Offerings: who takes part, public vs. private, IPO and follow-on offerings, best efforts vs. firm commitment, and shelf registration

Participants and proceeds

An issuer creates securities to raise capital. An investment banker helps structure and distribute an offering. The lead underwriter manages the process; a syndicate of underwriting firms can share the purchase commitment and distribution work. Selling-group members help sell securities without assuming the syndicate's underwriting commitment. Investors purchase the securities. Counsel and accountants assist with legal disclosure and financial information.

Follow the money: proceeds from newly issued shares go to the issuer, while proceeds from shares offered by existing shareholders go to those selling shareholders. An offering can contain both.

Classify the offering

An initial public offering, or IPO, is a company's first public offering of stock. A follow-on offering occurs after the company has already gone public. A follow-on can include new shares, existing shareholders' shares, or both. Do not confuse a public distribution of existing shares with routine secondary-market trading between investors.

A registered public offering uses a registration statement and prospectus. For sales subject to registration, the registration statement must be effective before sales occur. Filing alone is not effectiveness. The prospectus communicates information about the business, securities, risks and offering terms. SEC registration is disclosure, not an endorsement of investment merit.

A private placement relies on an exemption from registration. Section 4(a)(2) covers issuer transactions not involving a public offering. Under Regulation D, Rule 506(b) prohibits general solicitation and permits accredited investors and a limited number of sufficiently sophisticated nonaccredited purchasers. Rule 506(c) permits general solicitation, but all purchasers must be accredited and the issuer must take reasonable steps to verify their status. An exemption from registration does not remove antifraud obligations.

Who bears the unsold-inventory risk?

In a firm commitment, the underwriter buys the agreed securities from the issuer for resale and bears the risk that they cannot be resold at the expected price. In best efforts, the firm acts as selling agent without committing to purchase the unsold securities; the issuer bears the risk of raising less money. An all-or-none condition requires the entire offering to sell or the offering is canceled and investor funds returned. A minimum-maximum condition requires the stated minimum to be raised before the offering can proceed.

Shelf registration

Shelf registration permits eligible securities to be registered for delayed or continuous sale, allowing an issuer to conduct later takedowns as financing needs arise. It is a registered offering mechanism, not a private-placement exemption or an underwriting commitment. Required disclosures must remain current. Certain shelf registrations have a three-year offering window, with renewal and transition provisions; do not apply that period to every shelf category.

Keep four questions separate: Who receives the proceeds? Is the offering public or exempt? Is it the first public stock offering or a follow-on? Who commits to buy the securities?