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Limitations During Securities Issuance Process

12. What is an issuer allowed to do during each stage of the registration process?

A company offering its shares for sales to public for the first time (an initial public offerings) must register with the SEC or perfect an exemption from registration. If the company must register, the ability to advertise or offer to sell securities to the public follows a process that is linked to the filing of the registration statement. Generally, companies must follow the following framework and timeline:

•    Pre-filing Period – This refers to the period leading up to making the regulatory filings required by the SEC. During this period, the issuer cannot make offers to sell or take offers to buy securities. The issuer may, however, engage underwriters about the planned issuance. The underwriters may make commitments regarding the underwriting process for the securities, but no securities are actually sold during this period.

•    Waiting Period – This period refers to the post-SEC filing period during which an issuer can undertake limited efforts to market or sell the securities. The waiting period generally lasts for 20 days following the filing, if not extended. During this period, the SEC is charged with evaluating the registration statement and investigating the information contained therein. The SEC is looking for disclosures that may be incomplete or confusing to investors. The issuer may use this period to solicit offers to purchase securities, but no sales can take place until the registration is complete. The issuer will generally put out advertisements, known as “tombstone ads”, to garner interest in the offering. The ads generally identify the securities being offered, the broker, provide access to prospectus information, and state an offer price.

⁃    Note: Nearly all registrations filings extend beyond the standard 20-day period. This gives the SEC more time to evaluate the issuance. Companies are rightfully woeful to proceed with the sale of securities if the SEC has not properly evaluated the offering disclosures. Issuing securities with noncompliant disclosures can subject the company to civil and criminal liability.

•    Post-Effective Period – This is the period following registration. At this point, the registration and plan for issuing securities is officially approved. Unless the SEC gives notice that the registration and plan is defective, the approval is automatic. The issuer is now free to sell securities.

As stated above, the ability of an issuer to undertake activity in promoting, offering, or selling securities varies somewhat based upon the status of the issuer.

•    Discussion: Why do you think the securities laws prohibit the offer to sell securities to varying degrees based upon the stage of filing of the registration statement? Should there be any restrictions that remain in place following the post-effective date?

•    Practice Question: ABC Corp is in the process of registering with the SEC to sell company shares to the public. Rachel, a large investor, approaches ABC Corp immediately following the filing of the registration statement. Rachel wants to get ahead of other investors and purchase a large quantity of shares. What are ABC Corp’s options and limitations in this situation?

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