This article is from the Investing Articles: Public Offerings: IPO and DPO series.
The Securities Act of 1933, also known as the Full Disclosure Act, the New Issues Act, the Truth in Securities Act, and the Prospectus Act governs the issue of new issue corporate securities. The Securities Act of 1933 attempts to protect investors by requiring full disclosure of all material information in connection with the offering of new securities.
Part of meeting the full disclosure clause of the Act of '33, requires that corporate issuers must file a registration statement and preliminary prospectus (also know as a red herring) with the SEC. The Registration statement must contain the following information:
Once the registration statement and preliminary prospectus are filed with the SEC, a 20 day cooling-off period begins. During the coolong-off period the new issue may be discussed with potential buyers, but the broker is prohibited from sending any materials (including Value Line and S&P sheets) other than the preliminary prospectus.
Testing receptivity to the new issue is known as gathering "indications of interest." An indication of interest does not obligate or bind the customer to purchase the issue when it becomes available, since all sales are prohibited until the security has cleared registration.
A final prospectus is issued when the registration statement becomes effective (when the registration statement has cleared). The final prospectus contains all of the information in the preliminary prospectus (plus any amendments), as well as the final price of the issue, and the underwriting spread.
The clearing of a security for distribution does not indicate that the SEC approves of the issue. The SEC ensures only that all necessary information has been filed, but does not attest to the accuracy of the information, nor does it pass judegement on the investment merit of the issue. Any representation that the SEC has approved of the issue is a violation of federal law.