When the issuer first issues a financial instrument, it is sold in the primary market. Companies raise new issues by selling them in the market. Hence it is the primary market whose sale generates income for the issuer of the financial instrument. Issuance of securities requires compliance with securities laws. Primary market consists of both public market and private placement market.

Public market offerings of new issues typically involve the use of an investment bank. The process of investment banks to bring these securities to the public market is underwriting. Another method of offering new issues is the auction process. Bonds of some entities such as municipal governments and some regulated entities are issued in this way.

There are different regulatory requirements for the general investing public and privately held securities. Two major securities laws in the United States, the Securities Act of 1933 and the Securities Exchange Act of 1934, require that all securities offered to the public be registered with the SEC, unless an exemption is granted.

One of the exemptions set forth in the 1933 Act is that for transactions that do not involve any public offering by the issuer, such offering is referred to as a private placement offering. Before 1990, buyers of privately held securities were not allowed to sell these securities for two years after acquisition. SEC Rule 144A, passed by the SEC in 1990, eliminates the two-year holding period if certain conditions are met, with the result that the private placement market is now classified into two categories.

See more