Public Offerings and Registration

The Registration Process

Public offerings of securities require registration with the SEC under the Securities Act of 1933 (unless an exemption applies). Investment bankers are deeply involved in drafting offering documents and navigating the regulatory process.

Key Documents

• Registration Statement (Form S-1): Initial filing with the SEC for an IPO. Contains the prospectus plus additional information not in the prospectus.
• Prospectus: The disclosure document provided to investors. Must contain all material information about the offering and the issuer.
• Preliminary Prospectus ("Red Herring"): Distributed during the waiting/cooling-off period. Contains everything except the final price and effective date.
• Free Writing Prospectus (FWP): Any written communication that constitutes an offer and is not the statutory prospectus. Must be filed with the SEC. Available after filing the registration statement.

Shelf Registration (Rule 415)

Allows issuers to register a large amount of securities and sell them in tranches over time (up to 3 years). Well-known seasoned issuers (WKSIs) can use automatic shelf registration (Rule 405) — the registration statement becomes effective immediately upon filing. A WKSI is a company with either $700M+ in public float or $1B+ in registered non-convertible securities in the past 3 years.

The JOBS Act and Emerging Growth Companies (EGCs)

The Jumpstart Our Business Startups Act created a category of Emerging Growth Companies — companies with total annual gross revenue under $1.235 billion. EGCs receive scaled disclosure requirements:

• Only 2 years of audited financials (vs. 3 for non-EGCs)
• Exemption from SOX Section 404(b) auditor attestation on internal controls
• Can "test the waters" — communicate with QIBs and institutional accredited investors before filing to gauge interest
• Confidential filing of the registration statement (reviewed privately before public filing)

FINRA Corporate Financing Rules

• FINRA Rule 5110: Governs underwriting terms and arrangements. Caps underwriting compensation and requires filing of offering documents with FINRA.
• FINRA Rule 5121: Special rules for public offerings where the underwriter has a conflict of interest (e.g., an affiliate of the issuer).
• FINRA Rules 2262/2269: Require disclosure of control relationships with the issuer and participation in distributions.

The Three Phases of an Offering

SEC registration creates three distinct phases with different communication rules:

• Pre-filing period: No offers, no sales. "Gun jumping" (promoting the issue before filing) is prohibited. Exception: WKSIs can make communications under Rule 163; EGCs can "test the waters."
• Waiting (cooling-off) period: Between filing and effectiveness. Oral offers are permitted. Written offers only via the preliminary prospectus ("red herring") or free writing prospectus. No sales yet.
• Post-effective period: Registration is effective. Sales can begin. Final prospectus must be delivered (or access given under Rule 172). Free writing prospectuses continue to be permitted.

Rule 134 "tombstone" ads are permitted at any time — they contain only basic identifying information and are not considered offers.

Prospectus Liability — Section 12

• Section 12(a)(1): Liability for selling unregistered securities in violation of Section 5. Strict liability — no due diligence defense.
• Section 12(a)(2): Liability for material misstatements or omissions in the prospectus or oral communications. A due diligence defense IS available (the seller must show they did not know, and in the exercise of reasonable care could not have known, of the misstatement).
• Section 17(a): Anti-fraud provision. The SEC can bring enforcement actions for fraud in the offer or sale of securities.

Research Reports During a Distribution — Rules 137/138/139

The Securities Act generally restricts written communications during a distribution, but these safe harbors permit research under specific conditions:

• Rule 137: A broker-dealer that is NOT participating in the distribution may publish research about the issuer. The research must be in the regular course of business and the broker-dealer receives no compensation from the issuer or underwriter for the report.
• Rule 138: A broker-dealer participating in an offering of one type of security (e.g., debt) may publish research about a different type of the issuer's security (e.g., equity) — and vice versa. The key: the research and the offering must involve different security types.
• Rule 139: A participating broker-dealer may continue to publish research if it's part of a regular publication that covers the issuer (e.g., an industry report that has always included the issuer). Two conditions: (1) the issuer must already be included in the publication, and (2) the research cannot give the issuer materially more favorable treatment.

Why this matters: The exam tests which rule applies based on whether the firm is participating in the deal and whether the research covers the same or different security type.

Additional Offering Rules

• Section 23 — Unlawful Representations: It is illegal to represent that the SEC has approved the securities or found the registration statement to be accurate. The SEC reviews for completeness, not merit. Any statement implying SEC endorsement is a violation.
• Rule 153A — "Preceded by a Prospectus": In exchange-traded offerings, the access equals delivery model applies — the prospectus is deemed to precede the confirmation if it was filed with the SEC and is available online. This satisfies Section 5(b)(2) delivery requirements.
• Rule 159 — Information at Time of Contract: Liability under Section 12(a)(2) is determined based on what information was conveyed to the buyer at or before the time of the contract of sale (typically the trade date), not the settlement date. This means post-sale corrections don't cure pre-sale misstatements.

FINRA Rule 5131 — IPO Allocation and Conduct

Rule 5131 addresses specific abuses in the IPO allocation process:

• Spinning prohibition: A managing underwriter may not allocate IPO shares to an executive officer or director of a company as an inducement for that company to direct future investment banking business to the firm. This is "quid pro quo" allocation.
• Conditional orders prohibited: A member may not accept market orders in a new issue before secondary-market trading begins. Only limit orders are permitted before the opening.
• Penalty bids: If IPO shares are returned ("flipped") by a purchaser shortly after pricing, the syndicate manager may impose a penalty bid that reclaims the selling concession from the selling broker. This discourages short-term flipping that can destabilize the aftermarket.
• Lock-up waiver disclosure: When a managing underwriter agrees to release or waive a lock-up early, it must notify the market at least 3 business days in advance.

FINRA Rule 5130 — Key Exemptions from IPO Restrictions

Rule 5130 prohibits restricted persons (broker-dealers and their associated persons) from purchasing new-issue shares. Important exemptions and definitions:

• Issuer-directed securities: Shares specifically directed by the issuer (not the underwriter) to particular purchasers are generally exempt
• De minimis ownership: A fund with restricted-person beneficial ownership below a threshold (generally 10%) may purchase IPO shares
• Immediate family exclusions: An "immediate family member" does NOT include parents-in-law, so a parent-in-law of a restricted person may generally purchase IPO shares
• Retired representatives: A retired registered representative generally ceases to be restricted one year after leaving the industry, if they have no continuing financial interest in a member firm
• Institutional exemptions: Registered investment companies (mutual funds) are generally exempt from the restricted- person prohibition

Greenshoe and Stabilization — How It Works

The Overallotment Option (Green Shoe)

The standard maximum overallotment option is 15% of the original offering size. The syndicate may sell up to 115% of the shares offered, creating a short position of up to 15%.

Covered Short vs. Naked Short

• Covered short (up to 15%): Covered by the greenshoe option. If the stock drops, the syndicate buys shares in the open market (stabilization) instead of exercising the option. If the stock rises, the syndicate exercises the greenshoe.
• Naked short (beyond 15%): If the syndicate oversells beyond the greenshoe, the excess must be covered through open-market purchases only — the greenshoe cannot cover this portion. This creates additional buying support.

Covering Transaction vs. Exercising the Option

A covering transaction is when the syndicate buys shares in the open market to close the short position. Exercising the greenshoe means purchasing additional shares from the issuer at the offering price. The choice depends on where the stock is trading relative to the offering price.

Lock-Up Agreements — Mechanics

• Standard period: 180 days from pricing is the customary lock-up for insiders in an IPO
• Who grants waivers: The lead managing underwriter typically has sole authority to waive or release the lock-up for specific insiders
• Advance notice: Under FINRA Rule 5131, if the managing underwriter waives a lock-up early, it must provide at least 3 business days' advance notice to the market
• Lock-up scope: Covers sales, pledges, hedging transactions, and other transfers that would effectively reduce the insider's economic exposure to the stock

Safe Harbor Communication Rules

Rule 168 — Reporting Issuers

Allows reporting companies to continue releasing regularly issued factual business information (earnings, dividends, product launches) and forward-looking information during an offering, without it being treated as an illegal offer. The information must be of the type regularly released by the issuer.

Rule 169 — Non-Reporting Issuers

Provides a narrower safe harbor for non-reporting companies. Permits only factual business communications of the type regularly released in the ordinary course of business. Does NOT cover forward-looking information (that is the key difference from Rule 168).

Rule 134 — Tombstone Advertisements

Permits brief public notices (tombstone ads) identifying the security, offering price, and where to obtain a prospectus. May include the amount of the offering and the managing underwriters' names. Must not contain any material beyond the permitted items.

Follow-On Offerings and ATM Programs

Seasoned Equity Offerings (SEOs)

Subsequent equity offerings by companies already public. Typically use Form S-3 (shorter form available to seasoned issuers). Can be executed as overnight deals — priced and allocated in a single evening with minimal marketing.

At-the-Market (ATM) Offerings

An ATM program allows a public company to sell shares incrementally into the existing trading market at prevailing market prices over time, rather than in a single large offering. Requires a shelf registration (Rule 415). The issuer controls the timing and size of each sale. ATMs are popular because they minimize market impact and provide flexible capital-raising.

Secondary vs. Primary Offerings

In a primary offering, the company issues new shares and receives the proceeds. In a secondary offering, existing shareholders (insiders, PE sponsors) sell their shares — the company receives nothing. Many follow-on offerings combine both.

Rule 10b-18 — Issuer Repurchase Safe Harbor

Provides a voluntary safe harbor from market-manipulation liability for issuer share repurchases, if four conditions are met:

• Single broker-dealer: Purchases on any single day must be made through only one broker or dealer
• Timing: No purchases during the opening or final 30 minutes (or 10 minutes for actively traded securities) of the trading day
• Price: The purchase price must not exceed the highest independent published bid or the last independent sale price, whichever is higher
• Volume: Daily purchases must not exceed 25% of the average daily trading volume over the prior four calendar weeks

Violating any condition means the specific purchase loses safe harbor protection, but it does not automatically constitute manipulation — it simply removes the presumption of compliance.

SEC Issuer Categories and Special Registration Forms

Issuer Categories

• WKSI (Well-Known Seasoned Issuer): $700M+ public float OR $1B+ in registered non-convertible securities in prior 3 years. May use automatic shelf registration.
• Seasoned issuer: Has been reporting for at least 12 months and has a public float of at least $75M. May use Form S-3.
• Unseasoned issuer: Reporting for 12+ months but does not meet the $75M float threshold. Limited to Form S-1 for primary offerings.
• Non-reporting issuer: Not yet subject to SEC reporting obligations (pre-IPO). Uses Form S-1.

Special Forms

• Form S-8: Registers securities offered under employee benefit plans (stock options, RSUs, ESPP). Short form available only to reporting companies.
• Form S-4: Registers securities issued in connection with business combinations (mergers, acquisitions, exchange offers).
• Form F-6: Registers American Depositary Receipts (ADRs) for foreign issuers.

Additional Offering Concepts

Rule 405 — Affiliate Definition

An affiliate of an issuer is any person that directly or indirectly controls, is controlled by, or is under common control with the issuer. Affiliates face additional restrictions on resales (Rule 144 volume limits apply indefinitely).

Stale Financial Statements

Financial statements in a registration statement generally become stale (unusable) after a specified period. For standard non-accelerated filers, annual financial statements typically become stale after 135 days (about 4.5 months after fiscal year-end). An issuer must update its financials before the registration statement can become effective if the existing statements are stale.

Regulation FD in the Offering Context

If a company accidentally discloses material nonpublic information to a select audience (such as a single analyst), it must promptly disclose the same information publicly. In a securities offering context, this is critical — selective disclosure during the marketing phase can create significant liability.

Shelf Registration — Rule 415, WKSI, and Takedowns

Shelf registration lets an issuer register a pool of securities on Form S-3 or F-3 and then sell them over time as market conditions allow. The mechanics are governed by Rule 415 under the Securities Act, with the most favorable treatment reserved for Well-Known Seasoned Issuers (WKSIs).

How Long a Shelf Stays Effective

A traditional shelf registration statement generally remains effective for up to three years. After that window expires, the issuer must file a new registration statement to continue accessing the shelf. The three-year period refreshes with each new shelf, and a new shelf can be filed before the old one expires to avoid a gap.

Well-Known Seasoned Issuer Status

A WKSI generally satisfies two criteria: (a) worldwide public float of at least $700 million, or issuance of at least $1 billion of non-convertible debt in the past three years, and (b) timely filing of all required SEC reports for at least 12 months. Public float is the aggregate market value of voting and non-voting common equity held by non-affiliates.

Automatic Shelf Registration (ASR)

WKSIs can file an automatic shelf registration statement on Form S-3ASR (or F-3ASR for foreign issuers), which becomes effective immediately upon filing without SEC staff review. Key ASR features:

• No dollar cap on the amount registered at filing — the issuer pays registration fees on a pay-as-you-go basis at each takedown
• Permits unallocated or "universal" shelf structures registering multiple classes of securities at once
• Permits forward incorporation by reference from future Exchange Act filings
• Allows WKSIs to take down securities the same day pricing terms are set, critical for fast-moving markets

Shelf Takedowns

A takedown is the sale of a tranche from the shelf. The issuer files a prospectus supplement under Rule 424(b) containing the pricing and transaction-specific terms not included in the base prospectus. Takedowns can be for common stock, preferred, debt, or other registered classes, and can be structured as underwritten, agented, at-the-market (ATM), or continuous offerings.

Gun-Jumping and the Communication Safe Harbors

Section 5 of the Securities Act divides the offering process into three periods — pre-filing, waiting, and post-effective — and restricts what the issuer can say publicly in each. "Gun-jumping" refers to making impermissible offers or conditioning the market before the registration statement is filed or becomes effective. The SEC has adopted several safe harbors that permit normal business communications without triggering a Section 5 violation.

Rule 163A in Practice — The 30-Day Quiet

Rule 163A is the most broadly useful pre-filing safe harbor. Any issuer can make communications more than 30 days before filing without Section 5 risk, as long as the communication does not reference the securities offering. This gives companies a clean window to make normal business announcements — product launches, earnings releases, press conferences — in the run-up to a registration.

Classic Gun-Jumping Scenario

The exam often tests whether a CEO interview or press release is permissible. A detailed television interview discussing forward-looking revenue projections during the pre-filing period — without a safe harbor to rely on — is likely gun-jumping if it conditions the market for the offering. The remedy is generally a cooling-off period before the offering can proceed.

Free Writing Prospectus — Rule 433 Mechanics

A Free Writing Prospectus (FWP) is a written offer made outside the statutory prospectus — a flexible tool that lets issuers and underwriters deliver marketing materials, term sheets, and electronic roadshows during an offering without the constraints of the formal prospectus. Rule 433 sets the conditions.

Core Conditions

• Registration statement must be on file. For seasoned and unseasoned issuers, the registration statement must generally be on file before any FWP can be distributed. WKSIs have more latitude under Rule 163.
• Preliminary prospectus generally must accompany or precede. For non-reporting issuers, a preliminary prospectus containing a bona fide price range must generally accompany or precede the FWP.
• Required legend. The FWP must carry a prescribed legend directing investors to the registration statement and prospectus, and explaining where to obtain them.
• Filing with the SEC. An issuer FWP generally must be filed with the SEC. Underwriter or dealer FWPs prepared by or on behalf of the issuer also must be filed.
• Retention. The issuer and relevant offering participants must retain FWPs for three years from the last sale of securities in the offering.

Electronic Roadshows

Whether an electronic roadshow is a written or oral communication determines how it is regulated. A live, real-time webcast is generally treated as oral. A recorded electronic slide presentation broadly distributed online is generally treated as a written communication — and therefore analyzed as a Free Writing Prospectus. For IPOs of common equity, at least one version of the recorded roadshow must generally be made available to any potential investor who asks for it (or the FWP must be filed).

When an FWP Isn't Required

Regular-way Exchange Act filings (10-K, 10-Q, 8-K, proxy statements) are governed by their own rules and are not treated as FWPs. A press release by a reporting issuer that fits within Rule 168 — continuing factual business communications — is also not an FWP. The FWP regime catches the non-standard marketing materials specifically created for the offering.

Offering Pricing Mechanics — Stabilization, Penalty Bids, and the Syndicate Short

After an IPO or follow-on prices, the lead underwriter actively manages aftermarket trading to support an orderly market. These activities are narrowly permitted under SEC Regulation M and FINRA Rule 5131.

Stabilization Bids — Rule 104

A stabilizing bid is a purchase order placed by the syndicate manager to prevent or retard a price decline in the aftermarket. Under Rule 104 of Reg M, a stabilizing bid:

• May generally be entered at no more than the lower of the public offering price and the highest independent bid
• Must be disclosed in the registration statement
• Can only be undertaken by the syndicate manager or its designated agent, not by multiple syndicate members independently
• May not push the price artificially upward

Syndicate Short Position

Underwriters typically oversell the offering to create a syndicate short position, which they later cover in one of two ways:

• Covered short — up to the size of the overallotment option (the 15% greenshoe). The underwriter can either exercise the greenshoe (acquiring shares from the issuer at the offering price) or buy in the open market to cover.
• Naked short — any oversold amount beyond the greenshoe. Can only be covered by open-market purchases, which functions as aftermarket price support.

Penalty Bids Under FINRA 5131

A penalty bid is a tool to deter "flipping" — investors selling allocated IPO shares immediately in the aftermarket. The syndicate manager identifies shares sold in the aftermarket that came from flipping accounts and reclaims the selling concession originally paid to the syndicate member that allocated those shares. It does not penalize the investor directly but disincentivizes syndicate members from allocating to known flippers.

Returned Shares Under 5131

If IPO shares are returned by a purchaser after pricing, FINRA Rule 5131 generally prohibits the syndicate from simply placing them into a syndicate member's proprietary account. Returned shares must be offered back into normal allocation channels or used to reduce the syndicate short.

Emerging Growth Companies and the JOBS Act

The JOBS Act of 2012 created the Emerging Growth Company (EGC) category, which relaxes several IPO rules for smaller, newer public issuers. A company qualifies as an EGC if it has total annual gross revenues under a threshold (currently $1.235 billion, indexed for inflation) and has not completed its IPO before December 8, 2011. EGC status generally lasts up to five years after the IPO, subject to certain disqualifying events.

Confidential Filing

EGCs can submit their initial Form S-1 to the SEC on a confidential basis. The filing is not made public until a later stage of the SEC review process — typically at least 15 days before the roadshow begins. Confidential filing lets the issuer receive SEC comments and iterate privately before disclosing financial results, strategy, and key risks to competitors and the market.

Test-the-Waters (TTW)

An EGC and its underwriters may engage in pre-filing communications with qualified institutional buyers (QIBs) and institutional accredited investors to gauge investor interest in the offering. These test-the-waters discussions would ordinarily be prohibited as gun-jumping under Section 5. The JOBS Act permits them specifically for EGCs, and more recent SEC rule changes have expanded TTW availability to most issuers.

Reduced Disclosure Requirements

Compared to a standard IPO filer, an EGC can:

• Present only two years (rather than three) of audited financial statements in its registration statement
• Delay compliance with new or revised GAAP accounting standards until private-company effective dates
• Skip the auditor attestation of internal controls under SOX Section 404(b) during its EGC period
• Use scaled executive compensation disclosure

Research Around EGC IPOs

The JOBS Act eliminated the traditional FINRA post-IPO research quiet period for EGCs. Research analysts at participating underwriters may publish research on an EGC without the 10-day or other waiting periods that applied to non-EGC IPOs. For non-EGC follow-on offerings, the syndicate manager is typically still subject to a three-day quiet period before publishing research on the issuer.

Section 5, Section 11, and the Due Diligence Defense

Section 5 — The Three-Period Framework

Section 5 of the Securities Act makes it unlawful to offer or sell securities in interstate commerce unless a registration statement is on file (during the waiting period) and effective (during the post-effective period), subject to exemptions. The three periods are:

Section 11 — Civil Liability for Misstated Registration Statements

Section 11 imposes civil liability on certain parties when a registration statement contains a material misstatement or omission at the time it becomes effective. Potential defendants include:

• The issuer (near-strict liability — no due diligence defense available)
• Every director at the time of filing
• Every officer who signed the registration statement
• Every underwriter named in the registration statement
• Every expert (accountants, engineers, appraisers) who consented to being named, limited to the expertised portions they authored

The Due Diligence Defense

All defendants except the issuer can raise a due diligence defense under Section 11(b). To succeed, a non-issuer defendant must generally show:

• Expertised portions (e.g., audited financial statements) — no reasonable ground to believe, and did not believe, there was a misstatement. Lower investigation standard because the expert signed off.
• Non-expertised portions — after reasonable investigation, reasonable ground to believe, and did believe, the statements were true and not misleading.

Underwriters are held to a demanding investigation standard for non-expertised portions. The BarChris case remains the benchmark: underwriters cannot rely passively on issuer representations and must independently verify material facts.

Section 11 Damages

Damages are measured by statute, generally as the difference between the amount paid (up to the offering price) and the value of the security at the time of suit — with adjustments if the plaintiff disposed of the security before suit. Damages cannot exceed the public offering price per share times the number of shares.

Rule 424(b) — Prospectus Filing Categories and Timing

Rule 424 under the Securities Act governs when and how final prospectuses and prospectus supplements must be filed with the SEC after effectiveness. For a shelf takedown, the Rule 424(b) filing contains the pricing and transaction-specific terms omitted from the base prospectus.

Filing Timing — The 2-Business-Day Rule

In general, a final prospectus or prospectus supplement containing pricing information must be filed with the SEC within two business days of the earlier of:

• The date the prospectus is first used
• The date the issuer (or selling security holder) determines the offering price

The Rule 424(b) Categories

The SEC divides Rule 424(b) filings into numbered categories based on what the prospectus contains. The exam does not expect you to memorize each subcategory, but you should know:

• Rule 424(b)(1) — prospectus containing information omitted under Rule 430A (pricing information for a non-shelf offering)
• Rule 424(b)(2) — prospectus for shelf takedowns that contains information previously omitted from the shelf base prospectus (price, terms, distribution method)
• Rule 424(b)(3) — prospectus supplement used to correct or update a previously filed prospectus
• Rule 424(b)(5) — prospectus filed in connection with a shelf takedown that is a continuation of a previously filed prospectus

Stickers for Minor Updates

If the issuer discovers a minor factual error during the waiting period or after effectiveness — one that is not a fundamental change requiring a post-effective amendment — the correction can generally be made through a Rule 424(b) prospectus supplement, sometimes called a "sticker." The sticker is filed electronically on EDGAR and does not require re-clearance by the SEC staff. Fundamental changes (material changes in the business, restated financials, major accounting errors) do require a post-effective amendment and SEC review.

Rule 430A — The Price Omission Rule

Rule 430A allows the issuer to omit pricing information — the public offering price, underwriting discount, net proceeds, and related items — from the registration statement when it goes effective. The pricing information is then supplied in a Rule 424(b)(1) prospectus filed after pricing. This mechanic lets the registration statement become effective on a day when pricing hasn't yet happened, which is essential for the IPO workflow where pricing is determined the night before trading begins.