Under Rule 421(d) and rule amendments adopted by the SEC in January 1998, issuers must draft certain prospectus sections in "plain English" - including a "visually inviting" front cover. In practice, the SEC has expanded the scope of this rule to cover the rest of prospectus.
This "Plain English" rule under the Securities Act of 1933 requires that issuers use "plain English" in the organization, language and structure of risk factor sections of the prospectus as well as its cover pages and any required summary. Under the rule, the disclosure in these sections must "substantially comply" with each of the following "plain English" writing principles:
Issuers "may include" design elements (such as pictures, logos, charts or graphs) in the prospectus, provided that the design is not misleading and the required information is clear.
The SEC has expanded Rule 421( d ) (which already requires that prospectus disclosure be "clear, concise and understandable") to clarify what is required, in terms of clarity, in other sections of the prospectus. In other words, the rest of the prospectus are subject to the following plain English principles:
It should be emphasized that while Rule 421(d) differentiate s between (1) the cover, risk factors and the required summary in the prospectus and (2) the rest of the prospectus, in practice the SEC staff applies fairly strict "plain English" standards to the entire prospectus. A poorly drafted prospectus not conforming to the "plain English" principles delay s the SEC staff's review process, and, consequently, the entire registration process. Moreover, the "plain English" principles have been applied by the SEC staff as strict requirements, such as the prohibition of certain words that the staff views as "legalistic" in the forepart of the prospectus, and prohibition of what the staff views as "jargon." To avoid delays, issuers and their counsel should make all efforts to draft the prospectus to comply with the SEC staff's views on "plain English."
Views of SEC staff on plain English can be found in two SEC publications: (1) The "Plain English Handbook" intended to help issuers to create "clearer, more visually inviting" disclosure documents, and (2) a Staff Legal Bulletin (No. 7, updated June 1999) addressing frequently asked questions and outlining common "plain English" comments from SEC staff. Examples of SEC staff views on plain English include the following:
• Use first person ( e.g. , use we , us , our and ours ), instead of "the Company" or " Dragon Co. Ltd. " )
• Avoid technical jargons
• Avoid defined terms
• Avoid "prohibited words" such as "certain" and "such"
• Comply with section specific ( e.g., summary and risk factors) directives.