The Issue Process for Public Securities

10 Pages Posted: 21 Oct 2008

See all articles by Susan Chaplinsky

Susan Chaplinsky

University of Virginia - Darden School of Business

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Abstract

This note covers alternative methods for issuing securities in the U.S. public markets. It focuses on the basic institutional requirements of an underwritten security offering and the role of investment bankers. Two regulatory reforms of the U.S. Securities and Exchange Commission, Rules 415 and 144a, are also discussed.

Excerpt

UVA-F-1129

THE ISSUE PROCESS FOR PUBLIC SECURITIES

That investment bankers play an integral role in the issuance of new corporate securities is an article of faith (at least in lower Manhattan). This belief is supported by evidence that shows that the overwhelming majority of U.S. firms choose to issue equity through firm-commitment underwritings when apparently less costly methods of issue are available (e.g., rights offerings, shelf registrations). This note covers the basic institutional requirements of a firm-commitment security offering. The note then discusses two other reforms instituted by the Securities and Exchange Commission, Rule 415 (shelf registration) and Rule 144A, which give firms other options when issuing securities. While those methods can be used to issue any type of security (e.g., debt, equity, convertibles, REITs), this note focuses primarily on equity issuance because it is the most complex and costly form of issuance.

U.S. Securities Regulation

The issuing process and underwriting activities surrounding new-security sales are limited by a complex set of regulations that have their formal basis in the Securities Act of 1933 and the Securities Exchange Act of 1934 (the Exchange Act). The Securities Act of 1933 covers new issues, requiring that “every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that essentially no important element attending to the issue shall be concealed from the buying public.” Although Section 11 of the Securities Act imposes civil penalties on persons involved in the issue—including the underwriter—for material misstatements and omissions, it allows underwriters to avoid this liability if they can show they acted prudently and reasonably investigated the circumstances of the issue. Thus, this provision, in effect, supports the rationale for “due diligence.”

Due diligence requires that an underwriter provide reasonable support for the statements made in the registration documents and sufficient information to enable investors to properly evaluate the issuer's purpose, performance, and rationale for the offer. As part of this investigation, investment bankers often ask the issuer's auditors for a “comfort letter,” which discloses the procedures used in preparing unaudited financial information for the registration statement. As noted above, under the 1933 act, the company has absolute liability for material misstatements or omissions. If the underwriters' due-diligence activities did not reveal these problems, however, they can attempt to avoid this liability by claiming that the issuer kept them “in the dark,” too.

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Keywords: securities

Suggested Citation

Chaplinsky, Susan J., The Issue Process for Public Securities. Darden Case No. UVA-F-1129, Available at SSRN: https://ssrn.com/abstract=1278885 or http://dx.doi.org/10.2139/ssrn.1278885

Susan J. Chaplinsky (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm

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