This page of our SIE Study Guide covers the various types of securities offerings, the roles of investments bankers and distribution networks, and regulatory filing requirements and exemptions.

The two main types of securities are equity and debt. Within these categories are several different types of offerings that a company might pursue depending on their timeline and objectives, as described below.

Public Offerings

A public offering occurs when an issuer sells its securities to the general investing public. It generally refers to an initial public offering (IPO) which is the first time a company offers its shares to the investing public. The company must file a registration statement with the SEC prior to offering its securities for sale.

A follow-on offering, also known as an additional public offering (APO), is a subsequent offering of shares to the investing public. Both IPOs and APOs must meet strict SEC registration requirements under the Securities Act of 1933.

  • IPOs and APOs would both be part of the more general category of primary distributions, which are shares issued by a corporation in exchange for direct proceeds.

Large public offerings are those exceeding $50 million. Small offerings enjoy certain relaxed SEC paperwork/filing requirements under Regulation A (Reg A), which provides an exemption from registration for public offerings up to $20 million (Tier 1) or $50M (Tier 2) in any 12-month period. Tier 1 offerings require the issuer to file with state regulators in each state it plans to sell its securities.

  • Intrastate Offerings — Rule 147: When a corporation goes public but the sales are confined to residents of one state. State registration is required but SEC registration is not. Also known as single state offerings.
  • Interstate: The shares are being offered to residents of multiple states.

Private Offerings

In a private offering, the issuer does not sell its securities to the investing public but rather to a narrowly defined group of investors who meet strict wealth and sophistication requirements. Private offerings are more commonly referred to as private placements.

Federal securities laws require that any offer or sale of a security be registered with the SEC or meet an exemption. SEC Regulation D (Reg D) contains the rules for exemptions from registration, allowing some companies to offer and sell their securities without having to register them with the SEC. A Reg D offering provides access to the capital markets for smaller companies that otherwise couldn’t afford the costs of a standard SEC registration.

In a secondary market offering—not to be confused with a follow-on offering—a block of public company shares is sold by the present holder of the shares rather than the issuing company. No new shares are being created in the transaction.

  • If the number of shares offered is large, to the extent their sale could influence the issuing company’s stock price, then the sale will need to be registered with the SEC.

Restricted and Control Securities — Rule 144 Limitations: Securities acquired in private, unregistered sales by an issuer or an affiliate of the issuer are called restricted securities. Affiliates are generally defined as an issuer’s officers, directors, and investors owning 10% or more of the voting stock of the issuer.

The SEC has strict rules for those who wish to sell restricted securities in the public marketplace; shareholders must satisfy certain conditions under Rule 144 in order to be exempt from registering the sale with the SEC. For example, they must hold the securities for a minimum length of time known as the holding period, often six months or one year.

Company Buy-Back Programs: A stock buyback, or share repurchase, occurs when a company buys back its shares from the market using company funds. It is one way for a company to re-invest in itself. The repurchased shares are referred to as treasury stock and may be re-sold to the investing public later or used for a variety of other purposes such as conversions of convertible bonds.

  • The number of outstanding shares on the market is reduced and, with fewer shares on the market, the relative ownership percentage of each investor increases.
  • Shareholders are not required to participate. When a buyback occurs in lieu of paying a dividend, any resulting increase in stock value constitutes a tax deferral for stockholders not participating and may also give a tax benefit to participants, assuming the capital gains tax rate is below the ordinary income tax rate applicable to dividends.
  • To prevent fraud, SEC Rule 10B-18 prohibits share repurchases during the last 30 minutes of the trading day (10 minutes for companies with higher average daily trading volumes) and requires that the price per share not exceed the highest independent price bid made during the day. Additionally, the repurchase must be made using a single broker and may not exceed 25% of the stock’s average daily volume.

Methods of Distribution

Investment banks who underwrite public securities offerings have a few different options for distributing those offerings, depending on their appetite for risk.

Firm Commitment: The investment bank commits to purchase all the securities in an offering from the issuer and then resell them to the public. They assume the financial responsibility for these securities; any unsold shares are paid for and held by the investment bank.

Best Efforts: The investment bank agrees only to use its best professional efforts to market and sell the issuer’s securities and any unsold shares are returned to the issuer.

All or None: This is a variation on best efforts. In this instance, if 100% of the shares don’t sell, then the entire offering is nullified and the shares are returned to the issuer.

Minimum-Maximum (Mini-Max): This is a variation on all or none. In this instance, instead of having to sell 100% of the shares, a lesser minimum percentage is set, such as 50%. As long as that percentage is sold to the public, then the deal goes through.

Roles of Participants

Securities offerings can have many different participants. The exact number and roles of these participants will vary depending on the type of offering; participants for IPOs and municipal bonds are described below.

Initial Public Offering: There will typically be an underwriting syndicate comprised of more than one investment bank or broker-dealer, with one of these firms acting as the lead underwriter and the others acting as syndicate members. By forming a temporary syndicate, the lead underwriter is able to spread out the risk of the deal.

Sometimes, the lead underwriter will form an outside group of brokerage firms to assist the syndicate in its distribution efforts; these firms are not formally in the syndicate and are rather called members of the selling group.

If a brokerage firm has a client who wants the new shares, but the broker is neither in the syndicate nor in the group, then they can still contact the lead underwriter and ask if there are shares available for purchase.

Municipal Bond Offering: Municipal bonds are typically offered under a negotiated sale or a competitive sale.

In competitive sales, issuers advertise that their bonds are for sale by releasing a notice of sale to the public. This advertisement contains terms of both the sale and the bond issue. From there, broker-dealers and/or banks (the underwriters) place bids on the bonds at a specified time on a specified date and the bidder offering the lowest interest rate wins.

In negotiated sales, issuers are allowed to select the underwriter(s), with whom they directly negotiate the terms of the bonds and the terms of the sale in a “two-party” process. Additionally, investors are able to submit indications of interest (IOIs) in negotiated sales which then help the underwriter(s) finalize the offering price and sell the bonds.

Shelf Registrations and Distributions

Issuers who plan to sell their securities over a period of time rather than all at once may benefit from filing for a shelf registration, which will allow them to register the offer and sale of securities on a delayed (future) basis or on a continuous basis; the registered shares that aren’t sold right away are said to be “sitting on the shelf.”

A shelf registration statement is the filing made by the issuer with the SEC that can cover multiple future primary offerings, secondary offerings, or both. By filing this statement, an issuer can take securities “off the shelf” and then offer them for sale relatively quickly, such as when market conditions are favorable.

Offering Documents and Delivery Requirements

Each type of securities offering is required to deliver certain documents to investors and, in most cases, file those documents with the SEC as part of the registration process, unless the offering meets an exemption from registration.

Prospectus: Document filed with the SEC for public securities offerings, including stocks, bonds, and mutual funds. The prospectus discloses relevant information about the issuer and the investment, such as the company’s summary, the number and type of securities being offered, names of the underwriters, and the risks involved in the investment. Companies are required to file both a preliminary prospectus and a final prospectus, with the latter containing the offering price.

Private Placement Memorandum (PPM): Document provided to potential investors in a private placement that discloses relevant issuer information as well as the objectives, terms, and risks of the offering. Though private placements are exempt from SEC registration, the PPM is still required to comply with federal securities laws.

Official Statement: Document prepared for (or on behalf of) a state or local government in relation to a municipal bond offering. It contains information such as interest rate, timing of interest and principal payments, tax considerations, and more.

Program Disclosure Document: Document containing information about 529 plans such as fees and expenses.

Regulatory Filing Requirements and Exemptions

Securities registration is intended to facilitate informed investment decisions by describing the nature of the securities for sale, company management practices, and other material information. However, certain securities and offerings such as limited private offerings, offerings of limited size, offerings available in only one state, and federal/municipal/state securities are not required to be registered.

When securities are not required to be registered with the SEC, they are referred to as exempt securities. When securities offerings are not required to register with SEC, they are referred to as exempt offerings. Keep in mind that all securities offerings—regardless of whether they’re exempt or not—are subject to the antifraud provisions of federal securities laws.

In addition to the SEC, most states require registration of issuers and/or securities offerings unless an exemption is available. These requirements can be found in each state’s securities laws—commonly known as Blue Sky Laws—which vary state by state.

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