Section 5 Regulations
Section 5 seeks to promote mandatory disclosures by requiring registration statements and to ensure potential investors only have access to information that the SEC approves during a public securities offering. Section 5 centers its regulation around the SEC’s review of the registration statement and separates its regulations of the issuers’ activities in three different timeframes: the pre-filing period, the waiting period, and the post-effective period.
In the pre-filing period, Section 5(c) prohibits the issuer from making any “offer” to sell securities, and Section 2(a)(3) defines “offer” as all communications that may condition the market for the sale of the securities. During this time, issuers begin consulting underwriters to market the securities, law firms to manage the filing of SEC documents, and accounting firms to audit their financial documents. Companies may engage in testing-the-waters communications with institutional investors during this time, however.
The waiting period begins once the issuer files the registration statement. During this time the SEC reviews the registration statement and the issuer and underwriter begin to gauge market interest. Unlike in the pre-filing period, Section 5 allows offers under certain conditions. Section 5(b)(1) allows oral offers, and companies often conduct roadshows during this time. For essentially all written offers, however, Section 5(b)(1) requires that they satisfy Section 10, which regulates what information prospectuses must contain.
Once the SEC approves the issuer’s registration statement, making it effective, then they are in the post-effective stage and may sell their security without restriction.
Exceptions to Section 5
The SEC exempts some offerings from Section 5, i.e. some offerings do not require the filing of a registration statement. From a policy standpoint, the SEC recognizes that some investors are financially sophisticated enough to fend for themselves and do not require the protections of Section 5.
When an issuer is able to issue securities without a registration statement that is referred to as a private placement. Regulation D, for example, creates safe harbors for issuers to privately place securities if the transaction meets certain conditions, thereby avoiding Section 5. Private placements under Regulation D usually involve an issuer selling securities to financial institutions, such as investment banks or mutual funds.
[Last updated in January of 2022 by the Wex Definitions Team]