Throughout this unit, we’ve discussed the typical securities registration process, which involves the 20-day cooling off period. But what if an issuer wanted to register a security in the future but wanted to take advantage of market conditions quickly? For example, an issuer wants to raise capital through a bond issuance, but wants to wait until interest rates decline. When interest rates fall below a certain threshold, the issuer intends to offer the security quickly to take advantage of the new lower cost of borrowing.
Issuers can bypass the normal rules and obtain quick security registration through the shelf registration rule, formally known as SEC Rule 415. Continuing with our example above, the issuer would file registration paperwork for the debt security with the Securities and Exchange Commission (SEC) (technically SEC Form S-3). Some of the form is left blank, including the security’s coupon (interest rate) and maturity, among other characteristics. As we stated above, the issuer is waiting until interest rates decline to offer the security, so some of the security’s features are yet to be determined. Regardless, the issuer still must make significant disclosures that will eventually be provided to investors by a prospectus.
The SEC reviews the registration form for completeness, except for the blank sections not required to be filled out yet. If all the necessary disclosures are provided, the regulator grants the security effective registration. The issuer will now wait to offer the security to investors as the registration form is placed on a metaphorical “shelf” at the SEC. At any point in the next three years, the issuer can take the registration form off the “shelf,” fill out the missing parts, and offer the security quickly to investors.
Let’s assume interest rates decline far enough a year later. The issuer will now provide the SEC with the information left blank on the initial form (e.g., coupon, maturity, etc.). The security can then be offered to investors 48 hours (two days) after the new SEC filing. Registering a security this way allows the issuer to avoid the 20 day cooling off period, saving 18 days of waiting time.
Sign up for free to take 4 quiz questions on this topic