Equity Public Offering

The whole unit on one sheet: the offering process, IPOs, underwriting, secondary offerings, and SPACs the exam loves.

Which One-Liners 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.
• Only the managing underwriter may stabilize the aftermarket price, and only at or below the offering price; the greenshoe (overallotment) option caps extra shares at 15%.
• 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.
• The de-SPAC target must have a fair market value of at least 80% of the trust account balance.
• SPAC dilution has three sources: the sponsor promote, warrants, and any PIPE shares sold to help fund the merger.
• The SEC's blank-check escrow requirement only reaches blank check companies that are also penny stocks (under $5). Exchange-listed SPACs are not penny stocks because of the listing itself, not their $10 price alone, so that requirement does not apply to them at all.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

• 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, tombstone ads, and oral communications such as the road show, but no binding sales, no binding offers, and no money.
• The SEC's stop order suspends the registration statement's 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).
• The ordinary "priced at $5 or more" exit from the penny-stock definition does not apply on its own; only the exchange listing itself removes a SPAC from penny-stock status, and that removal takes the SPAC out of the entire blank-check escrow rule, not just the escrow piece.

One-Breath Recap

An initial public offering 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), and only the managing underwriter may stabilize the aftermarket or exercise the 15% greenshoe. A secondary offering resells existing shares with no dilution, a follow-on issues new dilutive shares, and a special-purpose acquisition company is a blank-check shell whose investors may redeem regardless of how they vote.

Need more than the recap? Read the full Equity Public Offering unit.