Release No. 33-8591

Release No. 34-52056

Release No. IC-26993

Financial Reporting Rel. No. 75

International Series Rel. No. 1294

70 Fed. Reg. _____ - ____

Table of Contents

Securities Offering Reform

IV. Liability Issues

A. Information Conveyed by the Time of Sale for Purposes of Section 12(a)(2) and Section 17(a)(2) Liability

1. Interpretation and Rule

Under the Securities Act, purchasers of an issuer’s securities in a registered offering have private rights of action for materially deficient disclosure in registration statements under Section 11 and in prospectuses and oral communications under Section 12(a)(2). Section 11 liability exists for untrue statements of material facts or omissions of material facts required to be included in a registration statement or necessary to make the statements in the registration statement not misleading at the time the registration statement became effective. Under Section 12(a)(2), sellers have liability to purchasers for offers or sales by means of a prospectus or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading.³⁸⁹ Securities Act Section 17(a) is a general anti-fraud provision which provides, among other things, that it shall be unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.³⁹⁰

The term “sale” under the Securities Act includes any contract of sale.³⁹¹ As we discussed in the Proposing Release, we believe that we should address the discrepancies in time between the time of the contract of sale for securities (when an investor becomes committed to purchase the securities) on the one hand, and the later time of availability of a prospectus (and perhaps other information) on the other hand. The Securities Act registration regime permits final prospectuses to become available after an investor becomes committed to purchase a security.³⁹² This availability, therefore, does not necessarily address the receipt by an investor of information at the time of its contractual commitment.

We provided an interpretation of Section 12(a)(2) and Section 17(a)(2) in our Proposing Release and we are reaffirming that interpretation. Securities Act Section 12(a)(2) and Section 17(a)(2) do not require that oral statements or the prospectus or other communications contain all information called for under our line-item disclosure rules or otherwise contain all material information.³⁹³ Rather, under these provisions, the determination of liability is based on whether the communication includes a material misstatement or fails to include material information that is necessary to make the communication, under the circumstances in which it is made, not misleading. Under our interpretation, the time at which an investor has taken the action the investor must take to become committed to purchase the securities, and has therefore entered into a contract of sale, is one appropriate time³⁹⁴ to apply the liability standards of Section 12(a)(2) and Section 17(a)(2).³⁹⁵

We interpret Section 12(a)(2) and Section 17(a)(2) as meaning that, for purposes of assessing whether at the time of sale (including a contract of sale) a prospectus or oral communication or statement includes or represents a material misstatement or omits to state a material fact necessary in order to make the prospectus, oral communication, or statement, in light of the circumstances under which it was made, not misleading, information conveyed to the investor only after the time of sale (including a contract of sale) should not be taken into account.³⁹⁶ For purposes of Section 12(a)(2) and Section 17(a)(2), whether or not information has been conveyed to an investor at or prior to the time of the contract of sale currently is a facts and circumstances determination, and our actions today do not affect that determination. Such information could include information in the issuer's registration statement and prospectuses for the offering in question, the issuer's Exchange Act reports incorporated by reference therein or information otherwise disseminated by means reasonably designed to convey such information to investors. Such information also could include information directly communicated to investors (including, under the rules we are adopting today, through the use of free writing prospectuses).³⁹⁷

As noted above, liability under Section 12(a)(2) attaches to an oral communication or prospectus by means of which an offer or sale is made that contains a material misstatement or omits to state a material fact necessary to make the statements, in light of the circumstances in which they were made, not misleading. Liability under Section 17(a)(2) attaches to an untrue statement of a material fact or an omission to state a material fact necessary to make the statements made, in light of the circumstances in which they were made, not misleading, by means of which money or property is obtained.

Under our interpretation, the liability determination under Section 12(a)(2) or Section 17(a)(2) as to an oral communication, prospectus, or statement, as the case may be, does not take into account information conveyed to a purchaser only after the time of sale (including the contract of sale), including information contained in any final prospectus, prospectus supplement, or Exchange Act filing that is filed or delivered subsequent to the time of sale (including the contract of sale) where the information is not otherwise conveyed at or prior to that time.³⁹⁸

In furtherance of our interpretation discussed above, we also are adopting as proposed an interpretive rule, Rule 159, under Section 12(a)(2) and Section 17(a)(2). We intend that the effect of our interpretive rule will be the same as our interpretation. Our new Rule provides the following:

• For purposes of Section 12(a)(2) and Section 17(a)(2) only, and without affecting any other rights under those sections, for purposes of determining at the time of sale (including the time of the contract of sale), whether a prospectus, oral statement, or a statement,³⁹⁹ includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading,⁴⁰⁰ any information conveyed to the purchaser only after that time of sale will not be taken into account; and

• For purposes of Section 12(a)(2) only, a purchaser’s “knowing of such untruth or omission” in respect of a sale (including a contract of sale) means knowing at the time of such sale.

We find that our interpretation and interpretive rule are in furtherance of the objectives of Section 12(a)(2) and Section 17(a) and are necessary for the protection of the rights of investors intended to be provided by those sections.

We do not believe that our interpretation or interpretive rule should result in “speed bumps” or otherwise slow down the offering process. Particularly in light of the new rules we are adopting today regarding communications, issuers and underwriters should have sufficient flexibility to convey information in a manner that does not slow the offering process. At the same time, in our view, the interpretation that liability under Section 12(a)(2) and Section 17(a)(2) should be determined based on information conveyed at the time of sale (including a contract of sale) is unassailable.

2. Comments and Guidance Regarding Our Interpretation and Rule 159

With regard to our interpretation of Securities Act Section 12(a)(2) and Securities Act Section 17(a)(2) and proposed Rule 159, commenters raised concerns in the following areas:

• the Section 12(a)(2) and Section 17(a)(2) analysis of the information conveyed;⁴⁰¹

• the manner in which the time of “sale” is determined;⁴⁰²and

• the manner in which a purchaser and seller may terminate an old contract and enter into a new contract of sale based on new information.⁴⁰³

a. The Section 12(a)(2) and Section 17(a)(2) Analysis of the Information Conveyed

Securities Act Section 12(a)(2) and Section 17(a)(2) do not require that oral statements or the prospectus or other communication contain all information called for under our line-item disclosure rules or otherwise contain all material information. Rather, under these provisions, the determination of liability is based on whether the communication includes a material misstatement or fails to include material information that is necessary to make the communication not misleading in light of the circumstances in which the communication is made. In that regard, where in our discussion of our interpretation in the Proposing Release we referred to “materially accurate and complete information,” we were referring to the standards contained in Securities Act Section 12(a)(2) and Section 17(a)(2) – a communication that contains no material misstatements, and no material omissions that would cause the communication to be misleading in light of the circumstances in which it is made. Accordingly, liability for omissions under Section 12(a)(2) and Section 17(a)(2) is not based on the mere omission of required prospectus information or other material information, but on the omission of material information as a result of which the information conveyed is misleading, under the circumstances in which the communication in question is made. As a result, for example, a statement prior to the time of a contract of sale that a transaction is “the same as the XYZ transaction” or “just like the XYZ transaction” with specified modifications can, if there are no material omissions that would make that statement misleading under the circumstances in which it is made, meet the standards of Section 12(a)(2) and Section 17(a)(2). As another example, in an area cited by a number of commenters,⁴⁰⁴ in the asset-backed securities market there are a number of forward-sale transactions where contracts of sale are entered into based on “portfolio profiles” or similar communications specifying important characteristics of asset pools within given ranges or market standards. Where the characteristics enumerated in the portfolio profiles do not exclude material elements of the pool’s characteristics the omission of which would make the profiles misleading and where the final pools fall within the ranges or market standards disclosed in the portfolio profiles, this kind of disclosure prior to the time of a contract of sale can, depending on the facts and circumstances and even if all disclosure required in a statutory prospectus by our line-item requirements is not included, meet the standards of Section 12(a)(2) and Section 17(a)(2).

b. Determination of Time of Sale

Some commenters argued that the parties to the transaction should be able to determine by contract, by reference to state law, when the contract of sale is entered into, without regard to any provision of the federal securities laws,⁴⁰⁵ including the anti-waiver provisions of Securities Act Section 14.⁴⁰⁶ Other commenters argued that the iterative nature of their particular type of offerings meant that the parties could not identify the precise point when the purchaser became bound to acquire the securities.⁴⁰⁷

As we discuss above, we believe that one appropriate time to assess whether a purchaser has a claim under Section 12(a)(2), or whether there has been a violation of Section 17(a)(2), is the time of the contract of sale of the securities. State law contract principles are significant with regard to contract formation, and we are not aware of any current significant conflicts between state contract law and federal law regarding the elements of formation of a contract. Of course, a contract of sale under the federal securities laws can occur before there is an unconditional bilateral contract under state law, for example when a purchaser has taken all actions necessary to be bound but a seller’s obligations remain conditional under state law.⁴⁰⁸ If such conflicts were to arise in the future, we would have to consider at that time the appropriate actions to take, if any, to preserve the important federal interests in the determination of the time of a contract of sale. Importantly, beyond the elements of formation of a contract, federal law governs any waiver of a right or claim arising under the federal securities laws.⁴⁰⁹ Thus, contracts for sales of securities may not contain provisions that operate to waive a purchaser’s substantive rights under the federal securities laws. For example, conditional contracts that bind the purchaser at an earlier date but provide that no contract of sale occurs until the final prospectus is provided would not be consistent with the definition of sale under the Securities Act nor the anti-waiver provisions of Securities Act Section _14.⁴¹⁰

c. Termination of an Old Contract and Creation or Reformation of a New Contract

We recognize that there may be circumstances where a seller wishes to convey information to a purchaser after the time of a contract of sale that had not been conveyed before that time. In the Proposing Release, we made clear our view that sellers could convey additional or changed information after the time of the contract of sale, terminate the old contract by agreement with the purchaser, and enter into a new contract of sale based on the new information. Any rights to damages with respect to material defects in information in respect of the original contract of sale would cease to exist as a result of the termination and formation of a new contract. Commenters expressed uncertainty regarding how this renegotiation and new contract would be effected.⁴¹¹

In light of commenters’ concerns, we are providing guidance on the circumstances under which purchasers and sellers can reassess their purchase commitment based on new or changed information and enter into a new contract of sale, consistent with the purchaser’s rights, including under Section 12(a)(2), under the original contract and the anti-waiver provisions of the federal securities laws. Commenters expressed uncertainty regarding the termination of a contract of sale and the creation of a new contract and the ability, consistent with the federal securities laws, including the anti-waiver provisions, to agree contractually on a procedure to terminate and reform a contract of sale and thus provide a new time of sale at the time of the reformation of the contract.⁴¹² In our view, any such procedure must be the substantive equivalent of the termination by mutual agreement of the prior contract of sale and the entering into a new contract of sale. Any such procedure would, as pointed out above, result in a right to damages under the old contract ceasing to exist. It follows from this position that any such procedure would conflict with federal law unless:

• the investor is provided adequate disclosure of the contractual arrangement;

• the investor is provided with adequate disclosure of its rights under the existing contract at the time termination is sought;

• the investor is provided with adequate disclosure of the new information that the seller seeks to convey; and

• the investor is provided with a meaningful ability to elect to terminate or not terminate the prior contract and to elect to enter into or not enter into the new contract.

Whether the investor is given such adequate disclosure and meaningful ability will depend on the particular facts and circumstances. An evaluation of the facts and circumstances would include but not be limited to the following:

• the manner and prominence of the disclosure of the contractual arrangements and the investor’s rights under the old contract. Insufficient disclosure as to the provisions would not necessarily put the purchaser on notice of the arrangement and of its rights, and thus may be viewed as an unacceptable anticipatory waiver of the purchaser’s substantive rights.

• the process by which the new or changed material information will be conveyed to the purchaser. As noted above, whether information is conveyed is a facts and circumstances determination. However, in our view, in the context of providing new information following a contract of sale, factors to consider in determining whether the new information has been conveyed could include whether it is identified as new or changed or is otherwise sufficiently prominent.

• the method by which the purchaser is required to make or communicate its decisions. For the contractual provision to be consistent with the anti-waiver provisions of the federal securities laws, the purchaser must knowingly terminate the prior contract if it chooses to do so. Similarly, the investor must knowingly enter into the new contract if it chooses to do so. While we are not saying that the method chosen necessarily requires an affirmative communication rather than acquiescence by silence after the lapse of a specified period of time, the concept of reaffirmation is one that earlier Commissions and Congress have struggled with since the 1940s.⁴¹³ The method chosen should give the purchaser a meaningful ability to make its contractual decisions in light of the new or changed material information.

In addition to our general observations, we note the following:

• any contractual provision to the effect that the seller is deemed to have communicated information to the purchaser would be a violation of the anti-waiver provisions of the federal securities laws.⁴¹⁴

• a non-conditional contract that moves the time of sale forward to a different time would effectively act as a waiver of substantive rights under the federal securities laws and is a violation of the anti-waiver provisions of the federal securities laws.⁴¹⁵

3. Rule 412 and Rule 430B

Under Securities Act Rule 412, information contained in a prospectus supplement or Exchange Act filing incorporated by reference into a registration statement may modify or supersede other previously disclosed information that was contained in a document incorporated or deemed to be incorporated by reference in that registration statement. We are revising Rule 412 essentially as proposed to make it consistent with the other rules we are adopting today. The revisions provide that information contained in a document that is deemed part of and included in or incorporated by reference into a registration statement or prospectus that is contained in the registration statement would modify or supersede the information contained in the registration statement or prospectus that is part of or contained in the registration statement itself.⁴¹⁶ Thus, the provisions of Rule 412 regarding modified or superseded information will operate regardless of whether the new information is contained in an Exchange Act report, prospectus supplement, or prospectus that is part of or included in a registration statement.

Under Rule 430B, which we are adopting today (and in the corresponding undertakings of issuers), we have provided that subsequently provided information deemed part of and included in or incorporated by reference into a registration statement or prospectus that is part of the registration statement would not modify or supersede any information conveyed to an investor at an earlier time of sale (including the time of the contract of sale) for purposes of determining the information conveyed to an investor at or prior to that time.⁴¹⁷

4. Relationship of Section 12(a)(2) and Section 17(a)(2) Interpretation and Rule 159 to Section 11 Liability

Information contained in a prospectus or prospectus supplement that is part of a registration statement that is filed after the time of the contract of sale will be part of and included in a registration statement for purposes of liability under Section 11 at the time of effectiveness, which may be at or before the time of the contract of sale. The date and time that the information is part of the registration statement and the time of effectiveness relate to an investor’s rights under Section 11, but do not affect any rights assessed at the time of sale that the investor may have under Section 12(a)(2) or that we might enforce under Section 17(a). Thus, information that is deemed to be part of the registration statement as of the time of the contract of sale for shelf takedowns or as of effectiveness under Securities Act Rule 430A, will not, under our interpretation or Rule 159, be taken into account under Section 12(a)(2) or Section 17(a)(2), unless the information is conveyed to an investor at or prior to the time of sale (including the contract of sale). Similarly, an investor’s rights under Section 11 will not be affected by information conveyed to an investor at or prior to the time of the contract of sale that is not included in or incorporated by reference into the registration statement at the time of the effectiveness of the registration statement for the securities sold to the investor.⁴¹⁸ The class of investors that may have a claim under Section 11 and Section 12(a)(2) may thus be different.

A free writing prospectus that is not part of a registration statement will not be subject to Section 11 liability, although it will be subject to Section 12(a)(2) and Section 17(a)(2) liability.⁴¹⁹ Information contained in a free writing prospectus not otherwise included in or incorporated by reference into the registration statement will not be part of the registration statement for purposes of Section 11.

B. Issuer as Seller

We believe there currently is unwarranted uncertainty as to issuer liability under Section 12(a)(2) for issuer information in registered offerings using certain types of underwriting arrangements.⁴²⁰ As a result, there is a possibility that issuers may not be held liable under Section 12(a)(2) to purchasers in the initial distribution of the securities for information contained in the issuer’s prospectus included in its registration statement. This also could be the case for other communications that are offers by or on behalf of an issuer, including issuer free writing prospectuses. When an issuer registers securities to be sold in a primary offering, the registration covers the offer and sale of its securities to the public. The issuer is selling its securities to the public, although the form of underwriting of such offering, such as a firm commitment underwriting, may involve the sale first by the issuer to the underwriter and then the sale by the underwriter to the public.⁴²¹ We believe that an issuer offering or selling its securities in a registered offering pursuant to a registration statement containing a prospectus that it has prepared and filed, or by means of other communications that are offers made by or on behalf of or used or referred to by the issuer can be viewed as soliciting purchases of the issuer’s registered securities.⁴²² Therefore, we are adopting a rule providing that under Section 12(a)(2) an issuer in a primary offering of securities, regardless of the form of the underwriting arrangement, will be a seller and will be considered to offer or sell the securities to a purchaser in the initial distribution of the securities as to any of the following communications:

• any preliminary prospectus or prospectus of the issuer relating to the offering required to be filed pursuant to Securities Act Rule 424 or Rule 497;

• any free writing prospectus relating to the offering prepared by or on behalf of or used or referred to by the issuer and, in the case of an issuer that is an open-end management investment company, any profile relating to the offering provided pursuant to Securities Act Rule 498;

• the portion of any other free writing prospectus (or, in the case of an issuer that is a registered investment company or business development company, any advertisement pursuant to Securities Act Rule 482) relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and

• any other communication that is an offer in the offering made by the issuer to such purchaser.⁴²³

This definition of the issuer as a seller is not intended to affect whether any other person offers or sells a security by means of the same prospectus or oral communication for purposes of Section 12(a)(2). A communication by an underwriter or dealer participating in an offering would also not be on behalf of the issuer solely by virtue of that participation. As today, there are circumstances where the involvement of an issuer could be sufficiently extensive (for example under adoption and entanglement theories) that a communication of another person, including an offering participant, could be by an issuer.

A number of commenters were concerned that as proposed the rule was unnecessarily broad and would encompass purchasers of the issuer’s securities in the aftermarket, after the initial distribution of securities in the offering was completed.⁴²⁴These commenters were also concerned that the proposed rule would encompass oral communications made by underwriters.⁴²⁵ As with certain of our other proposals, some commenters wanted to limit liability only to those situations in which the communication was made by designated persons.⁴²⁶

While we have adopted the issuer as seller provisions substantially as proposed, we have included language that clarifies that it is aimed only at liability to purchasers in the initial distribution of the securities who were offered or sold the securities by means of the particular communication.⁴²⁷ Thus, the Rule, as adopted, would not cover purchasers of the issuer’s securities in the aftermarket. We have also provided, as noted above, that an underwriter or dealer participating in an offering is not acting on behalf of the issuer solely by virtue of that participation.

C. Due Diligence Interpretation

We requested comment in the Proposing Release as to whether we should re-evaluate the factors discussed in Securities Act Rule 176⁴²⁸ regarding what constitutes a reasonable investigation and reasonable grounds under Securities Act Section 11(c), and requested an explanation of the changes that should be made and how each of those changes would work in the context of each type of registered securities offering. In response, commenters urged us to reintroduce the 1998 proposal to amend Rule 176 so that it also applies to the reasonable care standard under Section 12(a)(2).⁴²⁹Additionally, commenters asked us to reaffirm the statement from the 1998 proposals that “Section 11 requires a more diligent investigation than Section 12(a)(2),” so as to avoid any implication that our view of the matter has changed.⁴³⁰ We have determined not to propose modifications to Rule 176 at this time. We believe, however, as we have stated previously, that the standard of care under Section 12(a)(2) is less demanding than that prescribed by Section 11 or, put another way, that http://sec.gov/rules/proposed/s70204/paceedu03112004.htm requires a more diligent investigation than Section 12(a)(2).⁴³¹ Moreover, we believe that any practices or factors that would be considered favorably under http://sec.gov/rules/proposed/s70204/paceedu03112004.htm, including pursuant to Rule 176, also would be considered as favorably under the reasonable care standard of Section 12(a)(2).⁴³²

³⁸⁹ Whether any particular statement or omission is material will depend on the particular facts and circumstances. Information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Basic v. Levinson, 485 U.S. 224, 231 (1988). To fulfill the materiality requirement, there must be a substantial likelihood that a fact "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id.

Courts have analyzed materiality under Exchange Act Section 10(b) and Exchange Act Rule 10b-5, and Securities Act Sections 11 and 12(a)(2) in a similar fashion. See, e.g., In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 368 n.10 (3d Cir. 1993) (noting that while there are substantial differences in the elements that a plaintiff must establish under these provisions, they all have a materiality requirement and this element is analyzed the same under all of the provisions).

³⁹⁰ See Securities Act Section 17(a)(2).

³⁹¹ See Securities Act Section 2(a)(3). Courts have held consistently that the date of a sale is the date of contractual commitment, not the date that a confirmation is sent or received or payment is made. See, e.g., Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972) (holding that a purchase occurs at “the time when the parties to the transaction are committed to one another”); In re Alliance Pharmaceutical Corp. Secs. Lit., 279 F. Supp. 2d 171, 186-187 (S.D.N.Y. 2003) (following the holding in Radiation Dynamics with respect to the timing of a contract of sale); Pahmer v. Greenberg, 926 F. Supp. 287, (citing Finkel v. Stratton Corp., 962 F.2d 169, 173 (2d Cir. 1992) (“[A] sale occurs for Section 12[(a)](2) purposes when the parties obligate themselves to perform what they have agreed to perform even if the formal performance of their agreement is to be after a lapse of time”)); Adams v. Cavanaugh Communities Corp., 847 F. Supp. 1390, 1402 (N.D. Ill. 1994) (noting that the Seventh Circuit has followed the Radiation Dynamics decision). Also, as indicated in note 395, below, the Uniform Commercial Code no longer requires that a securities contract be in writing.

³⁹² For example, in a shelf offering our rules permit an issuer to file a final prospectus supplement not later than the second business day after a takedown from the shelf registration statement.

³⁹³ Registration statements or final prospectuses or prospectus supplements would, as today, require inclusion of information necessary to satisfy our line-item requirements and other applicable requirements.

³⁹⁴ Under our interpretation, the time of contract of sale can be the time the purchaser either enters into the contract (including by virtue of acceptance by the seller of an offer to purchase) or completes the sale. The time of the contract of sale under our interpretation follows the statutory definition of sale in Securities Act Section 2(a)(3). Under Section 2(a)(3), sale includes “every contract of sale.”

Our interpretation is not intended to affect any rights currently existing at any other time. Section 12(a)(2) applies to oral communications and prospectuses (including final prospectuses) at other times. Section 17(a)(2) similarly applies to statements at other times. In addition, both Securities Act Section 12(a)(2) and Section 17(a) assess liability for “offers” as well as for sales.

The 1954 amendments to the Securities Act permitting the use of a preliminary prospectus recognized that the final prospectus would not always be available to investors at the time they made their investment decisions. See 1954 Amendments to the Securities Act of 1933, Pub. L. No. 83-577 68 Stat. 683 (1954). Following the 1954 amendments, the Commission adopted a number of rules that would ensure that preliminary prospectuses were sent to investors in initial public offerings at least 48 hours before the confirmation of the sale of the securities could be sent. Our interpretation and rule do not affect this requirement. See Securities Act Rule 460 [17 CFR 230.460], and Exchange Act Rule 15c2-8 [17 CFR 240.15c2-8].

³⁹⁵ Article 8 of the Uniform Commercial Code was amended in 1994 to eliminate the requirement that a contract for the purchase of a security be reflected in a writing. See UCC, 1994 official text with comments, Article 8-113 (West 1994). The official comment to the rule states that the requirement that a contract be in writing is unsuited to the realities of the securities business. Thus, under state law oral contracts for sales of securities are permitted.

³⁹⁶ As we discuss above, the basis for liability under Section 12(a)(2) for statements in a prospectus (including a free writing prospectus) or oral communication, and the basis for liability under Section 17(a)(2) for the statements to which the section applies, are that the statements cannot contain any misstatement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.

³⁹⁷ Direct communications can take various forms, including orally or through the use of electronic or other free writing prospectuses, under the new communications regime. See also Starr v. Georgeson Shareholder, Inc., 2005 U.S. App. LEXIS 11250 (2d Cir. 2005).

³⁹⁸ As we elaborate on later, this interpretation would not, of course, affect the ability of the seller and the purchaser to consider subsequently provided facts or disclosure and, among other actions, by agreement terminate their sale contract and by agreement enter into a new contract of sale with respect to the offered securities. In such case, for purposes of our interpretation and rule, the time of the contract of sale to that purchaser will be the time of the new contract of sale.

³⁹⁹ These include a prospectus or oral statement in the case of Section 12(a)(2), or a statement to which Section 17(a)(2) is applicable.

⁴⁰⁰ Or, in the case of Section 17(a)(2), any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

⁴⁰¹ See, e.g., letters from ABA-ABS; BMA-ABS; Cleary; and CSFB.

⁴⁰² See, e.g., letters from ABA; ABA-ABS; Alston; ASF; BMA-ABS; Citigroup; Cleary; CMSA; CSFB; Deloitte; Fried Frank; Merrill Lynch; Morgan Stanley; NYSBA; and SIA.

⁴⁰³ See, e.g., letters from ABA; ABA-ABS; CSFB; Morgan Stanley; and NYSBA.

⁴⁰⁴ See, e.g., letters from ABA-ABS; ASF; BMA-ABS; CMSA; the Mortgage Bankers Association of America (“MBA”).

⁴⁰⁵ See, e.g., letters from Cleary; CSFB; Fried Frank; Morgan Stanley; and SIA.

⁴⁰⁶  17 U.S.C. 77n.

⁴⁰⁷ See, e.g., letters from ABA-ABS; ASF; BMA-ABS; and CMSA. These comments were most prevalent in the asset-backed securities area. In this regard, the commenters stated that asset-backed securities offerings involved conditional contracts where investors agreed to purchase securities before they had all the prospectus information. These commenters stated that purchasers were given the opportunity to reassess their purchase decisions if new or changed information was provided. Investors who commented, on the other hand, did not believe that material changes or additional material disclosures made after their binding purchase decisions were adequately communicated to them, if at all, and they believed it was clear when they had entered into a contract of sale. See, e.g., letters from FMR and SSGA.

⁴⁰⁸ See notes 391 and 394 above.

⁴⁰⁹ AES Corp. v. Dow Chemical Co., 325 F.3d 174, 179 (3d Cir. 2003) cert. denied, 540 U.S. 1068 (2003); Petro-Ventures, Inc. v. Vrable, 967 F.2d 1337 (9th Cir. 1992).

⁴¹⁰ Any such contractual provision or any other contractual provision that operates as a waiver of substantive rights under the federal securities laws would be void, even if such provision was enforceable as a matter of state contract law.

⁴¹¹ While commenters also requested elaboration on when and how information would be considered conveyed, as we made clear in the Proposing Release, we believe this remains a facts and circumstances determination. See, e.g., letters from ABA; Alston; Citigroup; Cleary; and S & C.

⁴¹² See, e.g., letters from CSFB and Morgan Stanley.

⁴¹³ See, e.g., Nathan D. Lobell, Revision of the Securities Act, 48 Colum. L.Rev. 313, 332 (1948); Clark Byse and Raymond J. Bradley, Proposals to Amend the Registration and Prospectus Requirements of the Securities Act of 1933, 96 U.Pa. L.Rev. 609, 635-36 (1947-1948).

⁴¹⁴ Moreover, a contractual provision that provides that a purchaser is deemed to have read or have constructive or actual knowledge of information or documents, generally, would act as a waiver of substantive rights under the federal securities laws and thus would be inconsistent with the anti-waiver provisions of the federal securities laws. For example, a contractual provision stating that a purchaser who has access to information is charged with knowledge of that information for purposes of Section 12(a)(2) would be impermissible. These are merely examples of language that would be inconsistent with the anti-waiver provisions of the federal securities laws and are not all-inclusive.

⁴¹⁵ Thus, a waiver might also be deemed to occur where an underwriter e-mails the purchaser saying that the issuer filed a prospectus supplement and provides a specified period of time in which the purchaser may contact the underwriter, after which the purchaser will be deemed to have purchased the securities as of the end of the period, which would be a new date of sale.

⁴¹⁶ See discussion in Section V.B.1 below under “Date of Inclusion of Prospectus Supplements in Registration Statements and New Effective Dates of Registration Statements.”

⁴¹⁷  We originally proposed to include this provision in Rule 412 but have determined, in response to comments, to include it instead in Rule 430B. See, e.g., letter from William J. Williams, Jr. It also is included in undertakings of issuers provided in accordance with Item 512 of Regulation S-K and Regulation S-B [17 CFR 229.512 and 17 CFR 228.512].

⁴¹⁸ See discussion regarding Rule 430B in Section V.B.1 below under “Rule 430B.” See also Rule 158.

⁴¹⁹ A free writing prospectus, while considered to relate to a registered securities offering, is not included in and does not become part of the registration statement unless the issuer files it as part of the registration statement or includes it in a filing that is incorporated by reference into the registration statement. Thus, the responsibility and liability of offering participants for a particular free writing prospectus that is not incorporated or included in the registration statement can arise only under Section 12(a)(2) and Section 17(a)(2) and the other anti-fraud provisions. This is true regardless of whether the free writing prospectus contains information from the registration statement (including information that has been included with the consent of an expert).

⁴²⁰ See, e.g., Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988); Lone Star Ladies Investment Club v. Schlotzsky’s, Inc, 238 F.3d 363, 370 (5th Cir. 2001); Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003).

⁴²¹ The two transactions are parts of the same distribution of the securities to the public.

⁴²² See Pinter v. Dahl, 486 U.S. 622 (1988).

⁴²³ We are not addressing the status of the issuer as a seller in a registered offering of transactions by selling security holders only.

⁴²⁴ See, e.g., letters from ABA; Alston; CMSA; Davis Polk; and NYSBA.

⁴²⁵ See, e.g., letters from ABA and CMSA.

⁴²⁶ See, e.g., letters from Alston and CMSA.

⁴²⁷ We also have revised the final provision to provide that it covers communications by the issuer, not communications by or on behalf of the issuer.

⁴²⁸ 17 CFR 230.176.

⁴²⁹ See, e.g., letters from Morgan Stanley; SIA; and TBMA.

⁴³⁰ See, e.g., letters from ABA; SIA; and S & C.

⁴³¹ See the 1998 proposals, note 30, at Section IX.D. In a brief filed in Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), the Commission stated that the standard of care under Section 12(a)(2) (formerly Section 12(2)) is less demanding than that prescribed by http://sec.gov/rules/proposed/s70204/paceedu03112004.htm:

    [I]t would be inconsistent with the statutory scheme to apply precisely the same standards to the scope of an underwriter’s duty under Section 12[(a)](2) as the case law appropriately has applied to underwriters under Section 11. Because of the vital role played by an underwriter in the distribution of securities, and because the registration process is integral and important to the statutory scheme, we are of the view that a higher standard of care should be imposed on those actors who are critical to its proper operations. Since Congress has determined that registration is not necessary in certain defined situations, we believe that it would undermine the Congressional intent–that issuers and other persons should be relieved of registration–if the same degree of investigation were to be required to avoid potential liability whether or not a registration statement is required.

Brief for SEC in Nos. 74-2047 and 75-1260 (CA7), Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir., 1977), p. 69, as quoted by Powell, J., dissenting to the denial of certiorari in John Nuveen & Co. v. Sanders, 450 U.S. 1005 (U.S., 1981).

⁴³² See the 1998 proposals, note 30, at Section IX.