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
Related Articles
  1. Credit & Loans

    How Long Bankruptcy Will Affect You

    How long will the sad chapter of bankruptcy impact the rest of your life?
  2. Insurance

    Umbrella Insurance: You May Need It, Too

    If you have assets to protect – or just run a business from home – you could be unpleasantly surprised at how much you need umbrella insurance.
  3. Personal Finance

    The World's Most Luxurious Vacation Retreats

    White sand beaches, nature preserves, amazing hot springs...if you're looking for heaven on earth, these spots qualify.
  4. Budgeting

    10 Ways to Save Money at the Farmers' Market

    Strategic shopping can help your budget as well as your health.
  5. Personal Finance

    Protect Your Home From Medicaid Liens

    Plan ahead for long-term care needs to protect your home and your estate.
  6. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  9. Personal Finance

    Financial Analyst Cover Letters That Get You Hired

    Crafting a strong cover letter for a job can increase your chances of standing out from the crowd and landing an interview. Some techniques that help.
  10. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
RELATED TERMS
  1. Record Date

    The cut-off date established by a company in order to determine ...
  2. Supply

    A fundamental economic concept that describes the total amount ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  4. Investment Banker

    Someone working at an institution raising capital for companies, ...
  5. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
RELATED FAQS
  1. Are stocks real assets?

    Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real ... Read Full Answer >>
  2. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  3. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  4. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  5. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  6. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!