Key Concepts and Skills
• How securities are sold to the public, and the role of investment bankers
• Initial public offerings, and the costs of going public
Selling Securities to the Public
• Management must obtain permission from the Board of Directors.
• Firm must file a registration statement with the SEC.
• The SEC examines the registration during a 20-day waiting period. ▪ A preliminary prospectus, called a red herring, is distributed during
the waiting period.
▪ If there are problems, the company is allowed to amend the registration and the waiting period starts over.
• Securities may not be sold during the waiting period.
• The price is determined on the effective date of the registration and the selling effort begins.
Process for issuing securities:
1. Obtain approval from the Board of Directors 2. File registration statement with the SEC 3. SEC requires a 20-day waiting period
• Company distributes a preliminary prospectus called a red herring • Cannot sell securities during waiting period
4. The price is set when the registration becomes effective and the securities can be sold
• contains many pages (50 or more) of financial information, including a financial history, details of the existing business, proposed financing, and plans for the future.
• does not initially contain the price of the new issue. • does not have to be filed if the loan will mature in less than nine months or the issue involves less than
SEC examines the registration statement during a waiting period. During this time, the firm may distribute
copies of a preliminary prospectus to potential Investors.
• The preliminary prospectus is sometimes called a red herring because bold red letters are printed on the cover.
• Prospectus: shows potential investors and describes a new security offering
SEC makes no statement about the financial strength of the firm, it simply indicates that the registration is
A registration statement becomes effective on the 20th day after its filing unless the SEC sends a letter of
comment suggesting changes. In that case, after the changes are made, the 20-day waiting period starts
The company cannot sell these securities during the waiting period. However, oral offers can be made
• Public Issue • General cash offer—securities offered for sale to the general public on a cash basis
• Rights offer—public issue in which securities are first offered to existing shareholders on a pro-rata basis
• Initial Public Offering (IPO)—a company’s first equity issue made available to the public
• Seasoned equity offering—a new equity issue of securities by a company that has previously issued securities to the public
• Private Issue – Sold to fewer than 35 investors
– SEC registration not required
When a company decides to issue a new security, it can sell it as a public issue or a private Issue. In the
case of a public issue, the firm is required to register the issue with the SEC.
Rights offers are fairly common in other countries, but they are relatively rare in the United States,
particularly in recent years. We therefore focus primarily on cash offers in this module.
IPO is also called an unseasoned new issue.
A seasoned equity offering of common stock can be made by using a cash offer or a rights offer.