Ch. 6: Security Offerings 239
employee stock ownership plans (ESOPs), equity bonus plans, mutual-to-stock con-
versions, forced conversions of convertible securities (including conversions of venture
capital held securities at the IPO), equity financed acquisitions, dividend reinvestment
plans and funding pension plans with your own stock.
Legal systems, tax codes, securities regulations and the treatment of investors of a
country are likely to have a significant bearing on the level of security offering activity
as well as the choice of flotation methods. Over the last 25 years, there have been major
changes in securities regulations in the U.S. and other major capital markets. We review
some of these major changes and the trends in the evolution of security regulation in the
next section.
2.1. U.S. securities regulations
The U.S. regulatory environment is anchored on two major laws. The first major law
is the Securities Act of 1933, which requires issuers of securities to sell the entire is-
sue at a single offer price to all investors, to meet filing rules and extensive disclosure
requirements prior to the offering date. Under the regulations implementing this law,
prospective issuers must file an S-1 statement with SEC prior to the offering. Within
approximately 30 days, the SEC will send the issuer a letter of comment asking for
additional disclosures and request amendments to the registration statement. The issuer
sends a response and after several exchanges of letters, the SEC will typically declare
the registration effective. Once the filing statement is approved, the issuer can proceed
with the offering. The second major act is the Securities Exchange Act of 1934 which
mandates that issuers of publicly held securities make periodic disclosures through pub-
lic filings of annual 10-K, quarterly 10-Q and occasional 8-K statements, when material
changes occur.
There are several exemptions from the registration requirements under the Securities
Act for small issues, private placements, mergers and reorganizations. While privately
placed securities are exempt from registration requirements, these securities can not be
resold for a year without being publicly registered with the SEC.
In recent years U.S. securities regulations have moved toward more rapid disclosure
of material changes in company conditions, less delay in securities issuance and an
easing of restrictions on private placements and foreign security issuance in the U.S. and
the use of U.S. accounting standards under “generally accepted accounting standards”
(GAAP). However, these changes appear to be more than offset for foreign issuers and
small U.S. issuers by the passage of the Sarbanes–Oxley Act of 2002 which requires
major changes in Board of Directors committee structure, auditor independence and
certification of company financial disclosures.
As of March 1982, the SEC adopted Rule 415 Shelf Registration, which enabled pub-
lic companies to sell securities more rapidly. Under the Rule, issuers register securities
that can be sold from time to time over a two year period, with offer terms at each sale
set in light of current market conditions and other factors. The Rule permits an issuer to
avoid the delays involved in filing a new registration statement at each sale date. This