“Who shall separate us from the love of Christ? Shall trouble or hardship or persecution or famine or nakedness or danger or sword?”
Sources:
(1) Rice, S. M. (2024). SIE Exam 2025/2026 for Dummies (Securities Industry Essentials Exam Prep + Practice Tests and Flashcards Online) (4th ed.). John Wiley & Sons, Incorporated.. (2) https://www.sec.gov/files/forms-1.pdf (3) https://www.investopedia.com/terms/b/blueskylaws.asp.
The work created within this post is inspired by the above sources.
My previous post provided an introduction to three Acts of Congress that impact securities & securities trading.
This post will focus on: (1) providing an overview of the prospectus & registration process of non-exempt securities and (2) an overview of securities that are exempt from mandatory registration with the SEC.
The Prospectus & Registration Process
Typically, when a company decides to go public & sell their stock, they need to file a registration statement & prospectus with the SEC.
The Registration Statement has two principal parts: (1) the prospectus & (2) additional information & exhibits that need to be filed with the SEC but not necessarily investors.
Corporations & local governments would follow a slightly different registration process when issuing their corporate securities or municipal bonds.
Companies will utilize Form S-1 when preparing their registration statement.
Information about filling out the Form S-1 with non-financial disclosures can be found in Regulation S-K. Information about required financial statements for Form S-1 is found in Regulation S-X.
“the legal offering or ‘selling’ document that must be delivered to everyone who is offered or buys the securities. In the prospectus, your company must clearly describe important information about its business operations, financial condition, results of operations, risk factors, and management. The prospectus must also include audited financial statements.”
SEC Rule 415 provides for a mechanism known as shelf registration.
Shelf registration allows previously registered securities to be sold by issuers without additional permission by the SEC for up to three years (varies according to status). SEC Rule 415 provides an incentive for companies to register more securities than they plan to sell at once.
Shelf registration allows companies to wait for favorable market conditions.
Cooling-Off
After the filing of a registration statement with the SEC, a cool-off period of twenty-plus days begins. During this period, the SEC reviews the company’s registration statement.
If the issue is not cleared for sale . . .
If the issue is not cleared for sale by an effective date of registration, the registration statement will likely need to be amended. The SEC will issue a deficiency letter which halts the registration process.
Additionally, if the SEC believes the company’s registration statement is misleading or omitting material facts, the SEC can issue a stop order.
However, the SEC does not approve an issue, it only clears the issue for sale. The SEC does not have a responsibility to make sure the information included within the company’s registration statement is accurate or true.
During this cool-off period, agent underwriter(s) will often obtain the interest of potential investors interested in purchasing the issue once it is cleared by the SEC.
The Tombstone Advertisement
The tombstone advertisement is a rectangular newspaper ad with black-borders. The tombstone advertisement is typically the only advertisement that is allowed during the cool-off period. These ads will contain a statement of facts about the new issue & how to obtain the prospectus. These ads can, but do not always, include the price of the security being offered.
These ads will/must contain a legal disclaimer notifying the public that the tombstone advertisement is not considered an offer. The offer will only be made through the prospectus.
The Required Due-Diligence Meeting
The lead underwriter is required by law to hold a due-diligence meeting. This is often done near the end of the cooling-off period.
This required Due-Diligence meeting contains information about the issue & what the proceeds of the sale will be utilized for.
This information will be provided to syndicate members, brokers, analysts, etc… and provides additional opportunities for these individuals to ask questions.
Blue Sky Laws
Blue Sky Laws are state laws specific to securities. These blue sky laws often require that the brokerage firm, registered representative, and the security itself be registered in the purchasing customer’s home state with that state’s administrator.
If a security will be offered in a customers state, these blue sky laws require that security to be registered in any state it will be sold.
These laws can be similar from state-to-state, but there are some differences between the states.
The blue sky laws provide liability mechanisms to be implemented if there are fraudulent statements provided by the issuers. These laws help protect investors “who lack experience or knowledge” and “ensure[s] that investors are presented with offers for new issues that have already been vetted by their state administrators for fairness & equitability.”
“Who can separate us from the love of Christ?
Can affliction or anguish or persecution or famine or nakedness or danger or sword?”
EXEMPTIONS to REGISTRATION
Yet, there are certain securities that are exempt from registration with the SEC.
Exemptions often apply because of (1) the type of security or (2) the type of transaction that is involved.
The following types of securities are exempt from registration under the Securities Act of 1933:
(1) Securities issued by the U.S. government or Federal agencies
(2) Municipal securities (local government)
(3) Securities issued by credit unions, banks, or savings institutions.
(4) Public utility stocks/bonds.
(5) Securities issued by educational, not-for-profit, or religious organizations.
(6) Unsecured corporate debt securities with an initial maturity of 270 days or less (notes, bills of exchange, bankers’ acceptances, and commercial paper)
(7) Insurance policies & fixed annuities.
The following types of transactions are exempt: https://www.investopedia.com/terms/e/exempttransaction.asp .
START HERE !!!!
“Who shall separate us from the love of Christ? Shall tribulation, or distress, or persecution, or famine, or nakedness, or peril, or sword?”
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