What is the Cooling Off Period?

The cooling-off period is part of bringing new stocks and bonds to market in the United States. It happens when a company makes the final version of their official document about the stocks they want to sell, and when regular people can buy those stocks. The cooling-off period usually lasts 20 days.

Why Have a Cooling Off Period?

The Securities and Exchange Commission (SEC) allows companies selling stocks to have this cooling-off time. They want to give people a chance to really think about if they should invest in the new stocks. The company has to provide lots of information in their final document, called a prospectus. The cooling-off period gives potential investors time to read it carefully.

During the cooling off, the SEC also has time to review everything and ensure the company selling stocks follows all the rules. They check that the prospectus has all the required information and is accurate. This is a crucial step to protect regular folks who might want to invest but don’t know much about stocks.

What’s in the Final Prospectus?

In the prospectus they release right before the cooling off period, companies have to share a bunch of key information:

• Details on the stocks or bonds they want to sell
• The total amount of money they hope to raise
• Explanations of what they plan to do with that money
• Descriptions of the company’s business and properties
• Background on their management team
• Financial statements certified by independent accountants

It ends up being a pretty long document with many important things! The company is also not allowed to leave out any information that would be important for an investor to know.

The Cooling Off Period in Practice

Once a company files their final prospectus with the SEC, the clock starts on the cooling off period. The company can’t sell any of the new stocks or bonds during this time. They also usually can’t do much marketing or promotion of the offering.

There are some exceptions though. Companies can still have meetings with potential big investors like financial institutions during the cooling off, as long as they stick to the facts in the prospectus. And they’re allowed to send out copies of the full prospectus to anyone who asks for one.

Is 20 Days Always Enough?

Most of the time, the standard 20 day cooling off period gives the SEC enough time to look everything over and make sure it follows the rules. And it gives regular people enough time to read the prospectus if they’re interested in investing.

But in some cases, the SEC might need more time. If they find issues with the prospectus or have a lot more questions for the company, they can extend the cooling off period. The company then has to file an updated prospectus with any new information the SEC asked for. When that happens, the 20 day clock starts over again.

This doesn’t happen super often but it’s an important safeguard. The SEC wants to be really careful about approving companies to sell stocks to the public. Making the cooling off period longer sometimes is part of that.

After the Cooling Off Period

If everything looks good to the SEC during the cooling off period, the company gets a go-ahead to start selling on the planned effective date. This is when their registration statement officially becomes effective and they can start selling stocks to the public at the price listed in their prospectus.

The company still has to follow a bunch of rules and regulations after this point. But getting through the cooling off period and getting their registration statement approved is a big step!

It’s kind of like the company and the new stocks had to go through a test drive with the SEC during the cooling off before being released onto the highway of the stock market. The SEC is like the protective parent making sure everything is safe and ready.

Going Back to Update the Prospectus

Sometimes, important things change during the cooling off period and the company needs to update their prospectus. Maybe their financial situation changed, or they decided to sell a different amount of stocks. If that happens, they have to file an amended prospectus with the SEC.

Doing an update like this usually restarts the 20 day clock for the cooling off period. The SEC wants to have a full 20 days to review the new information and make sure everything still checks out. This is important because they don’t want companies changing things at the last minute without oversight.

Most companies try really hard to get everything right in their final prospectus so they don’t have to go back and update. Going back adds a lot of extra time to the process! But the option to refile is there if they need it.

Importance of the Cooling Off Period

The cooling off period is a super important step in bringing new investments to the public market. It protects regular people by:

• Giving the SEC time to review everything carefully
• Giving potential investors time to read the prospectus
• Making sure all the important information is out there
• Preventing companies from rushing to sell or making last minute changes

Could you imagine if companies could just immediately start selling stocks as soon as they filed their first documents? There would be a lot more risk for investors. They might not have all the information they need or the SEC might not have time to catch problems.

The cooling off period slows things down in a good way. It lets everyone do their due diligence to understand the potential new investment. Even though companies might want to start selling quicker, this rule is in place for good reasons.