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Have you ever wondered where stocks come from? Perhaps it's time for us to have that heart to heart talk about...the facts of life as they pertain to publicly-traded corporations.
In 1933, THE SECURITIES ACT OF 1933 (the Act) was passed to provide the guidelines that a corporation must abide by when issuing stock in an equity offering. This act is also known as "the Act of Full Disclosure".
The Securities and Exchange Commission (SEC) is the governing agency that oversees the issuance of public stock and there are certain provisions in the Act that are outlined to ensure that the SEC is able to enforce these regulations. One of the chief components of the Act addresses the registrations of new stock. This portion of the Act clearly defines what information must be given to any prospective buyers of a corporation's stock. Hence, the label "full disclosure".
The first step a company takes in issuing a publicly traded stock is filing a registration statement with the SEC. Most corporations would hire an investment banker to take care of this for them. The registration statement is required to contain the following information:
The day the investment banker places the registration statement with the SEC is known as the filing date. The time between filing with the SEC and receiving approval is known as the "Cooling Off Period". This is the period in which the SEC investigates and confirms that the disclosure given in the registration statement was complete.
An investment banker will issue what is known as a "Preliminary Prospectus". It is more commonly known by the name of "Red Herring". This prospectus will have red printing across the top and in the margins. The primary objective of a red herring is to create interest in the issue that is being brought to market. Information that will be important to the investor is contained in this prospectus. However, there are two items that are not included in the red herring--the public offering price and the effective date.
It is important to note that the investment banker may not provide any information to its clients other than what is stated in the red herring. At this time, the investment banker will take "Indications of Interest" from the general public. No orders may be taken for the stock.
Near the end of the cooling off period, the investment banker will have a meeting with the corporation known as a "due diligence meeting". The purpose of this meeting is to ascertain that no material facts were misstated or omitted. This meeting is a very serious and integral part of bringing a company public. The final registration statement is signed by both the underwrite, (i.e., the investment banker) and the corporation officers.
Once a company is notified of the effective date for the new issue, the final offering price will be determined. At this time, the issue may come to market and sales may be effected and money accepted. The "final prospectus" may then be distributed--it has the effective date and the offering price filled in and is minus the red ink. When the final prospectus is distributed, the underwriter may provide sales literature such as research reports or recommendations.
It's exciting isn't it, knowing about the entrance of companies into the market? But, just like the facts of life--sometimes, it's better to know the facts than what you hear at work or on the street. This little synopsis of the emergence of public companies is by no means a complete one. There are items pertaining to the underwriting process that I have touched upon lightly simply to facilitate showing the highlights. If you have an interest in learning more, head to your public library or contact your favorite investment professional.
We live in a GREAT country--rules and all. Just look at some of your favorite stocks and ponder how they made it to the public market. There are some astonishing stories about companies that have been brought public. The public securities market is constantly undergoing change, hopefully, for both the customers and the corporations. You, the investor have a chance to become a part of that market, but, as always prepare yourself through learning as you participate. I wish you successful investing.
Some corporations exist forever and never become public corporations, but, some companies take a big step forward and decide the best way to capitalize their company is through a stock offering. The publicly traded arena is an avenue that is used to help companies raise money for their companies. They can use this money for a variety of reasons: buying new equipment, expansion, building new facilities, etc.
