246 B.E. Eckbo et al.
Syndicate roles and compensation. Lead underwriters form and coordinate syndicates
and receive the management fees. Some banks share underwriting risk and underwriting
fees while other banks may help distribute shares and receive distribution fees.Lee et
al. (1996)discuss the typical breakdown of underwriting syndicate compensation for
IPOs.
Due diligence investigation. Underwriters must investigate the issuer and certify that
the issue price is fair.
Prospectus. An issuer must produce a document describing the security offering and
its financial condition with the help of its underwriter. The due diligence investigation
helps assemble the information needed to meet SEC filing requirements.
Registration process. An issue must be registered in advance with the SEC. This
must include a preliminary prospectus or red herring and later a final prospectus. In the
U.S. and many other countries this will include an initial price range for the proposed
offering.
Effective date. Security registration statements that must be filed prior to a security
offering are said to be effective after they are reviewed by the SEC staff and any con-
cerns are resolved. The date of SEC approval is termed the effective date of the security
offering’s registration statement, after which selling of the issue can occur.
A seasoned issuer. A reporting company that is eligible to use SEC Form S-3 or F-3
to register primary offerings of securities.
A well-known seasoned issuer. Publicly listed firms (involuntary filers) eligible to
issue shelf offerings, which are current and timely in their reporting obligations over the
past year. They must also (1) have outstanding a minimum of $700 million 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, they have issued
non-convertible securities other than common equity in registered primary offerings for
cash $1 billion aggregate amount of during the past three years.
Exchange listing process. An issuer may seek a preliminary assessment of whether
subsequent to a successful offering its stock is likely to meet an exchange’s listing re-
quirements. Plans to list on an exchange will be reported in the registration document.
Quiet period. U.S. regulation which prohibits firms going public and their underwrit-
ers from disclosing sales and earnings forecasts not in the prospectus starting before the
firm announces its IPO and ending 40 calendar days after the offer.^6 This also precludes
stock analysts affiliated with an underwriter from covering the stock of an IPO for the
same period.
(^6) Prior to July 2002, the quiet period only lasted until 25 calendar days after the IPO.