IPOs and the Slow Death of Section 5

Donald C. Langevoort

Georgetown University Law Center

Robert B. Thompson

Georgetown University Law Center


Since its enactment, Section 5 of the Securities Act of 1933 has restricted sales-based communications with investors, but that effort is nearly dead even with respect to the most sensitive of offerings, the IPO. Our paper traces that devolution, which began almost as soon as the ’33 Act came into existence, though the SEC’s 2005 de-regulatory reforms and Congress’ intervention in the JOBS Act of 2012. We show how much of this related to an embrace of “book-building” as the industry’s preferred method of price discovery, which requires private two-way communications between underwriters and potential sophisticated investors. But book-building (and the predictable IPO underpricing that results) has a retail dimension as well, and we point to ways in which the otherwise sensible deregulation may enable an over-stimulation of retail investor demand. We then explore two main justifications that have been given for the aggressive deregulation. The first is that any loss in prophylactic protection can be made up for by the threat of liability, particularly with an enhanced Section 12(a)(2). We find this unpersuasive for a variety of reasons. The other — amply visible in the long history of Section 5 — is a faith in the “filtration” process, that retail investors gain protection because of the availability of the preliminary prospectus during the waiting period, to those involved in the selling process if not the investors themselves. Putting aside the biased incentives that affect filtration, much of what is most important — and conveyed privately to the institutions in the course of book-building — is forward-looking information that probably need not appear in the formal disclosure, whether preliminary or final. None of this is an argument for returning to the old prophylactics of Section 5. But it is cause for the SEC and FINRA to pay close attention to the retail investor effects of the IPO selling practices, especially in the post-JOBS Act era.

Number of Pages in PDF File: 41

Keywords: IPOs, securities offerings, securities regulation

JEL Classification: K00, K22, K23

working papers series

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Date posted: August 28, 2013  

Suggested Citation

Langevoort, Donald C. and Thompson, Robert B., IPOs and the Slow Death of Section 5 (2013). Available at SSRN: http://ssrn.com/abstract=2316858 or http://dx.doi.org/10.2139/ssrn.2316858

Contact Information

Donald C. Langevoort (Contact Author)
Georgetown University Law Center ( email )
600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9832 (Phone)
202-662-9412 (Fax)
Robert B. Thompson
Georgetown University Law Center ( email )
600 New Jersey Avenue, NW
Washington, DC 20001
United States
(202) 661-6591 (Phone)
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