In this publication, we often write about offering features used outside of structured products that find their way into the structured products market. In this article, we write about how an offering methodology used for several years in the structured products world has made its way to another market, namely the IPO market.
In a recent no-action letter,4 the SEC's Division of Corporate Finance agreed that a broker-dealer's proposed procedures for selling securities in an IPO through conditional offers to buy would not constitute a pre-effective sale. Accordingly, these procedures would not violate Section 5(a) of the Securities Act.5 The procedures in question will look familiar to those market participants who work on registered offerings of structured products.
Under the procedures, the IPO shares will be offered to the broker-dealer customers based upon the range in the IPO price that is set forth in the red herring, as required by the SEC's rules. This range in share price is somewhat analogous to the ranged cap, multiplier, interest rate, or other term that may exist in the red herring for a structured note offering, and the final term depends in part upon market conditions on the pricing date. During the offering period, these accounts may place a "conditional offer to buy" ("COB") with their broker; the COB will only transform into an actual order if the offering price is within the range. The investor is also permitted to cancel its order prior to the expected time of effectiveness of the registration statement.6
This offering methodology, like that of structured notes, was designed to facilitate offerings of these products to retail investors. Unlike institutional investors, which are prepared to monitor the markets and effect securities transactions at just about any point in the trading day, retail investors cannot be expected to stand ready to confirm a prior indication of interest at exactly the time when an offering's final terms are set. Accordingly, a procedure that permits a COB to be made, and to be transformed into an actual order at the time that the final terms are set, permits retail investors to participate in the offering, based on a range of terms that they have agreed to at the time they placed their COB. Not all investors can be reached by telephone or email at the precise time the offering's terms are set.