Quick Answer
An initial public offering (IPO) is a company's first stock sale to the public: proceeds go to the issuer in the primary market. Under the Securities Act of 1933, an issuer files a registration statement, waits out a cooling-off period, and delivers a final prospectus. Secondary offerings resell existing shares to shareholders, not the company.
The whole unit on one sheet: the offering process, IPOs, underwriting, secondary offerings, and SPACs the exam loves.
The One-Liners That Win Points
- IPO = primary market: proceeds go to the issuing company, not selling shareholders.
- The SEC never "approves" an offering or judges its quality: it only declares the registration effective (disclosure met). "SEC approved" is always wrong.
- Secondary offering = existing, already-outstanding shares resold; the selling shareholders get the money, and it is not dilutive (no new shares).
- Follow-on / additional primary offering = the company issues NEW shares, receives the proceeds, and it IS dilutive.
- "Secondary offering" does NOT mean "second offering by a company": watch who receives the proceeds.
- Firm commitment: underwriter buys the entire issue as principal (dealer) and bears the loss on unsold shares.
- Best efforts: underwriter sells as agent (broker); unsold shares return to the issuer. All-or-none and mini-max are types of best efforts.
- A red herring (preliminary prospectus) lacks the final price and effective date and carries a red-ink disclaimer.
- A tombstone ad is NOT a prospectus and NOT an offer: just a factual announcement, no recommendations.
- Lock-up agreements are contractual (insiders vs underwriter), not SEC-mandated.
- A special purpose acquisition company (SPAC) is a shell with no operations that raises IPO cash to buy an unnamed private company: a blank check company / blind pool.
- SPAC investors can redeem their shares regardless of how they vote on the merger; redemption and voting are separate rights.
Numbers to Lock In
| Item | Value |
|---|---|
| Cooling-off (waiting) period minimum | 20 days |
| Post-IPO lock-up period | 90 to 180 days |
| SPAC IPO unit price | $10 per unit |
| SPAC business combination (de-SPAC) deadline | 18 to 24 months |
| SPAC shareholder redemption value | ~$10 per share plus interest |
| Sponsor promote (SPAC dilution) | ~20% of post-IPO shares |
Top Gotchas
- Proceeds direction is the tell: IPO and follow-on → the issuer; secondary offering → the selling shareholders.
- During the cooling-off period you may collect indications of interest and distribute the red herring and tombstone ads, but no binding sales and no money.
- The SEC's stop order suspends effectiveness for material misstatements: it is not an "approval" mechanism.
- Firm commitment = principal; best efforts = agent. The exam tests this principal-vs-agent line directly.
- A SPAC sponsor earns the promote only if a deal closes, so sponsors have incentive to push through ANY deal rather than liquidate.
- In role-identification questions (broker, agent, dealer, issuer): issuance and filings → issuer; distribution → broker-dealer; effecting transactions as an individual → agent; trading for own account → dealer; rating the securities → none of those four (rating agency).
One-Breath Recap
An IPO is a company's first stock sale in the primary market, so proceeds go to the issuer: file a registration statement, wait out the minimum cooling-off period (indications of interest and the red herring, but no money), then deliver the final prospectus once the SEC declares the registration effective, which is never an "approval." Underwriters take the issue on firm commitment (buy it all as principal) or best efforts (sell as agent, unsold returns to the issuer). A secondary offering resells existing shares so the selling shareholders, not the company, get paid and no dilution occurs, while a follow-on issues new dilutive shares to the company. A SPAC is a blank-check shell that raises IPO cash to buy an unnamed target, and its investors can redeem regardless of how they vote.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Equity Public Offering unit for the complete lesson.