Quick Answer
Public offerings register with the SEC and sell to the general public; private placements are exempt and limited to accredited investors. Key public-offering types are initial public offerings, follow-on offerings, and secondary offerings. Underwriting commitments, firm commitment, best efforts, all-or-none, and mini-max, determine who bears the risk of unsold shares.
Now that you understand who participates in bringing securities to market, let's look at the different types of offerings those participants handle.
Public vs. Private Offerings
The first major distinction is whether an offering is public or private. This determines the level of regulation, who can invest, and how freely the securities can be traded afterward.
| Feature | Public Offering | Private Placement |
|---|---|---|
| Registered with SEC | Yes - full registration required | No - exempt from registration |
| Who can buy | General public | Limited number of sophisticated/accredited investors |
| Disclosure document | Full prospectus | Private placement memorandum (PPM) |
| Resale restrictions | Freely tradable | Restricted securities; limited resale paths apply |
| Key regulation | Securities Act of 1933 (registration, prospectus, disclosure) | Regulation D limited-offering safe harbors |
Types of Public Offerings
This is one of the most commonly tested areas on the SIE. The key question is always: who receives the proceeds?
| Offering Type | Definition | Who Gets the Money? |
|---|---|---|
| Initial Public Offering (IPO) | A company's first sale of stock to the public - transitions from private to public company | The issuer (company) |
| Follow-on offering | An additional issuance of new shares by an already-public company | The issuer (company) |
| Additional primary offering | Same as follow-on - new shares issued to raise additional capital | The issuer (company) |
| Secondary offering | Sale of securities that are already issued and outstanding by current shareholders | The selling shareholder (NOT the issuer) |
Exam Tip: Gotchas
- "Secondary offering" does NOT mean the company gets the money. Existing shareholders are selling their shares; the company receives nothing. A "follow-on offering" (or additional primary offering) is when the company issues NEW shares and receives the proceeds. This distinction is frequently tested.
Underwriting Commitment Types
Once a company decides to go public (or issue additional shares), it must choose how the underwriter will handle the offering. The commitment type determines who bears the risk of unsold shares.
| Type | Risk to Underwriter | How It Works | Underwriter Acts As |
|---|---|---|---|
| Firm commitment | High | Underwriter purchases the entire issue at a discount and resells to the public; bears the risk of unsold shares | Principal (buys the securities) |
| Best efforts | Low | Underwriter agrees to sell as much as possible but returns unsold securities to the issuer | Agent (sells on behalf of the issuer) |
| All-or-none | Conditional | A type of best efforts where the entire issue must be sold or the offering is cancelled and funds are returned to investors | Agent |
| Mini-max | Conditional | A type of best efforts with a minimum sales threshold; if the minimum is met, the offering proceeds; if not, it is cancelled | Agent |
Exam Tip: Gotchas
- Firm commitment = principal; best efforts = agent. In a firm commitment, the underwriter buys the securities from the issuer (acts as principal). In best efforts, the underwriter sells on behalf of the issuer without purchasing (acts as agent). This principal vs. agent distinction is frequently tested.
- "Purchased the entire issue" = firm commitment. If the exam describes an underwriter purchasing the entire issue, that signals a firm commitment.
How the Commitment Types Connect
Think of the commitment types on a spectrum of risk:
- Firm commitment → Maximum risk to the underwriter (they buy everything)
- Best efforts → Minimum risk to the underwriter (they just try to sell)
- All-or-none → Best efforts with a binary outcome (sell all or cancel)
- Mini-max → Best efforts with a floor and ceiling (sell at least X, up to Y)
All-or-none and mini-max are variations of best efforts; the underwriter is still acting as an agent in both cases.
What Should You Check on Exam Day?
- Can you explain the difference between a follow-on offering and a secondary offering?
- Do you know who receives the proceeds in an initial public offering versus a secondary offering?
- Can you explain why a firm commitment underwriter acts as principal while a best efforts underwriter acts as agent?
- Do you know the difference between an all-or-none offering and a mini-max offering?
- Can you state which underwriting commitment type carries the highest risk to the underwriter?