Primary Markets and the Issuance Process
Key terms and rules covering the Securities Act of 1933, the offering timeline, and underwriting arrangements.
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Questions Covered in This Set
10 cards to master
What distinguishes the primary market from the secondary market?
In the primary market the issuer sells newly created securities and receives the proceeds; in the secondary market proceeds go to a selling investor, not the issuer.
Which act governs the primary market, and what is its nickname?
The Securities Act of 1933 — the 'Paper Act' or 'Truth in Securities Act.' Its philosophy is full and fair disclosure, not merit review.
What is a red herring?
The preliminary prospectus used during the cooling-off period; red ink on the cover warns that the information (including final price) is not final.
What may underwriters do during the cooling-off period?
Distribute the preliminary prospectus, collect non-binding indications of interest, publish a tombstone ad, and hold a due diligence meeting — but not accept money or orders, or send research/sales literature.
How long is the minimum cooling-off period?
20 days from filing the registration statement, though it often lasts months while the SEC issues comment/deficiency letters.
When must the final prospectus be delivered?
No later than with the confirmation of the trade in the post-effective period.
What does the SEC disclaimer on a prospectus state?
The SEC has neither approved nor disapproved the securities nor passed on the accuracy or adequacy of the prospectus; any contrary representation is a criminal offense.
Firm commitment vs. best efforts underwriting?
Firm commitment: syndicate buys the whole issue and owns unsold shares (max underwriter risk). Best efforts: syndicate acts as agent and returns unsold shares to the issuer (no underwriter risk).
Difference between all-or-none and mini-max?
AON: deal is canceled unless every share sells. Mini-max: a set minimum must sell for the deal to close. Investor funds go into escrow in both.
How does a selling group differ from a syndicate?
Selling group members help distribute shares for a concession but take no risk and buy no securities for their own account; syndicate members take on a portion of the issue.
