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Securities Regulation
University of Kentucky School of Law
Campbell, Rutheford "Biff"

SECURITY REGULATIONS OUTLINE
UNDERWRITING:
Best Efforts:
Firm Commitment:
UW Agreement:
be aware of what this includes. UW will agree to buy shares and take title, and then turn around and sell. Agency relationship and UW never takes title to the stock
c) The Registration Process
i) Time Periods
File
 
Effective
Pre-Filing
Waiting Period
Post Effective Period
Registration Statement
(disclosure statement – prospectus with different cover)
 
Incompliance
ii) What you are permitted to do changes as time goes on
(1) Pre-Filing: can not do much b/c no disclosure to provide investors
(a) Letter of Intent – Agreement btw. UW and Co.
(i) Outlines terms of proposed deal → how much will be sold; commission range anticipated; outline of the deal
(ii) Will have provision that not binding but UWs will bargain for coverage of costs and this will be binding
(iii) Do not always have these but reduces abuses by UWs if have these.
(b) Drafting of Registration Statement – filed electronically through Edgar
(i) Reg S-T: regulatory electronic filing rules and Edgar filing manual
(ii) Printer will run Edgarized copy and hard copy
(iii) Do not have all info with pre-filing like price so preliminary prospectus will leave these blank
(iv) Plain English is now mandatory when creating these documents
(v) Time: would be difficult to do this in less than 1 month for an IPO unless know the company very well
Counsel for Issuer:
·
Registration
·
Prospectus
·
Review UW agreement
Counsel for UW
·
UW agreement
·
Review registration and prospectus
(2) Waiting Period: preliminary prospectus and can do more
(a) Information will be available in the red herring prospectus
(b) Selling can begin:
(i) Lead UW: can start farming out to retail outlets only and may form UW syndicate (getting idea of interest) – no binding sales
(c) Still no UW contract yet [I has spent a lot of $$$$] – drafted but not signed.
(d) Review by the SEC:
(i) May have no review and can go effective in one week (may be delayed by selling efforts)
(ii) If review – 30 days and then letter of comment → explanation of deficiencies and then amendment will have to be filed.
(iii) Often if have already been to market will not review [say review all IPOs] – but plan for a review and 30 day wait
(3) Effective Date
(a) Right before effective
(i) Still no UW contract signed yet
(ii) Will price deal → this amendment will look different depending on whether or not there was a review which will require not only price amendment but also amendments to cure any deficiencies
1. Need to agree price to public and underwriters discount – usually will be prices at the close of the market
(iii) File Request for Acceleration
1. Any registration becomes effective 20 days after filing and each amendment has a separate 20 day period
2. When file amendment, will file acceleration request at the same time setting effective date for the following day → w/o letter, will not become effective for 20 days
3. 461(b): under normal conditions this acceleration is granted
4. 424(b): In the “old days” the printed prospectus would be one-sided and within period of time had to send 10 copies of the 2-sided prospectus but only if there had been substantive changes.
5. 430A: permissible to file request for acceleration without filing amendment to prospectus but remember that 424(b) kicks in and within 2 days, have to send a two-sided prospectus if there are substantive changes → this means that can merely transmit acceleration if no substantive changes. [ask Campbell about this] (iv) Effective → selling efforts begin
1. It is important to know the exact effective date because lead UW has 4 days to pay the issuer
2. SEC will most likely call to confirm effectiveness, although this creates substantial mistake if this information is wrong – everyone closes on verbal confirmation [letter comes later] (4) Closing – Timing can very but usually right after or before effective date – UW agreement signed and up until this time only had letter of intent and UW could have walked away at any time: money wired
Pre-filing
1. Letter of Intent
2. electronic filing with printer
3. No price information
4. Preliminary prospectus
:
Waiting Period:
1. Selling Begins (retailers only)
2. Use red herring
3. UW syndicate can be formed
4. UW K drafted but not signed
5. Review or no review by SEC
Effective
1. Before going effective
2. Selling Efforts begin
3. Signing of UW agreement
·
Price Deal
·
File Amend. with Acceleration Request:
d) Registration Statement
i) Forms change and disclosures chang

ital formation; some antifraud rules.
ii) 34 Act: reporting and antifraud rules
b) Underwriting (Public Offering)
i) Best Efforts: Agency relationship and UW never takes title to the stock
(1) Example: GE goes to Merrill and says want to sell 100K of CS and UW agrees to use best efforts on their behalf to sell through them.
ii) Firm Commitment: UW will agree to buy shares and take title, and then turn around and sell.
(1) Example: Will buy shares at 9.50 and sell at 10.00 [commission of 5% of the deal] iii) Finding a UW – most firms use investment banking groups
iv) Getting UW to take the deal
(1) IPO: will usually have a few shareholders put have never done a public offering
(a) Will evaluate as a “used car dealer” would, looking to trunover and make profit – have to be able to evaluate the deal
(i) Size is important – 10 million may be too small
(ii) How seasoned is the company – what lawyers and accountants are involved; more comfort when reporting under the 34 Act
(iii) Business type – product.
v) Underwriting agreement: understand the timing
(1) Agreement among:
(a) UW leader becomes agent in fact to sign K with issuer and puts other UWs in the syndicate in privy of K with the issuer. → agreement as to %s, etc.
(b) Essentially non-negotiable → accommodate risk under indemnity agreements and pricing appropriately
(c) Contents:
(i) Sale terms
(ii) Contract of adhesion (warrants) – changes statutory claims to K claims and important by K claim has fewer defenses and no scienter requirement like in 10b
(iii) Opine that auditor is independent – be careful with this because often auditors will act as consultants also and will probably have issue of loyalty vs. role as watchdog.
(d) Important to focus on what the L has to opine to → content of reg. stmt. and must be careful to protect with due diligence: huge obligation and will all drop into price.