Communication-Related Liabilities and Definitions

The communication and liability frameworks meet at the edges of the prospectus definition. Knowing which communication is a prospectus and which is not determines which liability rules apply.

The Broad Definition of "Prospectus"

The statutory definition of "prospectus" is intentionally broad.

• Reaches any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, that offers any security for sale or confirms the sale of any security
• The breadth is what gives the registration spine its force: any communication that "offers" a security is presumptively a prospectus and must fit one of the permitted forms (statutory prospectus or FWP) or one of the categorical carve-outs

The definition includes electronic communications under the modern interpretation. Marketing emails, web pages, podcasts, recorded video, social-media posts: all are "communications" under the definition and are subject to the prospectus rules if they offer a security.

Exam Tip: Gotchas

• The prospectus definition is broader than a printed document. Radio, television, and (by interpretation) electronic communications all count.
• An offer-related communication outside a permitted format is a prospectus violation even if it does not look like a prospectus. The form does not determine the legal status; the offering function does.

Carve-Outs From the Prospectus Definition

Several specific rules carve particular categories of communication out of the prospectus definition entirely.

• Tombstone announcements: narrow factual notices about an offering (issuer, securities, underwriters, price range, timing, where to get the prospectus) are not deemed prospectuses
• Generic offering announcements: brief notices that name no specific issuer
• Generic investment-company advertising: generic communications about investment-company products that do not refer to a particular fund or security
• Regularly released factual and forward-looking information by reporting issuers (when ordinary-course conditions are met)
• Regularly released factual information by non-reporting issuers intended for customers, suppliers, and other non-investors (when ordinary-course conditions are met)

Each carve-out has conditions. The carve-out applies only when the conditions are met; the same communication that satisfies the carve-out conditions is a prospectus the moment any one of those conditions is broken.

Exam Tip: Gotchas

• The carve-outs are categorical, not general. A communication outside the listed categories is a prospectus by default.
• Falling outside a carve-out's conditions converts the communication into a prospectus. A tombstone with selling commentary loses its carve-out status and is treated as a prospectus.

Free-Writing Prospectus Liability

A free-writing prospectus (FWP), even when permitted under the post-filing FWP framework, is still subject to the prospectus-and-communications liability provision for material misstatements.

• The FWP framework permits the use of the FWP under the registration spine
• The FWP framework does not insulate the FWP from civil liability for misstatements
• The same material-misstatement liability that applies to the statutory prospectus applies to the FWP

This is one of the most important practical points about FWPs. Many bankers and issuers think of FWPs as marketing pieces and not as legal disclosure; the prospectus-and-communications liability provision treats them as both.

Exam Tip: Gotchas

• A permitted FWP is still subject to liability for material misstatements. Use-permission is not the same as liability-shielding.
• The reasonable-care defense applies to FWPs the same way it applies to statutory prospectuses. The defendant must show reasonable care to escape liability.

Anti-Fraud Reach to Offer-Related Communications

The general anti-fraud provision in the registration statute applies to all offer-related communications regardless of their safe-harbor status under the registration framework.

• A communication that fits a carve-out from the prospectus definition (a tombstone, for example) is not insulated from the anti-fraud provision
• A communication that fits a research-report safe harbor (the non-participating broker-dealer research safe harbor, for example) is not insulated from the anti-fraud provision
• A communication that fits the pre-filing 30-day safe harbor is not insulated from the anti-fraud provision

The anti-fraud provision and the registration spine operate in parallel. Compliance with one does not satisfy the other. A communication can be perfectly compliant with the registration framework and still violate the anti-fraud rule if it is materially misleading.

Exam Tip: Gotchas

• Safe harbors from the registration framework do NOT shield against the anti-fraud provision. A research report that satisfies the participating broker-dealer regularly-published safe harbor is still actionable if it contains material misstatements.
• The anti-fraud provision reaches negligence under two of its three prongs. Scienter is required only for one prong; the other two reach negligence-based misstatements.

Forward-Looking Safe Harbor for Identified Statements

The forward-looking-statement safe harbor protects identified forward-looking statements with meaningful cautionary language.

• The 1933 Act safe harbor and the parallel 1934 Act safe harbor protect forward-looking statements made in good faith and with a reasonable basis
• The Private Securities Litigation Reform Act (PSLRA) statutory safe harbor protects forward-looking statements identified as such and accompanied by meaningful cautionary language
• The protection applies even to forward-looking statements that turn out to be wrong, provided the safe-harbor conditions are met

The safe harbor recognizes the inherent uncertainty in forward-looking statements. Without it, every projection or guidance update that turned out to be wrong would be a potential anti-fraud claim. With it, identified forward-looking statements paired with specific cautionary language are protected.

Exam Tip: Gotchas

• The safe harbor protects identified forward-looking statements, not all guidance. Statements not labeled as forward-looking, or accompanied by generic boilerplate cautionary language, may not qualify.
• The cautionary language must be "meaningful." Courts have struck down boilerplate that does not identify specific factors that could cause actual results to differ.

Think of it this way: the communications-and-liability framework is a permission-and-consequence matrix. The registration spine asks "can this communication happen?" The carve-outs (tombstone, generic, regularly-released-information) say yes. The FWP framework says yes with conditions. The civil-liability framework asks "what happens if this communication is materially misleading?" The prospectus-and-communications liability provision and the anti-fraud provision answer that question, with the forward-looking-statement safe harbor protecting identified forward-looking statements that meet the conditions.

Exam Tip: Gotchas

• Use-permission and liability-protection are two different things. A communication permitted by the registration framework can still be the basis of civil liability under the prospectus-and-communications provision or the anti-fraud provision. The deal team has to clear both gates.