A new offering asks your client to buy from a seller who knows far more than any buyer. Most rules here narrow that gap or keep insiders from taking the best deals.
An initial public offering (IPO) is a company's first sale of shares to the public. It is a primary market sale, so the company issues new shares and keeps the money. Most initial public offerings are sold through underwriters, the broker-dealers that price the deal, find buyers and distribute the shares. A direct listing works differently: it puts existing shares on an exchange with no underwriters selling a new issue.
The underwriting agreement decides who bears the risk of unsold shares:
- Firm commitment: The underwriters buy the whole issue and resell it, so they bear the loss on any unsold shares.
- Best efforts: On a best-efforts basis, the underwriters act only as agents and needn't buy shares they can't sell.
- All-or-none: This best-efforts deal is canceled unless every share sells. The label promises buyers they won't be stuck in a failed deal, so Securities and Exchange Commission (SEC) Rule 10b-9...
Common mistakes
- State filings for listed IPOs: The trap answer is a notice filing and fee. Section 18(c)(2)(D) allows neither. USA 1956 Section 307 notice filings reach fund shares and Regulation D offerings instead.
- Orders during the cooling-off period: A client who says "buy me 500 shares" while holding a red herring is giving only a nonbinding indication. Accepting an order or a check before effectiveness violates Section 5.
- Treating 180 days as law: The lock-up is a contract with the underwriters. Selling pressure arrives when it expires, not on the IPO date.
Bottom line
- Firm-commitment underwriters buy the whole issue, while best-efforts underwriters act as agents, and all-or-none or mini-max deals refund buyers when their conditions fail.
- Registration is effective 20 days after filing unless the SEC accelerates it or the issuer delays it (Section 8(a)), and effectiveness never means approval.
- No one offers before filing, the cooling-off period allows red-herring offers and nonbinding indications only, and sales wait for effectiveness and the final prospectus.
- Coordination is effective with the federal registration if no stop order is in effect or stop-order proceeding pending, the filing is 10 days old and pricing has been on file 2 full business days (the two timing conditions are waivable).
Exam shortcut
First, find who gets the cash. If the company gets it, new shares exist and dilution follows. If selling holders get it, it's a secondary distribution and the share count is unchanged. Use these stem signals: "Listed on Nasdaq" or another exchange means no state filing at all. An answer suggesting any regulator judged the merits is wrong.
The full lesson (about 3,709 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B11
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