6.1.4. The Pre-Filing Period
After an issuer decides to proceed with an offering of new securities, it will typically begin the process of selecting an underwriter to assist with the issue, a process that involves writing a registration statement and prospectus, both of which will be filed with the SEC.
With the issuer’s selection of an investment bank to underwrite the offering, both parties will sign a non-binding agreement called a letter of intent (LOI). The letter of intent is a tentative agreement between the two parties, setting out the basic terms of their relationship and the terms of the offering. The letter of intent allows the underwriter to conduct due diligence on the issuer before agreeing to take on the financial responsibility of the offering. Due diligence typically involves examining the issuer’s books and records to evaluate its financial viability and assessing the state of the market for the new issue. The investment bank will look for any evidence that the issuer’s securities might not be a good investment. Key elements of the due diligence process include performing background checks on senior officers; examining the company’s financial data; analyzing any pending or potential lawsuits; evaluating corporate bylaws; studying relevant contracts, patents, and copyrights; and conducting industry research.
At the same time, the underwriter and issuer will be negotiating the Underwriting Agreement (UA), which is a more detailed version of the LOI that is intended to be binding once signed. The UA includes:
• The public offering price of the securities
• The per-share underwriting spread
• A settlement date on which the issuer will receive payment and deliver the securities to the syndicate
• The net proceeds to be received by the issuer and which costs will be borne by which parties
• The details of the offering’s over-allotment (greenshoe) option, if there is one (these are discussed later in this chapte