Investment Companies - Underwriter Requirements and Procedures


It is crucial to understand that the issuer and the underwriting syndicate cannot sell securities, solicit requests for orders or send out any research report or any report that discusses the company's future sales and earnings during the period between the filing date and the effective date.

They can publish a tombstone advertisement, which contains a standardized clause that merely announces the new issue but disclaims the tombstone as an offer to sell or solicit orders. In addition, unsolicited requests for information may be met by sending out a preliminary prospectus.

No subscription payments may be requested, even if they are held in escrow until the effective date. Although a red herring can be sent to prospective purchasers without them requesting it, direct solicitations may be made only by means of a final prospectus.

Prospectus Delivery
The managing underwriter provides both preliminary and final prospectuses to the broker-dealers participating in the distribution. These dealers, in turn, provide prospectuses to clients over the 25-day period following the effective date if the securities are listed on a national exchange or on the Nasdaq.

There is no aftermarket prospectus requirement if the security is already listed on these markets. The prospectus delivery requirement for non-Nasdaq OTC securities is 90 days if the company has never before issued an IPO, or 40 days if the security has been previously listed.

Exempt Securities
Securities exempt from registration under the Securities Act of 1933 include the following:

  • U.S. government and federal agency issues
  • Municipal and state issues
  • Intrastate offerings
  • Small public offerings
  • Private placements
  • Insurance policies, including fixed annuity contracts
  • Commercial paper and banker acceptances with maturities of nine months or less

Regulation D: Private Placements
When a company wants to save time and money, it can sell securities in a non-public offering, known as a private placement. Provided the following conditions are met, a private placement is exempted by SEC Regulation D:

  • The buyer is a sophisticated investor, experienced enough to evaluate the risks involved.
  • The buyer has access to the same financial information that is normally included in a prospectus.
  • The buyer does not intend to make a quick sale.
  • The issue is sold to no more than 35 non-accredited investors. Note that this 35-person exception does not apply to accredited investors. Accredited investors are defined as financial institutions, private business development companies, and large, tax-exempt plans; an accredited investor can also be a director, officer or partner of the issuing company, or anyone with a net worth of $1 million, or an individual whose gross income for each of the past two years was $200,000 or more (or $300,000 jointly with a spouse) and who has reasonable expectations of meeting that income level the following year.

Penalties under the 1933 Securities Act
Any person who willfully violates the Securities Act of 1933 or SEC rules and regulations is subject to five years in prison, a $10,000 fine, or both. The act also holds the directors, attorneys, accountants, underwriting syndicate, and all persons who signed the registration statement civilly liable for false and misleading statements contained in the registration statement and prospectus. As a result, any one of the participating individuals may be sued by an investor who purchased the new issue and was not aware of any false statements or omissions.

Investment Company Act of 1940


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