Offerings

This free SIE study guide page covers securities offerings, such as initial public offerings (IPO), secondary offerings, and follow-on offerings. You’ll also learn about the role of investment bankers, underwriting syndicates, municipal advisors, regulatory filing requirements, exemptions, etc.

This topic is very important for passing the Securities Industry Essentials exam. Approximately 2 to 3 questions are asked from this section in every SIE exam.

Offerings

An offering refers to the process by which a company issues securities, such as stocks or bonds, to the public for investment. It involves registration with regulatory authorities, pricing the securities, and marketing them to potential investors, typically facilitated by investment banks.

Role of Participants

• Investment Bankers: They facilitate the issuance of securities and provide a range of financial services, including underwriting, M&A advisory, and capital raising. They play a crucial role in assisting companies with IPOs, bond offerings, and other capital market transactions while advising institutional clients on investment strategies.

• Underwriting Syndicate: A group of investment banks or broker-dealers formed to underwrite and distribute a securities offering collectively. Each syndicate member shares the risk and responsibility of selling the offering to investors.

• Municipal Advisors: They provide financial advice to state and local governments, as well as other municipal entities, regarding debt issuance, public finance, and other financial matters.

Types of Offering

If a company is looking for investment to expand its business, it can raise funds by offering a percentage of its stake. There are two types of offerings in the securities market: Public and Private.

Public Offering

A Public Offering occurs when a company sells securities, such as stocks or bonds, to the general public. It typically involves registration with the Securities and Exchange Commission (SEC) and is underwritten by investment banks. Public offerings provide companies with access to capital for growth and expansion.

• Initial Public Offering (IPO): An Initial Public Offering (IPO) is the first time a company offers its shares to the public. It involves thorough regulatory scrutiny by the Securities and Exchange Commission (SEC) and is typically underwritten by investment banks.

• Secondary Offering: A Secondary Offering occurs when existing shareholders, such as company insiders or institutional investors, sell their shares to the public after an initial public offering (IPO).

• Follow-on Offering: A Follow-on Offering, also known as Additional Public Offering (APO), happens when a company issues additional shares to the public after its initial public offering (IPO). It enables the company to raise additional capital for various purposes, such as expansion, debt reduction, or acquisitions. It can dilute existing shareholders’ ownership stake.

Note– IPOs and APOs are subject to rigorous SEC registration mandates outlined in the Securities Act of 1933, ensuring compliance and transparency in issuing new securities to the public.

• Intrastate Offering – Rule 147: Rule 147 allows companies to sell securities exclusively within one state, exempting them from federal registration requirements. To qualify, companies must conduct substantial business within the state and ensure that securities are only sold to residents of that state.

• Interstate Offering: It involves the sale of securities to residents of multiple states. These offerings must comply with federal securities laws, typically requiring registration with the Securities and Exchange Commission (SEC) unless an exemption applies, such as Regulation D for private placements or Regulation A for small public offerings.

Private Offering

A Private Offering involves the sale of securities to a select group of investors, typically institutions or high-net-worth individuals, without registration with regulatory authorities like the SEC. This offering is subject to exemptions under securities laws, providing companies with flexibility in fundraising while limiting public disclosure requirements.

• Company Buy-back Program: A Company Buy-back Program, also known as a share repurchase program, is when a company repurchases its outstanding shares from the open market. It can boost shareholder value by reducing the number of shares outstanding, potentially increasing earnings per share, and signaling confidence in the company’s prospects.

Methods of Distribution

Investment banks underwriting public securities offerings have options for distribution based on risk appetite. They can sell securities through firm commitment, best efforts, or bought deals, each offering varying levels of risk and responsibility in selling the securities to investors.

• Best Efforts: The investment bank commits to employing its utmost professional efforts to market and sell the issuer’s securities. However, it does not guarantee the sale of the entire issuance, and any unsold shares are returned to the issuer.

• Firm Commitments: The investment bank commits to purchasing the entire issuance of securities from the issuer at a specified price. The bank then sells these securities to investors at a higher price, earning a profit on the spread.

• All or None: The investment bank agrees to sell the entire issuance of securities for the issuer, ensuring that all shares are sold or the offering is canceled. The offering is terminated if the bank cannot sell all shares and investors receive refunds.

• Minimum-Maximum (Mini-Max): The investment bank agrees to sell a specified minimum number of securities but can also sell up to a maximum amount. This structure provides flexibility, allowing the bank to adjust the offering size based on investor demand while ensuring a minimum level of funding for the issuer.

Shelf Registrations and Distributions

Shelf registrations allow companies to register securities with the Securities and Exchange Commission (SEC) in advance without specifying when or if they will issue them.

This allows companies to quickly access capital markets when needed, reducing the time and costs associated with registering securities for each offering.

Once registered, companies can periodically issue securities from the “shelf” over a specified period, typically up to three years.

Investment banks may assist in facilitating these offerings, helping companies navigate the process of pricing, marketing, and selling securities to investors.

Shelf registrations and distributions are valuable tools for companies seeking efficient access to capital markets.

Offering Documents and Delivery Requirements

Each type of securities offering must deliver specific documents to investors and, in most cases, file them with the SEC as part of the registration process unless exempted. These documents, including prospectuses and offering circulars, provide essential information for investors to make informed decisions.

• Official Statement: It is a legal document prepared for municipal bond offerings, providing detailed information about the issuer, the bond issue, and associated risks. Investors rely on the Official Statement to assess the creditworthiness and suitability of the investment.

• Program Disclosure Document: A comprehensive disclosure document provided to investors participating in a securities offering program, such as a mutual fund or exchange-traded fund (ETF). It outlines critical information about the program, including investment objectives, risks, fees, and expenses.

• Prospectus: It is a legal document provided to investors before they purchase securities in a public offering. It contains essential information about the offering, including the company’s business model, financial performance, risks, and securities terms.

• Private Placement Memorandum (PPM): A PPM is a legal document provided to potential investors in a private placement offering. It outlines details about the investment opportunity, including the business plan, risks, terms, and regulatory disclosures.

Regulatory Filing Requirements and Exemptions

Regulatory filing requirements demand that some securities offerings register with the Securities and Exchange Commission (SEC), submitting detailed disclosure documents. However, certain exemptions allow offerings to proceed without complete registration, providing issuers flexibility while ensuring investor protection.

• Securities and Exchange Commission (SEC): When securities are not required to be registered with the SEC, they are referred to as exempt securities. However, it’s important to note that all securities offerings, whether exempt or not, must adhere to the antifraud provisions of federal securities laws, ensuring investors are protected from fraudulent practices.

• Blu-sky Laws: Blue-sky laws are state regulations that protect investors from fraudulent securities practices within their states. These laws require companies to register their securities offerings and provide disclosure documents before selling securities to residents.

This is the end of the first section of the SIE exam study guide. You have learned all the topics related to knowledge of capital markets. It’s time to test your knowledge about this section of the SIE task list. Participate in the practice quiz below and determine which area to focus further.