The U.S. bond market was valued at about $37 trillion in 2011, making it the world's largest securities market, according to the Securities Industry & Financial Markets Association. Companies and all levels of government sell bonds to finance capital improvements or public works projects or to restructure long-term debt. Bond issues must follow federal regulations overseen by the U.S. Securities and Exchange Commission. Those regulations include announcements known as tombstone ads.
Bond Issue Process
The Securities Act of 1933 Section (2a) (10) requires non-exempt bond underwriters and issuers such as corporations to file a Form S-1 registration with the SEC. The SEC has authority to approve the registration and the accompanying prospectus, which contains detailed information for investors. The time period between registration and SEC approval to proceed with the sale -- the "waiting" or "cooling-off period" -- lasts at least 20 days. During this waiting period, no selling or promotion can take place. However, the borrower and underwriter can announce the sale via a tombstone advertisement in financial newspapers. These announcements get their name from their plain, all-text appearance resembling a cemetery tombstone.
Rule 134 of the Securities Act stipulates that tombstones cannot present an offer to sell or a call to action, which differentiates them from traditional advertising. They must identify the issuer's name and include the name, address and toll-free telephone number of the person or entity from whom a prospectus may be obtained and a statement advising investors to read it. Tombstones may briefly describe the borrower's business, name the underwriting group, the size of the issue and the assigned – not anticipated -- security rating. "Securities Regulation in Cyberspace" notes that 2005 amendments to Rule 134 permit the inclusion of email and website addresses in the contact information.
The constraints imposed on tombstone ads serve to protect investors by ensuring full disclosure, preventing fraudulent presentation of information surrounding a bond issue and holding issuers liable for misrepresentation. A tombstone ad's sole purpose is to tell readers how they can get the prospectus, which underwriters have an obligation to provide to each inquirer or indication of interest. Underwriters and issuers cannot include additional marketing material such as research reports with a prospectus mailing nor can they make marks or highlight passages on pages of the prospectus.
Issues of municipal bonds, or munis, do not have to be registered with the SEC. Tombstone ads for such tax-exempt bonds may carry more information than those for corporate issues. In addition to describing the bond, a muni tombstone may include existing debt credit ratings; maturity; federal tax status; delivery, institutional pricing and retail ordering dates; and the name of the borrowing entity and dollar amount of the issue. These tombstones must also carry SEC-required verbiage for obtaining and reading a prospectus.
- FINRA: Buying and Selling Bonds
- "Pass the 66 – A Training Guide for the NASAA Series 66 Exam"; Robert Walker
- U.S. Securities and Exchange Commission: Form S-1
- Cornell University Law School: Legal Information Institute-Securities Act of 1933
- Qfinance: Definition of Tombstone
- "Barron’s Finance and Investment Handbook"; John Downes and Jordan Elliott Goodman
- American Bar Association: Business Law Today-When Performance Is an Issue - The SEC vs. Ad Claims
- U.S. Securities & Exchange Commission: Manual of Publicly Available Telephone Interpretations
- "Securities Regulation in Cyberspace, Third Edition"; Howard M. Friedman
- "Capital Markets Handbook"; John C. Burch and Bruce S. Foerster