Process for Bringing New Issues to Market
Quick Answer
Five mechanics drive a new-issue offering. Underwriters perform due diligence on the issuer, which files a registration statement on Form S-1, N-1A, or N-2. The underwriting agreement defines firm commitment or best efforts terms and who bears unsold-share risk. Selling group members distribute without risk. Blue-sky laws add state-level registration unless NSMIA covers the security.
Now that you understand the three phases and what documents go with each, the next piece is the mechanics: who investigates the issuer, who signs the underwriting contract, and who bears the risk if the securities do not sell. These roles are tested on almost every Series 6 exam.
What is due diligence in a securities underwriting?
Due diligence is the underwriter's investigation of the issuer before the registration statement is filed.
The investigation covers:
- Financial statements and recent accounting
- Business operations, customers, and competitive position
- Management backgrounds and related-party dealings
- Legal matters: pending litigation, contracts, intellectual property
Due diligence serves two purposes:
- Ensures the disclosures in the registration statement are accurate and complete
- Provides the underwriter with the reasonable investigation defense under Securities Act Section 11 against investor suits for material misstatements
The process typically culminates in a formal due diligence meeting attended by the issuer, underwriters, auditors, and legal counsel before the registration becomes effective.
What is a Securities Act registration statement?
The registration statement is the master filing with the SEC that describes the issuer and the securities being offered.
- Filed under Securities Act Section 5
- Filing starts the 20-day cooling-off clock
- Three primary forms tested on Series 6:
| Form | Used For |
|---|---|
| S-1 | Most corporate issuers (operating companies) |
| N-1A | Open-end investment companies (mutual funds) |
| N-2 | Closed-end investment companies |
Required contents of the registration statement include:
- Description of the issuer and its business
- Risk factors
- Use of proceeds (what the money will fund)
- Officer and director information, including compensation
- Audited financial statements
- Legal opinions on the securities being offered
Part I of the registration statement becomes the statutory prospectus (the document investors see). Part II contains supplemental information filed with the SEC but not distributed to investors.
What does an underwriting agreement cover?
The underwriting agreement is the contract between the issuer and the managing underwriter. It governs how the issue is distributed.
Key terms specified in the underwriting agreement:
- Commitment type (firm commitment vs. best efforts, covered below)
- Underwriting spread and selling concession
- Expense allocation between issuer and underwriter
- Indemnification provisions
- Representations and warranties from the issuer
Firm Commitment vs. Best Efforts
| Feature | Firm Commitment | Best Efforts |
|---|---|---|
| Underwriter's role | Principal: buys entire issue from issuer | Agent: tries to sell but does not buy |
| Who bears risk of unsold shares | Underwriter (takes onto its book) | Issuer (shares are returned) |
| Price certainty for issuer | Known in advance | Depends on sales |
| Underwriter exposure | Full market risk until resold | No market risk; only commission risk |
Two best-efforts variants also tested on Series 6:
- All-or-None (AON): the entire offering is canceled if not fully sold. No partial sales.
- Mini-max: a minimum threshold must be reached before any shares are sold, with a maximum cap above that threshold
Exam Tip: Gotchas
- In a best-efforts underwriting, unsold shares go back to the issuer. In a firm commitment, unsold shares stay with the underwriter (who already bought them). The exam tests this liability distinction directly and in scenarios.
How does a selling group differ from an underwriting syndicate?
A selling group is a set of additional broker-dealers that help distribute the securities without taking on underwriting risk.
Selling group members:
- Sign a selling group agreement with the syndicate managers, not the underwriting agreement
- Do NOT commit capital or buy unsold shares
- Earn only the selling concession (a portion of the total spread)
- Have no liability for unsold shares
Exam Tip: Gotchas
- Selling group members do NOT sign the underwriting agreement and do NOT assume underwriting risk. They receive the selling concession only. If shares go unsold, they have no obligation to buy them. The syndicate (firm-commitment underwriters) is on the hook, not the selling group.
What are blue-sky laws for securities offerings?
Blue-sky laws are state-level securities registration requirements, separate from federal SEC registration.
Issuers generally must register or qualify the offering in each state where securities will be sold. States use three main methods:
| Method | How It Works | Typical Issuer |
|---|---|---|
| Notification (filing) | Short notice filed with the state | Seasoned issuers with established reporting |
| Coordination | State registration runs alongside the SEC registration | Most new federal offerings |
| Qualification | Full standalone state review | New issuers with no SEC registration, especially in that state |
Covered Securities and NSMIA
Under the National Securities Markets Improvement Act (NSMIA), certain securities are designated covered securities and exempt from most state registration:
- Securities registered under the Investment Company Act of 1940 (mutual funds, unit investment trusts (UITs), closed-end funds)
- Securities listed on a national exchange (New York Stock Exchange (NYSE), Nasdaq, and other NMS exchanges)
- Securities offered to qualified purchasers under certain exemptions
States may still require notice filings and fees for covered securities, but cannot impose substantive registration requirements.
Think of it this way: The federal registration process covers disclosure to the SEC; blue-sky covers state-level registration. NSMIA carved out covered securities (including mutual funds) so they do not have to register in all 50 states separately, but states still collect notice fees.