Communications Rules and Prospectus Delivery
Quick Answer
Two communications rules govern new-issue offerings. The tombstone-advertisement rule lets a broker-dealer run a tombstone ad listing the issuer, underwriters, and offering basics without breaching the federal-registration requirement. The SEC's prospectus-delivery rule sets deadlines: a preliminary prospectus 48 hours before confirmation for first-time IPOs, a final prospectus with every confirmation, and continuing aftermarket delivery of 25, 40, or 90 days.
The previous sections covered what documents exist (red herring, final prospectus, POS, OS) and when they apply. This section covers the narrow communication rules that let a broker-dealer (BD) talk about a pending issue without breaching the federal-registration requirement, and the hard delivery deadlines that govern the prospectus itself.
What is a tombstone ad?
The Securities Act's tombstone-advertisement rule carves out a small list of communications that are NOT considered a prospectus under the Securities Act (SA). A tombstone ad gets its name from its plain, boxed appearance.
Tombstone ads can be used during the registration process without breaching the federal-registration requirement's prohibition on selling unregistered securities.
Permitted Content in a Tombstone Ad
A tombstone ad may contain:
- Name of the issuer
- Title and amount of securities being offered
- Offering price or a method for determining it
- Brief description of the issuer's general business
- Names of the underwriters
- Anticipated offering date
- Statement that a prospectus is available and where to obtain one
- Required legend: the communication is not an offer to sell (sales can only be made by prospectus)
What Tombstone Ads Cannot Contain
A tombstone ad cannot contain:
- Performance projections or yield promises
- Testimonials or customer endorsements
- Exaggerated or promotional language
- Recommendations or solicitation of purchase
Exam Tip: Gotchas
- A tombstone ad can list the issuer, the underwriters, and where to get a prospectus, but it cannot contain performance projections, recommendations, or sales pitches. The exam tests this by listing permitted and not-permitted items.
What does the SEC's prospectus-delivery rule require?
The SEC's prospectus-delivery rule governs the BD's obligation to deliver preliminary and final prospectuses in connection with registered offerings. It is the operational backbone of prospectus delivery.
The 48-Hour Rule
For initial public offerings (IPOs) of first-time issuers, the BD must send a preliminary prospectus to any person expected to receive a confirmation of sale at least 48 hours prior to sending the confirmation.
- Applies only to non-reporting issuers (first-time IPO candidates)
- The 48 hours is measured from delivery of the preliminary prospectus to delivery of the confirmation
- May be satisfied by posting the preliminary prospectus on the issuer's website, provided access is available to the customer
Exam Tip: Gotchas
- The 48-hour rule applies to IPOs of first-time issuers, not every IPO. It requires the preliminary prospectus to be delivered at least 48 hours BEFORE the confirmation, not at the time of confirmation.
Final Prospectus Delivery
The BD must deliver a final prospectus with or before the confirmation of sale for any registered offering subject to the federal-registration requirement. This is true for:
- IPOs
- Secondary offerings
- Continuous offerings by registered investment companies (satisfied through the open-end-fund-advertising and summary-prospectus delivery regimes)
Reasonable Steps to Furnish Prospectuses
The BD must take reasonable steps to furnish a copy of the preliminary or final prospectus to:
- Any person who requests one in writing
- Any selling group member expected to solicit purchases and requests a copy
How long must dealers continue delivering a prospectus after a registration is effective?
Even after a registration is effective, dealers must continue delivering a prospectus for a set aftermarket period. The timelines come from the Securities Act's dealer-exemption framework:
| Offering Type | Aftermarket Period |
|---|---|
| Standard IPO (not exchange-listed) | 90 days after effective date |
| Follow-on offering by a reporting issuer | 40 days after effective date |
| Securities listed on a national exchange or reporting under the Exchange Act | 25 days after effective date |
The aftermarket period exists because secondary-market buyers still need access to the issuer's disclosures, even if they did not buy in the primary offering.
How do the tombstone rule and the prospectus-delivery rule work together in a new issue?
Think of it this way: The tombstone-advertisement rule lets the BD advertise a pending offering in a limited way without breaching the federal-registration requirement. The SEC's prospectus-delivery rule sets hard deadlines on delivering the actual prospectus to anyone buying. The aftermarket periods extend that delivery requirement into the secondary market for a few weeks or months after the deal goes effective.