The Tombstone Communication

Federal securities law makes it illegal to offer a security before a registration statement covering it has been filed. The tombstone communication rule marks out a zone where a firm can still talk about a deal in progress without that talk becoming an illegal offer.

When Does the Tombstone Communication Rule Apply?

The tombstone communication rule only protects a communication that goes out after a registration statement containing a full, compliant prospectus has already been filed with the SEC. The rule does not help an issuer that wants to test interest before any registration statement exists.

• The safe harbor covers written and electronic communications alike.
• It applies to registered offerings; it is not a tool for a private placement.
• It does not apply to a communication about a registered investment company, with one exception: a registered closed-end investment company can still use it. An open-end fund cannot.

Exam Tip: Gotchas

• The tombstone communication rule needs a filed registration statement first. A notice published before any registration statement exists cannot rely on it. That earlier-stage notice relies on the proposed-offering notice rule instead.

What Can a Tombstone Communication Say?

The tombstone communication rule permits only a closed list of 21 specifically defined items. A firm cannot mix in content outside that list and still claim the safe harbor. The items most often tested are:

• The issuer's identity and contact information (name, address, phone, and email)
• The security's title and the amount being offered
• A brief description of the issuer's business
• The price of the security, or the method for determining it
• The underwriters' names and their roles in the offering
• The anticipated schedule for the offering
• Corrections of information the firm previously published under this same safe harbor

Exam Tip: Gotchas

• The list is closed, not illustrative. A tombstone that adds a recommendation, a performance claim, or any other item outside the defined list steps outside the safe harbor's protection entirely, not just for the extra item.
• Counting the paragraphs gives 22, but the answer is 21. The rule numbers its permitted items up to 22 and one of them is marked reserved, so it is an empty slot that permits nothing.

What Must a Tombstone Communication Include?

Except in the two excused communications described below, a tombstone communication must give the name and address of a person from whom a full prospectus can be obtained. That requirement does not depend on whether the registration statement is effective yet.

If the registration statement has not yet become effective, the communication must also state:

• That a registration statement has been filed but is not yet effective
• That the securities may not be sold, and no offers to buy may be accepted, before the effective date

Exam Tip: Gotchas

• Only the legend is a pre-effective requirement. Outside the two excused communications described below, the prospectus contact is required whether or not the registration statement is effective. A question that drops the contact just because the registration statement went effective is describing the legend rule, not the contact rule.

Two kinds of communication are excused from both. The first does no more than state from whom, and give the web address where, a full prospectus can be had, name the security, state its price, and say who will execute orders. The second is itself accompanied or preceded by a full prospectus.

Can a Tombstone Communication Ask for an Order?

Yes, but only on conditions. A tombstone communication that is accompanied or preceded by a full prospectus may invite an offer to buy the security, or ask the recipient to say whether they might be interested in it.

To do that, the communication must carry a statement covering two points:

• No offer to buy can be accepted, and no part of the purchase price received, until the registration statement is effective.
• Any such offer may be withdrawn without obligation at any time before notice of its acceptance.

Exam Tip: Gotchas

• The withdrawal statement is not needed in a communication to a dealer. The exception is the recipient's identity, not the content. A communication to an investor needs the statement; the same communication sent to a dealer does not.

How Does an Electronic Tombstone Satisfy the Prospectus Requirement?

Some uses of the tombstone communication rule require the communication to be accompanied or preceded by a full prospectus. For an electronic communication, an active hyperlink to the prospectus satisfies that condition. Meeting it also lifts the pre-effective legend above.

Think of it this way: A paper tombstone ad has to physically travel with (or ahead of) the prospectus. An email or webpage version does the same job with a working link instead of a paper attachment.

What Should You Check on Exam Day?

• Confirm a registration statement has already been filed before applying the tombstone communication rule; an earlier-stage notice is a proposed-offering notice rule question instead.
• Match a described communication's content against the closed list of permitted items, not just against "does this sound reasonable."
• Check whether the registration statement is effective yet. The legend applies only before effectiveness; the prospectus contact applies to every tombstone communication except the two excused kinds.
• Watch for a mutual fund in the facts. A registered open-end fund cannot use this rule at all.
• Remember that an active hyperlink can substitute for a physical prospectus in an electronic tombstone.