Red Herring, Prospectus, Tombstone

Rule 11 of 14 in this unit1.4

1.4 Offerings

SIE outline 1.4

Red Herring, Prospectus, Tombstone

Red herring: preliminary, no price. Prospectus: final, priced. Tombstone: an announcement, not an offer. NOT interchangeable documents.

The trick

Common trap: The tombstone goes out first to build interest, then the registration statement is filed, then the red herring is sent to the people who responded. Correct: Nothing goes out before the filing. Securities Act Section 5(c) makes it unlawful to offer to sell or offer to buy before a registration statement has been filed. The red herring and the tombstone both belong to the cooling-off period: after the filing, before the effective date. Order the stem by clock, not by importance: filed → 20 days under Section 8(a), earlier if accelerated, restarted by an amendment → effective → delivery. Anything a stem places before "filed" is the trap.

The method for this kind of question

506(b) and 506(c) trade opposite things

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Harder

In an all-or-none offering that falls short by a single share, what happens, and does the underwriter absorb the unsold shares?

A. The deal closes anyway; the underwriter absorbs nothing. All-or-none specifically requires the full amount to sell; a single-share shortfall does not close the deal. B. The whole offering is cancelled and funds are returned; the underwriter never held any shares to absorb C. The underwriter must buy the shortfall itself. Invents an obligation that would make this a firm commitment; all-or-none is a best-efforts variant, and the underwriter never buys the shortfall. D. The issuer must lower the price until it sells. Invents a repricing mechanism the structure does not have; the offering simply cancels.

How sure are you?

Sure Fairly sure Guessing

Correct: B. All-or-none means the deal only happens if the entire issue sells; falling short by any amount cancels it and returns investor funds, and since it is a best-efforts variant, the underwriter never took title to anything.

A. All-or-none specifically requires the full amount to sell; a single-share shortfall does not close the deal.

C. Invents an obligation that would make this a firm commitment; all-or-none is a best-efforts variant, and the underwriter never buys the shortfall.

D. Invents a repricing mechanism the structure does not have; the offering simply cancels.

Unit: SIE outline 1.4

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