Division of Corporation Finance: Updated Staff Legal Bulletin No. 7
Plain English Disclosure
Date: June 7, 1999
Summary
This updates the staff legal bulletin we issued on September 4, 1998 to provide information on the plain English rule and amendments as they apply to companies filing with the Division of Corporation Finance. This rule and the amendments apply to Securities Act of 1933 registration statements filed on or after October 1, 1998.
Questions and Answers
The original staff legal bulletin no. 7 answered the questions we had been asked most frequently from the date the rule and amendments were adopted to the date we published the bulletin. In this update, we eliminated the questions and answers that applied to the phase-in period for the new rule and amendments because this period ended October 1, 1998. Also, we added a question and answer on when Form S-3 post-effective amendments must comply with the plain English rule and amendments. See Q&A no. 10.
Risk Factor Guidance
Amended Item 503(c) of Regulation S-K specifies that issuers should not present risks that could apply to any issuer or any offering. Further, the subheadings must adequately describe the risk that follows. Item 503(c) seems to be the least understood of the plain English requirements. We have provided sample risk factor disclosures and subheadings to help preparers comply with Rule 421(d) of Regulation C and Item 503(c) of Regulation S-K.
Sample Comments
Now that the staff has gained several months' experience issuing plain English comments under the new rule and amendments, we thought it would be helpful to list the comments we have been issuing most frequently. By alerting issuers to these comments before they file their next registration statement, we hope to enable them to avoid receiving these comments. Of course, these are not the only plain English comments we issue; each prospectus is different and many of the comments we issue are unique to the organization of and disclosure in individual prospectuses.
Supplementary Information : The statements in this legal bulletin represent the views of the staff of the Division of Corporation Finance. This bulletin is not a rule, regulation, or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.
Contact Person : For further information regarding the plain English rule and amendments, please contact Carolyn A. Miller, Attorney-Adviser, at (202) 942-2890. For information regarding the comments the Division raises on a specific registration statement, contact the staff members identified in your comment letter.
Brief Description of the New Plain English Rule and Amendments
As of October 1, 1998, companies filing registration statements under the Securities Act of 1933 must:
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write the forepart of these registration statements in plain English;
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write the remaining portions of these registration statements in a clear, understandable manner; and
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design these registration statements to be visually inviting and easy to read.
The Commission adopted new Rule 421(d) and amendments to Rule 421(b), numerous Regulation S-K and Regulation S-B item requirements, and numerous disclosure form requirements.
Rule 421(d) – The New Plain English Rule
Issuers must use plain English writing principles in the organization, language, and design of the front and back cover pages, the summary, and the risk factors section. Also, when drafting the language in these parts of the prospectus, issuers must substantially comply with these plain English principles:
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short sentences;
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definite, concrete everyday language;
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active voice;
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tabular presentation of complex information;
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no legal jargon; and
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no multiple negatives.
In designing these and other parts of the prospectus, issuers may include pictures, logos, charts, graphs, or other design elements so long as the design is not misleading and the required information is clear.
Amended Rule 421(b)
When writing the remaining portions of their registration statements, issuers must use these standards:
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clear, concise sections, paragraphs, and sentences — using, whenever possible, short explanatory sentences and bullet lists; and
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descriptive headings and subheadings.
In addition, issuers must avoid:
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legal and highly technical business terminology; and
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frequent reliance on glossaries or defined terms as the primary means of explaining information. Define terms in a glossary or other section of the prospectus only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure.
Finally, issuers should avoid:
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legalistic or overly complex presentations that make the substance of the disclosure difficult to understand;
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vague "boilerplate" explanations that are imprecise and readily subject to different interpretations;
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complex information copied directly from legal documents without any clear and concise explanation of the provision(s); and
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repetitive disclosure that does not enhance the quality of the information.
Questions and Answers
1. Scope of New Rule and Amendments
Q: Which filings do the new plain English rule and amendments apply to?
A: They apply only to prospectuses filed under the Securities Act of 1933.
2. Glossaries and Defined Terms
Q: Rule 421(b) specifies that we "must avoid frequent reliance on glossaries or defined terms as the primary means of explaining information in the prospectus. Define terms in a glossary or other section of the prospectus only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure." When should we use a glossary?
A: You should use a glossary only if:
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you must include terms in your prospectus that are understood only by industry experts; and
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you cannot make the meanings of these terms clear from the context or explain them concisely where you first use them.
You should not use a glossary to define commonly understood abbreviations, like SEC, or acronyms, like NASDAQ. Further, you should not use a glossary to define terms that you have created solely for the purpose of your registration statement. We urge you not to create a vocabulary that is unique to your offering, with the exception of brand or trade names you use to identify the type of security you are offering.
3. Documents Incorporated by Reference
Q: Are all the documents we incorporate by reference into our registration statements subject to the new plain English rule and amendments?
A: No. The information you incorporate by reference in response to a general requirement need not comply. For example, Item 12 on Form S-3 requires you to incorporate by reference your recent Exchange Act reports in their entirety.
However, any information you incorporate by reference to satisfy a specific disclosure requirement must comply with the applicable plain English rule and amendments. For example, on Form S-3, if you incorporate by reference risk factors from a Form 10-K to satisfy Item 3, the risk factors must comply with Rule 421(d). Similarly, on Form S-3, if you incorporate by reference the description of securities to be registered from a Form 8-A, this description must comply with Rule 421(b).
4. Information Physically Included in a Prospectus
Q: If we reprint in our registration statement information from our 1934 Act filings, do we need to revise it to comply with the plain English rules?
A: Yes. Any information that you physically include in a prospectus must comply.
5. Plain English “Monitors”
Q: Will the staff randomly select registration statements to review them only for plain English?
A: Possibly. We may choose to review a filing solely for compliance with the new rule and amendments. We call this spot check a "monitor." The number of monitors we conduct depends on many factors, such as work load.
6. Staff Members Who Issue Plain English Comments
Q: Who on the staff will issue plain English comments on our registration statements?
A: The same staff member who is assigned to review your registration statement will also conduct the plain English review. Plain English comments you receive, if any, will appear in your regular comment letter.
7. Nature of Plain English Comments
Q: What will the staff be looking for when reviewing a prospectus for compliance with the new plain English rule and amendments? Will you be issuing "grammar" comments?
A: The staff will read the registration statements for clarity. The standards in Rule 421(d) and the guidance in the amendments to Rule 421(b) give issuers the tools they need to write clear disclosure documents. While the staff generally will not issue grammar comments, it may cite these rules in comments that are issued to help clarify issuers' disclosure.
8. Issuer's Business Is Highly Technical
Q: Because Rule 421(d) substantially curbs the use of technical terms in the forepart of the prospectus, how should issuers whose businesses are highly technical describe their companies?
A: An issuer with a highly technical business should provide a brief, general description of its business with, if necessary, concrete examples to illustrate the description. Compare the following two descriptions of Computational Systems, Inc. The first is from CSI's 1996 10-K, which is not subject to the plain English rules. The other is from the summary of a merger proxy that CSI filed during the Division's plain English pilot program:
Computational Systems, Inc. 10-K 1
The Company primarily designs, produces and markets an integrated family of advanced predictive maintenance products and services for use in large scale, continuous run manufacturing facilities. The Company's Reliability-Based Maintenance products and services help customers detect potentially disruptive conditions in the operation of their machinery before damage or complete mechanical failure occurs, thereby allowing maintenance to be scheduled at the most appropriate time.
Computational Systems, Inc./Emerson Electric Company's merger proxy 2
CSI's primary business is the design manufacture, and sale of a family of high-tech instruments that help companies determine when their industrial machines are in need of repair or adjustment. CSI also offers services to help its customers better manage the maintenance of their equipment. CSI's products and services help its customers keep their production lines running and maintain the quality of their products which may be adversely affected by an improperly functioning production line machine. CSI's customers are primarily large manufacturing, processing or power generating companies.
9. Limited Partnership Offerings and Redundant Risk Factor Disclosure
Q: In your proposing and adopting plain English rule releases, you emphasize how important it is to eliminate redundant information in registration statements. Why then does Securities Act Release No. 6900 require limited partnership offering prospectuses and similar offerings to list key risks on the cover page and repeat them in the risk factors section?
A: We believe the unique nature of these offerings and the risks they present to investors warrant requiring the issuer to highlight these risks on the cover page. Of course, the cover page, summary, and risk factors section must otherwise comply with the plain English rule and amendments.
10. When Plain English Applies to Post-Effective Amendments to Form S-3 Registration Statements
Q: When does a post-effective amendment to a Form S-3 that, when first filed was not subject to plain English, trigger the plain English requirements?
A: Now that the plain English rule and amendments are effective, there are two instances in which you must rewrite your post-effective amendment to comply. You must rewrite your post-effective amendment to comply if:
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it incorporates by reference audited financials that are more recent than those incorporated in any earlier post-effective amendment or the original registration statement; or
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enough time has lapsed since your last post-effective amendment or the original registration statement that you are required to post-effectively amend your prospectus under Section 10(a)(3) of the Securities Act of 1933.
11. Plain English is Clarity, Not Brevity
Q: In our efforts to write the disclosure in plain English, should we focus on making the disclosure brief?
A: No — not at the expense of completeness or accuracy. The goal of plain English is clarity, not brevity. Writing disclosure in plain English can sometimes increase the length of particular sections of your prospectus. You will likely reduce the length of your plain English prospectus by writing concisely and eliminating redundancies — not by eliminating substance.
12. When Electronic Filers Also Submit Paper Copies to the Staff for Review
Q: Recently, the Division of Corporation Finance announced that, because issuers are required to file their registration statements electronically on EDGAR, the staff did not want issuers to send paper copies of their filings. However, in the plain English adopting release, you say if a registration statement that is subject to the new plain English rule is selected for review, the staff will need paper copies. Why?
A: As many people know, when issuers file their registration statements electronically on our EDGAR system, the document's layout is lost. Because the new plain English rule is intended to enhance the readability of the prospectus through language and design, we need to see the layout of the plain English sections as you are delivering them to investors.
The staff member assigned to your filing will call to request paper copies of the prospectus. We are working to upgrade our EDGAR system to give issuers the option of filing of an exact duplicate of the paper copy sent to investors but this may not occur for some time.
13. Plain English and Acceleration Requests
Q: Can the staff ask the Commission to deny acceleration of a registration statement where the issuer has not made a good faith effort to comply with the new plain English rule and amendments?
A: Yes. Under Rule 461(b)(1), the staff may ask the Commission to deny acceleration "[w]here there has not been a bona fide effort to make the prospectus reasonably concise, readable, and in compliance with the plain English requirements of Rule 421(d)."
Risk Factor Guidance
Risk factors loosely fall into three broad categories:
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Industry Risk – risks companies face by virtue of the industry they're in. For example, many REITs run the risk that, despite due diligence, they will acquire properties with significant environmental issues.
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Company Risk – risks that are specific to the company. For example, a REIT owns four properties with significant environmental issues and cleaning up these properties will be a serious financial drain.
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Investment Risk – risks that are specifically tied to a security. For example, in a debt offering, the debt being offered is the most junior subordinated debt of the company.
When drafting risk factors, be sure to specifically link each risk to your industry, company, or investment, as applicable. See the two examples of before and after risk factors, below.
Before:
Competition
The lawn care industry is highly competitive. The Company competes for commercial and retail customers with national lawn care service providers, lawn care product manufacturers with service components, and other local and regional producers and operators. Many of these competitors have substantially greater financial and other resources than the Company.
After:
Because we are significantly smaller than the majority of our national competitors, we may lack the financial resources needed to capture increased market share.
Based on total assets and annual revenues, we are significantly smaller than the majority of our national competitors: we are one-third the size of our next largest national competitor. If we compete with them for the same geographical markets, their financial strength could prevent us from capturing those markets.
For example, our largest competitor did the following when it aggressively expanded five years ago:
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launched extensive print and television campaigns to advertise their entry into new markets;
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discounted their services for extended periods of time to attract new customers; and
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provided enhanced customer service during the initial phases of these new relationships.
Our national competitors likely have the financial resources to do the same, and we do not have the financial resources needed to compete on this level.
Because our local competitors are better positioned to capitalize on the industry's fastest growing markets, we may emerge from this period of growth with only a modest increase in market share, at best.
Industry experts predict that the smaller, secondary markets throughout the mid-west will soon experience explosive growth. We have forecasted that about 17% of our future long-term growth will come from these markets. However, because it is common practice for lawn care companies in smaller markets to acquire customers through personal relationships, our competitors in nearly half of these mid-west markets are better positioned to capitalize on this anticipated explosive growth. Unlike us, these local competitors live and work in the same communities as their and our potential customers.
For the foreseeable future, the majority of our sales people who cover these markets will work out of our two mid-west regional offices because we lack the financial resources to open local offices at this time. As a result, we may substantially fail to realize our forecasted 17% long-term growth from these markets.
Before:
Shares Eligible for Future Sale
Sales of substantial amounts of privately held Common Stock in the public market following the Offering could have an adverse effect on the price of the Company's Common Stock. Upon completion of the Offering, the Company will have outstanding 24,000,000 shares of Common Stock. Of these shares, the 6,000,000 shares offered hereby will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 18,000,000 shares of Common Stock held by existing stockholders (the "Restricted Shares") are restricted securities as that term is defined in Rule 144 (" Rule 144") under the Securities Act. Approximately 10,000,000 Restricted Shares will become eligible for sale beginning 90 days after the effectiveness of the Registration Statement of which this prospectus is a part (the "Effective Date") pursuant to Rule 144 under the Securities Act. Holders of approximately 8,000,000 additional Restricted Shares (the "Lock-up Shares") are subject to agreements not to sell or otherwise transfer their shares for a period of 180 days following the Effective Date. The Underwriters, in their sole discretion and at anytime without notice, may release any or all of the holders of Lock-up Shares from any or all of their obligations under the agreements not to sell.
After:
Eighteen million, or 75%, of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
After this offering, we will have outstanding 24,000,000 shares of common stock. This includes the 6,000,000 we are selling in this offering, which may be resold in the public market immediately. The remaining 75%, or 18,000,000 shares, of our total outstanding shares will become available for resale in the public market as shown in the chart below.
As restrictions on resale end, the market price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
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Number of shares/% of total outstanding
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Date of availability for resale into public market
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8,000,000 / 33%
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180 days after the date of this prospectus due to an agreement these shareholders have with the underwriters. However, the underwriters can waive this restriction and allow these shareholders to sell their shares at any time.
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10,000,000 / 42%
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Between 90 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
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For a more detailed description, see "Shares Eligible for Future Sale," on page 79.
Sample Comments
The order in which we provide these sample comments follows the order in which we issue comments in our comment letters to issuers.
Comments applicable to entire prospectus
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#1
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Rather than use "Company" to refer to your company, use your actual company name or a shortened version of it throughout your prospectus.
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#2
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Throughout your prospectus, you are capitalizing terms that you are using for their common meanings. For example, you capitalize "Common Stock," "Preferred Stock," "Registration Statement," "Prospectus," "Merger Agreement," etc. Because you are using these terms for their common meanings, you could safely eliminate the initial capital letters without causing confusion.
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#3
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The meanings of the terms in parenthetical phrases are clear from their context. For example, you define The X Company, Inc., as ("X Company"). It's highly unlikely that anyone reading your prospectus will think you are referring to any other company when you use the shortened name "X Company." Similarly, you define the Securities and Exchange Commission as ("SEC"), the Internal Revenue Service as ("IRS"), and Securities Exchange Act as (the "Exchange Act"). Parenthetical definitions such as these are unnecessary. Therefore, delete these and all other unnecessary parenthetical definitions from your prospectus.
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#4
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Many of the terms you use are unique to this prospectus. By creating terms that exist only for use in this prospectus, you are forcing investors to learn a new vocabulary before they can understand your disclosure. Eliminate this over-reliance on defined terms. Instead, disclose material information in a clear, concise, and understandable manner. See Rule 421(b) of Regulation C.
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#5
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If you choose a shortened name or abbreviation, ensure its meaning is clear from the context. For example, consider using "Hard Disk Drive Group" as the shortened name of "Hard Disk Drive Group Company, Inc." rather than "HDDG" since the meaning of this abbreviation is unclear without the benefit of a parenthetical definition. See Rule 421(b) of Regulation C.
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#6
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The term "such" is typically legalese for "this," "these," or "the." Please replace this term throughout your prospectus with a concrete, everyday word that means the same thing.
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#7
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Many sentences throughout your prospectus are too long to understand on the first reading because you have embedded lists of information in paragraph form. See, for example, pages X, Y, and Z. Rather than include these lists in the paragraph, break them out into bullet points, with one bullet point for each list item. Also, use bullet points, regular numbers, or letters instead of small Roman numerals in parentheses. See Rule 421(b) of Regulation C.
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#8
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Many sentences throughout your prospectus contain parenthetical phrases that disrupt the flow of information and make these sentences very long. As a result, investors may have to read them several times to understand the disclosure. See, for example, pages A, B, C, and D. Eliminate parenthetical phrases throughout your prospectus. If the information in the parenthetical phrase is part of the sentence, merely set it off by commas. If the parenthetical phrase does not fit as part of the sentence, include it in its own sentence.
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#9
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Minimize the use of footnote treatment, where possible. For example, if the text in a footnote applies to the entire table, include the text in the narrative discussion that precedes the table. Also, if a number of footnotes repeat the same text, consider moving this text to the introductory paragraph or adding a column to the table that includes this information.
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#10
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The organization of your prospectus is driven by the mechanics of the transaction, not by how the transaction can affect your shareholders' investments. For example, the first page of your summary describes the merger subsidiary that exists solely to effect the merger. Will shareholders base their investment decisions on this? The organization of your prospectus should be from the shareholders' perspectives and explain how the proposed transactions affect their investments.
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#11
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Eliminate all unnecessary redundancy throughout your prospectus. For example, by page 5, you have repeated 3 times what the Company X shareholders will receive in the transaction. It is appropriate:
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#12
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Your subheadings do not state and characterize succinctly the information that follows. For example:
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#13
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Currently, your prospectus is written from the perspective of someone who is already quite familiar with the transaction and the entities involved. For example, throughout your prospectus, you make several references to "certain circumstances," "certain matters," "certain amendments," "certain persons," and "certain extraordinary matters." Presumably, someone who is already familiar with these transactions will know what you're referring to. But, what should these phrases mean to your shareholders, who are first learning of the proposed transaction through this prospectus? Replace the term "certain" with a brief description of what makes the information qualify as "certain."
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Comments applicable to the forepart of the prospectus: cover page, summary, and risk factors section
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#14
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The forepart of your prospectus contains a lot of jargon, technical terms, and legalese. You have not used words for their common meanings. For example, these words and phrases appear in the first 10 pages of your prospectus:
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Jargon/technical terms
proprietary drug
intravenous solutions
logistics capabilities
coordinated manufacturing
and distribution efforts
proprietary medicines
vertically integrated cost-
efficient providers
revenue synergies
lower margin
products utilization realigning
sales forces
centralized management
information systems
profit-enhancing synergies
global platform
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Legalese
definitive agreement
consummation
those preceded by
herein
set forth under
by such forward-
looking statements
without limitations
cease to conduct
completion of the
combination
commencing
hereinafter so
surrendered
defeased
as amended
qualified in its entirety
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Eliminate the legalese and industry jargon from the forepart of your prospectus. Instead, explain these concepts in concrete, everyday language. Further, place any industry terms you use in context so those potential investors who do not work in your industry can understand the disclosure. See Rule 421(d) of Regulation C.
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#15
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Note: this comment does NOT apply to registration statements filed on
Form S-4 because that form requires specific information on the inside front cover page.
Organize the forepart of your prospectus from your investors' perspectives. For example, on the inside front cover you advise investors as to where they can find more information but you haven't provided them with any other information yet. Move this information so it appears somewhere after the risk factors section or, if you did not include a risk factors section, the summary.
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#16
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The forepart of your prospectus contains many defined terms. The meanings of the terms you use in the forepart of your prospectus must be clear from the context. Accordingly, eliminate the defined terms throughout the forepart of your prospectus and use terms whose meanings are clear from the context instead. See Rule 421(d) of Regulation C.
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Cover page comments
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#17
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Your cover page exceeds the one page limit imposed by Item 501 of Regulation
S-K. Much of the information you include here is very detailed and is repeated in the summary. Move the information that is not required by Item 501 or is not key to an investment decision off the cover page. This will enable you to limit the cover to one page.
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#18
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Limit the cover page to the information that is required by Item 501 of Regulation S-K and other information that is key to an investment decision. Your cover page contains superfluous information such as the par value of common stock. Will potential investors base their investment decisions on the par value? Also, how should investors use the information in [the last paragraph]? Is this information key to an investment decision?
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#19
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Using [all capital letters] [and] [cascading margins] impedes the readability of the text on the cover page. Since Item 501 limits this page to information that is key to an investment decision, it is very important that it be readable. See part IV.A. of Securities Act Release No. 7497. Revise text written in all capital letters and eliminate cascading margins from your cover page.
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#20
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Item 501(a)(5) of Regulation S-K requires you to highlight the cross reference to the risk factors section by prominent type or in another manner. Your cross reference is not visually distinctive from the other text on your cover page. Highlight this cross reference using, for example, bold-faced and italicized type. Note that placing this cross reference in all capital letters will impede its readability, not highlight it.
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#21
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The text on your cover page is dense and the margins are quite narrow. This is because you are including much more information than is required by Item 501 of Regulation S-K. As a result, your cover page is not visually inviting. The layout of your cover page must highlight the information required by Item 501 and encourage investors to read your prospectus. Move any information that is not required by Item 501 or is not key to an investment decision off the cover page. Then, surround the remaining information with ample white space and use wider left and right hand margins. See Rule 421(d) of Regulation C.
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#22
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The cover page should focus shareholders on the information that is key to their investment decision. On your cover page, this key information is obscured by a technical, detailed description of the transaction. For example, before you tell shareholders what they will receive in the merger, you introduce the merger subsidiary that exists solely to effect the merger. Before you provide the date, time, and location of the meeting, you tell shareholders that the acquiring company needs to amend its certificate of incorporation before it can complete the transaction.
Reorganize your cover page to highlight the information that is key to your shareholders' investment decisions. Also, move the information that is not required by Item 501 of Regulation S-K or is not key to an investment decision off the cover page.
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Q&A section comments
Some issuers choose to include a "Questions and Answers" section in their merger proxy/prospectuses even though this section is not required by any of our rules. The staff neither encourages nor discourages the use of a Q&A section. However, we do not consider it a suitable replacement for the summary. If you include a Q&A section, it must not be a mere repetition of portions of the summary in a different format.
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#23
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You currently repeat a lot of information in both your Q&A and summary section. The Q&A should not repeat any information that appears in the summary, and vice versa . For purposes of eliminating redundancies and grouping like information together, view your Q&A and summary section as one section.
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#24
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Answer each question directly. Currently, you begin many answers with a discussion of related matters and don't provide the answer until the end of the paragraph. For example, Question #3 asks when you intend to complete the merger. Your answer begins with a discussion of the steps you must take before you may complete the merger. The answer — by the end of the next fiscal quarter — appears at the end of the paragraph. Put the answer first. Then, if necessary, describe the contingencies.
Further, if the question calls for a "yes" or "no" answer, state "yes" or "no" first, then explain why.
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Summary comments
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#25
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The introductory paragraph to your summary states that the summary is not complete. A summary, by its very nature, does not and is not required to contain all of the detailed information that is in the prospectus. However, if you have elected to include a summary in your prospectus, it must be complete. Do you mean to say that, because this is a summary, it may not contain all of the information that is important to your investors? Delete the reference to an incomplete summary from your prospectus.
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#26
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Group like information together. Currently, your summary separates the items that discuss how the transaction directly affects shareholders with information on other topics. For example, the exchange ratio appears on page 3 and the tax consequences for payments on fractional shares appears on page 7. In between are discussions of regulatory matters, termination fees, conditions to the merger, etc.
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#27
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It is not clear in the summary which information you intend to highlight for shareholders. For example, in the first several pages in your summary, you explain at length the technical steps the companies must take, such as creating a merger subsidiary, to effect the merger. Further, you discuss the boards of directors' reasons for the merger and the conflicts of interest that may result before you explain how the proposed transaction directly affects shareholders. For example, the exchange ratio does not appear until page 36. Is this a logical order of information? Also, do shareholders need a summary of the technical steps to make an investment decision?
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#28
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We note your summary contains a lengthy description of the company's business and business strategy. Further, we note the identical disclosure appears later in your prospectus. In the summary, you are to carefully consider and identify those aspects of the offering that are the most significant and determine how to best highlight those points in clear, plain language. The summary should not include a lengthy description of the company's business and business strategy. This detailed information is better suited for the body of the prospectus. If you want to highlight key aspects of your business strategy, consider listing these in a bullet-point format, with one sentence per bullet point. See Item 503(a) of Regulation S-K and part IV.C. of Securities Act Release No. 7497.
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#29
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The amount of detail you include in the summary overwhelms the most significant aspects of the offering. For example, currently you include detail such as [insert example]. Do [shareholders] [potential investors] need this degree of detail in the summary? Also, much of this detail is repeated in the body of the prospectus. In the summary, you must carefully consider and identify those aspects of the offering that are the most significant and determine how to best highlight those points in clear, plain language.
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Risk factor comments
See also the Risk Factor Guidance section.
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#30
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We note in the introductory paragraph to your risk factors section you state that this section is not complete, that there may be risks that you do not consider material now but may become material, or there may be risks that you have not yet identified. You must disclose all risks that you believe are material at this time. Delete this language from your introductory paragraph.
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#31
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Currently, it appears you are including more than one risk factor under one subheading. For example, is the second paragraph under "Recent Operating Results" a significant risk factor of this offering that needs to stand alone under an explanatory subheading? Other examples of "bundled" risk factors include . . . In order to give the proper prominence to each risk you present, we suggest you assign each risk its own descriptive subheading.
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#32
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Present the risks in more concrete terms. For example, in the first risk factor on page 12, you discuss the risks due to the "costs" associated with the benefit plans. So investors can better understand these risks, clearly state that the "costs" are not expenses of running those plans, but rather the added compensation expense that stems from the shares purchased or granted to employees and executives under those plans.
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#33
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In each risk factor, get to the risk as quickly as possible and provide only enough detail to place the risk in context. In some of your risk factors, the actual risk you are trying to convey does not stand out from the extensive detail you provide. For example, what specifically is the risk in the first risk factor? The first paragraph explains in detail Company X's past losses without any reference to a current risk.
Also, this discussion of past losses appears elsewhere in the prospectus. Where you repeat later in the prospectus the details you currently include in your risk factors section, eliminate the extensive detail here. Instead, include a very brief overview to place the risk in context and provide a specific cross reference to the more detailed discussion elsewhere in the prospectus.
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#34
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Provide the information investors need to assess the magnitude of the risk. For example, in the second risk factor on page 4, you state that increases in short-term interest rates could have a material adverse effect on XYZ Bank's profitability. Explain why. Are a substantial percentage of XYZ's interest-earning assets in long-term investments that pay fixed rates while the interest you pay to your depositors fluctuates? If so, what percentage of your interest-earning assets are in long-term investments?
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#35
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Item 503(c) of Regulation S-K states that issuers should not "present risk factors that could apply to any issuer or to any offering." For example, the risk you disclose under "Dependence on Key Personnel" could apply to nearly any issuer in your industry and even in other industries. If you elect to retain these and other general risk factors in your prospectus, you must clearly explain how they apply to your industry, company, or offering. For example, explain why you are concerned you could lose these key personnel. Are they about to retire? Do you not have employment contracts with them?
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#36
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Revise each subheading to ensure it reflects the risk that you discuss in the text. Many of your subheadings currently either merely state a fact about your business, such as "Our capacity to borrow is limited" and "The services we provide are regulated," or describe an event that may occur in the future, such as "We may not be able to obtain the necessary regulatory approvals," and "We expect competition in our industry to increase." Succinctly state in your subheadings the risks that result from the facts or uncertainties.
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#37
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The subheadings in your risk factors section are too vague and generic to adequately describe the risk that follows. For example, on page X, you use the subheading "Competition." Because all companies operating in a free market economy are subject to competition, this subheading is not descriptive.
Revise your risk factor subheadings so they reflect the risk that follows. As a general rule, your revised subheadings should work only in this prospectus. If they are readily transferable to other companies' offering documents, they are probably too generic. See Item 503(c) of Regulation S-K.
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#38
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To the extent possible, avoid the generic conclusion you make in most of your risk factors that the risk discussed would have a material adverse effect on your [operations] [financial condition] [business]. Instead, replace this language with specific disclosure of how your [operations] [financial condition] [business] would be affected.
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Comments applicable to body of prospectus
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#39
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Rule 421(b) of Regulation C requires you to avoid relying on defined terms as a primary means of explaining information in the prospectus. We note that the body of your prospectus contains a large number of defined terms. For example, page 32 alone contains over 20 defined terms. Most of these are terms that you created solely for use in this prospectus. While this practice provides a useful shortcut for the writer, potential investors must memorize a new vocabulary — whose usefulness is limited to this prospectus — before they can understand your disclosure. Revise your prospectus to eliminate your over-reliance on defined terms, as required by Rule 421(b).
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#40
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If you must include technical terms in the body of your prospectus that are understood only by industry experts, you must make every effort to concisely explain these terms where you first use them. Where this is simply not possible, explain these terms in a glossary. In addition, do not use technical terms or industry jargon in your concise explanations.
You should not use a glossary to define commonly understood abbreviations, like SEC, or acronyms, like NASDAQ. Further, you should not use a glossary to define terms that you have created solely for the purpose of your registration statement. We urge you not to create a vocabulary that is unique to your offering.
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#41
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Under Rule 421(b) of Regulation C, you must avoid copying complex information directly from legal documents without any clear and concise explanation of this information. It appears that much of the language in the body of the prospectus was taken directly from the underlying [indenture] [shareholder agreements] [rights plan] [merger agreement] [statute on dissenters rights] [employment agreement]. Rewrite this disclosure so it is clear, concise, and understandable. If you believe the language as it appears in the underlying legal documents is indispensable to your prospectus, you must:
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