Second Market and Shares Post Term Paper

Excerpt from Term Paper :

fictional firm (RMD) can be able to offer pre-IPO's to investors. This is accomplished by looking at the way various policies can be implemented that is in compliance with the Securities Act of 1933 along with the Securities and Exchange Act 1934. Once this occurs, is when we can be able to see how they can create a unique market that will address this demand from retail and institutional investors.

Over the last several decades, demand for pre-IPOs (initial public offerings) has been increasing exponentially. Part of the reason for this, is because there has been a shift in the focus of investors. As a large number are realizing that they can make significant returns by investing in these companies before they are going public. Evidence of this can be seen by looking at the below table which is highlighting how high investor demand for pre-IPO's had an impact on their total returns once the company went public. This is accomplished by looking at the popularity of different issues over varying periods of time ranging from1 to 36 months.

Investor Demand in for Pre-IPOs Comparison with the Total Returns Realized once a Company goes Public

Time Period

Total Return after the IPO



6 months


12 months


24 months


36 months


These figures are important, because they are illustrating how those investors who become involved in per-IPOs are realizing larger returns vs. waiting for the company to begin trading.

As a result, this is an indication that there is a shift in the kinds of products that retail investors are seeking out with increasing numbers wanting pre-IPOs. In the case of RMD Securities, this is showing how the firm can be able to address these needs. However, due to the fact that these companies are not publically traded and will be going this route in the future means that there are different regulations that must be followed. To determine what laws are most relevant requires comparing how the Securities Act of 1933 along with the Securities and Exchange Act of 1934 are applied. Once this occurs, is when we will be able to see how these different laws are relevant and what steps must be taken by the RMD to ensure that they are in compliance with them. This is the point that they can begin offering these securities to retail investors.

The Securities and Exchange Act of 1933

The Securities and Exchange Act of 1933 is designed to create standards that all companies must follow when they are in the process of going public. The basic idea is to provide investors with more than enough information about the company. At the same time, is designed to eliminate any kind of fraud or misrepresentations that the corporation, investment bankers and legal council could make during the process. As a result, there are several different provisions that must be followed when any company is registering under these regulations. The most notable include:

A detailed description of the firm's assets and principal locations.

Information about the management.

A description of the kinds of securities that will be offered to the public.

All financial statements must be certified by public accountants.

This is important, because it is showing this law is providing a basic standard that all firms must follow during the process of registering any kind of company that is about to go public. However, during the process are certain exemptions that are allowed these include:

Private offerings that have limited numbers of investors.

Securities that is smaller in size and intrastate offerings.

The securities of municipal, state and federal governments.

This is significant, because it is illustrating how there are certain exemptions that are allowed under the law depending on the size and focus of the offering.

In the case of RMD securities, this means that they must understand how these different aspects of the law apply to investors and what areas must given the most emphasis. Given the fact that the firm is going be selling private placements, there are a number of provisions that they must take into consideration. The most notable include: the kind of investors they are selling the offering them to and if it is going to be sold inside one state or across the country.

The kind of investors that the offering is sold to is when you are looking at the objectives of the individual and if they have the ability to understand the risk / rewards. What is happening is the Securities and Exchange Act of 1933, will allow RMD to sell pre-IPOs to someone who is considered to be an accredited investor. This is a person who earns over $300 thousand per year and has a net worth of at least $1 million. These elements are important, because they are showing how the firm must have procedures to ensure that all customers are meeting these basic standards before they can begin discussing the possibility of purchasing a pre-IPO.

At the same time, if the offering will be sold in a one or more states this will determine how disclosures are made by the firm. This is because any kind of pre-IPO that is promoted in one state is exempt from select aspects of the law. However, if it is sold in numerous states, then the firm must disclose this information to SEC. This is important, because all IPOs will eventually involve the company selling the issue to residents of different states around the country.

As a result, the way trading will be conducted for pre-IPOs are to identify clients who are considered to be accredited investors. Once this takes place, is when there must be a process of registering the security with federal and state officials where the offering will be sold. This is when the firm will have a process in place that will ensure that all pre-IPOs are following the basic provisions of the law.

However, there needs to be a certain degree of flexibility during the process. This is because these offerings will be marketed to a wide variety of investors. As a result, RMD Securities must ensure that they qualify for the issue and have the ability to understand the risks / rewards of the offering. The best way that this can be accomplished is through having everyone fill out and sign a disclosure document. This is where they are stating that they understand the risks of investing in these kinds of companies and that they are accredited investors. Once this takes occurs, is when it will protect the firm against regulatory pitfalls from the lack of disclosure.

Moreover, this protecting the customer against issues that could be considered to be very risky by having them acknowledge that they qualify (prior to conducting the trade). In the event that there are any problems, this information can be used in a securities arbitration case to highlight that there were proper disclosures and follow up. This will protect RMD against possible legal challenges and investors by providing them with more than enough information.

These elements are important, because they are showing how this approach will address any kind of issues RMD Securities will face associated with the Securities and Exchange Act of 1933. Once this takes place, is when they will be able to market these products to investors and ensure that they are in compliance with the various provisions of the law. This is when they can begin to build their business and meet the demands of investors.

The Securities and Exchange Act of 1934

The Securities and Exchange Act of 1934 is focused on giving the SEC broad powers to regulate the sale and trading of securities in the public markets. This is accomplished by focusing on several different areas to include:

Corporate Reporting -- This is when companies that have more than $10 million in assets and over 500 shareholders must file annual / periodic reports with the SEC. The information must be audited and certified by an independent public accountant.

Proxy Solicitations -- This is when any kind of materials that are used in shareholders votes for the board of directors and special meeting must be supplied to the SEC. As, they want to see that the management is disclosing all relevant facts to investors about the company and what issues will be discussed during shareholder meetings.

Tender Offers -- This when anyone who is seeking to acquire more than 5% of the stock through a direct purchase or special offering (a tender offer) must file with the SEC.

Insider Trading -- This provision is designed to prevent the use of nonpublic information for the benefit of select investors.

The Registration of Exchanges, Associations and Others -- This stipulation requires that all exchanges, broker dealers, transfer agents and clearing houses register with SEC. For the exchanges they are creating self-regulatory agencies (SROs) that will set the various rules that everyone must follow during the process.

These different elements are…

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