Required Legend

A firm distributes a preliminary prospectus for a proposed offering to prospective investors before the registration statement is effective. The document does not include the legend disclosing that it is preliminary and subject to completion or amendment. A principal reviewing the document questions this omission. What must be corrected?

1. A.Nothing needs to be corrected, since a preliminary prospectus may be distributed in the same form as a final prospectus.Wrong. A preliminary prospectus must include the required legend disclosing its preliminary status.
2. B.The document should instead be withheld entirely until the registration statement becomes effective.Wrong. Distributing a preliminary prospectus before effectiveness is generally permitted; the issue is the missing required legend.
3. C.The document should instead include a specific final offering price, which is what distinguishes it from a final prospectus.Wrong. A preliminary prospectus is distinguished by its required legend, not by including a final offering price it typically lacks.
4. D.The document must include the required legend disclosing that it is preliminary and subject to completion or amendment.Correct. The required preliminary legend must be included.

Why: A preliminary prospectus (sometimes called a "red herring") must include a legend disclosing that the document is preliminary and subject to completion or amendment; distributing the document without this legend fails to alert recipients to its preliminary status.

A firm accepts penny stock account statements that omit the required legend or disclosure language specified for penny stock customer statements, using its standard equity account statement format instead. What must the principal correct?

1. A.Nothing, because Rule 15g-6 applies only to margin accounts holding penny stocksWrong. Rule 15g-6's account statement disclosure requirement is not limited only to margin accounts.
2. B.Nothing, since the firm's standard equity account statement format satisfies all disclosure requirementsWrong. This is the exact trap the question describes; penny stock account statements require their own specific disclosure content.
3. C.Correct the statement format to include the required penny-stock-specific disclosure content under Rule 15g-6Correct. Rule 15g-6 requires specific disclosure content on account statements for customers holding penny stocks.
4. D.Nothing, as long as the customer received a general risk disclosure document at account openingWrong. A general risk disclosure at account opening does not substitute for the required ongoing account statement content.

Why: Rule 15g-6 requires specific disclosure content on account statements for customers holding penny stocks. The principal must correct the statement format so it includes the required penny-stock-specific content, rather than relying on the firm's standard equity account statement format.

A firm prepares a written sales piece about a registered offering that is distributed separately from the statutory prospectus, intended to qualify as a free writing prospectus. The document is distributed to prospective investors without the legend required for a free writing prospectus and without being filed where the applicable rules require filing. A principal reviewing this discovers the omissions. What is the concern?

1. A.There is no concern, since the firm's intent that the document serve as a free writing prospectus is what determines its treatment.Wrong. Intent alone doesn't satisfy the actual conditions required for free writing prospectus treatment.
2. B.The document does not satisfy the conditions for free writing prospectus treatment without the required legend and any applicable filing.Correct. The required legend and any applicable filing are necessary conditions for free writing prospectus treatment.
3. C.The concern only arises if the document was distributed to retail rather than institutional investors.Wrong. The legend and filing conditions apply regardless of whether recipients are retail or institutional.
4. D.The concern is resolved as long as the statutory prospectus was delivered to the same investors at some other point.Wrong. Separate delivery of the statutory prospectus doesn't cure the free writing prospectus document's own missing legend and filing.

Why: A free writing prospectus is subject to specific conditions, including a required legend directing recipients to the statutory prospectus and, in many circumstances, a filing requirement; distributing the document without satisfying these conditions means it does not qualify for free writing prospectus treatment as intended.