use the current provision
of Rule 421 which allows you to condense or summarize information in
the prospectus, information other than the financial statements.
C. Proposed Revisions to Regulation S-K
1. Front of Registration Statement and Outside Front Cover Page of
Prospectus
We propose to revise the requirements for the outside front cover
page of the prospectus to eliminate the stylized format and require
legal warnings in plain English. We believe that the legal language
specified by the requirements is not informative to investors. More
importantly, we believe the dense format of the cover page discourages
investors from reading the important business and financial disclosures
in the prospectus.
Substantially the same changes are being proposed to the
requirements for small business issuers, except Regulation A offerings.
In 1992, we adopted major revisions to the Regulation A offering
process for companies not subject to our reporting requirements.
Because few Regulation A offerings were made last year, we are not
proposing changes to the disclosure requirements for these offerings.
We request your comments, however, on whether the legal legends
required in these offerings should be changed to conform to our
proposals to draft these legends in plain English.55 The table
below shows the current requirements of Regulation S-K and our proposed
changes.56
---------------------------------------------------------------------------
\55\ Regulation A requires a bold-face, all-capital legend that
the SEC does not approve or disapprove of the securities offered, 17
CFR 230.253, and a legend indicating the document is incomplete, 17
CFR 230.255. In addition, Form 1-A requires legal warnings in all-
capital letters regarding the risk of the offering in the Model 1-A
disclosure alternative.
\56\ See Item 501 of Regulation S-K, 17 CFR 229.501 and Item 501
of Regulation S-B, 17 CFR 228.501. See Appendix B for a chart
showing the changes to Regulation S-B.
Regulation S-K--Item 501
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Information in highly Information formatted
formatted design. in clear, inviting design.
Company name.................. Same.
Title and amount of securities Same.
offered.
By whom securities offered.... Same.
Formatted distribution table Bullet list or other
showing price, underwriting design that highlights the
commission, and proceeds of offering. price, underwriting
commission, and proceeds of
offering.
Instruction on showing bona Retain.
fide estimate of range of maximum
offering price.
Instruction on showing how Retain.
price determined.
Formatted best efforts Bullet list or other
distribution table. design that highlights the
information.
Specific language and print Clear language with no
type for legal warnings. type specified.
No requirement................ Name of underwriters
and type of underwriting
arrangements.
Cross-references to disclosure Delete.
in prospectus.
Specific cross-reference to Delete.
risk factors.
Underwriters' over-allotment Move to underwriting
option. section.
Expenses of offering.......... Move to underwriting
section.
Commissions paid by others and Move to underwriting
other non-cash consideration. section.
Finders fees.................. Move to underwriting
section.
------------------------------------------------------------------------
Our proposals would require you to format the outside front cover
page in a design that invites an investor to read the information. The
proposals would allow you to use pictures, graphs, charts, and other
designs that accurately depict your company, its business, products, or
financial condition, so long as the information is not misleading. The
proposals would eliminate the current requirements for cover page
cross-references, including the cross-reference to risk factors. A
cross-reference may unnecessarily clutter the cover page and duplicate
the information in the table of contents. We believe that our proposed
requirement for risk factors in plain English will improve the
disclosure to investors, making the cross-reference unnecessary. We
propose to retain the cross-reference to risk factors on the cover page
for small business issuers since often these companies present greater
risks because of their limited operations and financial condition.
Your comments are requested, however, as to whether the existing
requirements should be retained, and if so, which ones. We also request
that you indicate other information or design elements for the cover
page that would provide clearer, more readable disclosure. We ask you
to give us your comments on whether the proposed disclosure
requirements are sufficiently flexible to permit you to meet the plain
English requirements. Your comments are requested on whether the cross-
reference to risk factors should be retained for all offerings or
whether the plain English requirements make it unnecessary for any
offering, including small business issuer offerings.
The legal warnings required by our regulations would be in plain
English.57 Because the current requirement for printing the legend
in all capital letters makes the information difficult to read, no
print type or size is proposed. We offer one example of a plain English
legend, however, you are encouraged to draft your own plain English
version, so long as the content is retained. One example of the current
legend rewritten in plain English is as follows:
---------------------------------------------------------------------------
\57\ The staff is working with the North American Securities
Administrators Association, Inc.'s Disclosure Reform Task Force to
coordinate our efforts to assure clearer communications with
investors. The Disclosure Reform Task Force is considering the
effect of our plain English initiatives on the states' disclosure
requirements, particularly the language used in state-required
legends.
[[Page 3161]]
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED The Securities and Exchange
OR DISAPPROVED BY THE SECURITIES AND Commission has not approved or
EXCHANGE COMMISSION NOR HAS THE disapproved these securities,
COMMISSION PASSED UPON THE ACCURACY OR or determined if this
ADEQUACY OF THIS PROSPECTUS. ANY prospectus is truthful or
REPRESENTATION TO THE CONTRARY IS A complete. Any representation
CRIMINAL OFFENSE. to the contrary is a criminal
offense.
------------------------------------------------------------------------
Our proposals would require the legend indicating an incomplete
prospectus, commonly called the ``red herring'' legend, to be in any
plain English format. One example of the current legend in plain
English would read as follows:
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
Information contained herein is subject The information in this
to completion or amendment. A prospectus is not complete and
registration statement relating to may be amended. We may not
these securities has been filed with sell these securities until
the Securities and Exchange the registration statement
Commission. These securities may not filed with the SEC is
be sold nor may offers to buy be effective. This prospectus is
accepted prior to the time the not an offer to sell nor is it
registration statement becomes seeking an offer to buy these
effective. This prospectus shall not securities in any state where
constitute an offer to sell or the the offer or sale is not
solicitation of an offer to buy nor permitted.
shall there be any sale of these
securities in any State in which such
offer, solicitation or sale would be
unlawful prior to registration or
qualification under the securities
laws of any State.
------------------------------------------------------------------------
Although no requirement currently exists to disclose the name of
the underwriter and the type of offering, this information is usually
provided on the cover page. Our proposal would specifically provide for
this information in plain English on the cover page.
We have not proposed any specific print size or font type for the
plain English portion of the prospectus. Our proposals allow you the
flexibility to use a print type and font size that enhances your
document design so long as the information is easily readable. We
request your comments as to whether we should require or prohibit any
specific print type or font size and the reason for your position.
Your comments should address specifically the proposed revisions to
the legends and suggest alternative plain English legends. Your
comments should address whether the plain English legends adequately
inform investors, and whether the proposed cover page information
should be mandated, or whether other information should be permitted
and, if so, what information. For example, should information on the
cover page be limited to the name of the company and the securities
offered, with the other information disclosed in the summary section of
the document?
In addition, we request public comment on whether specific
information should be required for the cover pages of merger proxy
statements, registered exchange offers, or other offerings. Please
provide examples of the types of information that should be required.
We specifically request your comments on whether the limited
partnership roll-up transactions should be subject to these plain
English proposals or should different standards apply to these
transactions and, if so, what standard should apply. For example, the
current roll-up disclosure provisions 58 provide for a detailed
discussion of risks of the offering, while the proposals made today
would require risk factors to be brief. Also, risk factors are required
on the cover page, summary section and risk factors section in limited
partnership roll-up prospectuses.59 Our proposals would require
the risks to be described in plain English only in the risk factor
section.
---------------------------------------------------------------------------
\58\ Item 904 of Regulation S-K, 17 CFR 229.904.
\59\ See Items 902(b)(2) of Regulation S-K 17 CFR 229.902(b)(2);
Item 903(b)(1) of Regulation S-K, 17 CFR 229.903(b)(1); and Item
904(a)(2) of Regulation of S-K, 17 CFR 229.904(a)(2).
---------------------------------------------------------------------------
2. Inside Front and Outside Back Cover Pages of Prospectus
Currently, information of a highly technical nature is required on
either the inside front or outside back cover page of the
prospectus.60 Except for the availability of Exchange Act
reports,61 the table of contents, and the legend concerning the
dealer's prospectus delivery obligation, we propose to move this
technical information to the body of the prospectus, as shown in the
following table.
---------------------------------------------------------------------------
\60\ See Item 502 of Regulation S-K, 17 CFR 229.502 and Item 502
of Regulation S-B 17 CFR 228.502.
\61\ Securities Exchange Act of 1934, 15 U.S.C. 78a et seq.
Regulation S-K--Item 502
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Stabilization activities by Move to underwriting
underwriters. section.
Underwriters' passive market Delete because it
making activities legend. duplicates information in
underwriting section.
Disclosure of dealer Move to back cover
prospectus delivery obligation. page.
Availability of Exchange Act Move to back cover
reports generally. page or include with
incorporation by reference
disclosure in short form
registration statements.
Availability of Exchange Act Move to registration
reports incorporated by reference in statement forms permitting
short form registration statements. incorporation by reference.
[[Page 3162]]
Availability of annual reports Move to business
to shareholders with GAAP audited description section.
financial statements for foreign
issuers and others not subject to our
proxy rules.
Enforceability of civil Move to business
liability provisions of federal description section.
securities laws against foreign
persons.
Table of contents............. Move to inside front
cover page or immediately
following the cover page.
------------------------------------------------------------------------
Much of the currently required information is highly technical and
drafted in legal language that often confuses rather than informs
investors. We believe that placing this information in the front of the
prospectus overshadows the essential business and financial information
fundamental to an investment decision. Because the disclosure will be
elsewhere in the prospectus, the information provided investors will be
the same. Moving this information to the body of the prospectus will
give you the freedom to design an inviting cover page which highlights
key information for investors.
We believe the current information on the underwriter's
stabilization activities, passive market making activities, and the
dealer's obligations to deliver prospectuses is key information on the
orderly distribution of the offering. But this information is not
essential for the front of the document. We propose relocating the
stabilization information to the underwriting section of the
prospectus.\62\ Information on passive market making activities
currently is required both in the underwriting section of the
prospectus and as a legal legend on either the inside front or outside
back cover page. Duplication of this information on the cover page is
unnecessary and we propose to delete it from the cover page but retain
the information in the underwriting section.
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\62\ Item 508 of Regulation S-K, 17 CFR 229.508 and Item 508 of
Regulation S-B, 17 CFR 228.508.
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We also propose to retain the requirement to disclose the dealer's
prospectus delivery obligations on the back cover page of the
prospectus. This will help dealers meet their obligations to deliver a
prospectus in connection with the distribution of the securities.
However, we request your views as to whether this information is
necessary and, if so, whether we should require that this notice to
dealers be disclosed elsewhere in the document, like the inside front
cover page.
You have an obligation to send to security holders, upon request
and at no charge, the Exchange Act reports incorporated by reference in
short-form registration statements. We currently require you to
disclose this obligation on the inside front cover page or elsewhere,
as appropriate. We propose to relocate this information to the section
of the short form registration statements detailing what information
you must incorporate by reference.
We propose to move the disclosure regarding the availability of
Exchange Act reports to the back cover page of the prospectus.
Alternatively, it could be included as part of the disclosure
incorporating Exchange Act reports by reference into short form
registration statements. Moving the information to the back cover page
would provide you the flexibility to design the front of the document
in a clear manner. Requiring this information to be provided where the
Exchange Act reports are incorporated by reference would eliminate
duplication in short form registration statements.\63\
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\63\ Our proposals would amend Forms S-2, S-3, S-4, F-3 and F-4
to include the requirement to disclose the availability of documents
incorporated by reference with the disclosure on incorporation by
reference of Exchange Act reports.
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Because we now have an 800 number that gives information on how to
obtain the reports filed with us and because copies of these reports
are now available on the Internet, the proposed revisions would delete
the requirement that our headquarters and regional office addresses be
given. For this reason, we are also proposing to delete the requirement
to disclose the availability of these reports at the exchange where the
issuers' securities are listed. Of course, you must continue to send
copies of your Exchange Act reports to the exchange where your
securities are listed.\64\ We request your comments on whether the
information should be required elsewhere in the document, or whether
the requirements should give companies greater flexibility to place the
information where it is highlighted best for investors, given the
design of the document. If your Exchange Act reports are on your
Internet site, our rule proposals encourage you to give the web site
address in your documents.
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\64\ Rule 12b-11, 17 CFR 240.12b-11.
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One example of a plain English rewrite of this disclosure follows:
------------------------------------------------------------------------
Before After
------------------------------------------------------------------------
Our company is subject to the Our company files annual,
informational requirements of the quarterly and current reports,
Securities Exchange Act of 1934, as proxy statements and other
amended (the ``Exchange Act''), and, information with the SEC. You
in accordance therewith, files reports may read and copy any reports,
and other information with the statements or other
Securities and Exchange Commission information we file at the
(the ``Commission''). The reports and SEC's public reference room in
other information filed by our company Washington, D.C. You can
with the Commission can be inspected request copies of these
and copied at the Commission's public documents, upon payment of a
reference room located at 450 Fifth duplicating fee, by writing to
Street, N.W., Room 1024, Washington, the SEC. Please call the SEC
D.C. 20549, and at the public at 1-800-SEC-0330 for further
reference facilities in the information on the operation
Commission's regional offices located of the public reference rooms.
at: 7 World Trade Center, 13th Floor, Our SEC filings are also
New York, New York 10048; and at available to the public on the
Northwest Atrium Center, 500 West SEC Internet site (http://
Madison Street, Suite 1400, Chicago, www.sec.gov.).
Illinois 60661. Copies of such
material can be obtained at prescribed
rates by writing to the Securities and
Exchange Commission, Public Reference
Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549..
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[[Page 3163]]
Our proposals would move to the body of the prospectus the
information on the availability of audited financial statements, where
the company is a foreign private issuer or is not subject to our proxy
rules. As proposed, we would require the information to appear, under a
descriptive heading, as part of the business description. 65 We
believe that relocating this information in the business section of the
prospectus would inform investors of the continued availability and
type of financial information your company will provide.
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\65\ Item 101 of Regulation S-K and Regulation S-B.
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Currently, you may provide information as to the enforceability of
civil liabilities against foreign persons on the inside front cover
page or in the front of the prospectus. We propose to move this
information to the business description section of the
prospectus.66 The staff's experience is that this information is
often provided as a generic risk factor. If enforceability of civil
liabilities presents a material risk to an investor given the company
and its operations, our proposal for plain English prioritized risk
factors would require risk disclosure. Your comments should address
whether, given our global markets, the information now is sufficiently
routine to make this disclosure more appropriate in the business
description and required as a risk factor only when it is a material
risk relating to an investment in the company. If you believe the
information should be disclosed in another section of the prospectus,
please give us the reason(s) for your position.
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\66\ Item 101 of Regulation S-K and Regulation S-B.
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As currently permitted, the table of contents often appears on the
back cover page. We question whether a reader goes to the back of the
document first to locate a guide to the document, so our proposals
would require this information to be on the inside front cover or
immediately behind the cover page. We request your comments on whether
the information flow of the document should permit you the flexibility
to place the table of contents where you believe it best serves as a
guide to the document, and the reasons for your position.
3. Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed
Charges 67
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\67\ See Item 503 of Regulation S-K, 17 CFR 229.503 and Item 503
of Regulation S-B, 17 CFR 228.503.
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Currently, you are required to include a summary of the information
contained in the prospectus where the length or complexity of the
prospectus makes a summary appropriate. The existing requirements also
specify that a risk factor section be provided, where appropriate, and
that this section immediately follow either the summary section or the
cover page. In addition, information is required as to the ratio of
earnings to fixed charges.
a. Summary
Our proposals would require a prospectus summary in plain English.
To address the problem where the summary is ten to twenty-five pages
long, we have revised the current provision to require that the summary
section be brief. The current requirement continues to be a general
provision giving you the flexibility to draft a meaningful summary
appropriate to the type of offering.
We request your comment as to whether the summary should be further
limited to a specific number of pages. For example, should the summary
be no more than three, four, or five pages? We also request your
comments as to whether we should require specific information in this
section, such as condensed financial information and a summary of
management's discussion and analysis. Please indicate any specific
information you believe should be in the summary.
A recent review by the staff of a number of the short form
registration statements indicates that these offerings often include a
summary or similar section describing the company's business and
operations. This discussion contains a lengthy discussion of the
company's business, risk factors, and summarized financial information.
The information is not specifically required, but apparently is
considered important to the selling effort. If you elect to include
this information, the disclosure would be subject to the same plain
English disclosure requirements as we propose for the front of the
document. Please give us your comments on whether short registration
forms should have a summary and, if so, which offerings, and the
reasons for your position. We also request your comments as to whether
a summary section should be required for all prospectuses, given the
current complexity of these documents.
b. Risk Factors
Our proposals would require the risk factors to be in plain English
and be listed in order of their importance. As is currently the case,
the discussion would immediately follow the summary, if one is
provided, or the cover page of the prospectus. Often the risk factor
disclosure in a prospectus is boilerplate, listing risks that could
apply to any offering or that are not likely to occur. Because
boilerplate risks do not provide meaningful information to investors,
we believe they should not be used and our proposals specifically
prohibit them.
For example, if your company is making an initial public offering
of common stock and the securities will be listed and traded on a
national securities exchange, it is not helpful to investors to provide
a statement that management can give no assurance that an active market
will develop in the company's securities. If, given these facts, you
believe that a market will develop for the securities, then the risk
factor is not helpful to an investor. On the other hand, if, given
these facts, you believe that a market reasonably may not develop,
additional information would be necessary as to why a trading market
may not develop.
We are concerned, however, that plain English alone will not
address the problem of listing many risk factors that are so general
that they are not meaningful and add to the length of the document
making the document difficult to read. We request your comments on
whether we should require disclosure of a specific number of risk
factors, such as eight, or alternatively limit the risk factor
discussion to no more than two pages.
Your comments specifically are requested as to whether there should
be any limit on the number of prioritized risk factors or the number of
pages, or whether the limit should be higher or lower than eight risk
factors or the two pages. For instance, should there be no more than
four risk factors discussed in this section, divided equally between
company and offering risks, or should the number of permitted risk
factors be increased to 10 or 12 with no allocation as to the nature of
the risk? Should there be a page limit and should the limit be no more
than two pages, three pages, four pages or higher?
c. Ratio of Earnings to Fixed Charges
When you issue debt or a class of preferred equity, you are
required to disclose a ratio of earnings to fixed charges. Since this
information usually is included in the prospectus with selected
financial data, we propose to move the requirement to that
section.68 Where a prospectus summary is included, we propose that
the ratio of earnings to fixed charges be shown as part of the
summarized financial data, as is currently the practice.
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\68\ Item 301 of Regulation S-K, 17 CFR 229.301.
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[[Page 3164]]
D. Proposed Rules for Investment Companies
Current disclosure standards direct investment companies to provide
clear, concise, and understandable disclosure in prospectuses.69
We are concerned, however, that fund prospectuses are overly complex
and difficult to follow. We have commenced significant disclosure
initiatives to improve the information provided to fund investors,
including consideration of a summary disclosure document or ``profile''
for funds and updating prospectus disclosure requirements. We expect to
announce proposals that would implement these initiatives in the near
future.
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\69\ See, e.g., General Instruction G of Form N-1A.
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The plain English disclosure proposals complement these disclosure
initiatives. The proposed changes to Rule 421 would apply to
funds.70 The proposed revisions in Regulation S-K intended to
improve the clarity of disclosure in prospectuses of corporate issuers
would not apply to funds, although similar legal legends and other
requirements are included in specific rules for investment
companies.71 We plan to consider conforming changes to the rules
for fund prospectuses in connection with the disclosure initiatives for
investment companies. We request your comments on whether the proposed
changes to Rule 421 should be modified for fund prospectuses.
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\70\ While the disclosure in fund prospectuses must be clear,
concise, and understandable, the proposed plain English principles
in Rule 421(d) would apply to the front and back cover pages of the
prospectus and summary, if any. The specific requirement for plain
English risk factors disclosure referred to in proposed Rule 421(d)
would not apply to funds since the same disclosure is not required
in their prospectuses.
\71\ See, e.g., proposed Item 501(b) (5) and (8) of Regulation
S-K (SEC legend and subject to completion legend); similar legends
are required for mutual funds by Rule 481(b) (1) and (2) of
Regulation C, 17 CFR 230.481(b) (1) and (2). Many of the proposed
revisions to Regulation S-K would, if applied to funds, affect
relatively few offerings of fund securities, e.g., descriptions of
underwritten offerings in proposed Item 501(b)(6).
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The phase-in of plain English requirements proposed for corporate
issuers discussed below may need to be modified for investment
companies since they are engaged in continuous offerings of securities.
We also request comment on special requirements that may be necessary
to allow for the orderly phase-in of the proposed plain English
requirements for investment companies.
V. Staff Review
A. Plain English Pilot Program
The Division of Corporation Finance has established a pilot program
to work with public companies on drafting plain English documents filed
under either the Securities Act or the Exchange Act. We also expedite
the review of these filings. The staff's comments, in plain English,
will be consistent with these plain English proposals. The staff has
issued five interpretive letters under the plain English pilot program.
The staff granted interpretive relief from compliance with the legend
requirements in the front of the prospectus, the distribution table
showing the price, underwriters' commissions and proceeds of the
offering, and the disclosure regarding the availability of Exchange Act
reports.72 The staff also stated its view that identification of a
company's web site and the statement ``[o]ur SEC filings are also
available to the public from our web site'' will not, by itself,
include or incorporate by reference any information into the
registration statement that is included or hot linked to the issuer's
regular web site that is not otherwise incorporated by reference into
the registration statement.73 Because the staff's interpretive
position on these matters is now well established, other pilot
participants may rely on these positions and do not need to submit a
specific written request.
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\72\ Division of Corporation Finance letters to ITT Corporation
(dated November 12, 1996 and January 6, 1997), Baltimore Gas and
Electric Corporation (two letters dated January 6, 1997) and SCANA
Corporation (dated January 6, 1997).
\73\ Division of Corporation Finance letter to ITT Corporation
(December 6, 1996) and BGE Corporation (dated January 6, 1997).
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B. Denial of Request for Acceleration
Currently, we consider a number of factors in determining whether
the statutory requirements for acceleration of registration statements
for public offerings, including mutual fund offerings, have been met,
and may refuse to accelerate the effective date in appropriate
circumstances. Among the factors that we consider is the clarity of the
disclosure. We may refuse to accelerate a registration statement:
Where there has not been a bona fide effort to make the
prospectus reasonably concise and readable, so as to facilitate an
understanding of the information required or permitted to be
contained in the prospectus.'' 74
\74\ Rule 461 of Regulation C.
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Our proposals amend this provision to reflect the proposed requirement
for plain English. To effectively implement plain English we are
committed to administering this rule in a manner that achieves its goal
of readable documents. If your document, when filed, indicates a good
faith effort to meet the requirement, our staff will work with you, in
the review and comment process, to meet any plain English requirements
adopted and your financing schedule. We request your views as to other
actions that we should take to make the prospectus clearer to investors
and implement the plain English requirements.
C. Phase-In of Plain English Requirements
To make sure that our plain English proposals do not interfere with
your need to access the capital markets on a timely basis, any plain
English rule that is finally adopted would be phased in as follows:
Registration statements pending on the effective date of
the rule would not need to be revised to meet the plain English
requirements;
An updating amendment to a registration statement filed to
meet section 10(a)(3) of the Securities Act 75 would be required
to comply with the rule in effect at the time of filing;
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\75\ 15 U.S.C. 77j(a)(3).
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Any shelf registration statement affected by the plain
English rule would be required to comply with the requirement at the
time a new shelf registration statement is filed, but no later than
December 31, 1998.
All filings would be required to comply with the rule no
later than December 31, 1998.
Please give us your comments on whether this schedule provides you
the necessary flexibility to meet the proposed revisions, if adopted.
VI. Request for Comments
We request your comments on whether plain English should be
mandated or only recommended, and whether there are other alternatives
that will provide for a more reader-friendly and understandable
disclosure document. Your comments are also requested on whether or not
plain English should be required for the entire prospectus and not just
the cover page, prospectus summary, and risk factors section. Please
furnish the specific reasons for your position. We request your comment
on whether additional plan English techniques should be required and,
if so, which ones. If you have concerns that plain English will
increase liability we request information on the substantive basis for
your
[[Page 3165]]
concern and, if available, the factual data in support of your
position.
We specifically request that investors provide comments on the
proposals.
VII. Cost-Benefit Analysis
Our plain English proposals streamline existing requirements and
require a clear writing style and format. We believe the proposals, if
adopted, would result in little additional costs as issuers implement
the organizational, language, and document structure changes necessary
to comply with these proposals. Additional cost, if any, should be
short-term and would be outweighed by the significant improvement in
disclosure to investors. In addition, a number of the proposals
simplify the cover page format, which should result in some printing
and other cost savings in preparing prospectuses.
We request your comment on whether the proposed rules would be
``major rules'' for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996. We have tentatively concluded that
the proposed rules would not result in a major increase in costs or
prices for consumers or individual industries or significant adverse
effects on competition, employment, investment, productivity,
innovation, or small business. We request comments on whether the
proposed rules are likely to have a $100 million or greater annual
effect on the economy. Your comments should provide empirical data to
support your views.
As an aid in evaluating the cost and benefits of the proposals, we
request your comments and those of others involved in the registration
process on this cost/benefit analysis. Please provide empirical data in
support of your position to assist us in determining the cost and
benefits of the proposals. We specifically request individual investors
to provide us their views on the cost and benefits of the proposals.
VIII. Summary of the Initial Regulatory Flexibility Analysis
We have prepared an initial regulatory flexibility analysis, IRFA,
in accordance with 5 U.S.C. 603 concerning the proposed rules. As
discussed more fully in the IRFA, the proposed rules would codify our
interpretive advice, eliminate requirements that are no longer useful,
and require plain English to be used to simplify the language used in
the front of the documents. The rule amendments are proposed under
sections 6, 7, 8, 10, and 19(A) of the Securities Act, and sections 3,
12, 13, 14, 14(d), 23(a), and 35A of the Exchange Act.
As the IRFA describes, we are aware of approximately 1100 Exchange
Act reporting companies and approximately 800 active registered
investment companies that currently satisfy the definition of ``small
businesses'' under Rule 157 of the Securities Act. However, there is no
reliable way to determine how many businesses may become subject to
reporting obligations in the future or may otherwise be impacted by the
rule proposals. The proposed rules do not affect the substance of
disclosures registrants must make. The proposals do not impose any new
recordkeeping requirements or require reporting of additional
information. Thus, we believe that the proposals will not increase
reporting, recordkeeping, or compliance burdens, and in some cases may
slightly reduce those burdens for small businesses. Our view is also
based on the experience of participants in the plain English pilot
program. Pilot participants reported that the time required to
understand the reporting requirements and prepare disclosures was the
same, and in some cases a little less, than under existing rules.
Although none of the program participants is a ``small business'' as
defined by our rules, we believe the proposals will affect all
registrants in the same way.
As discussed more fully in the IRFA, several possible significant
alternatives to the proposals were considered. These included
establishing different compliance or reporting requirements for small
entities, or exempting them from all or part of the proposed
requirements. We believe that such alternatives are not appropriate for
the following reasons: (i) They would be inconsistent with our mandate
to require prospectuses to fully and fairly disclose all material
information to investors; (ii) they would negate the important benefits
of the proposals; and (iii) they would not reduce small issuers'
compliance costs. The IRFA also indicates that there are no current
federal rules that duplicate, overlap, or conflict with the proposed
rules.
We encourage written comments on any aspect of the IRFA. In
particular, we seek comment on: (i) The number of small entities that
would be affected by the proposed rules; and (ii) the determination
that the proposed rules would not increase, and in some cases might
slightly reduce, reporting, recordkeeping, and other compliance
requirements for small entities. If you believe the proposals will
significantly impact a substantial number of small entities please
describe the nature of the impact and estimate the extent of the
impact. For purposes of making determinations required by the Small
Business Regulatory Enforcement Act of 1966, we are also requesting
data regarding the potential impact of the proposed rules on the
economy on an annual basis. Your comments will be considered in the
preparation of the Final Regulatory Flexibility Analysis if the
proposed amendments are adopted. A copy of the analysis may be obtained
by contacting Ann D. Wallace, Division of Corporation Finance,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
IX. Paperwork Reduction Act
The proposed amendments would affect several regulations and forms
76 that contain ``collection of information requirements'' within
the meaning of the Paperwork Reduction Act of 1995.77 In order to
obtain Office of Management and Budget approval, we previously
submitted estimates to that Office of the time and cost burdens imposed
on public companies by each regulation and form. Each of the
regulations and forms currently is approved by that Office and displays
a Paperwork Reduction Act control number.
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\76\ We are proposing changes to Rules 421 and 461 of Regulation
C, Items 101, 501, 502, 503 and 508 of Regulation S-K and Regulation
S-B and Item 301 of Regulation S-K. We also are proposing minor
amendments to registration Forms S-2, S-3, S-4, S-20, F-3 and F-4
under the Securities Act. Regulation S-K, Regulation S-B and
Regulation C do not impose reporting burdens directly on public
companies. For administrative convenience, each of these regulations
is assigned one burden hour. The burden hours imposed by the
disclosure regulations are reflected in the estimates for the forms
that refer to the regulations.
\77\ 44 U.S.C. 3501 et seq.
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We believe that the proposed amendments would not result in a
substantive or material change to the collection of information
requirements based on our experience with the plain English pilot
programs. Pilot participants have indicated that they do not believe
that drafting plain English documents has increased their time or cost
burdens. In addition, the proposed rules do not affect the substance of
the disclosure required. We anticipate that the proposals would not
materially change the annual burden reporting and burden hours, because
the proposals provide guidance on meeting existing disclosure
obligations and simplify the format of the disclosure provided to
investors.
We solicit comment on our determination that the proposals would
not result in a substantive or material change to the collection of
information requirement and burdens. If you believe the proposals will
affect materially the annual burden, you are asked to provide
[[Page 3166]]
an estimate of the change in the burden and the basis for your
position.
X. Statutory Authority
The rule amendments outlined above are proposed pursuant to
Sections 6, 7, 8, 10 and 19(a) of the Securities Act and Sections 8,
30, 31 and 38 of the Investment Company Act of 1940.
List of Subjects in 17 CFR Parts 228, 229, 230 and 239
Reporting and recordkeeping requirements, Securities and Investment
companies.
XI. Text of the Proposals
In accordance with the foregoing, Title 17, Chapter 11 of the Code
of Federal Regulations is proposed to be amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
2. By amending Sec. 228.101 to add paragraphs (c) and (d) to read
as follows:
Sec. 228.101 (Item 101) Description of business.
* * * * *
(c) Reports to security holders. If the small business issuer is
not required to deliver an annual report to security holders, indicate
whether it will voluntarily send an annual report and whether the
report will include audited financial statements.
(d) Canadian Issuers. Canadian issuers shall provide the
information required by Item 101(f) of Regulation S-K (Sec. 228.101(f))
(Enforceability of Civil Liabilities Against Foreign Persons).
3. Section 228.501 is amended by adding an introductory text,
revising paragraphs (a)(4), (a)(5), (a)(7) and (a)(8) and removing
paragraph (a)(11) to read as follows:
Sec. 228.501 (Item 501) Front of registration statement and outside
front cover of prospectus.
The following information must be provided in plain English as
required by Sec. 230.421(d) of Regulation C of this chapter.
(a) * * *
(4) Cross reference to and identify the location in the prospectus
(e.g., by page number or other specific location) of the risk factors
section of the prospectus. The information should be highlighted by
prominent type or otherwise.
(5) The small business issuer must provide disclosure that informs
investors that the Securities and Exchange Commission has not approved
the securities or passed on the adequacy of the disclosures in the
prospectus and that any representation to the contrary is a criminal
offense. The disclosure may be in one of the following formats or other
clear and concise language.
Example A: The Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy
of the prospectus. Any representation to the contrary is a criminal
offense.
Example B: The Securities and Exchange Commission (``SEC'') has
not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
(6) * * *
(7) If the securities are to be offered for cash, the small
business issuer should set forth the price to the public, and the cash
underwriting discounts and commissions. The information may be set
forth in a table, term sheet format or other clear presentation. The
small business issuer may present the information in any format that
fits the design of the cover page so long as the information can be
easily read and is not misleading. The information must be shown on a
per unit and aggregate basis. If the offering is made on a minimum/
maximum basis, information on the aggregate minimum/maximum must be
shown. For best efforts or best efforts minimum/maximum offerings the
cover page should disclose the date the offering will end and the
provisions to place the funds in an escrow, trust, or similar account.
Note that Item 508(a) requires all compensation and expenses of the
underwriters to be disclosed in that section.
(8) A prospectus used before the effective date of the registration
statement must include a prominent statement that indicates that:
(i) The information in the prospectus will be amended or completed;
(ii) The securities may not be sold until the registration
statement becomes effective; and
(iii) The prospectus is not an offer to sell nor is it seeking an
offer to buy the securities in any State where the offering is not
permitted. The legend may be in the following language or other clear,
and understandable language:
The information in this prospectus is not complete. We may not
sell these securities until the registration statement filed with
the SEC is effective. This prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any state where the
offer or sale is not permitted.
(iv) Comparable information must be provided if the prospectus is
used before the determination of the initial public offering price in
the case of a prospectus that omits this information as permitted by
Sec. 230.430A of this chapter.
* * * * *
4. Section 228.502 is revised to read as follows:
Sec. 228.502 (Item 502) Inside front and outside back cover page of
prospectus.
A small business issuer must disclose the following information in
plain English as required by Sec. 230.421(d) of Regulation C of this
chapter.
(a) Information available to security holders. (1) On the inside
front or outside back cover page of the prospectus, the small business
issuer must state whether it is a reporting company; and
(2) The small business issuer shall describe the nature and
frequency of the reports and other information the issuer is required
to file with the Securities and Exchange Commission (SEC) that are
available to investors. The small business issuer shall indicate that
the documents can be reviewed and copied at the Commission's Public
Reference Room in Washington, DC. 20549. In addition, if the small
business issuer is an electronic filer, the disclosure shall indicate
that the reports may be viewed on the SEC's Internet site (http://
www.sec.gov) or that copies may be obtained, upon payment of a
duplicating fee, by writing to the SEC's Public Reference Section. The
small business issuer should indicate that information on the operation
of the public reference room may be obtained by calling the SEC at 1-
800-SEC-0330. Small business issuers are encouraged to give their
Internet site address, if one is available.
(3) The small business issuer shall state the name of any national
securities exchange on which its securities are listed.
(b) Address and telephone number. The small business issuer must
include on the inside front cover page, or in the summary of the
prospectus, the complete mailing address and telephone number of the
small business issuer's principal executive offices.
(c) Dealer Prospectus Delivery Obligations. The small business
issuer must set forth information on the outside back cover page of the
prospectus which advises dealers conducting transactions in the
securities, whether or not they are participating in the distribution,
that
[[Page 3167]]
they may be required to deliver a prospectus. The disclosure should
specify the time period during which dealers must deliver a prospectus
as specified in section 4(3) of the Securities Act and Sec. 230.174 of
this chapter. The following legend may be used or any other format that
includes the required content and is clear and concise;
Until (insert date) all dealers that buy, sell or trade these
securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
(d) Table of Contents. On the inside front cover page of the
prospectus, or immediately following the cover page, the small business
issuer should provide a reasonably detailed table of contents showing
the location in the prospectus, including page number, if practicable,
of the subject matter of the various sections or subdivisions of the
prospectus, including the risk factors section required by Item 503 of
Regulation S-B.
(e) Financial Data Graphs. Registrants are encouraged to use
tables, schedules, charts and graphic illustrations of the results of
operations, balance sheet, or other financial data that presents the
data in an understandable manner. Any presentation must be consistent
with the financial statements and related non-financial information.
The graphs and charts must be drawn to scale and the information
provided must not be misleading.
5. By revising Sec. 228.503 to read as follows:
Sec. 228.503 (Item 503) Summary information and risk factors.
The following information must be furnished in plain English as
required by Sec. 230.421(d) of Regulation C of this chapter.
(a) Summary. Provide a summary of the information contained in the
prospectus where the length and complexity of the prospectus make a
summary useful. The summary should be brief. The summary should not and
is not required to contain all of the detailed information in the
prospectus.
(b)(1) Risk factors. Discuss under the caption ``Risk Factors'' any
factors that make the offering speculative or risky. The risk factor
disclosure should highlight critical factors that the investor must
consider in making an investment decision. Generic and boilerplate
risks that could apply to any issuer or any offering should not be
provided. The risk factors must be discussed in the order of their
importance. The factors may include, among other things, the following:
(i) The small business issuer's lack of recent profits from
operations;
(ii) The small business issuer's poor financial position;
(iii) The small business issuer's business or proposed business; or
(iv) The lack of a market for the small business issuer's common
equity securities.
(2) The risk factor discussion should immediately follow the
summary section. If no summary section is necessary, the risk factor
discussion should immediately follow the cover page of the prospectus
or, if included, a pricing information section that immediately follows
the cover page.
Instruction to Item 503(b)(2)
``Pricing information'' as used in paragraph (b) of this section
shall mean price and price-related information of the type that may
be omitted from the prospectus in an effective registration
statement in reliance on Sec. 230.430A(a) of this chapter and
information disclosed in a prospectus but is subject to change as a
result of pricing.
6. Section 228.508 is amended to add a sentence to the end of
paragraph (a) and paragraph (j) to read as follows:
Sec. 228.508 (Item 508) Plan of distribution.
* * * * *
(a) Underwriters and underwriting obligations. * * * Disclose in a
table all underwriting compensation including the other expenses of the
offering specified in Item 511 of this Regulation S-B.
* * * * *
(j) Stabilization and other transactions. The small business issuer
must provide disclosure which briefly describes any transaction that
the underwriters intend to conduct during the offering that stabilizes,
maintains or otherwise affects the market price of the offered
securities. Disclosure should be provided to indicate, if true, that
the underwriters may discontinue these transactions at any time and
indicate the exchange or other market on which these transactions may
occur.
(1) If the stabilizing begins before the effective date of the
registration statement, the small business issuer must state the amount
of securities bought, the prices at which they were bought and the
period within which they were bought. If Sec. 230.430A of this chapter
is used, the final prospectus must include information on the
stabilizing transactions before the public offering price was set.
(2) In connection with warrant or rights offerings to existing
security holders, where securities not purchased by security holders
are reoffered to the public, give the following information in the
reoffer prospectus:
(i) The amount of securities bought in stabilization activities
during the rights offering period and the price or range of prices at
which the securities were bought;
(ii) The amount of the securities subscribed for during the rights
offering period;
(iii) The amount of the securities purchased by the underwriter
during the rights offering period; and
(iv) The amount of the securities reoffered to the public and the
offering price.
Instruction to Paragraph (j)
The disclosure should include information on stabilizing
transactions, syndicate short covering transactions, penalty bids or
any other transaction that affects the offered security's price. The
nature of the transactions should be described in a clear
understandable manner.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
7. The authority citation for part 229 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
8. By amending Sec. 229.101 to add paragraphs (e) and (f) before
``Instructions to Item 101'' to read as follows:
Sec. 229.101 (Item 101) Description of business.
* * * * *
(e) Reports to security holders. Where a registrant is not required
to deliver an annual report to security holders (or holders of American
Depositary Receipts) by Section 14 of the Exchange Act (15 U.S.C. 78n)
or stock exchange requirements, describe briefly the nature and
frequency of reports that will be given to security holders. Specify
whether or not such reports will contain financial information that has
been examined and reported upon, with an opinion expressed by, any
independent public or certified public accountant. In the case of the
reports of a foreign private issuer, state whether the report will
contain financial information prepared in accordance with United States
generally accepted accounting
[[Page 3168]]
principles, or whether the report will include a reconciliation of such
information with such accounting principles.
(f) Enforceability of civil liabilities against foreign persons.
(1) A foreign private issuer shall provide disclosure which informs an
investor as to whether actions may be brought under the civil
liabilities provisions of the Federal securities laws against the
registrant, its officers and directors, the underwriters or experts
located in or residents of a foreign country or whose assets are
located outside the United States. The disclosure shall address the
following matters:
(i) The investor's ability to effect service of process within the
United States on the foreign private issuer or any person;
(ii) The investor's ability to enforce judgments obtained in United
States courts against the persons based upon the civil liability
provisions of the Federal securities laws;
(iii) The investor's ability to enforce, in an appropriate foreign
court, judgments of United States courts based upon the civil liability
provisions of the Federal securities laws; and
(iv) The investor's ability to bring an original action in an
appropriate foreign court to enforce liabilities against the foreign
private issuer or any person based upon the Federal securities laws.
(2) If any of the disclosures are based upon an opinion of counsel,
counsel must be named in the prospectus. The foreign private issuer
must file a signed consent of counsel, to the use of counsel's name and
opinion, as an exhibit to the registration statement.
9. By amending Sec. 229.301 by designating the introductory text as
paragraph (a), introductory text, redesignating paragraphs (a) and (b)
as paragraphs (a)(1) and (a)(2); redesignating existing instruction as
``Instructions to Item 301(a)'' and adding paragraph (b) to read as
follows:
Sec. 229.301 (Item 301) Selected financial data.
* * * * *
(b) Ratio of Earnings to Fixed Charges. If debt securities are
registered, a ratio of earnings to fixed charges must be shown. If
preference equity securities are registered, a ratio of combined fixed
charges and preference dividends to earnings must be shown. The ratio
must be presented for each of the last five fiscal years and the latest
interim period for which financial statements are presented. If
proceeds from the sale of debt or preference securities will be used to
repay any of the registrant's outstanding securities, and the change in
the ratio would be ten percent or greater, a pro forma ratio must be
shown.
Instructions to Item 301(b)
1. Definitions. The following definitions apply when calculating
the ratio of earnings to fixed charges.
A. Fixed charges. The term ``fixed charges'' means the sum of the
following: (i) Interest expensed and capitalized, (ii) amortized
premiums, discounts and capitalized expenses related to indebtedness,
(iii) an estimate of the interest within rental expense, and (iv)
preference security dividend requirements of consolidated subsidiaries.
B. Preference security dividend. The term ``preference security
dividend'' is the amount of pre-tax earnings that is required to pay
the dividends on outstanding preference securities. The dividend
requirement shall be computed as the amount of the dividend divided by
(1--the effective income tax rate applicable to continuing operations).
C. Earnings. The term ``earnings'' is the amount resulting from
adding and subtracting the following items. Add: (i) Pretax income from
continuing operations before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity investees, (ii)
fixed charges; (iii) amortization of capitalized interest, (iv)
distributed income of equity investees, and (v) the registrant's share
of pre-tax losses of equity investees for which charges arising from
guarantees are included in fixed charges. Subtract: (i) interest
capitalized, (ii) preference security dividend requirements of
consolidated subsidiaries, and (iii) the minority interest in pre-tax
income of subsidiaries that have not incurred fixed charges. Equity
investees are investments that are accounted for using the equity
method. Public utilities following SFAS 71 should not add amortization
of capitalized interest in determining earnings, nor reduce fixed
charges by any allowance for funds used during construction.
2. Disclosure. The following disclosure should be provided when
showing the ratio of earnings to fixed charges.
A. Deficiency. If a ratio indicates less than one-to-one coverage,
the registrant must disclose the dollar amount of the deficiency.
B. Pro forma ratio. The pro forma ratio may only be shown for the
most recent fiscal year and the latest interim period. Only the net
change in interest or dividends of the refinancing may be used to
calculate the ratio.
C. Foreign private issuer. A foreign private issuer must show the
ratio based on the figures in the primary financial statement. If
materially different, the ratio also must be shown based on the figures
resulting from the reconciliation to U.S. generally accepted accounting
principles.
D. Summary Section. If a summary section is provided in the
prospectus, registrants should show the ratios in that section.
3. Exhibit. The registrant must file an exhibit to the registration
statement to show the figures used to calculate the ratios. See
paragraph (12) of Item 601 of Regulation S-K.
10. By revising Sec. 229.501 to read as follows:
Sec. 229.501 (Item 501) Front of the registration statement and
outside front cover page of the prospectus.
(a) Facing Page. The facing page must indicate the approximate date
of the proposed sale to the public and, where appropriate, must include
the delaying amendment legend required by Sec. 230.473 of Regulation C
of this chapter.
(b) Outside Front Cover Page of Prospectus. The following
information, if applicable, must appear on the outside cover page of
the prospectus, and must be in plain English as required by
Sec. 230.421(d) of Regulation C of this chapter. The information may be
presented in a table, bullet list, term sheet format or other clear
design. Registrants should design the outside cover page in a manner
and format that is easy to read and encourages the investor to read the
disclosure. Registrants may use any design that does not diminish the
required information and is not misleading.
(1) Name. The registrant's name should be set forth. A foreign
private registrant must give the English translation of the name.
Instruction to Paragraph 501(b)(1)
If the registrant's name is the same as that of a company that
is well known, the registrant must include information to eliminate
any possible confusion with the other company. If the name indicates
a line of business in which the registrant is not engaged or is
engaged only to a limited extent, the registrant must include
information to remove a misleading inference as to the registrant's
business. In some circumstances disclosure may not be sufficient and
the registrant may be required to change its name. A name change is
not required where the registrant is an established company, the
character of its business has changed, and the investing public is
aware generally of the change and the registrant's current business.
[[Page 3169]]
(2) Title and amount of securities. The title and amount of
securities offered must be given. The amount of securities offered by
selling security holders must be stated separately. A brief description
of the securities must also be given except where the information is
clear from the title of the security. For example, no description is
necessary for common stock that has full voting rights, dividends and
liquidation rights usually associated with common stock.
(3) Offering price, underwriting commissions and offering proceeds.
Where securities are to be offered for cash, the price to the public,
the underwriting discounts and commissions, and the proceeds to be
received by the registrant and the proceeds to be received by the
selling shareholders, if any, should be shown.
Instructions to Paragraph 501(b)(3)
1. If a preliminary prospectus is circulated and the registrant
is not subject to the reporting requirements of Section 13(a) or 15
(d) of the Exchange Act, set forth either:
(A) A bona fide estimate of the range of the maximum offering
price and the maximum number of securities offered; or
(B) A bona fide estimate of the principal amount of the debt
securities offered.
2. If it is impracticable to state the price to the public, the
method by which the price is to be determined should be explained.
If the securities are to offered at the market price, or if the
offering price is to be determined by a formula related to the
market price, indicate the market and market price of the securities
as of the latest practicable date.
3. The term ``commissions'' is defined in paragraph (17) of
Schedule A of the Securities Act. Only cash commissions paid by the
registrant or selling security holders are to be shown. See Item 508
of Regulation S-K as to the requirements to disclose other expenses
of the offering.
4. The proceeds shown should be the gross proceeds of the
offering less underwriting discounts and commissions. The price and
proceeds information should be shown on both a per unit and an
aggregate basis. Registration statements on Form S-8 relating to
employee benefit plans, Form S-4 or F-4 covering securities issued
in a merger transaction or Form S-3 or F-3 relating to a dividend
reinvestment plan are not required to comply with this paragraph.
(4) State Legend. Any legend or statement required by the law of
any State in which the securities are to be offered should be set
forth.
(5) Commission Legend. Disclosure should be furnished that
indicates that the Securities and Exchange Commission has not approved
the securities or passed upon the adequacy of the disclosures in the
prospectus and that any contrary representation is a criminal offense.
The legend may be in one of the following formats or other clear and
concise language:
Example A: The Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy
of this prospectus. Any representation to the contrary is a criminal
offense.
Example B: The Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
(6) Underwriting. Identify the underwriter(s) and briefly indicate
the nature of the underwriting arrangements. If the securities are
offered on a best efforts basis, set forth the termination date of the
offering, any minimum required purchase and any arrangements to place
the funds received in an escrow, trust, or similar account. If no such
arrangements have been made, so state. Registrants may use any clear,
concise, and accurate description of the underwriting arrangements. The
following descriptions of underwriting arrangements may be used, where
appropriate:
Example A: Best efforts offering. The underwriters are not
required to sell any specific number or dollar amount of securities
but will use their best efforts to sell the securities offered.
Example B: Best efforts, minimum-maximum offering. The
underwriter must sell the minimum number of securities offered
(insert number) but is only required to use their best efforts to
sell the maximum number of securities offered (insert number).
Example C: Firm commitment. The underwriters are required to
purchase all of the securities if any of the securities are
purchased.
(7) Date of Prospectus. The approximate date of the prospectus
should be given.
(8) ``Subject to Completion'' Legend. Any prospectus used before
the effective date of the registration statement must include a
prominent statement that indicates that:
(i) The information in the prospectus will be amended or completed;
(ii) The securities may not be sold until the registration
statement becomes effective; and
(iii) The prospectus is not an offer to sell nor is it seeking
offers to buy the securities in any State where offers or sales is not
permitted. The legend may be in the following language or other clear,
and understandable language:
The information in this prospectus is not complete. We may not
sell these securities until the registration statement filed with
the SEC is effective. This prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any state where the
offer or sale is not permitted.
(iv) Comparable information must be provided if the prospectus is
used before to the determination of the initial public offering price
in the case of a prospectus that omits this information as permitted by
Sec. 230.430A of this chapter.
11. By revising Sec. 229.502 to read as follows:
Sec. 229.502 (Item 502) Inside front and outside back cover pages of
prospectus.
This information must be furnished in plain English as required by
Sec. 230.421(d) of Regulation C of this chapter.
(a) Available Information. Registrants subject to the reporting
requirements of section 13(a) or 15(d) of the Exchange Act (15 U.S.C.
78m(a) or 78o(d)) at the time the registration statement is filed must
provide disclosure indicating:
(1) That the registrant is subject to the information requirements
of the Exchange Act and files reports and other information with the
Securities and Exchange Commission;
(2) That reports (and where registrant is subject to sections 14(a)
and 14(c) of the Exchange Act (15 U.S.C. 78n(a) and (c)), proxy and
information statements) and other information filed by the registrant
can be reviewed and copied at the Commission's Public Reference Room in
Washington, DC 29549. In addition, if the registrant is an electronic
filer, the disclosure must indicate that the reports may be viewed on
the SEC's Internet site (http://www.sec.gov) or that copies may be
obtained, upon payment of a duplicating fee, by writing to the SEC's
Public Reference Section. The registrant must indicate that information
on the operation of the public reference rooms may be obtained by
calling the SEC at 1-800-SEC-0330. Registrants are encouraged to give
their Internet site address, if one is available. This information must
appear on the back cover page or in the prospectus where the registrant
discloses the reports incorporated by reference;
(3) The name of any national securities exchange on which the
registrant's securities are listed.
(b) Table of Contents. The registrant must provide on the inside
front cover page, or immediately following the cover page, a reasonably
detailed table of contents. The table of contents should show the
location in the prospectus, including the page number, if practicable,
of the subject matter of the various sections or subdivisions of the
prospectus, including the risk factor section required by Item 503 of
Regulation S-K.
[[Page 3170]]
(c) Address and Telephone Number. Registrants must include the
complete mailing address, including zip code, and the telephone number,
including area code, of their principal executive offices.
(d) Financial Data Graphs. Registrants are encouraged to use
tables, schedules, charts and graphic illustrations of the results of
operations, balance sheet, or other financial data that presents the
data in an understandable manner. Any presentation must be consistent
with the financial statements and related non-financial information.
The graphs and charts must be drawn to scale and the information
provided must not be misleading.
(e) Dealer Prospectus Delivery Obligations. Information must be set
forth on the outside back cover page of the prospectus that advises
brokers of their prospectus delivery obligation, including the
expiration date specified by section 4(3) of the Securities Act (15
U.S.C. 77d(3)) and Sec. 230.174 of this chapter. If the expiration date
is not known on the effective date of the registration statement, the
date must be included in the copy of the prospectus filed under
Sec. 230.424(b) of this chapter. The legend can be in any format so
long as the content is set forth. No legend is required if dealers are
not required to deliver a prospectus under Sec. 230.174 of this chapter
or section 24(d) of the Investment Company Act (15 U.S.C. 80a-24). The
legend may read as follows:
Until (insert date) all dealers that buy, sell or trade these
securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
12. By revising Sec. 229.503 to read as follows:
Sec. 229.503 (Item 503) Prospectus summary and risk factors.
The following information must be furnished in plain English as
required by Sec. 230.421(d) of Regulation C of this chapter. The
information may be presented in table, bullet list, term sheet format,
or other clear design. Registrants should structure and organize the
prospectus summary and risk factors discussion in a manner and format
that is easy to read and encourages investors to read the disclosure.
Registrants may use any format or design that does not obscure the
required information and is not misleading.
(a) Prospectus Summary. Registrants must include a summary of the
information in the prospectus where the length or complexity of the
prospectus makes a summary appropriate. The summary section should be
brief. The summary should not and is not required to contain all of the
detailed information in the prospectus.
Instruction to paragraph (a)
The summary section must provide investors with a clear, concise
and coherent ``snapshot'' description of the most significant
aspects of the offering. Summaries should not randomly repeat the
text of the prospectus but should provide a brief overview of the
key aspects of the offering. Registrants must carefully consider and
identify the aspects of an offering that are the most significant
and determine how best to highlight these points in everyday
language.
(b) Risk Factors. Where appropriate, registrants must set forth
under the caption ``Risk Factors'' a discussion of the most significant
factors that make the offering speculative or one of high risk. The
risk factors must be discussed in the order of their importance. The
risk factors discussion should be short, concise and organized in a
logical manner. The prioritized risk factors must highlight critical
factors the investor must weigh in making an investment decision.
Generic and boilerplate risk that could apply to any registrant or any
offering should not be provided. Each risk factor must be set forth
under a subcaption that adequately describes the risk. The risk factor
discussion should immediately follow the summary section, if one is
included, or the cover page of the prospectus. The factors may include,
among other things, the following:
(1) The registrant's lack of an operating history;
(2) The registrant's lack of profitable operations in recent
periods;
(3) The registrant's financial position;
(4) The registrant's business or proposed business; or
(5) The lack of a market for the registrant's common equity
securities or securities convertible into or exercisable for common
equity securities.
13. By amending Sec. 229.508 by revising paragraphs (b) and (e) and
adding paragraph (l) to read as follows:
Sec. 229.508 (Item 508) Plan of distribution.
* * * * *
(b) New Underwriters. Where securities being registered are those
of a registrant that has not previously been required to file reports
under section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or
78o(d)) and any of the managing underwriter(s) (or where there are no
managing underwriters, a majority of the principal underwriters) was
organized, reactivated, or first registered as a broker-dealer within
the past three years, these facts should be disclosed in the
prospectus. If appropriate, disclosure that the principal business
function of the underwriters is to sell the securities to be
registered, or that the promoters of the registrant have a material
relationship with such underwriter(s) should be provided. Sufficient
details shall be given to allow full appreciation of the
underwriter(s)' experience and its relationship with the registrant,
promoters and their controlling persons.
* * * * *
(e) Underwriters' compensation. Set forth in tabular form the
nature of the compensation and the amount of discounts and commissions
to be allowed or paid to the underwriters. Separately show amounts to
be paid by the company and the selling shareholders. In addition, all
other items deemed by the National Association of Securities Dealers to
constitute underwriting compensation for purposes of the Association's
Rules of Fair Practice must be shown in the table.
Instructions to Paragraph 508(e)
1. The term ``commissions'' is defined in paragraph (17) of
Schedule A of the Securities Act. Show cash commissions paid by the
registrant or selling security holders separately in the table.
Commissions paid by other persons also shall be set forth in the
table. Any finder's fee or similar payments shall be disclosed in a
note in the table.
2. Where an underwriter has received an over-allotment option,
maximum-minimum information shall be presented in the table, based
on the purchase of all or none of the shares subject to the option.
The terms of the option should be described in the narrative.
* * * * *
(l) Stabilization and other transactions. (1) The registrant must
provide disclosure which briefly describes any transaction that the
underwriter(s) intends to conduct during the offering that stabilizes,
maintains or otherwise affects the market price of the offered
securities. Disclosure should be provided to indicate, if true, that
the underwriter(s) may discontinue these transactions at any time and
indicate the exchange or other market on which these transactions may
occur.
(2) If the stabilizing began before the effective date of the
registration statement, set forth the amount of securities bought, the
prices at which the securities were bought and the period within which
they were bought. In the event that Sec. 230.430A of this chapter is
used, the prospectus filed pursuant to Sec. 230.424(b) of this chapter
or included in a post-effective amendment must include information
[[Page 3171]]
as to stabilizing transactions effected before the determination of the
public offering price set forth in such prospectus.
(3) If the securities being registered are to be offered to
existing security holders pursuant to warrants or rights and any
securities not taken by security holders are to be reoffered to the
public after the expiration of the rights offerings period, the
registrant shall be set forth, in a supplement or otherwise, in the
prospectus used in connection with such reoffering:
(i) The amount of securities bought in stabilization activities
during the rights offering period and the price or range of prices at
which such securities were bought;
(ii) The amount of the offering securities subscribed for during
such period;
(iii) The amount of the offered securities subscribed for by the
underwriters during the period;
(iv) The amount of the offered securities sold during such period
by the underwriters and the price, or range of prices, at which the
securities were sold; and
(v) The amount of the offered securities to be reoffered to the
public and the public offering price.
Instruction to Paragraph (j)
The disclosure should include information on stabilizing
transactions, syndicate short covering transactions, penalty bids or
any other transaction that affects the offered security's price. The
nature of the transactions should be described in a clear,
understandable manner.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
14. The authority citation for Part 230 continues to read in part
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78(d), 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
15. By amending Sec. 230.421 by revising paragraph (b) and adding
paragraph (d) to read as follows:
Sec. 230.421 Presentation of information in prospectuses.
* * * * *
(b) The information set forth in a prospectus should be presented
in a clear, concise and understandable fashion. All information
contained in a prospectus shall be set forth under appropriate captions
or headings reasonably indicative of the principal subject matter set
forth thereunder. Except as to financial statements and other tabular
data, all information set forth in a prospectus shall be divided into
reasonably short paragraphs or sections. Registrants shall prepare the
prospectus using the following standards:
(1) Information shall be presented in clear, concise paragraphs
and sentences. If possible, information shall be presented in short
explanatory sentences and ``bullet'' lists;
(2) Captions and subheading titles shall specifically describe the
disclosure included in the section;
(3) Terms that are not clear from the context generally should be
defined in a glossary or other section of the document. Glossaries are
recommended where they facilitate understanding. Frequent reliance on
defined terms as the primary means of explaining information in the
body of the prospectus must be avoided; and
(4) Legal and highly technical business terminology should be
avoided.
Notes to Sec. 230.421(b)
In drafting prospectus information, registrants should avoid
the following:
1. Legalistic, overly complex presentations that make the
substance of the disclosure difficult to understand;
2. Vague ``boilerplate'' explanations that are imprecise and
readily subject to differing interpretations;
3. Complex information copied directly from legal documents
without any clear and concise explanation of the provision(s); and
4. Disclosure repeated in different sections of the document
that increases the size of the document, does not enhance the
quality of the information, and overwhelms the reader.
(d)(1) The registrant must use plain English principles in the
organization, language, and structure of the front and back cover
pages, and the summary and risk factors sections, if any, included in
the prospectus. These sections should communicate the information
clearly to investors. At a minimum, the disclosure should substantially
comply with each of the following plain English writing principles:
(i) Active voice;
(ii) Short sentences;
(iii) Definite, concrete, everyday words;
(iv) Tabular presentation or ``bullet'' list for complex material,
whenever possible;
(v) No legal jargon, or highly technical business terms; and
(vi) No multiple negatives.
(2) The design of these sections or other sections of the
prospectus may include pictures, logos, charts, graphs or other design
elements so long as the design is not misleading and the required
information is clear.
16. By amending Sec. 230.461 by adding a sentence to the end of
paragraph (b)(1) to read as follows.
Sec. 230.461 Acceleration of effective date.
* * * * *
(b) * * *
(1) * * * Where the plain English prospectus requirements of
Sec. 230.421(d) of this chapter have not been met.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
17. The authority citation for Part 239 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 781,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
Sec. 229.12 [Form S-2 Amended]
18. By amending Form S-2 (referenced in Sec. 239.12), Item 12 to
add paragraph (d) to read as follows:
[Note: The text of Form S-2 does not, and this amendment will
not, appear in the Code of Federal Regulations]
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
Item 12. Incorporation of Certain Information by Reference.
* * * * *
(d) The registrant shall indicate that it will provide, without
charge to each person, including any beneficial owner to whom a
prospectus is delivered, upon their written or oral request, a copy
of any and all of the information that has been incorporated by
reference in the prospectus but not delivered with the prospectus.
Registrants are not required to send the exhibits to the information
that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the
prospectus incorporates. The registrant shall give the title or
department including the address and telephone number where the
request should be made.
* * * * *
Sec. 239.13 [Form S-3 Amended]
19. By amending Form S-3 (referenced in Sec. 239.13) Item 12 to
add paragraph (c) before the instruction to read as follows:
[Note: The text of Form S-3 does not, and this amendment will
not, appear in the Code of Federal Regulations]
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
[[Page 3172]]
Item 12. Incorporation of Certain Information by Reference.
* * * * *
(c) The registrant shall indicate that it will provide, without
charge to each person, including any beneficial owner to whom a
prospectus is delivered, upon their written or oral request, a copy
of any and all of the information that has been incorporated by
reference in the prospectus but not delivered with the prospectus.
Registrants are not required to send the exhibits to the information
that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the
prospectus incorporates. The registrant shall give the title or
department including the address and telephone number where the
request should be made.
* * * * *
Sec. 239.20 [Form S-20 Amended]
20. By amending Form S-20 (referenced in Sec. 239.20) to revise
the reference in Item 1 ``Item 502(f) of Regulation S-K
[Sec. 229.502(f) of this chapter]'' to read ``Item 101(f) of Regulation
S-K [Sec. 229.101(f) of this chapter]''.
Sec. 239.25 [Form S-4 Amended]
21. By amending Form S-4 (referenced in Sec. 239.25) to revise
Item 2 to read as follows:
[Note: The text of Form S-4 does not, and this amendment will
not, appear in the Code of Federal Regulations]
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
Item 2. Inside Front and Outside Back Cover Pages of the
Prospectus.
Set forth the information required by Item 502 of Regulation S-
K (Sec. 229.502 of this chapter). In addition, on the inside front
cover page, the registrant shall include information that highlights
by print type or otherwise that the prospectus incorporates by
reference important business and financial information about the
company that is not included in or delivered with the document but
which is available to security holders upon request. Give the name,
address and telephone number where the request should be directed.
In addition, the registrant should indicate that in order to obtain
timely delivery, the request should be made no later than five
business days prior to the date on which the investment decision
must be made.
* * * * *
Sec. 239.33 [Form F-3 amended]
22. By amending Form F-3 (referenced in Sec. 239.33) by adding
paragraph (d) to Item 12 before the instruction to read as follows:
[Note: The text of Form F-3 does not, and this amendment will
not, appear in the Code of Federal Regulations]
FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
Item 12. Incorporation of Certain Information by Reference.
* * * * *
(d) The registrant shall indicate that it will provide, without
charge to each person, including any beneficial owner to whom a
prospectus is delivered, upon their written or oral request, a copy
of any and all of the information that has been incorporated by
reference in the prospectus but not delivered with the prospectus.
Registrants are not required to send the exhibits to the information
that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the
prospectus incorporates. The registrant shall give the title or
department including the address and telephone number where the
request should be made.
* * * * *
Sec. 239.34 [Form F-4 Amended]
23. By amending Form F-4 (referenced in Sec. 239.34) to revise Item
2 to read as follows:
[Note: The text of Form F-4 does not, and this amendment will
not, appear in the Code of Federal Regulations]
FORM F-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
Item 2. Inside Front and Outside Back Cover Pages of the
Prospectus.
Set forth the information required by Item 502 of Regulation S-K
(Sec. 229.502 of this chapter). In addition, on the inside front
cover page, the registrant shall include information that highlights
by print type or otherwise that the prospectus incorporates by
reference important business and financial information about the
company that is not included in or delivered with the document but
which is available to security holders upon request. Give the name,
address and telephone number where the request should be directed.
In addition, the registrant should indicate that in order to obtain
timely delivery, the request should be made no later than five
business days prior to the date on which the investment decision
must be made.
* * * * *
Dated: January 14, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendix A to the Preamble does not appear in the Code of
Federal Regulations and the examples to Appendix A will not be in
the Federal Register but may be viewed on our Internet site (http://
www.sec.gov)
Appendix A--Examples of Plain English Disclosure Documents
The following pages are before and after samples taken from
document filed by some of the Plain English Pilot participants:
Bell Atlantic Corporation
ITT Corporation
Baltimore Gas and Electric Company
Unisource Worldwide, Inc.
Some of the ``after'' examples do not contain all of the
information that appears in the corresponding ``before''. To make
these documents clearer and easier for investors to understand,
these registrants either moved this information to a more logical
section of the document or eliminated it because it was redundant.
Note: Appendix B to the Preamble does not appear in the Code of
Federal Regulations
Appendix B--Chart on Small Business Issuer Rule Proposals
Regulation S-B--Item 501--Front of Registration Statement and Outside
Front Cover of Prospectus
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Small business issuer name.... Same.
Title, amount and description Same.
of securities offered.
Selling security holders' Same.
offering identified.
Cross-reference to risk- Same.
factors.
SEC legal legend.............. Rewritten in plain
English.
Formatted distribution table Bullet list or other
showing price, underwriting design that highlights the
commission, and proceeds. information
Instruction on bona fide Retain
estimate of price.
Instruction requiring terms of Retain on cover page.
best efforts offering. No longer permitted in
summary.
Legal legend where preliminary Rewritten in plain
prospectus incomplete. English.
Legend required by state law.. Rewritten in plain
English.
Date of prospectus............ Retain.
[[Page 3173]]
Expenses of offering.......... Move to underwriting
section.
------------------------------------------------------------------------
Regulation S-B--Item 502--Inside Front and Outside Back Cover Pages of
Prospectus
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Availability of Exchange Act Retain on back cover
Reports. page or include with
incorporation by reference
disclosure in short-form
registration statements.
Availability of reports with Move to business
audited financial statements. description section.
Availability of reports Move to prospectus
incorporated by reference. where incorporation by
reference disclosure provided.
Stabilization legend.......... Move to underwriting
section.
Passive market making legend.. Delete.
Dealer prospectus delivery Move to back cover
legend. page of prospectus.
Table of contents............. Inside front cover
page or immediately following
cover page.
Canadian issuers disclosure on Retain as part of
enforceability of civil liability business description.
against foreign person.
------------------------------------------------------------------------
Regulation S-B--Item 503--Summary Information and Risk Factors
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Summary....................... Retain in plain
English. Propose to require
discussion to be brief.
Small business issuer address Move to inside cover
and telephone number. page or summary.
Risk factors.................. Retain in plain
English. Codify prior
interpretation to prioritize
risk factors.
------------------------------------------------------------------------
[FR Doc. 97-1300 Filed 1-17-97; 8:45 am]
BILLING CODE 8010-01-P
