As part of efforts to deepen the capital market and make fixed income securities issuing process faster, the Securities and Exchange Commission (SEC) has introduced a new rule that will facilitate price discovery and marketing ahead of the opening of offers.

SEC had in 2009 introduced Book Building process, which has assisted in effective marketing of offers, especially bonds. Book building is a process of price and demand discovery by which an issuing house/book runner, attempts to determine at what price a public offer should be made, based on demand from qualified institutional and high net worth investors. It has proven to be successful as many of the bond issues are done using this method.

THISDAY gathered that in order to tackle some of the shortcomings discovered by operators in applying the Book Building process, SEC has created a new rule on Red Herring.

The rule stipulates that while no securities shall be sold or offered for sale prior to the approval of the SEC, the issuing house will be allowed to circulate a preliminary prospectus, called Red Herring for the purpose of price discovery.

According to the rule “No report, recommendation, or sale literature shall be circulated between the period of filing and approval of an offer. The issuing house may, however, in an offer, requiring price discovery process, file and circulate a preliminary prospectus (Red Herring) which shall be boldly written in red lettering on the title page. On the cover page shall be boldly inscribed in red “this document is for guidance purposes for price discovery process Only.”

Explaining the new rule, SEC’s director, Securities and Investment Services, Mary Uduk, said it would enable issuing houses and issuers commence marketing of an offer without waiting for final approval of the commission.

“In the past there was no Red Herring. People have to wait for us to complete our review before they begin to market. But now, we looked at Book Building rule and saw it was not complete and we decided to add Red Herring,” she said.

According to her, apart from adding the new rule, having looked at what is obtained in other jurisdiction, the commission looked at existing rules and scaled down on the areas that affect how applications are filed.

She disclosed that unlike Nigeria where SEC looks at every underling documents, in other jurisdictions they do not review those documents.

“In other jurisdictions, the SEC does not review the underline documents. They only go straight to the prospectus. What they do is use the provisions of the law and go straight to compare what has been filed with the provision of the commission and see if they comply. And if yes, they just go ahead and approve,” she said.

Uduk noted that in other jurisdictions, the commissions do not look at registration, agreements with other parties, incorporation history among others.

“After contacting other jurisdictions, we decided to sit down and look at our rules again and scale down on how they affect filing of applications. We have also consolidated our rules to make them because in the past, the rules used to be in bits and pieces and people were finding it difficult to access them. But things have changed because we have consolidated the rules for easier access and compliance,” she said.