Series 7

Securities Markets - Registration

The primary way in which a company is able to issue securities to the public for the first time is by disclosing important financial information through registration. This information lets investors make informed judgments about a securities offering.

Registration statements are subject to SEC examination for compliance with disclosure requirements. Not all offerings of securities must be registered with the SEC.

Exemptions include the following:
  • Private offerings to a limited number of persons or institutions;
  • Offerings of limited size;
  • Intrastate offerings; and
  • Securities of municipal, state and federal governments.
Key Registration Dates
During the period that the registration statement is being filed, there are a number of key dates:
  • Filing date: This is when the initial registration statement is filed with the SEC.

  • Effective date of registration: This is the date declared by the SEC upon which shares can be sold to the public.

  • Cooling-off period: This is a delay of the effective date, imposed by the SEC due to premature publicity.
Due Diligence
Perhaps the most time-consuming aspect of the registration process - certainly from the issuer's point of view - is due diligence, the process of ensuring that the registration statement presented by the issuer contains all required information and that the information is not misleading.
  • The underwriter, assisted by legal counsel in countless meetings with the issuer's management team, reviews the source materials to ensure that the issuer is not attempting to defraud investors.

  • If the underwriter finds something amiss that cannot be reasonably explained away, then a potentially overpriced security does not come to market.

  • If there is something amiss and the underwriter does not find it because the issuer hid it well, then the legal burden to defend against fraud charges is on the issuer, not the underwriter, provided the latter exercised reasonable care in the due diligence process.

  • "Reasonable care" is a fairly nebulous term that is up to a judge to define, so underwriters tend to err on the side of caution.

  • Any investment bank with a reputation to uphold in the market has a strong incentive to take the time needed to perform that due diligence.

  • Any scrupulous corporate management team that hopes to someday float another offering on Wall Street has a similar incentive to painstakingly gather all the backup materials.

  • As for which specific components of the registration need to be subjected to due diligence review, FINRA has a 15-point guideline - and most investment banks far exceed it.
During the due diligence process, the syndicate is also being formed. The lead underwriter, or manager, invites other investment banks to participate. The selling group's participants then agree how many shares each one will underwrite - that is, how many each will be responsible for distributing to clients or purchasing on its own account.

The manager is then responsible for blue-skying the issue, which means determining in which states it can be sold and in which states it cannot. The manager then provides the other members of the syndicate with a list of where the offering can or cannot be sold.






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