The Life Cycle of a Public Offering (Section 5)
Section 5 is the central pillar of the registration structure set up by the Securities Act of 1933. Although Section 5 only applies to offers or sales that involve interstate commerce or communication, as a practical matter virtually all securities marketing activities and sales fall into this category. Certain types of transactions or securities are exempt from registration. We discuss those exemptions in Chapter 8.
Section 5 contains three key provisions, which create three distinct periods in a public offering life cycle. First, Section 5(c) prohibits offers to sell or buy a security unless a registration statement for that security has been filed first. During this pre-filing period, the issuer follows up its decision to offer securities to the general public by engaging an investment bank to act as its underwriter. An underwriter assists the issuer with the registration process, as well as marketing and selling those securities to the public.
After the issuer has selected an investment bank to underwrite the offering, both parties will sign a non-binding agreement called the letter of intent (LOI). This letter of intent is a tentative agreement between the two parties, setting out the basic terms of their relationship and the terms of the offering. At the same time, the letter of intent allows the investment bank to conduct due diligence on the issuer before agreeing to take on the financial responsibility of the offering. In most cases, the underwriter that is selected by the issuer will not want to bear all the financial risk of the offering. For this reason, the underwriter will often invite other investment banks during the due diligence period to join in the underwriting. This group of underwriters is known as the syndicate, and each of its members will be allotted a certain amount of shares that they will be responsible to sell.
The pre-filing period ends once the issuer and un