In a recent article, Professor Barbara Banoff mounted a spirited defense of the Securities and Exchange Commission's decision to adopt permanently Rule 415 under the Securities Act of 1933 (Securities Act). Rule 415 permits the registration of securities that an issuer intends to "put on the shelf'' rather than sell immediately. By having a block of "shelf registered" securities available, an issuer avoids the delay of the registration process once the decision is made to proceed with a sale. Shelf registration also gives an issuer the flexibility to seek bids from a group of competing underwriters and bypasses the traditional method of negotiating a fixed price in advance of sale with just one underwriting syndicate.
A major criticism of Rule 415 is that this speed and flexibility impede an underwriter's ability to perform "due diligence," its statutorily induced investigation of the accuracy of the information contained in the registration statement. Professor Banoff uses modern finance theory to argue that this concern is misplaced because the improvements in information reaching the market through underwriter due diligence do not benefit investors in a worthwhile fashion. Due diligence, she asserts, is therefore unnecessary.
This article examines whether modern finance theory demonstrates that the information improvement resulting from due diligence produces no social benefit. It suggests that given a properly broad view of the role of the market for securities in our economy, the opposite is the case. It then examines the issue that Professor Banoff has largely avoided: the effects of short form and shelf registration on underwriter due diligence. It finds that the effects are negative, and concludes that the SEC should develop ways to put the same kinds of pressures on issuers when they prepare Exchange Act periodic reports as underwriters historically placed on them when the issuers prepared Securities Act registration statements.
Law | Securities Law
Merritt B. Fox,
Shelf Registration, Integrated Disclosure, and Underwriter Due Diligence: An Economic Analysis,
Va. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/3793