6.1.4. Underwriting Process: Cooling-Off Period
Once the lead underwriter and the issuer have completed the registration statement, they will file it with the SEC. As soon as the filing takes place, a 20-day cooling-off period ensues, in which the public has time to study the information in the registration statement and the accompanying preliminary prospectus (also called a red herring). The preliminary prospectus contains almost all the same information as the final prospectus, which is issued when the registration takes effect; however, the preliminary prospectus, unlike the final prospectus, does not contain the public offering price because this is typically set the night before the offering.
At this time, the lead underwriter and issuer present the offering to potential investors, usually institutional investors, in a series of “road shows,” in which they both solicit interest in the offering and collect information on its strength in the market. The road show consists of a management presentation and a question-and-answer system. Because the investment banker cannot actually sell the securities, it will collect indications of interest from the investors. During this period, due diligence continues, the underwriting syndicate continues to be formed, and the selling group is assembled.
Two things are permitted during the cooling-off period:
•The first is the publication of a tombstone ad