Release No. 33-7380

Release No. 34-38164

Release No. IC-22464

62 Fed. Reg. 3151 - Jan. 21, 1997

Plain English Disclosure

ACTION: Proposed rules.

SUMMARY: One of the fundamental protections provided to investors by our federal securities laws is full and fair disclosure, but investors must be able to understand these disclosures to benefit from them. Prospectuses often use a complex, legalistic language that is foreign to all but financial or legal experts. To address these problems, our rule proposals would: Require companies to use plain English principles in writing the front and back cover pages, summary and risk factor sections of prospectuses; revise current requirements for highly technical information in the front of prospectuses; and revise the rule on the preparation of prospectuses to provide companies with more specific guidance on the clarity required in the entire document.

DATES: Public comments are due March 24, 1997.

ADDRESSES: Please send three copies of the comment letter to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-6009. Comments can be sent electronically to the following e-mail address: rule-comments@sec.gov. The comment letter should refer to File No. S7-3-97; if e-mail is used please include the file number in the subject line. Anyone can inspect and copy the comment letters in the SEC's Public Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549. We will post comment letters submitted electronically on our Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Ann D. Wallace, Senior Counsel to the Director, Division of Corporation Finance, at (202) 942-2980, or Kathleen K. Clarke, Special Counsel, Division of Investment Management, at (202) 942-0724, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: To implement the first step in our plain English initiatives, we are publishing for comment amendments to Rules 421 ¹ and 461 ² of Regulation C ³ and Items 101,⁴ 301,⁵ 501,⁶ 502,⁷ 503,⁸ and 508 ⁹ of Regulation S-K.¹⁰ We also are proposing minor amendments to Forms S-2,¹¹ S-3,¹² S-4,¹³ S-20,¹⁴ F-3,¹⁵ and Form F-4,¹⁶ as part of this plain English initiative.

The Office of Investor Education and Assistance is issuing simultaneously a draft of the text of A Plain English Handbook: How to Create Clear SEC Disclosure Documents. The handbook covers proven techniques and tips on how to create plain English documents. You may request a copy of the draft handbook by calling 1-800-SEC-0330; or you may access the document on our Internet site (http://www.sec.gov).

Table of Contents

I. Executive Summary

Full and fair disclosure is one of the cornerstones of investor protection under the federal securities laws. Documents that communicate clearly and effectively play a crucial role in achieving the basic protections provided by disclosure. For many years, it has been recognized that the language and style of disclosure documents could be improved. Most recently, the Task Force on Disclosure Simplification ¹⁷ criticized prospectuses for their dense writing, legal boilerplate, and repetitive disclosures. These problems are magnified by the complex transactions and novel securities that dominate today's securities market.

As part of our ongoing commitment to give investors more understandable disclosure documents, we are proposing a rule for public comment that requires the use of plain English writing principles when drafting the front of prospectuses--the cover page, summary, and risk factor sections of these documents. The proposed rule would require public companies and mutual funds to write this information in everyday language that investors can understand on the first reading.

The efforts to date of the public companies participating in our plain English pilot programs support our belief that disclosure documents can be made more readable without sacrificing substantive business and financial information. Our proposed plain English rule, Rule 421(d), would specify six minimum plain English writing principles that public companies should use in drafting the front of prospectuses: Active voice, short sentences, everyday

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language, tabular presentation of complex material, no legal jargon, and no multiple negatives. This proposal would not reduce or eliminate any of the substantive disclosures public companies must give investors. The prospectus would continue to contain detailed business and financial information, which would be available to investors and others in the marketplace who use this information.

Recognizing that many of our rules have contributed to the legalistic language and tone of these documents, we also are proposing to eliminate highly formatted and overly technical information required on the cover page. The proposed rules move to the body of the document technical information that may be important to the offering process, but is not critical for the cover page. In addition, we are proposing other revisions to Rule 421, the rule on the preparation of prospectuses, to give companies guidance on how to improve the readability of the rest of the prospectus.

Because our plain English proposals will change customary drafting practices, we are continuing our plain English pilot programs to help companies draft clearer disclosure documents. The documents filed by pilot participants will provide other companies with examples of plain English documents. Also, the Office of Investor Education and Assistance today is issuing a draft of the text of A Plain English Handbook: How To Create Clear SEC Disclosure Documents to explain the plain English principles of our proposed rule and other techniques for producing clearer documents. The staff welcomes your views on the draft handbook and how it can be improved. Once the staff receives your comments, the handbook will be finalized and available to the public at no cost.

We have used a number of the plain English writing techniques in this release. For example, we have kept sentences and paragraphs short and avoided defined terms, cross-references, and other legalistic or formal writing conventions. We also have used the personal pronoun ''we'' when referring to the SEC and ''you'' when referring to public companies and mutual funds that would need to comply with our plain English proposals.

We encourage everyone involved in the public offering process-- public companies, lawyers, accountants, underwriters and investment bankers--to give us their comments on the proposed rules and other ways we can improve the language in disclosure documents. Most importantly, we would like investors, financial analysts, brokers, and other users of these disclosure documents to give us their views on our plain English proposals and ways to improve the readability of these documents.

II. Background

A. Prospectus Disclosure Problems

Giving investors full and fair disclosure is one of the cornerstones of investor protection under the federal securities laws. The legislative history of the Securities Act of 1933¹⁸ states that the purpose of disclosure ''is to secure for potential buyers the means of understanding the intricacies of the transaction into which they are invited.'' ¹⁹ The prospectus--the traditional offering document--must describe the company's business, management, and financial condition to enable investors to make informed investment decisions.

Investors often complain that prospectuses use arcane, complex, and incomprehensible language.²⁰ As a result, many investors may skim, rather than read, prospectuses.²¹ A recent study on the investment concerns of senior citizens concluded:

The notion that there is ''full disclosure'' to Americans about their investments is, by and large, a myth * * * [m]ost written disclosures are too long and too complicated to be of any practical use to someone other than a securities lawyer or expert investor.²²

The Task Force's report criticized prospectuses for their dense writing, legal boilerplate, and repetitive descriptions of the company's business. Noting that trivial points sometimes receive as much attention as material ones, the report found that dense disclosure can often bury the points that are most significant to making an informed investment decision. The report expressed concern that prospectuses are filled with legal jargon and over-inclusive disclosures.

These problems are not new. More than forty-five years ago, Professor Louis Loss identified prospectus readability as one of the basic problems with the registration process.²³ In 1969, the Wheat Report found that prospectuses included unnecessary information, and were often so long or complex that the average investor could not readily understand them.²⁴

Over the years, the SEC has attempted to address these problems. The SEC's concern about prospectuses for employee benefit plans prompted a 1966 release encouraging issuers to avoid complex legal and other technical language in the plan prospectus. Most plan prospectuses either repeated the full text of the legal document adopting the plan or summarized the legal document using the same legal language. In the release, the SEC recognized that the chief goal of registration is to provide investors with disclosures that they can readily understand, concluding that ''* * * failure to use language that is clear and understandable by the investor may operate to defeat the purpose of the prospectus.'' ²⁵

When the SEC adopted the integrated disclosure system in 1982, it encouraged issuers to deliver their more readable glossy annual reports to shareholders, rather than the legalistic annual report on Form 10-K. The SEC believed that the more readable annual reports would ''promote the goal of concise, effective communication in the Securities Act context.''²⁶

Also in 1982, the SEC codified, in Rule 421 of Regulation C, the requirement for clear, concise and understandable presentation of information in prospectuses.²⁷ This rule calls for descriptive captions or headings, and reasonably short paragraphs or sections. The rule also permits summaries of the information required in the prospectus, except for financial or tabular information.

Several of the existing disclosure items already require companies to use plain English tools--a table or chart--to improve clarity and increase the likelihood that investors can grasp the information. For example, disclosure of managements' compensation must be in

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tables.²⁸ Proxy statements must use a table showing the identity, background, and security holdings of nominees for the board of directors,²⁹ and the security ownership of management and significant owners of an issuer's equity securities.³⁰ Another provision encourages the use of tables, schedules, charts, and graphic illustrations to make financial information more understandable.³¹

In 1991, the U.S. Congress and others expressed serious concern about the complexity and length of limited partnership prospectuses, and particularly the documents used to roll up limited partnerships. In congressional hearings on the need for legislation to reform the roll- up process, former SEC chairman Richard Breeden addressed the problem of unreadable disclosure: ''I have taken a look at some of the documents filed with us in these roll-up transactions and I would like to meet the person who can understand all of the disclosures in some of these documents.'' ³²

To address these concerns, the SEC issued an interpretive release to advise issuers on the requirements for clear, concise, and understandable disclosure in limited partnership offerings.³³ Even with the interpretive release, our review staff in the Division of Corporation Finance continues to see documents that do not clearly explain the terms of these complex offerings.

Beginning in 1994, we renewed our efforts to promote more readable disclosure documents, which led us to explore alternatives. With the support and participation of various industry groups and public companies, we instituted pilot projects to encourage the use of plain English and to gain practical experience on how to fashion rule changes that would improve the disclosure to investors. We recognize that everyone involved in the process--issuers, accountants, lawyers, underwriters, investment bankers, and the SEC--has a role in creating more readable documents.

B. SEC Plain English Initiatives

We are committed to providing investors with better and more understandable disclosure documents. Our ultimate goal is to have all disclosure documents written in plain English, and we have undertaken several initiatives to improve the readability of these documents. With the cooperation of the Investment Company Institute and several large mutual fund groups, we recently organized a pilot program to permit mutual funds to use ''profiles'' with their prospectuses. ³⁴ The ''profile'' provides a standard format summary of eleven specific items of information so that investors can compare funds more easily. We are developing a proposed rule for public comment that would build on this experience.

In the spring of 1996, our Division of Corporation Finance began a plain English pilot program that encourages companies to draft their prospectuses and other disclosure documents more clearly. The Division, together with our Office of Investor Education and Assistance, offers advice on how to organize these documents, as well as examples of how to rewrite the legalese in plain English. To companies that undertake plain English disclosure, the Division offers expedited review of their documents. ³⁵ The reception to our plain English pilot program has been positive, and the pilot participants' documents are serving as examples of clearer disclosure. ³⁶

C. Arguments for Plain English

The plain English movement started in the early 1970s with the simplification of insurance contracts, and gained momentum when more than half the states enacted statutes requiring plain English insurance contracts. A number of state bar associations, starting with Michigan, established plain English committees. Federal agencies, such as the Federal Communications Commission, the Small Business Administration, and the Department of the Interior, redrafted some or all of their regulations, as well as legal documents such as subpoenas, in plain English. The movement is also active in Canada, England, and Australia.

Plain English has been implemented successfully in many areas. For example, after Citibank started using a plain English promissory note, the number of collection lawsuits dropped considerably because borrowers had a better understanding of their obligations.³⁷ One law review article on using plain English in contracts under the Uniform Commercial Code, concluded that ''. . . [p]reparing documents in plain English will decrease the number of good faith disputes over the meaning of the words of the agreement.'' ³⁸ Past experience with plain English suggests that its adoption in the securities area will increase investors' understanding of the business and financial condition of companies and lessen misunderstandings that lead to costly legal disputes. Clearer disclosure also should assist market professionals in making recommendations to clients and assist the courts in determining whether a company has made proper disclosure.

D. Criticisms of Plain English

When initially considering the change from a formal, legalistic writing style to plain English, the following reservations often are raised: (1) Legal language is more precise and is necessary to make complex material clear and accurate; and (2) federal securities law liability provisions particularly the strict liability provisions of section 11 of the Securities Act ³⁹ requires legal language. Neither case law nor the experience of

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plain English practitioners appear to support these arguments.

1. Plain English Is Imprecise and Unsuited for Complex Material

In using plain English, you are not forced to choose between clarity and precision. The disclosure obviously must be correct, but plain English often is more precise than the obscure and complex writing style that is prevalent in prospectuses. While legal terms like ''hereafter,'' ''hereinafter,'' and ''herein'' may give a legal flavor to writing, they do not add precision. ⁴⁰ Needlessly wordy documents can actually increase ambiguity and usually hide important facts. Ambiguities and omissions that go unnoticed in long and turgid documents become more obvious when these documents are written in plain English, and are more likely to be detected and corrected by those who review these documents for accuracy. ⁴¹

Unfortunately, some equate the term ''plain'' with ''simplistic.'' They fear their writing will be reduced to a simple style and restricted to a limited vocabulary ill-suited to conveying complex information. But plain English does not mean ''dumbing down'' complex information. It means writing it well so that it is not needlessly difficult to understand.

Some in the legal profession have used plain English techniques to clarify a number of complex legal procedures and statutes. The Judicial Conference Advisory Committee on the Federal Rules of Appellate Procedure has proposed revising these rules using elements of plain English. ⁴² While these rules are currently being circulated for public comment, initial reaction to the rewrites appears to be positive. Such efforts are not limited to the United States. In Australia, a task force is rewriting Australia's Corporation Law under a mandate to simplify it. ⁴³ Earlier, the Law Reform Commission of Victoria, Australia, redrafted Victoria's Takeover Code in plain English. ⁴⁴

2. Plain English Will Increase Liability

Stemming largely from the misconceptions addressed above, some practitioners expressed concern that the use of plain English will expose companies to greater liability under section 11. Liability should not increase. First, the rule proposals do not reduce the substantive information that must be given to an investor; plain English does not mean leaving out anything important or material. Second, we know of no case that has held anyone liable under Section 11 for clearly disclosing material information to investors. ⁴⁵ In all likelihood, liability should decrease with the use of plain English because it results in less confusing and ambiguous disclosure.

III. Elements of Plain English

Plain English simply means writing well.⁴⁶ Plain English, or plain language, has been described as follows:

There is no one absolute form of plain language. It does not consist only of one-syllable words and one-clause sentences. It is not simplified or reduced English. It is the opposite not of elaborate language but of obscure language, for it seeks to have the message understood on the first reading. The plainness of a passage is defined in terms of the audience for that passage. It is clear, straightforward language for that audience.⁴⁷

In summary, plain English requires you to:

Know your audience;

Know what material information needs to be disclosed;

Use clear writing techniques to communicate the information; and

Design and structure your document so it is easy and inviting to read.

A. Know Your Audience

Since the purpose of using plain English is to communicate substantive information clearly to investors and the marketplace, you must first identify the investor groups to whom you are writing.⁴⁸ The educational background and financial sophistication of your current or prospective investors should dictate the language you use.

If your company has a mix of sophisticated institutional investors and less experienced institutional and individual investors, you should write at a level that the less experienced investors would understand. While the language may change, the information will not. To serve an audience of various levels of sophistication such as securities analysts and others in the marketplace, some issuers present information in a format that makes it easy for investors to locate the basic information while providing additional detailed information for anyone who is interested.⁴⁹ Where an offering is directed at only the most sophisticated institutional investors, clear writing still is necessary for your audience to understand the disclosure and to serve the needs of the securities markets.

B. Know What Information Needs To Be Disclosed

You can only communicate clearly when you understand the substance precisely and accurately.⁵⁰ A failure common to disclosure documents is the tendency to indiscriminately combine material and immaterial information in dense and long sentences, in effect dumping large amounts of information on the reader. Disclosure documents typically fail to prioritize information and organize it logically so the reader can process it intelligently and quickly. All too often, details are disclosed before investors even know why they are receiving or reading a document. Plain English requires you to make judgments as to the importance of this information and the order in which you present it to investors.

A standard prospectus cover page--the cover page for an initial public offering, a merger, or a shelf offering--usually has dense print running to each of the four corners of the page. The sentences typically run 60 to 100 words long, with superfluous information and defined terms that interrupt the readers' attention. The name of the company, terms of the security, and underwriters' compensation are repeated two or three times. We believe that the cover page of the prospectus should invite the investor to read the document and should highlight key information about the offering. This information includes

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such items as the name of the company, the type of security, price and amount offered, and whom an investor should contact to purchase the security. The original cover pages and the plain English rewrites of the cover page of pilot participants documents in Appendix A give you examples of how to address this issue.

When a prospectus summary is included in the document, it frequently runs 10 to 30 pages. These so-called summaries often provide a long description of the company's business and its business strategy. Where the prospectus provides a description of the security, it is often copied from the indenture or other legal document that is filed as an exhibit to the registration statement.

The summary should not, and is not required to, contain all of the detailed information in the prospectus. As current Rule 421 states and as explained in the interpretive release on limited partnerships, the summary should provide investors with a clear, concise, and coherent ''snapshot'' description of the most significant aspects of the offering. The summary should be balanced, giving investors both the pluses and the minuses of investing in your company or participating in the proposed transaction.

C. Use Clear Writing Techniques To Communicate Information

Although it is impossible to give a precise formula for clear writing, using the following plain English principles will help you produce clearer and more readable disclosure documents. Our proposed rule would require you, at a minimum, to comply substantially with each of these plain English principles in drafting the front and back cover pages and the summary and risk factors sections of the prospectus:

Active voice;

Short sentences;

Definite, concrete, everyday language;

Tabular presentation and ''bullet lists'' for complex material whenever possible;

No legal jargon or highly technical business terms; and

No multiple negatives.

Success in clear writing is, of course, ultimately a question of how well all the elements are put together, and requires a good faith effort to achieve clarity. The draft plain English handbook offers numerous examples of how to use these and other plain English tools to write more clearly. We provide examples of these requirements only to illustrate the plain English principle. You should make sure that your disclosure reflects the facts of your particular situation.

1. Active Voice

The active voice generally is easier to understand than the passive because the reader can clearly identify the person or the thing performing the action. The passive voice delays readers' comprehension, and in some cases, allows the writer to delete who is performing the action altogether, further hindering comprehension. When the sentence is long and complicated, the passive voice forces the reader to go back and start at the beginning. The passive voice usually results in needlessly longer sentences. Consider the following examples:

Notice that in the proxy example, the passive legalese is ambiguous because it never states who can revoke a proxy. Also, when you use a vague cross-reference, you hinder your readers' ability to locate the information. The rewrite is clearer because it uses everyday language and provides the page number where investors can find out how to revoke their proxies.

2. Short Sentences

The plain English requirement for short sentences addresses one of the most critical language problems in disclosure documents. It is fairly common for sentences in prospectuses or other disclosure documents to be 60 to 100 words or more, with clauses and parenthetical phrases that increase their complexity. Needlessly complex sentences, which often mix substantive information with definitions and numerous qualifications, can overwhelm the reader. You should strive to have shorter sentences, typically 25 to 30 words. We believe that the rewrites in the following examples are shorter, clearer and less vague:

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3. Definite, Concrete, Everyday Language

Language that is vague or abstract begs for further explanation. It is not enough merely to translate information into clearer language. As the following example shows, you must reassess the disclosure to determine whether more information is needed to make it understandable. You should note that the rewrite reflects an analysis of all of the information in the prospectus.

In the rewrite, the reasons for the history of net losses replaces the general, vague language on the ''significant, non-cash accounting charges'' causing the loss.

4. Tabular Presentations

A tabular presentation organizes complex material in a manner that greatly facilitates investor comprehension. For example, an ''if-then'' table highlights for investors the events of defaults and their remedy under the indenture. An illustration follows:

After
Event of default (If)	Remedy (Then)
Interest payment 30 days late	Trustee or holders of at least 25% of these notes outstanding may notify the company in writing that the principal, premium, if any, and accrued interest are immediately due and payable; or Upon written request of the holders of at least 25% of these notes out-standing, the Trustee shall notify the company in writing that the principal, premium, if any, and accrued and unpaid interest are im-mediately due and payable.
Failure to pay principal or premium at maturity, acceleration, redemp-tion, or repurchase.	Same as above. nbsp;
Court ordered bankruptcy, insolvency, reorganization, liquidation, or similar action continuing for 60 consecutive days.	Neither the Trustee nor holders are required to act. The principal, accrued and unpaid interest will be immediately payable.

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5. No Legal Jargon or Highly Technical Business Terms

One of the persistent criticisms of the prospectus writing style is the use of legal jargon and legalese. Here are two examples from debt offerings replete with legalese:

When you use defined terms and excessive cross-references, practices common to legal drafting, you force the reader to learn a new vocabulary--your vocabulary. These writing conventions may be a short hand for the writer but they inhibit the reader's ability to understand the information.

6. No Multiple Negatives

Negative sentences and multiple negatives within a sentence hinder comprehension as the reader deciphers the meaning of the negatives. Ask yourself which sentences are clearer.

D. Design And Organize Your Document So It Is Easy and Inviting To Read

We believe the dense copy used in the typical prospectus coupled with its legal tone, discourages investors from reading the document. By importing into your disclosure documents the design concepts you already use in your annual reports to shareholders, you can make disclosure documents visually inviting and easier to read.

Experts believe, generally, that the eye can only comfortably scan 50-70 characters in a line without losing its place.⁵¹ It is thus difficult to read dense blocks of text that run across an entire page. A number of the plain English pilot participants solved the problem by using two columns. White space also relieves the eye and encourages the investor to read the document. The use of all capital letters, right- hand margins that are justified, and tissue-like paper can make the job of reading a document extremely hard.

If your prospectus includes a table of contents with descriptive captions, subcaptions, and page numbers, an investor will be able to locate information easily in the prospectus. Captions and descriptive headings throughout the document also cue the reader as to the subject matter.

Depending on the type of offering and the audience, a question-and- answer format can greatly increase the readability of your document. We have

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encouraged the use of the question-and-answer format for employee stock purchase plans.⁵² Several of the plain English pilot participants used a question and answer format to answer common questions raised by investors.

Although not part of our proposed rules, another effective tool for producing plain English documents is to use personal pronouns. Personal pronouns immediately engage your readers' attention. A familiar writing style where ''we'' or ''I'' refers to management or the company, and ''you'' refers to the investor, involves your reader and increases comprehension. If you avoid distant and abstract language like ''the company'' and ''a shareholder,'' your writing becomes clearer and more appealing because you are communicating directly with your reader.

Take, for example, a recent offering made by Berkshire Hathaway.⁵³ The cover page of the prospectus contains the following personal communication: ''Warren Buffet, as Berkshire's Chairman, and Charles Munger, as Berkshire's Vice Chairman, want you to know the following (and urge you to ignore anyone telling you that these statements are `boilerplate' or unimportant).''

This introduction is followed by clear warnings regarding the company's asset growth, share price, and the market for the securities offered. A similar personal approach, with the frequent use of the pronoun ''we'' to refer to the company, Warren Buffet, or Charles Munger, is used in Berkshire Hathaway's 1995 annual report to shareholders.

Several of the pilot participants used personal pronouns throughout their documents. Others employed a modified approach in which personal pronouns were used when referring to the company but a more formal designation like ''holder'' or ''noteholder'' was used when referring to the investor.⁵⁴

IV. Plain English Rule Proposals

The Task Force on Disclosure Simplification recommended developing a plain English introduction to the prospectus and, to enhance the prospectus's readability, eliminating boilerplate ''legalese,'' requiring a summary of key information, and enhancing the disclosure to include significant financial ratios and other information. The Task Force also recommended that the Commission issue a plain English interpretive release. Our proposals include most of the Task Force's specific recommendations for improving the readability of documents. This release serves as our interpretative advice on plain English. We have decided to defer action on the Task Force's recommendation to provide investors with disclosure on significant financial ratios. Further study is needed to determine the best format for providing important financial indicators to investors and the ratios that should be provided.

A. Proposed Plain English Rule 421(d)

While all prospectuses must be clear and understandable, our proposals would also require the front of the prospectus to meet the plain English requirements in proposed Rule 421(d). In addition, we are proposing to codify our interpretive advice, first given for limited partnership offerings, to give you more guidance on how to meet the requirements for clear, concise and understandable disclosure in prospectuses.

If adopted as proposed, Rule 421(d) would require you, when drafting the cover page, summary, and risk factors sections, to use the plain English principles, discussed above in the section, Elements of Plain English. You should design these sections of the document to make them inviting and easy to read. This design could take many forms, including the use of pictures, logos, charts, graphs, or other features, so long as the design is not misleading and the required information is clear. The examples from pilot participants' documents, included in Appendix A, and the staff's draft handbook give you guidance in this area. We will include on our Internet site examples of other plain English documents to help you draft more readable disclosure documents.

Our proposals for plain English cover pages, prospectus summary, and risk factors sections should improve greatly the readability of the entire document. We encourage you to use plain English techniques to draft the entire prospectus. We also encourage you to use these techniques for drafting your other disclosure documents.

We request your comments on all aspects of the proposed rule. Your comments should provide any factual support for your position. Please comment on whether you believe the proposed plain English requirements will achieve clearer disclosure and improve readability. We also request your comments as to whether compliance with the proposed rule changes will cause registrants to highlight key information for investors and eliminate redundant or uninformative information.

B. Clear, Concise and Understandable Prospectuses--Rule 421(b)

We are proposing the following expansion of Rule 421(b) to give you guidance on the minimum requirements to meet the current provision for clear, concise, and understandable disclosure in the prospectus and to identify drafting problems to avoid. These standards and common prospectus drafting problems were identified in our interpretive release on limited partnership offerings. In drafting the disclosure in the prospectus you should apply the following techniques:

Information must be presented in clear, concise paragraphs and sentences. If possible, information should be presented in short explanatory sentences and ''bullet'' lists;

Captions and subheading titles must describe specifically the information included in the section;

Terms that are not clear from the context generally should be defined in a glossary or other section of the document. Glossaries are recommended where they facilitate understanding of the disclosure. Frequent reliance on glossaries or defined terms as the primary means of explaining information in the body of the prospectus should be avoided; and

Legal and highly technical business terminology should be avoided.

Our proposals also include a Note to Rule 421(b) that lists drafting conventions that you should avoid in presenting prospectus information. The proposed Note to Rule 421(b) identifies the following problems in drafting prospectus disclosure:

Legalistic, overly complex presentations that make the substance of the disclosure difficult to understand;

Vague ''boilerplate'' explanations that are imprecise and readily subject to differing interpretations;

Complex information copied directly from legal documents without any clear and concise explanation of the provision(s); and

Disclosure repeated in different sections of the document that increases the size of the document, does not enhance the quality of the information, and does not enlighten the reader.

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Some have suggested that the undue length of many prospectus also makes them difficult to read. You are encouraged to use the current provision of Rule 421 which allows you to condense or summarize information in the prospectus, information other than the financial statements.

C. Proposed Revisions to Regulation S-K

1. Front of Registration Statement and Outside Front Cover Page of Prospectus

We propose to revise the requirements for the outside front cover page of the prospectus to eliminate the stylized format and require legal warnings in plain English. We believe that the legal language specified by the requirements is not informative to investors. More importantly, we believe the dense format of the cover page discourages investors from reading the important business and financial disclosures in the prospectus.

Substantially the same changes are being proposed to the requirements for small business issuers, except Regulation A offerings. In 1992, we adopted major revisions to the Regulation A offering process for companies not subject to our reporting requirements. Because few Regulation A offerings were made last year, we are not proposing changes to the disclosure requirements for these offerings. We request your comments, however, on whether the legal legends required in these offerings should be changed to conform to our proposals to draft these legends in plain English.⁵⁵ The table below shows the current requirements of Regulation S-K and our proposed changes.⁵⁶

Our proposals would require you to format the outside front cover page in a design that invites an investor to read the information. The proposals would allow you to use pictures, graphs, charts, and other designs that accurately depict your company, its business, products, or financial condition, so long as the information is not misleading. The proposals would eliminate the current requirements for cover page cross-references, including the cross-reference to risk factors. A cross-reference may unnecessarily clutter the cover page and duplicate the information in the table of contents. We believe that our proposed requirement for risk factors in plain English will improve the disclosure to investors, making the cross-reference unnecessary. We propose to retain the cross-reference to risk factors on the cover page for small business issuers since often these companies present greater risks because of their limited operations and financial condition.

Your comments are requested, however, as to whether the existing requirements should be retained, and if so, which ones. We also request that you indicate other information or design elements for the cover page that would provide clearer, more readable disclosure. We ask you to give us your comments on whether the proposed disclosure requirements are sufficiently flexible to permit you to meet the plain English requirements. Your comments are requested on whether the cross- reference to risk factors should be retained for all offerings or whether the plain English requirements make it unnecessary for any offering, including small business issuer offerings.

The legal warnings required by our regulations would be in plain English.⁵⁷ Because the current requirement for printing the legend in all capital letters makes the information difficult to read, no print type or size is proposed. We offer one example of a plain English legend, however, you are encouraged to draft your own plain English version, so long as the content is retained. One example of the current legend rewritten in plain English is as follows:

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Our proposals would require the legend indicating an incomplete prospectus, commonly called the ''red herring'' legend, to be in any plain English format. One example of the current legend in plain English would read as follows:

Although no requirement currently exists to disclose the name of the underwriter and the type of offering, this information is usually provided on the cover page. Our proposal would specifically provide for this information in plain English on the cover page.

We have not proposed any specific print size or font type for the plain English portion of the prospectus. Our proposals allow you the flexibility to use a print type and font size that enhances your document design so long as the information is easily readable. We request your comments as to whether we should require or prohibit any specific print type or font size and the reason for your position.

Your comments should address specifically the proposed revisions to the legends and suggest alternative plain English legends. Your comments should address whether the plain English legends adequately inform investors, and whether the proposed cover page information should be mandated, or whether other information should be permitted and, if so, what information. For example, should information on the cover page be limited to the name of the company and the securities offered, with the other information disclosed in the summary section of the document?

In addition, we request public comment on whether specific information should be required for the cover pages of merger proxy statements, registered exchange offers, or other offerings. Please provide examples of the types of information that should be required. We specifically request your comments on whether the limited partnership roll-up transactions should be subject to these plain English proposals or should different standards apply to these transactions and, if so, what standard should apply. For example, the current roll-up disclosure provisions ⁵⁸ provide for a detailed discussion of risks of the offering, while the proposals made today would require risk factors to be brief. Also, risk factors are required on the cover page, summary section and risk factors section in limited partnership roll-up prospectuses.⁵⁹ Our proposals would require the risks to be described in plain English only in the risk factor section.

2. Inside Front and Outside Back Cover Pages of Prospectus

Currently, information of a highly technical nature is required on either the inside front or outside back cover page of the prospectus.⁶⁰ Except for the availability of Exchange Act reports,⁶¹ the table of contents, and the legend concerning the dealer's prospectus delivery obligation, we propose to move this technical information to the body of the prospectus, as shown in the following table.

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Much of the currently required information is highly technical and drafted in legal language that often confuses rather than informs investors. We believe that placing this information in the front of the prospectus overshadows the essential business and financial information fundamental to an investment decision. Because the disclosure will be elsewhere in the prospectus, the information provided investors will be the same. Moving this information to the body of the prospectus will give you the freedom to design an inviting cover page which highlights key information for investors.

We believe the current information on the underwriter's stabilization activities, passive market making activities, and the dealer's obligations to deliver prospectuses is key information on the orderly distribution of the offering. But this information is not essential for the front of the document. We propose relocating the stabilization information to the underwriting section of the prospectus.⁶² Information on passive market making activities currently is required both in the underwriting section of the prospectus and as a legal legend on either the inside front or outside back cover page. Duplication of this information on the cover page is unnecessary and we propose to delete it from the cover page but retain the information in the underwriting section.

We also propose to retain the requirement to disclose the dealer's prospectus delivery obligations on the back cover page of the prospectus. This will help dealers meet their obligations to deliver a prospectus in connection with the distribution of the securities. However, we request your views as to whether this information is necessary and, if so, whether we should require that this notice to dealers be disclosed elsewhere in the document, like the inside front cover page.

You have an obligation to send to security holders, upon request and at no charge, the Exchange Act reports incorporated by reference in short-form registration statements. We currently require you to disclose this obligation on the inside front cover page or elsewhere, as appropriate. We propose to relocate this information to the section of the short form registration statements detailing what information you must incorporate by reference.

We propose to move the disclosure regarding the availability of Exchange Act reports to the back cover page of the prospectus. Alternatively, it could be included as part of the disclosure incorporating Exchange Act reports by reference into short form registration statements. Moving the information to the back cover page would provide you the flexibility to design the front of the document in a clear manner. Requiring this information to be provided where the Exchange Act reports are incorporated by reference would eliminate duplication in short form registration statements.⁶³

Because we now have an 800 number that gives information on how to obtain the reports filed with us and because copies of these reports are now available on the Internet, the proposed revisions would delete the requirement that our headquarters and regional office addresses be given. For this reason, we are also proposing to delete the requirement to disclose the availability of these reports at the exchange where the issuers' securities are listed. Of course, you must continue to send copies of your Exchange Act reports to the exchange where your securities are listed.⁶⁴ We request your comments on whether the information should be required elsewhere in the document, or whether the requirements should give companies greater flexibility to place the information where it is highlighted best for investors, given the design of the document. If your Exchange Act reports are on your Internet site, our rule proposals encourage you to give the web site address in your documents.

One example of a plain English rewrite of this disclosure follows:

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Our proposals would move to the body of the prospectus the information on the availability of audited financial statements, where the company is a foreign private issuer or is not subject to our proxy rules. As proposed, we would require the information to appear, under a descriptive heading, as part of the business description. ⁶⁵ We believe that relocating this information in the business section of the prospectus would inform investors of the continued availability and type of financial information your company will provide.

Currently, you may provide information as to the enforceability of civil liabilities against foreign persons on the inside front cover page or in the front of the prospectus. We propose to move this information to the business description section of the prospectus.⁶⁶ The staff's experience is that this information is often provided as a generic risk factor. If enforceability of civil liabilities presents a material risk to an investor given the company and its operations, our proposal for plain English prioritized risk factors would require risk disclosure. Your comments should address whether, given our global markets, the information now is sufficiently routine to make this disclosure more appropriate in the business description and required as a risk factor only when it is a material risk relating to an investment in the company. If you believe the information should be disclosed in another section of the prospectus, please give us the reason(s) for your position.

As currently permitted, the table of contents often appears on the back cover page. We question whether a reader goes to the back of the document first to locate a guide to the document, so our proposals would require this information to be on the inside front cover or immediately behind the cover page. We request your comments on whether the information flow of the document should permit you the flexibility to place the table of contents where you believe it best serves as a guide to the document, and the reasons for your position. 3. Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges ⁶⁷

Currently, you are required to include a summary of the information contained in the prospectus where the length or complexity of the prospectus makes a summary appropriate. The existing requirements also specify that a risk factor section be provided, where appropriate, and that this section immediately follow either the summary section or the cover page. In addition, information is required as to the ratio of earnings to fixed charges.

a. Summary

Our proposals would require a prospectus summary in plain English. To address the problem where the summary is ten to twenty-five pages long, we have revised the current provision to require that the summary section be brief. The current requirement continues to be a general provision giving you the flexibility to draft a meaningful summary appropriate to the type of offering.

We request your comment as to whether the summary should be further limited to a specific number of pages. For example, should the summary be no more than three, four, or five pages? We also request your comments as to whether we should require specific information in this section, such as condensed financial information and a summary of management's discussion and analysis. Please indicate any specific information you believe should be in the summary.

A recent review by the staff of a number of the short form registration statements indicates that these offerings often include a summary or similar section describing the company's business and operations. This discussion contains a lengthy discussion of the company's business, risk factors, and summarized financial information. The information is not specifically required, but apparently is considered important to the selling effort. If you elect to include this information, the disclosure would be subject to the same plain English disclosure requirements as we propose for the front of the document. Please give us your comments on whether short registration forms should have a summary and, if so, which offerings, and the reasons for your position. We also request your comments as to whether a summary section should be required for all prospectuses, given the current complexity of these documents.

b. Risk Factors

Our proposals would require the risk factors to be in plain English and be listed in order of their importance. As is currently the case, the discussion would immediately follow the summary, if one is provided, or the cover page of the prospectus. Often the risk factor disclosure in a prospectus is boilerplate, listing risks that could apply to any offering or that are not likely to occur. Because boilerplate risks do not provide meaningful information to investors, we believe they should not be used and our proposals specifically prohibit them.

For example, if your company is making an initial public offering of common stock and the securities will be listed and traded on a national securities exchange, it is not helpful to investors to provide a statement that management can give no assurance that an active market will develop in the company's securities. If, given these facts, you believe that a market will develop for the securities, then the risk factor is not helpful to an investor. On the other hand, if, given these facts, you believe that a market reasonably may not develop, additional information would be necessary as to why a trading market may not develop.

We are concerned, however, that plain English alone will not address the problem of listing many risk factors that are so general that they are not meaningful and add to the length of the document making the document difficult to read. We request your comments on whether we should require disclosure of a specific number of risk factors, such as eight, or alternatively limit the risk factor discussion to no more than two pages.

Your comments specifically are requested as to whether there should be any limit on the number of prioritized risk factors or the number of pages, or whether the limit should be higher or lower than eight risk factors or the two pages. For instance, should there be no more than four risk factors discussed in this section, divided equally between company and offering risks, or should the number of permitted risk factors be increased to 10 or 12 with no allocation as to the nature of the risk? Should there be a page limit and should the limit be no more than two pages, three pages, four pages or higher?

c. Ratio of Earnings to Fixed Charges

When you issue debt or a class of preferred equity, you are required to disclose a ratio of earnings to fixed charges. Since this information usually is included in the prospectus with selected financial data, we propose to move the requirement to that section.⁶⁸ Where a prospectus summary is included, we propose that the ratio of earnings to fixed charges be shown as part of the summarized financial data, as is currently the practice.

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D. Proposed Rules for Investment Companies

Current disclosure standards direct investment companies to provide clear, concise, and understandable disclosure in prospectuses.⁶⁹ We are concerned, however, that fund prospectuses are overly complex and difficult to follow. We have commenced significant disclosure initiatives to improve the information provided to fund investors, including consideration of a summary disclosure document or ''profile'' for funds and updating prospectus disclosure requirements. We expect to announce proposals that would implement these initiatives in the near future.

The plain English disclosure proposals complement these disclosure initiatives. The proposed changes to Rule 421 would apply to funds.⁷⁰ The proposed revisions in Regulation S-K intended to improve the clarity of disclosure in prospectuses of corporate issuers would not apply to funds, although similar legal legends and other requirements are included in specific rules for investment companies.⁷¹ We plan to consider conforming changes to the rules for fund prospectuses in connection with the disclosure initiatives for investment companies. We request your comments on whether the proposed changes to Rule 421 should be modified for fund prospectuses.

The phase-in of plain English requirements proposed for corporate issuers discussed below may need to be modified for investment companies since they are engaged in continuous offerings of securities. We also request comment on special requirements that may be necessary to allow for the orderly phase-in of the proposed plain English requirements for investment companies.

V. Staff Review

A. Plain English Pilot Program

The Division of Corporation Finance has established a pilot program to work with public companies on drafting plain English documents filed under either the Securities Act or the Exchange Act. We also expedite the review of these filings. The staff's comments, in plain English, will be consistent with these plain English proposals. The staff has issued five interpretive letters under the plain English pilot program. The staff granted interpretive relief from compliance with the legend requirements in the front of the prospectus, the distribution table showing the price, underwriters' commissions and proceeds of the offering, and the disclosure regarding the availability of Exchange Act reports.⁷² The staff also stated its view that identification of a company's web site and the statement ''[o]ur SEC filings are also available to the public from our web site'' will not, by itself, include or incorporate by reference any information into the registration statement that is included or hot linked to the issuer's regular web site that is not otherwise incorporated by reference into the registration statement.⁷³ Because the staff's interpretive position on these matters is now well established, other pilot participants may rely on these positions and do not need to submit a specific written request.

B. Denial of Request for Acceleration

Currently, we consider a number of factors in determining whether the statutory requirements for acceleration of registration statements for public offerings, including mutual fund offerings, have been met, and may refuse to accelerate the effective date in appropriate circumstances. Among the factors that we consider is the clarity of the disclosure. We may refuse to accelerate a registration statement:

Where there has not been a bona fide effort to make the prospectus reasonably concise and readable, so as to facilitate an understanding of the information required or permitted to be contained in the prospectus.'' ⁷⁴

Our proposals amend this provision to reflect the proposed requirement for plain English. To effectively implement plain English we are committed to administering this rule in a manner that achieves its goal of readable documents. If your document, when filed, indicates a good faith effort to meet the requirement, our staff will work with you, in the review and comment process, to meet any plain English requirements adopted and your financing schedule. We request your views as to other actions that we should take to make the prospectus clearer to investors and implement the plain English requirements.

C. Phase-In of Plain English Requirements

To make sure that our plain English proposals do not interfere with your need to access the capital markets on a timely basis, any plain English rule that is finally adopted would be phased in as follows:

Registration statements pending on the effective date of the rule would not need to be revised to meet the plain English requirements;

An updating amendment to a registration statement filed to meet section 10(a)(3) of the Securities Act ⁷⁵ would be required to comply with the rule in effect at the time of filing;

Any shelf registration statement affected by the plain English rule would be required to comply with the requirement at the time a new shelf registration statement is filed, but no later than December 31, 1998.

All filings would be required to comply with the rule no later than December 31, 1998.

Please give us your comments on whether this schedule provides you the necessary flexibility to meet the proposed revisions, if adopted.

VI. Request for Comments

We request your comments on whether plain English should be mandated or only recommended, and whether there are other alternatives that will provide for a more reader-friendly and understandable disclosure document. Your comments are also requested on whether or not plain English should be required for the entire prospectus and not just the cover page, prospectus summary, and risk factors section. Please furnish the specific reasons for your position. We request your comment on whether additional plan English techniques should be required and, if so, which ones. If you have concerns that plain English will increase liability we request information on the substantive basis for your

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concern and, if available, the factual data in support of your position.

We specifically request that investors provide comments on the proposals.

VII. Cost-Benefit Analysis

Our plain English proposals streamline existing requirements and require a clear writing style and format. We believe the proposals, if adopted, would result in little additional costs as issuers implement the organizational, language, and document structure changes necessary to comply with these proposals. Additional cost, if any, should be short-term and would be outweighed by the significant improvement in disclosure to investors. In addition, a number of the proposals simplify the cover page format, which should result in some printing and other cost savings in preparing prospectuses.

We request your comment on whether the proposed rules would be ''major rules'' for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. We have tentatively concluded that the proposed rules would not result in a major increase in costs or prices for consumers or individual industries or significant adverse effects on competition, employment, investment, productivity, innovation, or small business. We request comments on whether the proposed rules are likely to have a $100 million or greater annual effect on the economy. Your comments should provide empirical data to support your views.

As an aid in evaluating the cost and benefits of the proposals, we request your comments and those of others involved in the registration process on this cost/benefit analysis. Please provide empirical data in support of your position to assist us in determining the cost and benefits of the proposals. We specifically request individual investors to provide us their views on the cost and benefits of the proposals.

VIII. Summary of the Initial Regulatory Flexibility Analysis

We have prepared an initial regulatory flexibility analysis, IRFA, in accordance with 5 U.S.C. 603 concerning the proposed rules. As discussed more fully in the IRFA, the proposed rules would codify our interpretive advice, eliminate requirements that are no longer useful, and require plain English to be used to simplify the language used in the front of the documents. The rule amendments are proposed under sections 6, 7, 8, 10, and 19(A) of the Securities Act, and sections 3, 12, 13, 14, 14(d), 23(a), and 35A of the Exchange Act.

As the IRFA describes, we are aware of approximately 1100 Exchange Act reporting companies and approximately 800 active registered investment companies that currently satisfy the definition of ''small businesses'' under Rule 157 of the Securities Act. However, there is no reliable way to determine how many businesses may become subject to reporting obligations in the future or may otherwise be impacted by the rule proposals. The proposed rules do not affect the substance of disclosures registrants must make. The proposals do not impose any new recordkeeping requirements or require reporting of additional information. Thus, we believe that the proposals will not increase reporting, recordkeeping, or compliance burdens, and in some cases may slightly reduce those burdens for small businesses. Our view is also based on the experience of participants in the plain English pilot program. Pilot participants reported that the time required to understand the reporting requirements and prepare disclosures was the same, and in some cases a little less, than under existing rules. Although none of the program participants is a ''small business'' as defined by our rules, we believe the proposals will affect all registrants in the same way.

As discussed more fully in the IRFA, several possible significant alternatives to the proposals were considered. These included establishing different compliance or reporting requirements for small entities, or exempting them from all or part of the proposed requirements. We believe that such alternatives are not appropriate for the following reasons: (i) They would be inconsistent with our mandate to require prospectuses to fully and fairly disclose all material information to investors; (ii) they would negate the important benefits of the proposals; and (iii) they would not reduce small issuers' compliance costs. The IRFA also indicates that there are no current federal rules that duplicate, overlap, or conflict with the proposed rules.

We encourage written comments on any aspect of the IRFA. In particular, we seek comment on: (i) The number of small entities that would be affected by the proposed rules; and (ii) the determination that the proposed rules would not increase, and in some cases might slightly reduce, reporting, recordkeeping, and other compliance requirements for small entities. If you believe the proposals will significantly impact a substantial number of small entities please describe the nature of the impact and estimate the extent of the impact. For purposes of making determinations required by the Small Business Regulatory Enforcement Act of 1966, we are also requesting data regarding the potential impact of the proposed rules on the economy on an annual basis. Your comments will be considered in the preparation of the Final Regulatory Flexibility Analysis if the proposed amendments are adopted. A copy of the analysis may be obtained by contacting Ann D. Wallace, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

IX. Paperwork Reduction Act

The proposed amendments would affect several regulations and forms ⁷⁶ that contain ''collection of information requirements'' within the meaning of the Paperwork Reduction Act of 1995.⁷⁷ In order to obtain Office of Management and Budget approval, we previously submitted estimates to that Office of the time and cost burdens imposed on public companies by each regulation and form. Each of the regulations and forms currently is approved by that Office and displays a Paperwork Reduction Act control number.

We believe that the proposed amendments would not result in a substantive or material change to the collection of information requirements based on our experience with the plain English pilot programs. Pilot participants have indicated that they do not believe that drafting plain English documents has increased their time or cost burdens. In addition, the proposed rules do not affect the substance of the disclosure required. We anticipate that the proposals would not materially change the annual burden reporting and burden hours, because the proposals provide guidance on meeting existing disclosure obligations and simplify the format of the disclosure provided to investors.

We solicit comment on our determination that the proposals would not result in a substantive or material change to the collection of information requirement and burdens. If you believe the proposals will affect materially the annual burden, you are asked to provide

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an estimate of the change in the burden and the basis for your position.

X. Statutory Authority

The rule amendments outlined above are proposed pursuant to Sections 6, 7, 8, 10 and 19(a) of the Securities Act and Sections 8, 30, 31 and 38 of the Investment Company Act of 1940.

List of Subjects in 17 CFR Parts 228, 229, 230 and 239

Reporting and recordkeeping requirements, Securities and Investment companies.

XI. Text of the Proposals

In accordance with the foregoing, Title 17, Chapter 11 of the Code of Federal Regulations is proposed to be amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

1. The authority citation for part 228 continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b- 11, unless otherwise noted.

2. By amending Sec. 228.101 to add paragraphs (c) and (d) to read as follows:

Sec. 228.101 (Item 101) Description of business.

* * * * *

(c) Reports to security holders. If the small business issuer is not required to deliver an annual report to security holders, indicate whether it will voluntarily send an annual report and whether the report will include audited financial statements.

(d) Canadian Issuers. Canadian issuers shall provide the information required by Item 101(f) of Regulation S-K (Sec. 228.101(f)) (Enforceability of Civil Liabilities Against Foreign Persons).

3. Section 228.501 is amended by adding an introductory text, revising paragraphs (a)(4), (a)(5), (a)(7) and (a)(8) and removing paragraph (a)(11) to read as follows:

Sec. 228.501 (Item 501) Front of registration statement and outside front cover of prospectus.

The following information must be provided in plain English as required by Sec. 230.421(d) of Regulation C of this chapter.

(a) * * *

(4) Cross reference to and identify the location in the prospectus (e.g., by page number or other specific location) of the risk factors section of the prospectus. The information should be highlighted by prominent type or otherwise.

(5) The small business issuer must provide disclosure that informs investors that the Securities and Exchange Commission has not approved the securities or passed on the adequacy of the disclosures in the prospectus and that any representation to the contrary is a criminal offense. The disclosure may be in one of the following formats or other clear and concise language.

Example A: The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of the prospectus. Any representation to the contrary is a criminal offense.

Example B: The Securities and Exchange Commission (''SEC'') has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

(6) * * *

(7) If the securities are to be offered for cash, the small business issuer should set forth the price to the public, and the cash underwriting discounts and commissions. The information may be set forth in a table, term sheet format or other clear presentation. The small business issuer may present the information in any format that fits the design of the cover page so long as the information can be easily read and is not misleading. The information must be shown on a per unit and aggregate basis. If the offering is made on a minimum/ maximum basis, information on the aggregate minimum/maximum must be shown. For best efforts or best efforts minimum/maximum offerings the cover page should disclose the date the offering will end and the provisions to place the funds in an escrow, trust, or similar account. Note that Item 508(a) requires all compensation and expenses of the underwriters to be disclosed in that section.

(8) A prospectus used before the effective date of the registration statement must include a prominent statement that indicates that:

(i) The information in the prospectus will be amended or completed;

(ii) The securities may not be sold until the registration statement becomes effective; and

(iii) The prospectus is not an offer to sell nor is it seeking an offer to buy the securities in any State where the offering is not permitted. The legend may be in the following language or other clear, and understandable language:

The information in this prospectus is not complete. We may not sell these securities until the registration statement filed with the SEC is effective. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any state where the offer or sale is not permitted.

(iv) Comparable information must be provided if the prospectus is used before the determination of the initial public offering price in the case of a prospectus that omits this information as permitted by Sec. 230.430A of this chapter. * * * * *

4. Section 228.502 is revised to read as follows:

Sec. 228.502 (Item 502) Inside front and outside back cover page of prospectus.

A small business issuer must disclose the following information in plain English as required by Sec. 230.421(d) of Regulation C of this chapter.

(a) Information available to security holders. (1) On the inside front or outside back cover page of the prospectus, the small business issuer must state whether it is a reporting company; and

(2) The small business issuer shall describe the nature and frequency of the reports and other information the issuer is required to file with the Securities and Exchange Commission (SEC) that are available to investors. The small business issuer shall indicate that the documents can be reviewed and copied at the Commission's Public Reference Room in Washington, DC. 20549. In addition, if the small business issuer is an electronic filer, the disclosure shall indicate that the reports may be viewed on the SEC's Internet site (http:// www.sec.gov) or that copies may be obtained, upon payment of a duplicating fee, by writing to the SEC's Public Reference Section. The small business issuer should indicate that information on the operation of the public reference room may be obtained by calling the SEC at 1- 800-SEC-0330. Small business issuers are encouraged to give their Internet site address, if one is available.

(3) The small business issuer shall state the name of any national securities exchange on which its securities are listed.

(b) Address and telephone number. The small business issuer must include on the inside front cover page, or in the summary of the prospectus, the complete mailing address and telephone number of the small business issuer's principal executive offices.

(c) Dealer Prospectus Delivery Obligations. The small business issuer must set forth information on the outside back cover page of the prospectus which advises dealers conducting transactions in the securities, whether or not they are participating in the distribution, that

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they may be required to deliver a prospectus. The disclosure should specify the time period during which dealers must deliver a prospectus as specified in section 4(3) of the Securities Act and Sec. 230.174 of this chapter. The following legend may be used or any other format that includes the required content and is clear and concise;

Until (insert date) all dealers that buy, sell or trade these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

(d) Table of Contents. On the inside front cover page of the prospectus, or immediately following the cover page, the small business issuer should provide a reasonably detailed table of contents showing the location in the prospectus, including page number, if practicable, of the subject matter of the various sections or subdivisions of the prospectus, including the risk factors section required by Item 503 of Regulation S-B.

(e) Financial Data Graphs. Registrants are encouraged to use tables, schedules, charts and graphic illustrations of the results of operations, balance sheet, or other financial data that presents the data in an understandable manner. Any presentation must be consistent with the financial statements and related non-financial information. The graphs and charts must be drawn to scale and the information provided must not be misleading.

5. By revising Sec. 228.503 to read as follows:

Sec. 228.503 (Item 503) Summary information and risk factors.

The following information must be furnished in plain English as required by Sec. 230.421(d) of Regulation C of this chapter.

(a) Summary. Provide a summary of the information contained in the prospectus where the length and complexity of the prospectus make a summary useful. The summary should be brief. The summary should not and is not required to contain all of the detailed information in the prospectus.

(b)(1) Risk factors. Discuss under the caption ''Risk Factors'' any factors that make the offering speculative or risky. The risk factor disclosure should highlight critical factors that the investor must consider in making an investment decision. Generic and boilerplate risks that could apply to any issuer or any offering should not be provided. The risk factors must be discussed in the order of their importance. The factors may include, among other things, the following:

(i) The small business issuer's lack of recent profits from operations;

(ii) The small business issuer's poor financial position;

(iii) The small business issuer's business or proposed business; or

(iv) The lack of a market for the small business issuer's common equity securities.

(2) The risk factor discussion should immediately follow the summary section. If no summary section is necessary, the risk factor discussion should immediately follow the cover page of the prospectus or, if included, a pricing information section that immediately follows the cover page.

Instruction to Item 503(b)(2)

''Pricing information'' as used in paragraph (b) of this section shall mean price and price-related information of the type that may be omitted from the prospectus in an effective registration statement in reliance on Sec. 230.430A(a) of this chapter and information disclosed in a prospectus but is subject to change as a result of pricing.

6. Section 228.508 is amended to add a sentence to the end of paragraph (a) and paragraph (j) to read as follows:

Sec. 228.508 (Item 508) Plan of distribution.

* * * * *

(a) Underwriters and underwriting obligations. * * * Disclose in a table all underwriting compensation including the other expenses of the offering specified in Item 511 of this Regulation S-B. * * * * *

(j) Stabilization and other transactions. The small business issuer must provide disclosure which briefly describes any transaction that the underwriters intend to conduct during the offering that stabilizes, maintains or otherwise affects the market price of the offered securities. Disclosure should be provided to indicate, if true, that the underwriters may discontinue these transactions at any time and indicate the exchange or other market on which these transactions may occur.

(1) If the stabilizing begins before the effective date of the registration statement, the small business issuer must state the amount of securities bought, the prices at which they were bought and the period within which they were bought. If Sec. 230.430A of this chapter is used, the final prospectus must include information on the stabilizing transactions before the public offering price was set.

(2) In connection with warrant or rights offerings to existing security holders, where securities not purchased by security holders are reoffered to the public, give the following information in the reoffer prospectus:

(i) The amount of securities bought in stabilization activities during the rights offering period and the price or range of prices at which the securities were bought;

(ii) The amount of the securities subscribed for during the rights offering period;

(iii) The amount of the securities purchased by the underwriter during the rights offering period; and

(iv) The amount of the securities reoffered to the public and the offering price.

Instruction to Paragraph (j)

The disclosure should include information on stabilizing transactions, syndicate short covering transactions, penalty bids or any other transaction that affects the offered security's price. The nature of the transactions should be described in a clear understandable manner.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975--REGULATION S-K

7. The authority citation for part 229 continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted. * * * * *

8. By amending Sec. 229.101 to add paragraphs (e) and (f) before ''Instructions to Item 101'' to read as follows:

Sec. 229.101 (Item 101) Description of business.

* * * * *

(e) Reports to security holders. Where a registrant is not required to deliver an annual report to security holders (or holders of American Depositary Receipts) by Section 14 of the Exchange Act (15 U.S.C. 78n) or stock exchange requirements, describe briefly the nature and frequency of reports that will be given to security holders. Specify whether or not such reports will contain financial information that has been examined and reported upon, with an opinion expressed by, any independent public or certified public accountant. In the case of the reports of a foreign private issuer, state whether the report will contain financial information prepared in accordance with United States generally accepted accounting

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principles, or whether the report will include a reconciliation of such information with such accounting principles.

(f) Enforceability of civil liabilities against foreign persons. (1) A foreign private issuer shall provide disclosure which informs an investor as to whether actions may be brought under the civil liabilities provisions of the Federal securities laws against the registrant, its officers and directors, the underwriters or experts located in or residents of a foreign country or whose assets are located outside the United States. The disclosure shall address the following matters:

(i) The investor's ability to effect service of process within the United States on the foreign private issuer or any person;

(ii) The investor's ability to enforce judgments obtained in United States courts against the persons based upon the civil liability provisions of the Federal securities laws;

(iii) The investor's ability to enforc