Shelf Registrations

Firms that want to raise external financing have to disclose information and file the required statements with the SEC before they can issue securities. This registration process is costly and time consuming and is one reason why some firms rely on internal financing. In response to this criticism, the SEC simplified its rules and allowed firms more flexibility in external financing. Rule 415, which was issued in 1982, allows firms to make a shelf registration, in which they can file a single prospectus for a series of issues the firm expects to make over the next two years.

Besides making the process less cumbersome, shelf registration also gives firms more flexibility in terms of timing, since stock and bond issues can be made when windows of opportunity open up. Thus, a firm might make a shelf registration for $200 million in bonds and make the bond issue when interest rates are at a low point. This flexibility in timing also allows firms to open up the process to aggressive bidding from investment banks, reducing transactions costs substantially. Some firms make the issues themselves rather than use investment bankers, since the process is simpler and faster.

Overall, the spreads on new issues, especially for bonds, have been under pressure since the passage of shelf registration. In spite of its benefits, however, shelf registration is more likely to be used by large firms making bond issues and less likely to be used by small firms making equity issues.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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