When the makers of Samuel Adams beer, the Boston Beer Co., offered shares directly to consumers last year through coupons in its six-packs, it knew it had to make the offering documents simple enough for the average beer drinker to understand. But by the time the lawyers finished filing the prospectus with legal jargon to fend off potential lawsuits, some of the most important information was either hard to find or difficult to understand.
So to help consumers, the company's investor relations department suggested including a question-and-answer section to explain the offering in plain English.
"It was our way to deal with the complexity of the offering," said Alex Gregory, one of the investment bankers on the deal and now in Boston Beer's IR department.
Boston Beer was ahead of the game. For now, the Securities and Exchange Commission (SEC), which oversees the selling and trading of securities, is recommending that all prospectuses be made simpler for investors to understand. Industry experts say annual reports could be next on the SEC's editing block.
Currently under federal securities law, full and fair disclosure of financial information about a company is required to be given to the public. However, most of the documents are written in a dense and technical style.
The SEC is considering a rule proposal to require plain English be used on the cover page, summary and risk factors sections of prospectuses.
For now, though, it has issued a draft handbook that offers suggestions to a certain audience - IR executives as well as lawyers and investment bankers - to encourage them to write disclosure documents in plain English.
"The SEC regulations will definitely affect the investor relations community," said David Lake, North American editor for Investor Relations magazine based in London. "It will probably create some jobs and at least include IR people in other important areas besides promotions."
For example, the SEC recommends inclusion of a simple question-and-answer section at the front of the document and the creation of cover pages and summaries - a job most likely suited for IR executives.
"We would like to have every prospectus have its cover pages, summaries, and risk factors written in plain English," wrote Warren Buffet, investment guru and contributor to the SEC handbook. "We ask issuers to use the hallmarks of plain English - active voice, short sentences, everyday language, tables and business or legal business jargon."
One reason for the often-complex and over-inclusive documents is the litigious climate in which investors often sue investment banks if shares do not hold their value after an offering.
Kevin Cramer, a corporate lawyer at Jones Day in Washington, D.C., agrees there is a problem with clarity, and acknowledges his prospectuses are not always as concise as they could be.
As an example, he says he often insists that clients include the following paragraph in offering documents: "There can be no assurance that the market price of the common stock after the offering will equal or exceed the initial offering price. Factors such as quarterly fluctuations in the financial results of the company, announcements of new products... by the company or its competitors, and general conditions in the company's industry, its customers' industries or the financial markets could cause the price of the common stock to fluctuate substantially.' "
(Jones Day, 202/879-3939, ir Magazine, 212/425-9649, Boston Beer, 617/522-9080)