Free writing prospectuses: Overview, definition, and example
What is a free writing prospectus?
A free writing prospectus (FWP) is a written communication used by companies to provide information about a securities offering, typically during the process of registering a public offering with the Securities and Exchange Commission (SEC). It is called "free writing" because it is not constrained by the traditional "prospectus" rules that typically govern how a company's offering documents must be presented. A FWP can be distributed at any time and is not required to be filed with the SEC before use, although it must still comply with applicable securities laws and regulations.
Free writing prospectuses are often used to provide additional details that may not be included in the preliminary or final prospectus, such as specific pricing information, terms of the offering, or updates on a company’s operations or financial condition. They are commonly used in public offerings of stocks or bonds and are part of the communication process during a securities offering.
Why are free writing prospectuses important?
Free writing prospectuses are important because they provide an efficient way for companies to communicate additional, timely information to investors about an offering. They allow companies to give prospective investors further insight into the terms of the offering or updates to the offering document, making them an essential tool in securities offerings. FWPs ensure that the communication is clear, transparent, and timely, offering a method for companies to reach investors quickly and effectively.
The flexibility of a free writing prospectus makes it valuable for issuers who need to provide up-to-date information, especially in fast-moving markets or during offerings that may span a longer time period. However, the communication of this information must still adhere to SEC regulations to avoid misleading or incomplete disclosures.
Understanding free writing prospectuses through an example
Imagine a company, Company A, is in the process of issuing a new series of bonds. They have already filed a registration statement with the SEC, but they want to provide more details about the offering to potential investors. Rather than waiting for a new formal filing, the company can issue a free writing prospectus to highlight the bond’s interest rate, offering size, and the expected maturity date. The FWP allows Company A to convey specific details to investors ahead of the final offering document.
Another example could involve a company issuing shares during an Initial Public Offering (IPO). During the roadshow phase, the company might use a free writing prospectus to supplement its initial prospectus by providing information about a special promotion or updated financial performance. These details might be relevant to attracting more investors but are not included in the main formal offering document.
An example of free writing prospectuses clause
Here’s how a free writing prospectus clause might appear in a securities offering agreement:
“The Issuer may, from time to time, distribute a free writing prospectus (FWP) to potential investors. Any FWP distributed shall include material information regarding the terms of the offering, including any updated pricing, offering size, or other material changes not included in the preliminary prospectus. All FWPs shall be consistent with the registration statement filed with the SEC and shall not contain any misleading or incomplete statements.”
Conclusion
Free writing prospectuses offer companies a flexible and efficient way to provide additional information to investors during a securities offering. By allowing companies to distribute timely, detailed updates about the offering, they help ensure that investors have the most up-to-date information available, improving transparency and trust. Companies must still comply with securities regulations to ensure that these communications are not misleading or incomplete, making FWPs an important tool for compliance and investor relations in the securities market.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.