Gun Jumping: What's an Offer?

In the last section we learned that you can't offer to sell or offer to buy securities unless the issuer has filed a registration statement. But what constitutes an offer? Obviously, if I say, "Would you like to buy my truck?" that's an offer to sell my truck. If it had been a share of stock rather than a truck that would trigger the costly requirements of the Securities Act. So folks try to get clever.

Suppose I tell you, "Hey, that truck over there? It can tow an aircraft carrier. Most truck enthusiasts would give up an arm and a leg to have it." Have I made an offer? I haven't asked you to buy the truck, but I'm clearly trying to raise your interest. Should that count? Do you have to say the magic words, "Would you like to buy my..."?

The SEC takes a broad view of offers. The idea is that an offer is really two parts. First, I try to make you think it's a good idea to buy the truck. Second, I ask if you want to buy the truck. That first part, which the SEC calls "conditioning the market" is sufficient to constitute an offer even if I never directly ask if you want to buy the truck. It's considered part of the marketing effort.

Recall that offers are prohibited before a registration statement is filed with the SEC. Gun jumping is a violation of Section 5 by making an offer before a registration statement is filed or making a sale before the registration statement is effective. Folks involved in gun jumping can be sued by the SEC or be forced by the buyer to rescind the sale.

The release below explains the reasoning and gives an example that may not immediately strike you as violating the rules against offers.