Section 5 of the Securities Act of 1933

Let's look at when we use the prospectus and registration statement in the sales process, which consists of an offer, an agreement to sell and then delivery. This is governed by Section 5 of the Securities Act of 1933.

The Offer

Pause for a moment to read § 5(c) below. The rule for offers is that you can't offer to buy or sell securities until the issuer has filed a registration statement with the SEC.

"Offer" is broadly defined to include anything that conditions the market. We'll discuss this further in the next section on gun jumping.

The Sale

Next is the sale. Pause and read § 5(a)(1) below. This subsection says you can't sell a security unless the registration statement is effective. So combining it with the paragraph above, you can't make an offer until the registration statement is filed, and you can't make a sale until the registration statement is effective.

Once an issuer files a registration statement with the SEC, the SEC staff reviews the registration statement and comments on deficiencies. The issuer will make revisions (or argue that the disclosure is fine) and file an updated version of the registration statement. Then the SEC staff will provide new comments and the process will go on like this until the SEC and the issuer are comfortable with the registration statement. Only after that review process will the SEC declare the registration statement effective.

Once the registration statement is effective the issuer can make sales.

The contents of the registration statement are addressed in § 5(b)(1). Pause and read it below.

Each registration statement includes a prospectus, and § 5(b)(1) says you can't use a prospectus unless the prospectus has everything required by § 10. This is a complex area with many exceptions and exceptions to the exceptions. Just know that for the sale, you need an effective registration statement and preparing one is a massive task.

The Delivery

Finally, § 5(a)(2) says that you can't deliver the securities until the registration statement is effective. This makes sense, because you shouldn't have even sold them without an effective registration statement. § 5(b)(2) says that when you do deliver the securities, you also need to deliver the prospectus. There are exceptions to this, which most offerings will rely on.

Summary