DEFINITION of 'Effective Date'

In contract law, the effective date is the date that an agreement or transaction between or among signatories becomes binding. For an initial public offering (IPO), it is the date when shares can first be traded on an exchange.

BREAKING DOWN 'Effective Date'

Business agreements and transactions are documented with effective dates, the time when parties to the contract begin their obligations to perform under the contract. These contracts can be in the form of employment agreements, credit or loan agreements or commercial transaction deals. As far as the effective "date" is concerned, the parties will decide whether the contract should officially begin on the date of signing, on a date that has already passed (backdating), or on a future date.

For a company that wants to go public, the effective date occurs within 30 days after the security is registered with the Securities and Exchange Commission (SEC), giving time for the SEC to review the Form S-1 registration for completeness of disclosure so that prospective investors can make informed decisions. During this review period, the SEC can ask questions, request clarifications or instruct the company to fill or amend certain sections of the filing.

Example of an Effective Date

The IPO process is tightly controlled by the SEC. Twilio Inc. filed for an IPO on May 26, 2016. Shortly after, the company submitted an amended filing, taking care to print on the cover page of the prospectus the following: "The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine." The effective date turned out to be June 23, 2016. Twilio's shares began trading that day.

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