Communications Rules and Prospectus Delivery

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 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.

What May a Tombstone Ad Contain?

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 prospectus-delivery rule require?

The 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.

What Is 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
• The rule requires the BD to deliver a copy to that person. Posting the preliminary prospectus on the issuer's website does not satisfy the duty on its own, even when the customer can reach the site. The access-equals-delivery convenience applies to the final prospectus, not to this 48-hour obligation.

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.

When Must the Dealer Deliver a Final Prospectus?

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)

What Reasonable Steps Must a Dealer Take to Furnish a Prospectus?

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?

A dealer can owe a prospectus in the secondary market for a set period after an offering becomes effective. For the continuously offered fund and variable products a Series 6 representative sells, that duty is met through the fund-advertising and summary-prospectus delivery rules covered above. The fixed aftermarket day-count periods for one-time corporate initial public offerings are outside the Series 6 exam.

How do the tombstone rule and the prospectus-delivery rule work together in a new issue?

The two rules cover different halves of the same offering, and exam questions like to blur them.

• The tombstone rule governs advertising. It lets the BD announce a pending offering in a limited way without breaching the federal-registration requirement
• The prospectus-delivery rule governs delivery. It sets hard deadlines for getting the actual prospectus to anyone who buys

Think of it this way: the tombstone tells the market that the deal exists. The prospectus tells a buyer what they are buying.

What Should You Check on Exam Day?

• Can you list two things a tombstone ad may contain and two things it must never contain, like performance projections or solicitations?
• Do you know the 48-hour rule applies only to IPOs of first-time issuers, not to every IPO?
• Can you state that a final prospectus must be delivered with or before the confirmation of sale?