Phases of Underwriting – Series 7 Exam

📈 Phases of Underwriting – Series 7 Exam

Understanding the phases of underwriting is crucial for passing the Series 7 Exam. The underwriting process governs how new securities are issued and sold to the public. The Series 7 tests your ability to recognize the steps, timing, and key regulatory rules that apply.

Here’s a complete breakdown of the underwriting phases you need to master.

🏛️ What Is Underwriting?

Underwriting refers to the process by which an investment bank or broker-dealer helps an issuer (corporation, municipality, or government) bring new securities to the market. The underwriter manages risk, pricing, distribution, and regulatory compliance.

📘 The Three Main Phases of Underwriting

1. Pre-Registration (Pre-Filing) Period

• 📋 The issuer works with the underwriters to prepare the registration statement and prospectus.
• 🛑 No offers or sales are allowed during this phase.
• 📝 Due diligence begins: assessing the issuer’s financials, business model, and risks.
• 📑 Drafting the S-1 (or F-1) registration statement for SEC filing.

Key Concept:

• “Quiet period” — strict restrictions on communications
• Due diligence meeting conducted between issuer and underwriters

2. Cooling-Off Period

• 🧊 Begins once the registration statement is filed with the SEC.
• 📅 Lasts a minimum of 20 days, though the SEC can issue comments extending the period.
• 📢 Issuers and underwriters may distribute red herring prospectuses (preliminary prospectuses).
• 📋 No final sales or definitive offers allowed yet. Only indications of interest can be collected.
• 🔍 SEC reviews the registration for completeness (but does not approve the securities).

Key Activities:

• Holding a roadshow to market the offering to potential investors
• Collecting non-binding indications of interest
• Responding to SEC comments if needed

3. Post-Effective Period

• ✅ The SEC declares the registration effective.
• 🛒 Sales and official offers can begin.
• 📑 A final prospectus must be delivered to all purchasers at or before settlement.
• 💵 Underwriters sell shares to investors at the Public Offering Price (POP).
• 🎯 Stabilization efforts (if necessary) can be made under Regulation M to prevent price drops.

Key Concept:

• Underwriters may engage in price stabilization but must follow strict rules to avoid manipulation.

🔍 Quick Reference: What Can and Cannot Happen in Each Phase

🧠 Key Series 7 Rules to Remember

• 📜 SEC Review: Checks for completeness, not merit or accuracy
• 📄 Preliminary Prospectus (Red Herring): Can be used during the cooling-off period, but no price is listed
• 📋 Final Prospectus: Must be delivered no later than confirmation of the sale
• 🚫 Tombstone Ads: May appear during cooling-off but are limited to basic facts (issuer, type of security, underwriter)
• 🔥 Stabilization Rules: Allow underwriters to support a security’s price after offering, with disclosure

📝 Example Question

During which phase may a red herring prospectus be distributed to potential investors?

A. Pre-Registration Period
B. Cooling-Off Period
C. Post-Effective Period
D. After-market Period

✅ Correct Answer: B. Cooling-Off Period
Explanation: During the cooling-off period, the preliminary (red herring) prospectus can be distributed, and indications of interest can be gathered, but no final sales can occur.

🚀 Master Underwriting, Pass Series 7

Knowing the phases of underwriting and what activities are permitted in each phase is critical for answering multiple questions on the Series 7 Exam.

👉 Access Full Series 7 Study Guides and Practice Exams

Understand the process. Recognize the rules. Pass with confidence.