Ch. 6: Security Offerings 241
home market regulatory approval before initiating any foreign trading in its securities.
There can also be home country restrictions on foreign sales of domestic securities and
purchases of foreign securities by domestic investors.
Under Regulation T of the Securities and Exchange Act of 1934, the Federal Reserve
Board of Governors establishes rules to limit the portion of a security’s market value that
can be loaned to the investor by a broker. These margin requirements are established
for the purpose of reducing selling pressure on investors who financed their security
purchases with loans. Thus, in market downturns, investors borrowing on margin are
required to put up additional collateral when their securities fall in value. This can force
many liquidity impaired investors to sell securities to raise collateral or if they fail to
meet the call for added collateral, the broker can sell their securities and close out their
margin loans. Either event can create a cascading pattern of sell orders, which has been
alleged to destabilize the stock market.
The SEC regulates the financial condition of brokerage firms and the short selling
of securities by investors and underwriters. In the normal case of investor short selling,
brokerage houses and institutional investors lend securities to short sellers, who imme-
diately sell these securities in the stock market, knowing that at a future date they will be
obligated to purchase these same securities in the stock market to close out their short
positions with their lenders.
SEC regulations concerning public offerings of securities underwent sweeping
changes as of December 1, 2005. One major innovation is the creation of a new category
of issuers called “well known seasoned issuers” (WKSI) with special filing exemptions.
WKSIs are publicly listed firms (involuntary filers) that are eligible to issue shelf offer-
ings, which are current and timely in their reporting obligations over the past year. They
must also meet one of two conditions; (1) have outstanding a minimum of $700 mil-
lion of common equity market capitalization world-wide that is held by non-affiliates,
or (2) if they are only registering non-convertible securities other than common equity,
that during the past three years they have issued non-convertible securities other than
common equity in registered primary offerings with an aggregate value of $1 billion.^4
Under the new rules, a WKSI can have oral or written communication with investors
before during and after the offering process. WKSIs are also given automatic shelf reg-
istration status. They are permitted to register unspecified amounts of different specified
types of securities on Form S-3 or F-3 (only non-convertible securities excluding com-
mon equity if only condition (2) above is met) without allocating between primary and
secondary offerings. These registration statements are automatically effective on filing
without SEC review. Issuers can also add further classes of securities and eligible ma-
jority owned subsidiary securities after the registration statement is effective, provided
they make a post-effective amendment to the offering’s registration statement.
(^4) Majority owned subsidiaries of these firms also may be considered to be “well-known seasoned issuers”
if the securities issued are non-convertible securities other than common equity, are fully and unconditionally
guaranteed by the parent and are of investment grade.