Cooling-off Period

A candidate asks how the registration statement relates to the prospectus. The accurate description is that the prospectus is:

1. A.A summary the SEC prepares after it has reviewed the registration statement.Wrong. The SEC prepares no documents for an offering, since the issuer and its counsel draft everything filed.
2. B.A marketing document kept separate from anything filed with the SEC.Wrong. The prospectus is part of the filing itself, and its contents are prescribed rather than freely written.
3. C.The portion of the registration statement that is delivered to investors.Correct. The issuer files the full registration statement, and the prospectus is the part purchasers receive.
4. D.A supplement filed only when the registration statement contains an error.Wrong. Amendments correct filings, while the prospectus is a core component present from the very start.

Why: An issuer files a registration statement containing everything the rules require, including exhibits and information never distributed to the public. The prospectus is the section of that filing designed to be given to investors so they can make an informed decision. During the cooling-off period a preliminary version circulates without the final price, and once the registration is effective the final prospectus carrying the offering price must be delivered to purchasers. Delivery is what satisfies the disclosure obligation, which is why an offer made without it is a problem regardless of what was filed.

The cooling-off period begins on the date the:

1. A.issuer signs the underwriting agreementWrong. The agreement with the underwriters is a private contract and does not start any regulatory clock.
2. B.SEC declares the registration statement effectiveWrong. Effectiveness ENDS the cooling-off period. Sales may begin then.
3. C.first indication of interest is receivedWrong. Indications of interest are collected DURING the cooling-off period, so the period is already running.
4. D.registration statement is filed with the SECCorrect. Filing starts the cooling-off period, which runs a minimum of 20 days and in practice until the SEC declares the registration effective.

Why: The cooling-off period starts when the registration statement is filed with the SEC and runs a minimum of 20 days, though in practice it lasts until the SEC declares the registration effective.

Halverson Foods has filed its registration statement and its red herring is circulating. A prospective investor reads it and asks his representative how much Halverson will actually raise and at what price per share. Neither figure appears anywhere in the document. Why not?

1. A.The final public offering price, and therefore the proceeds to the issuer, are not fixed until shortly before the registration statement becomes effective.Correct. A red herring omits final price, spread, proceeds and effective date because those terms are still being negotiated.
2. B.The underwriters set the price only after observing the first day of secondary market trading.Wrong. The offering price is set before effectiveness. Secondary trading begins after the offering is priced and sold.
3. C.Price information appears only in the tombstone advertisement published during the cooling-off period.Wrong. A tombstone is a bare announcement of the issue and where to obtain a prospectus; it is not where pricing is established or disclosed.
4. D.The SEC prohibits disclosing an offering price to investors at any time before the securities begin trading in the secondary market.Wrong. The price is disclosed in the final prospectus, before any sale is confirmed. There is no such prohibition.

Why: A preliminary prospectus (red herring) contains substantially all of the disclosure an investor needs EXCEPT the economics that are still being negotiated: the final public offering price, the underwriting spread, and therefore the net proceeds to the issuer, along with the effective date. Those are set immediately before the registration statement goes effective, once the syndicate has gauged demand through indications of interest. The red herring carries a legend, printed in red, stating that the registration statement has been filed but is not yet effective and that the securities may not yet be sold.

During the cooling-off period, a representative sends a preliminary prospectus to an interested customer. Which statement is correct?

1. A.The document must be accompanied by the firm's internal research reportNothing may supplement the prospectus - attaching research to a red herring is prohibited, not required.
2. B.Sending it constitutes an illegal offer under the Securities ActThe statutory prospectus exemption makes the red herring one of the few LAWFUL written offers during the cooling-off period.
3. C.The representative may accept a check as long as it is not deposited until effectivenessNo payment may be accepted in any form before the effective date - holding the check does not cure it.
4. D.The document omits the final price and effective date, and the firm may accept only nonbinding indications of interestCorrect - the red herring solicits interest lawfully but cannot support orders or payment.

Why: The preliminary (red herring) prospectus is a permitted written offer during registration. It omits the final offering price and effective date, and the firm may accept only nonbinding indications of interest - no orders, no payments, no markups of the document. The clue is cooling-off period: solicitation of interest is allowed, sales are not. Review: the registration process.