When a company wants to sell securities to the public for the first time, the Securities Act of 1933 controls every step. Think of it as three distinct phases, each with strict rules about what you can and cannot do.
The pre-filing period is everything before the registration statement hits the SEC. No offers. No sales. No conditioning the market. If an officer goes on TV and hypes the upcoming IPO, that is gun-jumping, a Section 5 violation. It does not matter that no shares changed hands. The communication itself is the violation.
HIGH-FREQUENCY: Gun-jumping questions almost always involve someone talking about the offering before the registration statement is filed. The fact pattern will have an executive, board member, or insider making public comments about an upcoming deal. The answer is always "Section 5 violation."
The cooling-off period starts when the registration statement is filed and lasts at least 20 days. During this window, you can distribute the preliminary prospectus, called the red herring because of the red ink legend on the cover warning that...
Common mistakes
- Confusing cooling-off activities with post-effective activities. During the cooling-off period, you can distribute the red herring and publish tombstones. You cannot sell or accept money. If a question says "after filing but before the effective date" and an answer says "begin accepting purchase orders," that is wrong. Sales start only after the registration becomes effective.
- Mixing up 506(b) and 506(c). 506(b) prohibits general solicitation but allows 35 non-accredited investors. 506(c) allows general solicitation but requires all purchasers to be accredited and verified. Candidates who remember "Reg D allows 35 non-accredited" without distinguishing the sub-rule pick wrong answers on 506(c) questions.
- Adding the primary residence to net worth. The accredited investor net worth threshold is $1 million excluding the primary residence. A question will describe someone with a $1.5 million home and $900,000 in other assets.
Bottom line
- Three periods for new issues: pre-filing (no offers), cooling-off (20+ days, red herring and tombstones only, no sales), post-effective (final prospectus, sales begin)
- Firm commitment = underwriter buys all shares and bears risk; best efforts = underwriter sells what it can, issuer bears risk
- Spread = manager's fee + underwriting fee + selling concession; selling group members earn the concession only
- Eastern (undivided) account = shared liability for unsold by participation percentage; Western (divided) = each member eats only its own unsold
Exam shortcut
When you see "during the cooling-off period," the answer involves the red herring or tombstone (never sales, never money. When you see "eastern account" and a member who sold out, that member still owes its percentage of unsold shares. When you see "general solicitation" in a Reg D question, you are in 506(c) territory) accredited only, verified. Memory aid: "East = Everyone shares the pain.
The full lesson (about 3,820 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- A2
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