Prospectus Requirements and Timeliness

Every registered offering moves through three distinct phases. Each phase controls what a broker-dealer (BD) can say, which document must be delivered, and whether any money can change hands. Misidentifying the phase is one of the most heavily tested errors on Series 6.

What are the three phases of a new issue registration?

• The cooling-off clock starts when the issuer files the registration statement (typically Form S-1 for operating companies or Form N-1A for open-end mutual funds)
• The 20 calendar days is not a fixed date. An amendment filed before the effective date restarts the count (unless it was filed with the SEC's consent or under an SEC order), and an issuer can file a delaying amendment so the registration does not take effect until the issuer amends to end the delay or the SEC declares it effective
• The SEC can block a filing that is, on its face, incomplete or inaccurate in a material respect with a refusal order, or suspend a registration with a stop order
• A deficiency letter (the SEC staff's comments on the filing) does not extend the period by itself. The amendment the issuer files to answer it is what restarts the 20 days
• During the cooling-off period, the BD may engage in due diligence meetings and road shows with potential institutional investors

Exam Tip: Gotchas

• The 20-day cooling-off period is not a fixed date. Do not assume a registration is effective on day 21. A pre-effective amendment restarts the count, and a delaying amendment holds the registration open until the issuer ends the delay or the SEC declares it effective. A deficiency letter alone does not extend the period; the amendment that answers it does.

What is a preliminary prospectus or red herring?

The preliminary prospectus, commonly called a red herring, is the disclosure document used during the cooling-off period.

• Named for the red-lettered legend on the cover stating the registration is not yet effective and no offers to buy may be accepted
• Contains almost all the information that will appear in the final prospectus, with three notable omissions:
  • Final offering price (typically shows a price range instead)
  • Effective date
  • Net proceeds to the issuer
• Used to solicit indications of interest, which are non-binding expressions from potential buyers

Indications of interest are:

• Non-binding: the customer is not obligated to buy, and the BD cannot accept payment or execute a trade
• Revocable: the customer can back out at any time before the registration is effective
• Required to be re-confirmed: once the registration is effective, the BD must contact the customer again before executing any purchase

Exam Tip: Gotchas

• Indications of interest are non-binding both ways. The customer is not obligated to buy, and the BD cannot execute the trade. The BD must re-contact the customer after the registration is effective to confirm the purchase.

What is a final prospectus?

The final prospectus is the post-effective disclosure document.

• Issued once the SEC declares the registration effective
• For a fixed-price offering, includes the final public offering price, effective date, and proceeds to the issuer
• Must be delivered to the customer no later than with the trade confirmation (this is the prospectus-delivery timing standard covered in Topic 5)

For an open-end mutual fund, the prospectus discloses the pricing method and applicable sales charges rather than fixing one net asset value (NAV) for future purchases. After effectiveness, each purchase uses the NAV next computed after receipt of the order, plus any applicable sales charge.

A red herring may omit pricing-related information, but that does not mean sales charges must remain undisclosed until effectiveness. During cooling-off, the representative may collect only nonbinding indications of interest, not purchase orders.

Exam Tip: Gotchas

• A "prospectus" on the exam means the final prospectus unless stated otherwise. The preliminary prospectus is always called a "red herring" or "preliminary prospectus" in exam questions. Treat them as different documents with different rules.

How must prospectus information stay current during registration?

All information in the prospectus must be current as of the effective date.

• Material changes during the cooling-off period trigger an amendment to the registration statement
• A material amendment typically resets the 20-day clock, pushing the effective date back
• Using a stale preliminary prospectus (one that does not reflect material changes) after an amendment has been filed may violate the antifraud provision covered in Topic 7

Think of it this way: The cooling-off period is a quiet window where the issuer and SEC finalize disclosures while the BD gauges customer interest. Until the SEC says "go," no money moves, no prices are locked, and every conversation is conditional.

What Should You Check on Exam Day?

• Can you name the three phases of a new issue registration and what the broker-dealer may do in each: pre-registration, cooling-off, and post-effective?
• Do you know the 20-calendar-day cooling-off period restarts with a pre-effective amendment, a delaying amendment can hold it open, and a deficiency letter does not extend it by itself?
• Can you list the three items missing from a red herring: the final offering price, the effective date, and net proceeds to the issuer?
• Do you know indications of interest are non-binding and revocable, and the broker-dealer must re-confirm with the customer after the registration is effective?
• Can you state that a material change during cooling-off triggers an amendment that typically resets the 20-day clock?