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NYSE IPO Guide NYSE IPO Guide Third Edition

www.nyse.com/ipo Publisher Timothy Dempsey

Project Manager Chloe Tuck

NYSE Editorial William Kantrowitz and Zachary Harvey

Printing and Binding AGS

NYSE IPO Guide, Third Edition, is published by Caxton & Legal, Inc. 27 North Wacker Drive, Suite 601 Chicago, IL 60606 Phone: +1 312 361 0821 Email: [email protected] Web: www.caxtoninc.com

ISBN: 978-0-9964982-5-8

Copyright in individual sections rests with the co- publishers. No photocopying: copyright licenses do not apply.

DISCLAIMER The NYSE IPO Guide, Third Edition (the “Guide”), contains summary information about legal and regulatory aspects of the IPO process and is current as of the date of its initial publication (April 2021). The Guide should not be relied upon as a substitute for specific legal or financial advice from a professional. Although efforts have been made to ensure that the information herein is correct, the Guide may contain errors or omissions, and the NYSE, the publishers, and the contributing authors disclaim any responsibility for, or duty to update or correct, any such errors or omissions. The views expressed in the Guide are those of the authors alone.

Published by NYSE IPO Guide Third Edition

www.nyse.com/ipo

Preface 5 2.8 Anti-takeover protections 18 6.6 perception 62 Simpson Thacher & Bartlett IHS Stacey Cunningham President, NYSE Group 2.9 Incentive compensation 6.7 community arrangements 19 database and CRM 62 Simpson Thacher & Bartlett IHS Markit Introduction: Advantages of on the NYSE 7 2.10 Managing third-party risk 22 6.8 ESG and the newly public IHS Markit 64 IHS Markit NYSE 3. Preparing to go public 25 1. Why go public? 9 3.1 Choosing advisors 26 7. Obligations of a public J.P. Morgan (Investment company 67 1.1 Advantages of conducting Banking) an IPO 10 7.1 Ongoing reporting 68 J.P. Morgan (Investment Simpson Thacher & Bartlett 3.2 Financial information 27 Banking) KPMG LLP 7.2 Listing standards 71 NYSE 1.2 Potential issues 10 J.P. Morgan (Investment 4. The IPO process 39 Banking) 4.1 Process timeline 40 8. A and its 1.3 Going public without J.P. Morgan (Investment 73 an offering 11 Banking) J.P. Morgan (Investment 8.1 Proxy statement and Banking) 4.2 SEC registration and annual meeting 74 41 AST Simpson Thacher & Bartlett 8.2 Providing shareholders 2. Planning ahead 13 4.3 , marketing, with proxy material 75 and sale 43 AST 2.1 Look at your company the J.P. Morgan (Investment way will 14 Simpson Thacher Banking) 8.3 reporting by shareholders 77 & Bartlett Simpson Thacher & Bartlett 5. Direct listings 47 2.2 Prepare to be a public Latham & Watkins company 14 8.4 ownership mechanics 78 Simpson Thacher AST & Bartlett 6. IR and communications 53 2.3 Revisit risk with a public 9. Managing risk 81 company mindset 15 6.1 Preparing an IPO Simpson Thacher & Bartlett communications strategy 54 9.1 Liability under the federal FTI Consulting securities laws 82 2.4 Consider how you will get Simpson Thacher & Bartlett 6.2 Communicating with the to the desired and market post-IPO 56 15 FTI Consulting 9.2 Class action and Simpson Thacher & Bartlett lawsuits 83 Marsh 6.3 Legal framework for 2.5 Consider the composition communications 58 of your 15 Simpson Thacher & 9.3 Indemnification 84 Simpson Thacher & Bartlett Bartlett Marsh/Simpson Thacher & Bartlett 2.6 Review related party 6.4 Market intelligence and transactions 17 surveillance 59 9.4 D&O liability 87 Simpson Thacher & Bartlett IHS Markit Marsh

2.7 arrangements 17 6.5 targeting and outreach 61 9.5 Personal risk 91 Simpson Thacher & Bartlett IHS Markit Marsh

NYSE IPO Guide 3 Contents

Appendix V: NYSE American 10. Foreign private 93 Appendices 103 continued listing standards 110 10.1 American depositary Appendix I: NYSE domestic Appendix VI: Summary of receipts 94 original listing standards, filing and other requirements J.P. Morgan (Depositary domestic operating , Receipts Group) based on category 111 REITs, and funds 104 KPMG LLP 10.2 The IPO process for Appendix lI: NYSE original foreign private issuers 98 listing standards, FPIs 106 Simpson Thacher & Bartlett Contributor profiles 113 Appendix III: NYSE American 10.3 Financial information 99 original listing standards 108 KPMG LLP Appendix IV: NYSE financial 10.4 IR and communications 100 continued listing standards, FTI Consulting US companies 109

4 NYSE IPO Guide Preface

www.nyse.com/ipo Preface

Letter from the president a market model powered by the most of all types, including individuals, are NYSE Group sophisticated trading technology in the able to participate in the future of these world and enhanced by human judgment companies at an early stage in their life Congratulations on making it to this and accountability, resulting in access to the cycles. The journey you are about to begin important milestone in your company’s deepest pools of liquidity. can create for your , your history. The success that has gotten you Listing on the NYSE or NYSE American stakeholders and many others you may to this point comes with rewards, but this carries a range of advantages, including never actually meet. next step also comes with responsibilities— access to , improved branding and We thank you for playing this important and we are here to help you navigate it increased liquidity. Importantly, it comes role in America’s economic prosperity. all. As you embark on your initial public with all the benefits of being a member of We look forward to helping you navigate offering (IPO) journey, we hope you will find the NYSE community. Investors recognize your IPO journey and reach this significant a valuable resource in this edition of the that if a company is NYSE listed, the milestone. NYSE IPO Guide. We are grateful to all the company has met rigorous listing standards. contributors who collaborated with us. Our In addition, our listed companies have collective goal is to help guide you through access to market intelligence, investor the process and contribute to a positive and outreach, education and advocacy. From successful IPO experience. listing day and beyond, our people will As the world’s leading exchange, the help you connect with peers and other NYSE is the proud home to thousands business leaders to gain new insights and Stacey Cunningham of successful companies of all sizes, perspectives and to help your company President, NYSE Group industries and geographies. Our mission shine. is to help companies raise so they When companies go public—whether can change the world. Along the way, they through an IPO, a direct listing, a special create jobs and provide opportunities for purpose acquisition company (SPAC) or others to invest alongside them and share other means—the benefits extend to a broad in their success. For more than 225 years, universe of recipients. The companies our markets, people and technology have themselves get access to new capital, while helped companies unlock their potential by the economy benefits from those funds maintaining a commitment to transparent, being deployed in the form of orderly financial markets. The NYSE offers in people, products and services. Investors

6 NYSE IPO Guide Introduction: Advantages of listing on the NYSE

www.nyse.com/ipo Introduction: Advantages of listing on the NYSE

Introduction Better trading: The NYSE’s unique conversations and create a dynamic and NYSE Group market model engaged community. We seek to create better when you combine specific, meaningful ways for NYSE-listed One of the most important decisions an accountability and human oversight with companies to meet, share and benefit from a issuer will make during the IPO process world-class technology. At the center of range of expertise and varying perspectives. is selecting the right exchange on which this sits the DMM. DMMs are among the That begins with advocacy and leadership to list the company’s securities. You are most sophisticated trading firms. Every councils, extends to our thought leadership charting your course for the future. At the NYSE-listed company has their own DMM and content franchise designed for your NYSE, we realize how much work has gone that they select at the time of listing. While benefit, and continues with programming into building your company up to this point these market makers also trade on other and networking opportunities that allow you and that this is the beginning of your life exchanges, their behavior is different on the to make important connections. Our aim is as a publicly traded company. Companies NYSE because our unique rule set includes to create and foster opportunities for you to choose to go public for a myriad of greater obligations for DMMs. They are grow your business and create value for your reasons, but most notably to pursue responsible for maintaining a fair and orderly shareholders. opportunity. market designed to enhance investor While the NYSE community starts with These opportunities vary from issuer protections and support issuers, especially the more than 2,000 companies listed to issuer, but the one constant is that you during critical times in the market—they are on the NYSE, it does not end there. Our want an exchange that is prepared to be accountable. influence extends to our more than 3 million by your side. The NYSE’s key differentiator In addition to the DMM, the NYSE followers on social media, allowing you to from other exchanges is our market model. overlays human oversight and service share your story with new audiences. We In addition to the competitive market- through our active trading floor. This means also have an extensive network of media maker model used by other exchanges, the NYSE is better able to manage complex relationships that we can to give the NYSE also has a Designated Market transactions, navigate special situations and you the opportunity to tell your story to Maker (DMM). This unique participant help dampen . investors and stakeholders around the is required to maintain a fair and orderly Finally, the underpinning of all this is globe. market in the stocks it . Paired our proprietary technology known as Pillar. with industry-leading technology and the This technology has resulted in significant human oversight of the trading floor, stocks benefits for our issuers and their investors: trade better on the NYSE. more efficient processing, industry-leading Your listing also comes with benefits response times and more precise trading—a the moment you walk through the door. better trading experience found only on the Companies listing on the NYSE and NYSE NYSE. American join a community of iconic brands Better trading matters to issuers for and industry disruptors. Within this group key liquidity events like lock-up expirations, you can find great customers, powerful follow-ons and share repurchases, but it collaborators, peers, mentors, acquisitions also matters to your investors. The NYSE and, potentially, your next board member. model is purpose-built to give you peace of And, of course, investors. mind when it matters most. You can trust us with your future. From our superior trading platform to our dynamic Membership benefits: Building your global community and the lifetime of community and brand service and value we provide, we are here to Beyond trading your better, our job support you as a public company. is to help make connections, facilitate

8 NYSE IPO Guide 1 Why go public?

www.nyse.com/ipo Why go public?

1.1 Advantages of conducting an IPO (c) Branding event and prestige the necessary preparations months, if not J.P. Morgan () An IPO is a significant branding event. years, beforehand. By listing on the NYSE, the company will When considering an IPO, a company receive far-reaching media coverage, (a) Loss of privacy and flexibility should evaluate the pros and cons, as starting on the first day of trading if not Private companies can operate without well as the motivations for going public. before. Subsequent to the IPO, research disclosing proprietary information in a This evaluation process is best conducted analysts will begin to write reports on the public forum. However, to comply with in conjunction with an investment , company, further raising its profile. This can securities laws, public companies must which can assist the company in thinking enhance the company’s visibility, increase disclose potentially sensitive information through the key points. There are numerous its credibility with existing and potential publicly, which regulatory agencies, as advantages to going public, the most customers and suppliers well as competitors, can then access. In pertinent of which are detailed in the and help strengthen its competitive addition, the focus of research analysts following section. . and investors on quarterly results and stock price performance may constrain (a) Access to capital (d) Public for acquisitions the operational flexibility that a private Going public affords a company access Once the company is public, it can use its company enjoys. to capital, both at the time of IPO and on publicly tradable in whole an ongoing basis. An IPO can consist of or in part to acquire other companies in (b) Regulatory requirements and primary and/or secondary proceeds. A conjunction with, or instead of, raising potential liability company can raise primary capital to fund additional capital. Publicly tradable stock Public companies must file various reports growth, make investments and/or repay with a reference price is more attractive with the SEC and other regulators on an . An IPO can also provide liquidity to target shareholders than illiquid private ongoing basis. In to comply with to existing investors and give them an company stock, which is more difficult to disclosure requirements, companies often opportunity to sell stock. value. need to change or expand their existing Additionally: policies and infrastructure, which can be • Once the company is public, it has (e) Enhanced benefits for current costly and time-consuming. In addition, access to an entirely new, deep and employees directors and officers are potentially liquid source of capital for Stock-based compensation aligns liable for misstatements and omissions any future needs it may have. employees’ interests with those of the in the registration statement and in the • Being publicly traded adds to company and its public shareholders. By company’s ongoing reporting under the the company’s capital-raising toolkit, allowing employees to benefit alongside Securities Exchange Act of 1934 (the enabling the company to achieve and the company’s financial success, these Exchange Act). maintain an optimal and programs increase productivity and potentially use stock as an acquisition loyalty to the company and serve as a key (c) Sarbanes-Oxley currency. selling mechanism when attracting top The Sarbanes-Oxley (SOX) Act was • Following the IPO, the company will talent. Furthermore, issuing equity-based passed in 2002 following a number of be able to tap the equity markets via compensation will allow the company to major corporate and scandals, follow-on offerings of primary and/or attract top talent without incurring additional which investors billions of dollars and secondary shares, or a mix thereof. . Being a public company shook public confidence in US securities’ After the company has been public provides employees with the ability to controls and disclosure. SOX set new for 12 months, it will be eligible to monetize the value of their stock-based standards for public companies, including access the equity capital markets compensation, whether it is options or requirements relating to accounting, more efficiently via a shelf registration . , internal controls statement. and enhanced financial disclosure. 1.2 Potential issues Achieving SOX compliance can require J.P. Morgan (Investment Banking) significant time, resources and capital. (b) Liquidity event Although the JOBS Act relieves emerging Listing on the NYSE has numerous benefits, While there are numerous advantages growth companies (EGCs) and SEC rule not only for the company but also for its to going public, there are also several updates in 2020 relieve smaller reporting shareholders. As previously mentioned, the considerations that the company, its companies (SRCs) of the obligation to IPO can be structured such that existing management and its shareholders have their independent auditors provide owners of the company can sell down their should evaluate prior to embarking on the an attestation on internal controls under positions and receive proceeds for their IPO process. The most seamless IPO Section 404(b), they are still required to shares. In addition, once the company is processes are for companies that fully put in place internal controls sufficient for public, the existing owners can monetize evaluate these considerations before management to provide the certifications their holdings in an efficient fashion. embarking on an IPO and begin making required by Section 404(a).

10 NYSE IPO Guide Why go public?

(d) Cost and distraction of with those investors known to be interested After the IPO prices, all proceeds are held in management time and attention in owning them. In a split-off, each existing trust and accrue interest, only to be released Going public is a relatively expensive investor in the parent company elects upon the consummation of the acquisition , with one-off and ongoing to own either the parent company or the or upon liquidation of the SPAC. for legal counsel, accounting and auditing separated entity post-separation. After an acquisition has been services, directors and officers (D&O) announced, public SPAC investors have liability insurance, roadshow expenses (b) Foreign issuers listing ADRs two key decisions: (1) redeem their shares and underwriting fees, as well as for A foreign company that is publicly traded for a pro rata portion of the cash held in additional personnel to handle expanded on an international exchange outside the trust, or maintain their common stock reporting, compliance and investor relations United States can list ADRs on the NYSE ownership; and (2) vote either for or against activities. Furthermore, planning and without conducting an offering. The stock the acquisition. Investors benefit from both executing an IPO is a time-consuming is tied to the underlying international downside protection and coverage, process that can distract management and traditionally trades in tandem which provides additional upside if an from running the business day-to-day. with that security. While the ADR will give acquisition closes and the stock trades Ongoing public company obligations should the company incremental exposure to above the $11.50 . Meanwhile, the also be expected to take up significant US investors, there are often limitations SPAC management team, or sponsor, forms management time. on certain funds holding ADRs similar to the SPAC and commits at risk capital at the those limitations applying to the holding time of IPO. In return, the SPAC sponsor 1.3 Going public without an offering of international investments, and typically is entitled to entrepreneurial economics, J.P. Morgan (Investment Banking) the liquidity and trading of ADRs can suffer including common stock most typically when compared to direct listings of the equating to 20% of the SPAC shares Four avenues to go public in the US without underlying stock. outstanding post-offering and sponsor a simultaneous offering are (a) spin-offs/ Through a US listing, foreign private warrants. split-offs of existing groups or divisions of issuers (FPIs) can significantly improve their Per NYSE rules, the initial business already public companies, (b) foreign issuers access to the US equity market. Demand combination must represent a fair market listing American depositary receipts (ADRs) for foreign equities has grown considerably value of at least 80% of the cash held in in the United States, (c) direct listings and among both US institutional and individual trust. The company a SPAC acquires must (d) special purpose acquisition company investors. This demand has been driven by effectively be public market ready, as it (SPAC) mergers. a need for enhanced portfolio diversification, becomes a publicly traded entity as soon which holdings of foreign equities can as the initial business combination closes. (a) Spin-offs/split-offs provide, and a desire to tap into the higher Unlike an IPO where an S-1/F-1 is utilized, A spin-off or split-off occurs when a publicly rates found in many the S-4/proxy is the key SEC document. listed company separates a part of its countries outside the United States— Among other differences, a company business into a different publicly listed emerging markets, in particular. includes forward looking projections in entity. Typically, that part can function as the merger document. The S-4/proxy is a separate, stand-alone business, with (c) Direct listings typically filed shortly after the acquisition is characteristics distinct from those of the In a direct listing, a company’s outstanding announced. After a several month review parent company. In a spin-off, each existing shares are listed on a , period with the SEC, dates are set for investor in the parent company will receive such as the NYSE, without an underwritten the SPAC public shareholders of record, shares in the spin-off entity pro rata to offering. In a direct listing, the company redemption deadline and shareholder its ownership in the parent. For example, does not raise capital. Instead, the shares of vote. The redemption deadline typically Investor A, which owns 5% of Parent existing stockholders, such as employees precedes the shareholder meeting by two Company A, will receive 5% of the shares and early-stage investors, are listed on a business days, and results are usually outstanding in SpinCo A. In this transaction, stock exchange, enabling them to freely sell announced to the public at or post-closing. liquidity is generally preserved for the their shares. Refer to Chapter 5 for additional The proceeds (minus any redemptions), SpinCo, but the investor churn may be information on direct listings. as well as any incremental capital raised considerable. For example, Investor A may by the SPAC sponsor, can be used as be a logical shareholder of Parent Company (d) SPAC mergers primary and/or secondary consideration to A, yet dispose of the shares it receives in A company can become publicly listed by the selling company and its shareholders. SpinCo A due to a variety of factors. These merging with a SPAC. A SPAC is a publicly Given the proceeds from the SPAC IPO can can include differences in the business traded vehicle that typically has 18 to 24 be redeemed in full, a SPAC sponsor may model, growth profile and/or market months from its IPO to complete an initial raise committed equity in the form of either capitalization, among others. To this end, it business combination. Securities sold in a forward purchase agreement concurrent can be difficult to control the investor base SPAC IPOs are structured as units, with with the SPAC IPO or a private investment in a spin-off, whereas during an offering public investors receiving a common share in public equity (PIPE) once the target has process shares are strategically placed and a fraction of a (or full) warrant per unit. been identified.

NYSE IPO Guide 11

2 Planning ahead

www.nyse.com/ipo Planning ahead

2 Planning ahead Having accessed the information that with the skill set to interact with a public Simpson Thacher & Bartlett will allow you to view your own company company board of directors and public like a public market investor, what does company investors. Companies may take 6, 12, 18 or even 24 this data say? For example, if you will want During the pre-transaction preparatory or more months to prepare for their initial your company to be viewed as primarily phase, you should make yourself aware public offerings (IPOs) before formally belonging with, and valued like, a particular of the public company requirements to engaging underwriters and kicking off peer set—is that a true reflection of your which you will be subjected as part of and the actual transaction. Companies in the company’s business? Everyone involved following the IPO, and particularly those early planning stages of an IPO frequently should want the company to be valued related to finance and accounting (e.g., benefit from taking steps that include those appropriately in its IPO—even without the public company accounting, internal discussed here. potential liability that could arise from and and ). resulting shareholder lawsuits, there is The next step is to evaluate your internal 2.1 Look at your company the way perhaps nothing more painful for a company capabilities to identify deficiencies. Some of investors will that has recently completed an IPO than the key questions to ask include: Simpson Thacher & Bartlett being revalued downward by the market • Do we currently have a repeatable in post-IPO trading. Consider whether monthly and quarterly close process? Every company that pursues an IPO is there are acquisitions or new products (or, Do we have the ability to close our books going to be compared by analysts and conversely, dispositions or discontinuances) accurately each quarter and to review investors with other companies that are that are on the whiteboard that may make and report the results to the public on already public. As a result, it is important sense to accelerate during this pre- a timely basis and in accordance with to begin to understand how your company transaction phase in order to bolster the Securities and Exchange Commission appears when looked at in this way and, intended investment thesis. As another (SEC) guidelines? to the maximum extent possible, use this example, evaluate how your company’s • Do we have a finance department knowledge to take the steps necessary to results, whether in terms of top line growth with expertise in SEC accounting and ensure that your company is positioned or margins or otherwise, compare to the reporting requirements? Many private correctly. peer set. Do they differ materially and, if companies looking to become public • What different lines of business is your so, why? Are there initiatives that may be companies have inadequate skill company involved in? desirable to undertake now to enhance your sets within their finance departments • What publicly traded companies are in company’s future relative performance as it and hire additional internal staff in these or similar areas? will be measured by the market? connection with going public. • How do the research analysts and the Although no one without a deep • Do we have a finance team comfortable investment community value these understanding of your business can predict preparing forecasts and projections and peers? what specific insights may be gained from able to analyze current period results for • What metrics are used to evaluate these going through the exercise of understanding reporting purposes? peers’ performance? how the market values potential peers • Are our processes and controls • Are there different peer sets (with and then viewing your own company adequately documented and tested? differing approaches to and through the same lens or lenses, it would Do we have a plan to comply with multiples) applied to your company’s be quite surprising if such an exercise fails Sarbanes–Oxley requirements? different business lines? to uncover areas where an investment of • Does our technology infrastructure your time and attention, and perhaps even adequately support our compliance By reading the analyst reports on dollars, in advance of an IPO would efforts? potential peers while thinking about these attractive returns. questions and even taking the time to meet Having performed this IPO readiness with investors and analysts, you can start 2.2 Prepare to be a public company assessment, create—and then execute to understand how your company will be Simpson Thacher & Bartlett on—a realistic work plan that addresses viewed by investors. internal gaps and details necessary The next step is to determine whether Running a private company with a small internal staff hires. It can take many you have the ability today to capture and number of shareholders or investors can months to address areas of deficiency report the metrics that the market is used to be very different than operating a public or weakness, and you should factor seeing. For example, are you able to isolate company. Private companies usually lack in the time and cost of evaluating and information about separate lines of business a public company finance infrastructure, implementing policies, building the that are valued differently by the market? almost certainly will not have an investor necessary infrastructure and making The answers to such questions will inform relations capability and may require critical hires. Private companies often whether it makes sense to rework your additional resources within their legal underestimate the time it takes to internal and even external financial reporting function. They may also need to expand get ready to be a public company—a so as to be able to do this. Effecting these or reconfigure their management team transformation that needs to take place types of changes in reporting can take time. to ensure that they have senior officers before, not after, the IPO.

14 NYSE IPO Guide Planning ahead

2.3 Revisit risk with a public company to addressing these. Indeed, investors where a person or group holds a majority mindset are increasingly focused on how well the of the voting power for the election Simpson Thacher & Bartlett companies they invest in manage risk. of directors. A controlled company is only required to comply with the audit Every company, whether public or private, 2.4 Consider how you will get to committee requirements and accordingly makes decisions every the desired tax and organizational does not need a majority of its board to be day. Whether consciously, such as by structure independent or have a compensation or deciding to undertake an enterprise-wide Simpson Thacher & Bartlett nominating committee at all. When taken risk assessment exercise, or unconsciously, together with the transition rule for IPO such as by deciding not to hire an additional While it is beyond the scope of this chapter companies, this still means that a controlled resource in the compliance function. One to discuss the countless factors that may company that undertakes an IPO must have way or the other, your company has decided determine which tax structure is right for one independent director what balance to strike in terms of accepting you, it should be noted that it is sometimes at the time of listing, a second independent and mitigating risk. more costly (and perhaps even impossible) director after 90 days and a third by the time Undertaking an IPO alters a company’s to effect changes on the eve of an IPO the first year is up. A company that loses its risk profile. First, a company that has gone rather than well in advance. For this reason, status as a controlled company (perhaps public is exposed to entirely new types during the preparatory phase consider because its controlling stockholder has sold of risk—SEC enforcement actions, insider whether any significant will be down to 50% or below) has the benefit of a trading scandals, and stock drop lawsuits, desirable and then whether any advantage one-year transition rule, similar to the one for example. Second, a company that to doing this earlier in the process available to IPO companies, to come into becomes publicly traded is likely to find outweighs any associated disruption or compliance. that this changes the cost-benefit equation risk of buyer’s remorse in the event the IPO All this being said about the it has previously used to decide the right fails to occur as anticipated. Moreover, the requirements, it is standard operating levels of risk appetite and investment in risk adoption of a complex tax or organizational procedure for underwriters to advise mitigation. structure can lead to complex accounting, companies they are taking public that it A public company has disclosure legal and presentational challenges, and is preferable to be able to disclose to the obligations and is exposed to public the need to take additional time to educate market at the time of the launch of the scrutiny in ways that a private company the SEC staff and the market. It cannot marketing for the IPO that the company is not. Missteps may impair its be overemphasized how important it is will have a majority independent audit or attract adverse attention in ways that to evaluate your tax and organizational committee coming out of the gate. would not have otherwise been the case, structure early in the process of going public Accordingly, it is worth investing time before increasing the level of distraction for so that unnecessary costs and delays can and during the IPO process to identify management and even attracting class be avoided. at least two or three audit committee action lawsuits if the stock drops as a result independent directors. Identifying and of the disclosure or even drops around the 2.5 Consider the composition of your finding independent directors can be same time period for a totally unrelated board of directors difficult and time-consuming. In addition to reason. Moreover, the independent Simpson Thacher & Bartlett the fact that an audit committee member directors of the publicly traded company must meet heightened independence may have different views about risk. (a) How many independents are requirements as described herein, they Ultimately, the costs of a misstep to the needed and when? must also be “financially literate” and at company may be higher following its IPO The general rule for NYSE-listed companies least one member of the audit committee than it would have been before. is that a majority of their board must be needs to have real finance and accounting For this reason, consider conducting a “independent,” and they must have fully expertise (typically a former public company thoughtful assessment of your company’s independent audit, compensation and CFO or partner of an accounting firm). risk exposure during the pre-transaction nominating committees. However, the NYSE Putting aside the technicalities, one of the preparatory phase and identify whether has a transition rule for IPO companies that independent directors is going to have to there are areas that should be tightened up. requires at least one independent director be able and willing to serve as the chair of Indeed, putting aside the fact that post- on each of the three requisite committees at the audit committee, which is a tremendous IPO, the cost to the company of a misstep the time of the listing, majority independent amount of work. The audit committee has can be meaningfully higher, it will make the committees (i.e., at least two independent the critically important job of overseeing the IPO process itself go more smoothly if you directors) within 90 days of the listing and company’s financial reporting. All of this is have thoughtfully assessed the risks of only become fully compliant—with a majority on top of the fact that you want individuals your business and consciously decided on independent board and fully independent on your board who understand your industry, the appropriate level of investment in risk committees (i.e., at least three independent can add value by bringing useful skills and mitigation. The company’s management directors)—within one year after listing. insights to bear and work constructively should be conversant with the key risks to the In addition, there is also an exception with the other board members and business and able to articulate its approach for controlled companies—companies management.

NYSE IPO Guide 15 Planning ahead

(b) What makes a director a board member can be independent independent? • received more than $120,000 for purposes of the rules requiring that a The NYSE requires that its listed public per any 12-month period in company have a majority of independent companies have, with a few exceptions the last three fiscal years in directors if they receive less than $120,000 (such as controlled companies), a majority direct compensation from the in annual compensation from the company, of independent board members. The board company, other than in director for example, even a single dollar in is required to determine that the director and committee fees or compensation can disqualify this board in question has no material relationship or other deferred compensation member from being deemed independent with the company that would jeopardize for prior service (provided such for purposes of serving on the audit his or her ability to act independently. The compensation is not contingent in committee. An audit committee member NYSE has stated that “as the concern is any way on continued service); must also not be an affiliated person of independence from management, [it] does • is a current partner of the the company or any of its . not view ownership of even a significant company’s internal or external In addition, some proxy advisory firms amount of stock, by itself, as a bar to an auditor or was in the last three establish limits on the number of audit NYSE Listed independence finding” ( fiscal years a partner of such firm committees a director can sit on, and if a Company Manual , 303A.02). In addition to and personally worked on the board member serves on more than three this “determination” requirement, the NYSE company’s audit; public audit committees, the NYSE requires imposes a number of bright-line tests that • is a current employee of the an affirmative determination (which is bar a board from determining an individual company’s internal or external disclosed) that such service will not impair to be independent—the most important of auditor (and, in the case of an their ability to serve. which is that the board member cannot immediate family member, have been an employee of the company personally works on the To be independent for audit within the past three years and cannot company’s audit) or was in the last committee purposes, a committee have received compensation from the three fiscal years an employee of member must meet the general NYSE company (excluding board fees) in excess such firm and personally worked independence standards for directors of $120,000 in any of the last three years. on the company’s audit; described herein and also the Similar prohibitions apply to the director’s • is (or was in the last three following additional SEC requirements immediate family members. The rules also fiscal years) an executive for audit committee members. limit how much business the company can officer of a company that has a SEC rules define an “independent” do with the board member’s employer. compensation committee on director, for purposes of serving on which any of the company’s an audit committee, as a director present executive officers serves who, except in his or her capacity For purposes of the NYSE rules, a or served; or as a director or board committee director qualifies as “independent” if • is a current employee (or, in the member: (1) does not accept directly the board of directors of the company case of an immediate family or indirectly any consulting, advisory has affirmatively determined that she member, a current executive or other compensatory fee from the or he has no material relationship, officer) of another company that company or any of its subsidiaries; direct or indirect, with the company. makes payments to, or receives and (2) is not an “affiliated person” of In making this determination, the payments from, the company for the company or any of its subsidiaries. board of directors should broadly or services in an amount Direct or indirect acceptance of consider all of the relevant facts that exceeds (in any single a compensatory fee by a director and circumstances surrounding in the last three fiscal includes acceptance of such a a director’s relationships with the years) the greater of $1 million fee by (1) a spouse, a minor child company from the standpoint of the or 2% of such other company’s or stepchild, or a child or stepchild director as well as that of persons consolidated gross . or with which the sharing a home with the director or NYSE Listed Company Manual, director has an affiliation. The NYSE Source: (2) an entity (a) in which the director rules preclude a director from 303A.02 is a partner, member, an officer such being determined independent if as a managing director occupying the director or an immediate family a comparable position, or executive member: (c) Additional requirements for audit officer, or occupies a similar • is (or was in the last three fiscal committee members position (except limited partners, years) an employee of the Audit committee members must qualify nonmanaging members and those company (or, in the case of an under an enhanced independence occupying similar positions who, immediate family member, an analysis that imposes additional, stricter in each case, have no active role executive officer of the company); independence standards above and in providing services to the entity) beyond those outlined herein. So while

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decide that they would rather forego these and (b) that provides accounting, A “nonemployee director” is a arrangements than have them disclosed consulting, legal, investment banking director who: in SEC filings. In addition, the existence of or financial advisory services to the • is not currently an officer or these types of arrangements can negatively company or any of its subsidiaries. employee of the issuer or a parent affect the voting recommendations of proxy or of the issuer; advisory firms. If the arrangement looks Source: Rule 10A-3 under the Exchange Act • does not receive compensation unusual or off-market, it can garner negative in excess of the amount that public attention. would be required to be disclosed However, some things are prohibited In addition to these additional under Item 404(a) of Regulation whether you disclose them or not. In independence standards, members of S-K (currently $120,000), either response to the of the the audit committee must also satisfy directly or indirectly, from the early 2000s, Congress passed a law that the substantive standard that they are issuer or a parent or subsidiary of prohibits public companies from extending “financially literate” (as such qualification the issuer, for services rendered to their directors and executive is determined by the board). Also, the as a consultant or in any capacity officers or from arranging for third parties NYSE requires that at least one member of other than as a director; and to do this. One of the unexpected traps in the audit committee have “accounting or • does not possess an interest in preparing to go public relates to the timing related experience” any other transaction for which of this prohibition. The limitations and (NYSE Listed Company Manual, 303A.06 disclosure would be required under restrictions to which public companies are and 303A.07). A director who qualifies as Item 404(a) of Regulation S-K. subject typically begin to apply when the an “audit committee financial expert” (as company actually sells its stock to public Source: Rule 16b-3 under the Exchange Act defined by the SEC in Section 407 of the investors. This insider lending prohibition, Sarbanes–Oxley Act of 2002) is presumed by contrast, applies from the time of the first to satisfy this financial sophistication public filing of the registration statement. As requirement—public companies are required 2.6 Review related party transactions a result, insider need to be cleaned up to disclose whether they have an “audit Simpson Thacher & Bartlett before you publicly file with the SEC. committee financial expert” and, if not, During the preparatory phase, explain the reasons why not. The SEC requires companies wishing to consider reviewing the transactions and go public to include a separate section arrangements your company has with (d) Additional requirements for in their registration statement that details management and stockholders and compensation committee members the company’s transactions involving its see whether these are compatible with The NYSE requires public companies to related parties. The overarching disclosure your anticipated future public company consider additional factors when evaluating rule is relatively simple: provide the details disclosures. It may be that some level of the independence of compensation for any transaction in the last three years disclosure in the IPO registration statement committee members. The board of directors involving more than $120,000 in which the cannot be avoided, given that these must consider all factors specifically company is a participant and any director, disclosure requirements look back three relevant to determining whether a director executive officer or 5% stockholder (or their years, but it may be more appealing to be has a relationship to the listed company, immediate family members) who had or able to say that they were wound up prior which is material to that director’s ability has a direct or indirect material interest. The to the eve of the IPO. Also, it can frequently to be independent from management in rule’s complexity comes from its exceptions, take time to unravel arrangements so giving connection with the duties of a compensation which go on for several pages, but in all concerned some runway to do this can committee member. These factors include, summary, if the company is a participant in make it less painful. but are not limited to: (1) the source of a transaction in which a director or officer compensation of such director, including any is interested, even indirectly, and involves 2.7 Shareholder arrangements consulting, advisory or other compensatory more than $120,000, you will probably Simpson Thacher & Bartlett fee paid by the company to such director; and need to disclose it. In addition, you may (2) whether such director is affiliated with the also need to disclose transactions with your Another area that makes sense to focus on company, a subsidiary of the company or an independent directors even if they involve well in advance of an IPO is arrangements affiliate of a subsidiary of the company. $120,000 or less to the extent that these with and among the company’s You might also consider constituting transactions are considered by the board in shareholders to be sure that these are not a compensation committee with directors determining their independence. incompatible with the IPO or the company’s who are nonemployee directors for With a few exceptions, the SEC rules future status as a public company. purposes of Rule 16b-3 under the Exchange do not preclude related party transactions For example, it is standard operating Act, and thereby able to exempt equity if they are properly disclosed. Of course, procedure in an IPO for the underwriters to awards to directors and officers from the this disclosure regime has a not-so-subtle seek to lock up all the pre-IPO shareholders -swing recovery provisions of objective of discouraging these related until 180 days following the date of the Section 16 of the Exchange Act. party transactions. Many companies pricing of the IPO. So called lock-up letters

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are agreements directly between the pre- 2.8 Anti- protections certificate of typically IPO shareholders and the underwriters Simpson Thacher & Bartlett prohibits stockholder action by written whereby the shareholders agree they will consent, which prevents a majority of not sell their shares, lend them, It is worth considering whether to implement the shareholders of the company from them or really do anything with them that anti-takeover protections at the time of taking pre-emptive, unilateral action in involves putting money in the shareholders’ an IPO that will impede hostile acquirers lieu of a meeting. The certificate will also pockets or shifting away from them the who may seek to gain control of your typically be drafted to include provisions economic consequences of ownership company without negotiating with your restricting stockholders’ ability to call a of the shares until the lock-up period has board. Given that investors may suspect special stockholders’ meeting, thus further expired. Underwriters will frequently express that management is attempting to use such inhibiting their ability to take extraordinary an interest in locking up as many of the pre- protections to entrench its own position at action. A company’s bylaws will also almost IPO shares as they can out of concern that the of shareholders, a company always require timely advance notice to the it could impede the successful marketing should be thoughtful about its approach to company from stockholders before such of the offering if IPO investors are not able such protections. Such protections could stockholders may nominate new directors to be assured that there will not be a large also affect a public company’s eligibility for or propose other matters for consideration of stock from pre-IPO holders inclusion in certain stock indices. at a shareholders’ meeting. A supermajority being dumped into the market shortly after A number of devices and protections of shareholders’ votes may also be required trading starts. Accordingly, in anticipation of are available to IPO issuers. The most in order to amend the company’s certificate making the IPO process run more smoothly, straightforward, and powerful, anti- of incorporation or bylaws. As with classified you may wish to consider whether your takeover protection seen with some level of boards, supermajority voting requirements arrangements with existing shareholders, frequency is a dual-class high-vote/low-vote and certain other of these measures have including employee shareholders, can structure, which affords the holders of a become less common among larger, be designed in such a way that they will high-vote class of stock (typically founders, seasoned public companies. prevent these holders from selling during family owners, selected pre-IPO owners It is also almost universal for IPO the anticipated IPO lock-up period and even or insiders) with voting power sufficient issuers to authorize in their certificate of require them to enter into customary lock-up to control the election of directors even incorporation what is referred to as blank letters directly with the underwriters. when public investors, who hold a separate check , which enables a Similarly, and more broadly, it may make low-vote class of stock, own a majority of board to create and issue new series of sense to take a sweep through all shareholder the economic interests in the company. preferred stock with whatever rights and arrangements to identify if there are consent, Another such device is a classified board, preferences the board may desire at a given participation or other rights shareholders which is a board of directors divided into time. The board may use this ability to take have that may directly or indirectly impede multiple classes (almost always three). Each certain anti-takeover actions, including the the transaction. This need not be an explicit class serves a staggered multi-year term implementation of a stockholder rights plan, right to consent to or to participate as a seller (almost always three years), which prevents or poison pill, without further stockholder in an IPO—if a shareholder has the ability to a hostile acquirer from replacing more than approval. A poison pill generally allows block amendments to charter documents a specified percentage (almost always stockholders to purchase a company’s or corporate reorganizations, this may itself one third) of the directors at any single common stock at a highly discounted price effectively give that shareholder hold-up annual meeting. The prospect of having if a large block of stock is acquired by a value. Even soft items such as governance to conduct successful proxy fights at two third party who has not been pre-approved rights can be a problem. For example, successive annual meetings to gain control by the board, the effect of which is to dilute as discussed herein, following an IPO a of a company’s board can in and of itself be the third party’s value. Poison pills are rare company’s board will be required to ultimately a significant deterrent to a hostile bidder. In in IPO issuers due to the negative reaction have at least three and possibly more contrast to the use of a high-vote/low-vote they tend to engender among investors and independent directors, and it may not be structure, which remains less common the fact that with the authorization of blank consistent with the anticipated composition outside of specific industries and can attract check preferred stock the board may deploy of the company’s post-IPO board to include investor resistance, the significant majority a poison pill later when needed. designees of smaller shareholders who may of IPO issuers have classified boards. You should also be aware that unless have been granted the right to a seat on However, among larger publicly traded you take affirmative action to opt out, the board when it was a private company. companies it has become increasingly rare Delaware’s anti-takeover statute (Section Depending on the dynamics, it can be for this board structure to be retained over 203 of the Delaware General a tricky thing to ask for consents or take the -term in the face of high levels of Law) will apply to companies incorporated rights away from a stockholder on the eve support from shareholders for proposals to in that state, which is the jurisdiction of most of a transaction, so if your company has declassify boards. publicly traded US companies. Section afforded shareholders rights that could be There are also many additional 203 of the Delaware General Corporation problematic, consider on a case-by-case measures that are nearly universally Law provides that, subject to certain basis whether it makes sense to revisit these implemented without significant investor exceptions specified in the law, a publicly arrangements in advance. resistance. For example, an IPO issuer’s held Delaware corporation may not engage

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in certain “business combinations” with in order to comply with applicable tax and potential earnings charges associated with any “interested stockholder” for three years securities law requirements or that may performance-based compensation and after the date of the transaction in which the otherwise be appropriate once the company certain types of stock-based awards. person became an interested stockholder. is public. These provisions generally prohibit or delay For purposes of this discussion, (b) Stock-based arrangements the accomplishment of mergers, or management incentive arrangements The most typical forms of stock-based stock sales, or other takeover or change-in- will be described as falling into two broad arrangements include nonqualified stock control attempts that are not approved by a categories: (1) stock-based arrangements, in options, incentive stock options, stock company’s board of directors. Other states which value is tied to company stock price, appreciation rights, restricted shares, have adopted similar statutes. Some IPO subject to specified vesting requirements, phantom share awards and stock purchase issuers, such as companies controlled by which are typically only subject to programs—although numerous variations of financial sponsors, typically opt out of these continued service with the company, and these types of awards are possible. anti-takeover statutes to avoid impeding the (2) performance-based compensation Many public companies have adopted sponsors’ ability to sell off its stake following arrangements, in which value is subject omnibus long-term incentive plans, which the IPO. to the achievement of preestablished provide them with the flexibility to make all performance goals, which may include of these types of awards. In our experience, 2.9 Incentive compensation stock price as a measure of performance. Of equity-based awards that are settled arrangements course, as noted herein, it is possible, and in stock (rather than in cash) represent Simpson Thacher & Bartlett not uncommon, to structure arrangements the more favored forms of stock-based that have characteristics of both stock- incentives because of their comparatively (a) Overview based arrangements and performance- favorable accounting treatment.2 It is Companies going public often revisit based compensation arrangements, such fairly typical to provide the committee the arrangements they are employing as restricted shares, restricted units or stock administering the plan with broad discretion to incentivize management and their options that vest upon achieving specified to determine the terms and provisions of employees more broadly. Indeed, the performance goals. (Restricted shares and awards issued under the plan including ability to use publicly traded equity as restricted units that vest upon achievement the vesting schedule, term, post- a compensation currency is frequently of performance goals are often referred to employment exercise period (if applicable) viewed as a key benefit of pursuing an as performance shares and performance and redemption rights, etc. IPO. This chapter describes various types units, respectively.) of management incentive arrangements In structuring management incentive A. Stock options. A stock option that might be established in connection arrangements, it is important to take represents the right of the holder of the with an IPO and a summary of design into potential tax, securities option to acquire a specified number considerations and significant tax, securities law and accounting issues such as (1) of shares at a specified purchase price law, and accounting issues relating to such potential limitations on the deductibility (exercise price), subject to the terms and arrangements. Although not covered here, of compensation in excess of $1 million conditions of the award. other types of broad-based employee under Internal Code (IRC) Section Option awards to employees (as well arrangements might also be established 162(m),1 (2) reporting and short-swing profit as other stock-based awards) are typically once the company is public, such as rules applicable to officers, directors and made on a discretionary basis pursuant establishing an employee stock purchase 10% beneficial owners of public companies to an incentive plan administered by program for company employees. In under Section 16 of the Securities Exchange a committee of nonemployee outside addition, in connection with a potential IPO, Act of 1934 described in Chapter 7, and (3) directors in order to satisfy certain consideration is also commonly given to (1) requirements of the listing exchange entering into employment and noncompete and Section 16. Awards to nonemployee agreements with key members of the 1 Under current Internal Revenue Service (IRS) directors, if desired, may be made senior management team; (2) reassessing, guidelines, Section 162(m) generally prohibits potentially with the assistance of a public companies from deducting annual compensation consultant, the appropriate compensation in excess of $1,000,000 paid 2 Under generally accepted accounting principles mix of salary, bonus, benefits, perquisites to any “covered employee,” which includes (GAAP), equity awards that settle in stock are and company stock incentives offered any employee who has served as its CEO or generally recognized in the financial statements to senior management, relative to other CFO and any of its three next-highest paid at their grant date with compensation peer group public companies in similar executive officers who serve in that capacity cost recognized over the service period. By as of the last day of the company’s fiscal contrast, nonequity awards and equity awards industries; and (3) the impact of an IPO on year in respect of which the compensation that settle in cash are generally subject to the financial and estate planning of senior was paid. It is important to note that once an “liability” accounting treatment and, as such, must executives and substantial equity holders. employee qualifies as a covered employee, he be remeasured at fair value at each reporting Consideration should also be given as to or she will continue to be treated as a covered period until the award is settled. Therefore, whether any modifications to the company’s employee indefinitely, regardless of when the classification as a liability award can result in existing arrangements may be necessary compensation is payable. increased earnings volatility.

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under either the same plan that covers a strike price that is not less than grant date B. Stock appreciation rights. A stock employees or pursuant to a separate plan. fair market value in order to avoid running appreciation right (SAR) provides the In either case, pre-determined or formulaic afoul of the deferred compensation rules holder with the right to receive an amount procedures will be used to determine the under IRC Section 409A. Prior to an IPO, in cash or shares equal to the excess, if date of grant, exercise price and number of great care should be given to the valuation any, of the fair market value of a share on shares to be awarded. and grant process for stock options to the date of exercise over the grant date ensure a well-documented process for price. 1. Nonqualified versus incentive stock ensuring compliance with Section 409A. The tax treatment of SARs is similar options. There are two principal types of Following an IPO, valuations will be based to that of nonqualified stock options. The stock options: nonqualified stock options on public trading and companies should holder will generally not be taxed upon and incentive stock options (ISOs). ensure that grants utilize the public trading grant of the SAR, and the holder will Generally, an employee will not be prices. Some companies going public will recognize ordinary income at the time the taxed upon the grant of a nonqualified stock issue stock options with an exercise price SARs are exercised equal to the spread option. At the time the options are exercised, linked to the IPO price to provide employees between the grant date value and the fair the holder of the option will generally be with the benefit of any initial increase in the market value of the underlying shares at subject to ordinary income tax equal to trading price post-IPO. exercise. Upon exercise, the employer the spread between the exercise price is generally entitled to a corresponding and the fair market value of the underlying 2. ​Other important option terms. deduction. stock (i.e., for a public company, the trading Term of option. Options are generally If the value of a SAR is settled in cash, price), and the employer is generally granted with a 10-year term. ISOs cannot the award generally is treated as a liability entitled to a corresponding deduction in exceed a 10-year period. Typically, when award under GAAP, with potentially negative connection with the exercise (subject to there is a termination of employment, tax consequences. As a result, most public Section 162(m), discussed previously). Any the holder of an option will be given a company SAR awards are settled in shares further gain following exercise resulting from specified period of time following the end of of stock. appreciation in the value of the underlying employment to exercise his or her vested stock is taxable to the holder of the option options. This period is generally 3 to 12 C. Restricted shares. A restricted share upon disposition of the stock as either long- months but may vary depending upon the award provides the holder with the right to term or short-term . circumstances of termination. Upon death, become the owner of the shares that have ISOs allow the holder of the option to it is customary to provide that any vested been delivered to him or her, subject to avoid taxation until the underlying stock options can be exercised by the beneficiary potential forfeiture of the restricted shares is ultimately sold, assuming the statutory or estate for a year or longer. if specified vesting requirements are not holding periods are satisfied. (However, the Manner of payment. Options may be satisfied. These awards typically give the ISO spread value measured on the date of exercised by payment of cash, check or employee the current right to vote the exercise is included in the holder’s income money order equal to the exercise price. shares and the right to current or deferred for purposes of the alternative minimum Many public companies also provide an on such shares, even though tax (AMT) calculations. The application of alternative form of cashless exercise, which such shares might not vest until some date the AMT frequently can negate many of no longer results in unfavorable liability/ in the future and might be forfeited. the tax benefits of ISOs.) Upon the sale variable accounting. This permits exercise The holder of a restricted share award of the underlying stock, the entire spread of options upon delivery by the optionee will generally recognize ordinary income on between the exercise price and sale price to the company of irrevocable instructions the date the shares become vested, unless is then taxed at long-term capital gain to a to sell the underlying shares the holder submits an election to the IRS rates. However, it should be noted that the and remit to the company proceeds from within 30 days of grant electing to be taxed employee’s benefit comes at a cost to the such sale equal to the exercise price of on the grant date. employer—the employer is not entitled to the option. Additionally, with increasing The issuance of restricted shares will a deduction at any time with respect to an frequency, options are also sometimes result in a charge to earnings to reflect the ISO (assuming the statutory holding periods structured to allow for net of the value of the restricted shares as of the grant are satisfied). Consequently, ISOs are tax option, which allows the holder of an option date, the charge generally being recognized inefficient from the perspective of a tax- to pay for the exercise price and ordinary over the vesting period. paying employer. ISOs must conform to IRC income tax associated with exercise with statutory requirements, which include a limit shares that would otherwise have been D. Phantom shares; restricted stock on the amount of ISOs that can be granted realized in connection with the exercise. units. Unlike a restricted share award, to any one individual and a statutory holding This settlement results in the delivery of only neither a phantom share award nor a period of at least two years from the date of the spread value of stock (less an amount of restricted stock unit (RSU) award provides the ISO grant and one year from the date of stock used to pay for associated , with the holder with any current benefits of exercise. the employer paying the cash value of the ownership and, indeed, no shares are issued Both ISOs and nonqualified stock stock to the government to satisfy the tax currently. Rather, the award represents an options must also generally be granted with obligations). unfunded and unsecured promise by the

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company to pay the holder the number F. Typical forfeiture events for stock- continued by the successor company. of shares represented by such award (or based awards. (Companies may opt to provide for full its cash equivalent [phantom share]) on a 1. Termination of employment. The effect of acceleration of unvested awards in specified date, subject to satisfaction of termination of employment may vary based connection with a change in control, specified vesting requirements. upon the circumstances of termination (e.g, although this is looked upon unfavorably by The holder of a phantom share award discharge by the company with or without institutional investors and proxy advisory will generally recognize ordinary income on “cause,” resignation by the employee for firms.) Alternatives include no acceleration the date the award is settled in shares or in “good reason,” death or disability). or acceleration following an involuntary cash, even if the award vests on an earlier Typically, only unvested awards will termination of employment by the company date, although normal Federal Insurance be subject to forfeiture in the event of without cause or by the employee for Contributions Act (FICA) and Medicare stipulated terminations of employment, good reason during a specified period of withholding are required on the date of although vested awards often survive time (typically one to two years) following vesting. Depending on the underlying termination for only a limited period (e.g., a change of control (referred to as double vesting and share delivery (or cash 90 days). In addition, a small minority of trigger vesting). payment) schedule, phantom share awards companies provide for acceleration of may constitute “deferred compensation” the unvested awards in the event of a H. Shareholder approval and for purposes of Section 409A, in which discharge by the company without cause registration requirements. Most plans case care must be taken to ensure or upon the grantee’s resignation for good that will result in the issuance of securities compliance with Section 409A’s complex reason. Similarly, the grants may provide for to officers and directors will have to be set of rules and regulations. (A violation forfeiture or accelerated vesting of unvested approved by the company’s shareholders in of Section 409A will generally subject the awards in the event of the grantee’s death or order to satisfy applicable stock exchange award holder to accelerated taxation, along disability. requirements and IRC Section 422 (with with an additional 20% penalty tax plus respect to ISOs) interest.) 2. Breach of restrictive covenants. Some In addition, shares offered under If the value of a phantom share award companies provide for forfeiture of vested the plan generally must be registered is settled in cash, the award generally is (and of course unvested) awards in the with the SEC on a Form S-8. While pure treated as a liability award under GAAP, with event of a grantee’s breach of restrictive bonus arrangements (e.g., restricted stock potentially negative tax consequences. As a covenants, which may be included in the awards) may not require registration in result, most public companies utilize stock- agreement providing for the award. some cases, in most instances registration settled RSUs. on a Form S-8 is nevertheless desirable 3. Clawback. Increasingly, public to avoid application of Rule 144 holding E. Typical vesting schedule for stock- companies have adopted clawback period requirements following a plan based awards. policies that require repayment by equity participant’s receipt of the shares. 1. Time vesting. Stock-based awards are award recipients upon the occurrence of generally subject to a time-based vesting extraordinary events, such as a restatement I. Performance-based compensation requirement, commonly 25% each year of financials or misconduct by the recipient. arrangements. There is a great deal of over a four-year period or 33% each year Market practice continues to develop flexibility in designing performance-based over a three-year period. rapidly in this area, varying by industry and compensation arrangements. Following of the company. is a summary of the most significant 2. Performance vesting. In addition to considerations that should be considered in time-vesting stock-based awards, some G. Typical acceleration events for structuring such arrangements. companies have stock-based awards that stock-based awards. vest only if preestablished performance 1. Termination of employment. As indicated 1. Measure of performance to govern targets are met. Such performance targets herein, the company should consider awards. There are a wide variety of may be uniformly applied to all optionees whether to provide for the acceleration of performance measures used by (e.g., company earnings before interest, unvested awards if a grantee’s employment public companies in connection with taxes, and is terminated by the company without cause performance-based compensation [EBITDA] or return on equity targets) or may or upon the grantee’s death, disability or arrangements. Among the many be geared toward individual performance resignation for good reason. This approach possibilities are achievement of (e.g., achieving sales goals of a particular is most commonly (although not exclusively) preestablished earnings targets, net division in which the optionee is employed). found in awards to employees with income targets, growth in market Time-accelerated restricted stock options employment agreements. share or revenues, return on equity or are a variation of performance-based invested capital, funds from operations, options, which typically vest on a cliff 2. Other events. Public companies often achievement of cost savings, increase in basis after a certain period of time but provide for the acceleration of unvested common share value or comparison of may accelerate and vest earlier if certain awards upon a change of control if the competitor’s results. A common measure performance goals are met. unvested awards are not assumed and is total shareholder return (TSR), which

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combines appreciation require mandatory of part or all you currently have in place and how such and dividends paid to give a complete of the payment until some future date. existing arrangements will be affected by the picture of shareholder returns. TSR If mandatory deferral is preferred, some adoption of the new programs. In addition, is often calculated relative to a set of companies condition ultimate payout you may wish to consider engaging the predetermined peer firms to give a relative upon continued employment in order to services of a compensation consultant TSR score. Any such financial targets maximize the retentive power of the award. with expertise in your industry who may should be objectively measurable using If a deferral mechanic is considered, the be able to provide valuable insights as to GAAP, if possible. deferral mechanisms will need to be in the appropriate amounts of stock-based It may be appropriate to provide different compliance with the rules and regulations compensation and performance-based measures of performance for different levels governing deferred compensation found in compensation and the measures of of employees or for different segments Section 409A. performance relative to your competitors of the business. Moreover, multiple goals that should be used for purposes of could be used within a given performance 5. Effect of termination of employment. incentivizing senior management under the period even for a single group of employees. Generally, the employee’s right to all or a performance-based arrangements. portion of any partially earned award will Finally, while we have briefly described 2. Reward long-term or short-term be contingent upon the circumstances significant accounting considerations performance, or both? The plan could be surrounding termination of employment. that should be factored into designing designed to reward performance over a A voluntary resignation or termination for any compensatory program, you should short- or long-term period, or over a series cause will usually result in a complete consult with your for their views of sequential or overlapping performance forfeiture of the award. Employers should on the accounting consequences of any periods. Three- to five-year performance consider whether to include provisions compensatory program. periods are most common in long-term providing for partial vesting or retention plans. The choice of the duration of the of awards upon a qualifying if 2.10 Managing third-party risk period is oftentimes closely related to appropriate for the employee population. IHS Markit the chosen performance metric. Within any multi-year performance period, 6. Change of control. Typically, All companies, but particularly those performance could be measured year-by- performance-based awards provide for an contemplating an IPO, should ensure that year or only at the end of the performance acceleration of vesting and payment of a they have a strong and deeply embedded period. If the targets are expressed in yearly portion of the award upon the occurrence of third-party risk management capability. increments, consider whether to permit an a change of control. opportunity to “catch up” if performance (a) The risks of engaging third parties goals are not met in one performance 7. General tax considerations. There is The term third party includes vendors period but are achieved in the subsequent a significant difference in the tax effect supplying your company with products and performance period. of stock purchase programs and the services, but also alliances, phantom or other cash-based performance and charities, among others. Third-party 3. Form of payment. Payments may be compensation arrangements described relationships can be great enablers of made in cash or in shares, or a combination herein. While the typical stock purchase growth and innovation, but the benefits thereof. In lieu of immediate payment in arrangement will afford the participating must be viewed alongside associated risks: cash or shares, payment could be made employee with the opportunity to receive operational, legal, regulatory, financial and in the form of phantom shares. This capital gain treatment on the full appreciation reputational, all of which must be managed. approach would combine achievement of in share value subsequent to its acquisition of These include: the specified performance criteria with a the shares, the phantom and performance- • Information and cybersecurity—Sharing continued period of incentive tied to the based compensation arrangements sensitive data with third parties can underlying value of the common stock. The described previously will generally result expose firms to the risk of data breaches phantom shares would ultimately be settled in ordinary income to the employee upon or cyberattacks—exposing sensitive in shares or in cash based upon the value of payment. This distinction is a favorable one client data, private information or the common stock on the payment date. from the company’s perspective because it material nonpublic information. will be entitled to corresponding deduction • Business resilience—As reliance on 4. Timing of payments. Consider whether with respect to any ordinary income third parties for key payments will be made annually based recognized by the employee upon payment increases, there is a heightened risk of on annual targets or only at the end of the of the phantom or performance-based business disruption due to individual full performance period. Payment only at award, subject to Section 162(m). vendor failure or systemic failure. the end of the performance period subject • Concentration risk—Increasing industry to continued employment has a retentive (c) Conclusion reliance on a common set of vendors aspect and is the more common approach. Whatever approaches you ultimately elect (e.g., cloud providers) has led to growing Also consider permitting participants to pursue, consider the types, if any, of exposure to single points of failure to defer payment of vested amounts or incentive compensation arrangements that across supply chains.

22 NYSE IPO Guide Planning ahead

• Fourth party, nth party risk—The risk reports, certifications and independently Termination. Relationships must be securely that your vendors (or your vendor’s commissioned assessments. terminated, ensuring the necessary actions vendors) fail to effectively manage have been taken, which typically includes their subcontractors, which leads to Onboarding. Control gaps discovered destruction of data. operational risk. This may manifest in during the assessment phase should be combination with concentration risk. captured and managed with the third party • Vendor conduct—Reputational and (c) Building an effective program to develop remediation plans that will be Building a third-party risk management bribery risk associated with vendors tracked to completion. In some cases, the acting on behalf of your firm, being (TPRM) program requires board-level relationship may not be able to proceed; in engagement and a significant investment in perceived as employees or interacting others, gaps may reasonably be accepted directly with government officials. people, process and infrastructure: with risks. Finally, the relationship should be • TPRM experts—Experienced TPRM subject to a final approval stage. Approved experts are required to establish, build (b) The third-party risk management relationships will proceed into oversight. and oversee the program. Ongoing lifecycle training and development are critical Onboarding—inherent risk. When Risk-based oversight. As with to ensuring robust engagement onboarding a relationship with a new or onboarding, not all relationships are the with both business and third parties. existing third party, it is important to capture same. The types of activities required TPRM leaders should have a seat at key facts about the relationship and the during oversight (and their frequency) will senior operational and technology risk company so these facts can form the basis depend upon the facts and the level of committees. for an inherent risk assessment. Typical inherent risk. Both relationship owners from • Domain risk experts—It is important to keystone questions include, “Will the third the business and subject matter experts have access to specific experts (e.g., party hold personal information?” and (SMEs) have a role to play in carrying out cybersecurity) to assess vendors’ “Will the third party interact directly with oversight. Activities for SMEs may include control frameworks, address identified my customers?” The answers to these information security, privacy or business gaps and react to incidents. These and other questions should define the continuity reviews. Business owners will experts are typically embedded in risk tier assigned and therefore influence carry out contract reviews and may conduct existing SME groups. the application of your due diligence and operational performance assessments and • Infrastructure—An enterprise-wide oversight. other activities. Critically, they must also platform then codifies the firm’s ensure that key facts about relationships TPRM policy and drives it consistently Onboarding—residual risk. Searches are kept up-to-date. A common problem across the organization, plans and of relevant data sources about the third arises when a third-party product formerly performs risk assessments, tracks party should be undertaken to cover factors used for a nonsensitive and noncritical ongoing oversight and is a single including financial stability, cyber health, purpose is adopted by others in your firm for audited repository for associated adverse media and sanctions and screening a different purpose. This may be supporting documentation. checks on the company and key executives. a business-critical process, or it may involve • Reporting and analytics—Actionable Depending on the nature of the relationship, storing or processing sensitive data. Failing reporting at a vendor, business and an assessment may be given, asking the to identify this change in the relationship enterprise level is delivered to the board third party to answer questions and supply profile can expose your business to and/or senior committees. documentation to demonstrate suitable reputational, legal or other risks, because • Process integration—TPRM should be policies and controls. Use may be made the due diligence and oversight regime integrated with associated upstream of company-provided information such as applied is insufficient, having earlier been and downstream processes (e.g., system and organization controls (SOC) 2 determined to be based on outdated facts. and ).

NYSE IPO Guide 23

3 Preparing to go public

www.nyse.com/ipo Preparing to go public

3.1 Choosing advisors independence under applicable rules and to be used while marketing the transaction, J.P. Morgan (Investment Banking) regulations, the integrity of the company’s drive investor engagement and make financial statements and the processes recommendations around dealt timing, Retention of advisors/service and methodologies underpinning their sizing, composition and pricing. Oftentimes, providers preparation and audit. the most senior are considered lead Going public involves assembling a large The decision around auditors is of or active , while more junior and experienced team of professionals, critical importance, given that they will be banks are considered passive bookrunners including lawyers for the company and the integral to the company’s financial reporting or co-managers. underwriters, independent auditors and for many years. Auditors should be hired All bookrunners will participate in the underwriters, as well as other service well in advance of the IPO, such that the banker diligence leading up to the IPO. providers. The company should carefully financial statements and related disclosure Additionally, the bookrunners’ research consider the skills and qualifications of all to be included in the registration statement analysts will also be involved in undertaking parties it hires, given the importance of the are presented on a basis consistent with due diligence on the company and play an advice and services provided throughout prior-year . The SEC requires three important role in providing an independent the process. The key advisors and service years of annual historical audited financials view on the company to investors during providers are as follows. (two years in the case of emerging growth the roadshow. The bookrunners should be companies) and these would ideally have chosen based on their relationships with the Company counsel. Company counsel been audited by a single firm. Although aBig company, industry expertise, expertise in works in concert with the company’s 4 firm is most common for a company that executing IPOs, track records with issuers management team, in particular the is contemplating an IPO, there are a number and investors, distribution platforms and company’s CFO and general counsel, to of boutique and regional auditing firms that aftermarket support. represent the company’s legal interests are also well-regarded. The company should Co-managers are immediately junior throughout the process. Company counsel consider industry expertise, reputation and to the bookrunners. The co-managers’ is integral in carrying out due diligence, fit with the company, among other factors, investment banking teams are significantly drafting the registration statement and when selecting an auditing firm. less involved in the day-to-day execution. advising the company in relation to the In many cases the company requires They are, however, involved in due diligence. various legal agreements it will enter into in assistance in designing enhanced The co-managers’ research analysts connection with the IPO process, such as accounting processes and controls, will take part in all analyst diligence that lock-up and underwriting agreements, as preparing financial statements and other is conducted, and they will also play an well as generally providing legal advice to information for the audit and supplementing active role in discussing their views of the company throughout the process. its staff during the IPO process and the company with investors while the In selecting company counsel, it transition to a public company. The auditor roadshow is ongoing. Co-managers should is important to choose a firm that has may be unable to perform some of these be chosen based on their relationships considerable expertise and a proven tasks due to independence requirements, with the company, industry expertise and track record of executing IPOs, as well as so a separate accounting consultant may be aftermarket support. appropriate industry and sector expertise. necessary. Accounting consultants provide At a more personal level, it is critical to useful skills, experience and resources to Underwriters’ counsel. The lead select individual partners with whom the supplement the company’s accounting and bookrunners, on behalf of the underwriters, management team has good rapport, as controls functions in this time of transition, will select a counsel to act for them in they will be spending considerable time though the company should ensure that it connection with the IPO. This role includes together throughout the IPO process and does not become reliant on them beyond advising the underwriters on managing beyond. the IPO and has assembled an appropriate their own liability in connection with the IPO, team of in-house experts. confirming that the offering disclosure does Independent auditors and consulting not contain any material misstatements or accountants. The independent Underwriters. The underwriting syndicate omissions and ensuring that any issues accountants are involved in performing consists of various banks, each having that arise in due diligence are thoroughly an audit and, where relevant, reviewing different roles and status within the and appropriately addressed, whether certain financial statements prepared syndicate. The lead banks are known by disclosure or otherwise. In addition, by management and included in the as bookrunners because they run the underwriters’ counsel prepares drafts of registration statement. The accountants also for the offering once it is in its the underwriting agreement and lock-up provide a comfort letter to the underwriters marketing phase. The company should agreements and negotiates them with that, among other things, confirms the carefully choose the lead bookrunners company counsel, while also negotiating the accuracy of certain numbers included in for the IPO because of the significant role terms of the comfort letter to be delivered to the registration statement. The underwriters that they play throughout the process. The the underwriters by the company’s auditors. and their counsel conduct in-depth due lead bookrunners advise the company on diligence with the accounting firm around all facets of the IPO process, assist the Other advisors. In addition to the their relationship with the company, their company in shaping its investment thesis aforementioned, it may be appropriate to

26 NYSE IPO Guide Preparing to go public

appoint various other advisors in connection prospectus in connection with the offering. meet certain significance thresholds with the IPO, such as a compensation The registration statement and prospectus (described in the following section); consultant (to advise the company on the must contain financial statements and other depending on the significance of the structure of its stock-based compensation financial information regarding the financial acquisition, the company may be and related disclosures in the registration condition of the company and the results of required to present one to three years of statement), a roadshow coach (to advise the its operations. audited financial statements;1 management team on the most effective The Securities Act and the related rules • separate audited or unaudited annual way of presenting during the roadshow), an and regulations set out the requirements financial statements for significant investor relations firm and potentially an IPO that the company must follow when making investments accounted for under advisor. an offer to sell securities that do not meet the that meet certain one of the exceptions from registration. This significance thresholds; Other service providers. Aside from the framework includes the use of forms for • financial statements or disclosures advisory team, the company will require the registrations of offers (in particular, Forms of guarantors of securities being services of a number of service providers in S-1, S-3, S-4 and S-11). These forms specify offered and affiliates whose securities connection with its IPO: the information that must be disclosed collateralize the securities being offered; Financial printer and data room provider. under Regulation S-X and Regulation • financial information giving The company will need to appoint a financial S-K. Regulation S-X generally deals with effect to certain events (such as printer to typeset and format its registration form and content, significant business acquisitions/ statement, oversee the submission of it to while Regulation S-K generally deals with dispositions, reorganizations, the SEC via the Electronic Data Gathering, nonfinancial statement disclosures in the unusual exchanges and debt Analysis and Retrieval system (EDGAR) body of the registration statement. Form ); and process subsequent changes to the S-1 is the basic registration form used for a • segment reporting for companies that registration statement resulting from SEC US company’s IPO. Form S-3 is generally are engaged in multiple lines of business comments and other updates. The financial used for the registration of securities by or with operations in more than one printer is also likely to provide virtual data a company that already has securities geographic area (required disclosures room services to the company, enabling registered with the SEC, while Form S-4 is generally include separate revenues and documents required for the due diligence generally used for the registration of debt operating data for each segment); process to be uploaded and viewed or equity securities issued in relation to a • supplemental schedules for particular electronically by the working group. merger or acquisition. Form S-11 may be industries and circumstances; and Transfer agent. To list its stock on the used for the registration of securities issued • enhanced disclosure of financial and NYSE, the company will need to appoint by certain companies, including operational metrics for companies in a transfer agent that complies with the real estate investment trusts or securities certain industries. connectivity and insurance requirements to issued by other companies whose business operate within the direct registration system is primarily acquiring and holding real estate Companies that are classified in any of the Depository Trust Company (DTC). investment interests. of the following categories have modified Electronic roadshow provider. The SEC has specific and complex rules reporting requirements: Companies undertaking an IPO make regarding the financial statements and other • Smaller reporting company, as defined an electronic roadshow available for financial information that must be presented by Item 10(f)(1) of Regulation S-K, both institutional and investors. in a registration statement for an IPO. generally applies to new issuers with an This consists of a taped version of the Some of the significant financial statement expected of less than $250 roadshow presentation, available for viewing information that may be required includes: million. It also applies to new issuers electronically, and is usually arranged by the • audited annual financial statements for with $100 million annual revenues and underwriters on behalf of the company. recent fiscal years; no public float or a public float of less Stock option/equity administrator. Either • unaudited interim financial statements than $700 million when the registration before or, if not, upon becoming a public for the most recently completed interim becomes effective. company, it is common for the company period and the corresponding period of • Emerging growth company (EGC), to appoint a third party to manage and the preceding year; as defined by Section 2(a)(19) of the administer its stock option program(s). • selected financial information (usually Securities Act, generally applies to summarized from the company’s companies beginning with their initial 3.2 Financial information financial statements) for the past KPMG LLP five fiscal years and most recently 1 completed subsequent interim period In May 2020, the SEC adopted a variety of amendments to its rules for separate financial (a) Registration statement and its comparative period; statements of acquired , one of which An entity making an offering of securities • separate audited annual and unaudited limits the numbers of years that may be required registered with the SEC under the Securities interim financial statements for to be presented to two years. The amendments Act of 1933 (the Securities Act) must file businesses that have been acquired take effect January 1, 2021, but early adoption is a registration statement and distribute a or will probably be acquired that permitted.

NYSE IPO Guide 27 Preparing to go public

sale of registered equity securities Audited financial statements for the financial statements will likely require that have total annual gross revenues company and its predecessor must be the independent to perform less than $1.07 billion during their most accompanied by an audit report issued additional procedures. recently completed fiscal year. by independent accountants that are • Foreign private issuer (FPI), as defined registered with the Public Company Age of financial statements. Knowing by Section 3b-4 of the Exchange Accounting Oversight Board (PCAOB) the periods for which financial statements Act, generally applies to companies and audited in accordance with PCAOB will be required to complete a particular type incorporated outside the US that meet standards. If any of the audited financial of financing is a critical step in planning an certain additional criteria. statements required with the registration IPO. Financial statements must generally statement were audited by a predecessor comply with the SEC’s age of financial Some additional details regarding the independent accountant, consent may be statements requirements before the SEC first two categories, criteria for qualification needed from that independent accountant staff will start review of a filing. In certain and some of the differences in reporting to allow for inclusion of those financial circumstances, a company may submit requirements are outlined later in this statements and their audit report in the draft initial registration statements to the chapter. See Chapter 10 for additional registration statement. SEC for nonpublic review and omit financial information regarding FPIs. A table The preparation of these financial statements that it reasonably believes will containing selected comparative financial statements often raises certain data not be required to be presented separately statement reporting requirements for these collection, accounting and auditing issues, at the time it publicly files its registration categories is provided in the appendices. such as: statement. This includes the financial The following discussion focuses on the • the need to reevaluate existing statements of other companies under SEC requirements for companies that do accounting policies and consider Rules 3-05, 3-09 and 3-14 of Regulation not fall into any of the aforementioned three expanding disclosures to comply S-X. An EGC may omit from its confidential categories. with reporting requirements for submissions annual and interim financial public companies,3 such as segment data that it reasonably believes will not be Audited financial statements. Audited information, tax-rate reconciliation, required at the time of the IPO; however, annual financial statements required to and general an EGC must include all required financial be included in the registration statement compliance with Regulation S-X statements before it can distribute a include the following: and SEC interpretations of generally preliminary prospectus to investors. • Their balance sheets as of the end of accepted accounting principles (GAAP); The age of financial statements included the two most recent fiscal years. If the • the treatment of changes in accounting in an IPO is measured by the number of company has been in existence for policies or financial statement days between the date of effectiveness of less than one year, an audited balance presentation that arise during the most the registration statement and the date of sheet as of a date within 135 days of recent period, covered by the financial the latest in the filing. The the registration statement filing date is statements that may have a retroactive latest audited annual financial statements required. impact on the financial statements and included in the prospectus cannot be more • Their statements of comprehensive other financial information presented for than 1 year and 45 days old. income, cash flows and changes previous years; and If more than 134 days have lapsed since in stockholders’ equity for each of • the retrospective presentation of the latest audited annual balance sheet, the most recent three fiscal years or discontinued operations, consistently unaudited interim financial statements the shorter period during which the across the periods covered by the must also be included in the registration company (and its predecessors) has financial information presented. statement. Whenever updated interim been in existence.2 Designation of an financial statements are included, interim acquired business as a predecessor Accordingly, a company with financial statements of , cash is generally required where a company statements covering the required number flows and changes in stockholders’ equity acquires in a single succession, or of years should revisit those financial must be included for the corresponding in a series of related successions, statements and ensure that they are period of the prior year. Interim financial substantially all of the business (or a compliant with SEC requirements and statements for the first and second quarters separately identifiable line of business) recent SEC staff interpretations. Any must each be updated after 134 days. of another entity (or group of entities). modifications to previously issued audited Interim financial statements for the third The company’s own operations prior quarter must be updated 45 days after to the succession should appear the following fiscal year-end, at which time insignificant relative to the operations audited financial statements for the recently 3 Any previously elected private company GAAP assumed or acquired. completed fiscal year are required. alternatives created by the Standards Board (FASB)’s Private Company Council (PCC) alternatives (e.g., amortization Unaudited interim financial 2 May be presented in a note to the financial of ) are not be permitted in financial statements. Article 10 of Regulation S-X statements. statements filed with the SEC. provides guidance on the form and content

28 NYSE IPO Guide Preparing to go public

of condensed interim financial statements. company’s financial condition and trends of due diligence procedures, approvals Interim financial statements (also referred to in its results of operations, such as cash of the board of directors and/or as -period financial statements) must and cash equivalents balances, working shareholders and submission to be included in the registration statement capital balances and summary comparative appropriate government regulators for if the period between the effectiveness statements of comprehensive income. acquisition approval; date of the registration statement and the • economic and legal penalties date of the latest audited balance sheet Financial statements of an acquired associated with failure to consummate, in the filing exceeds a specified number business. If the company has made, or is including costs incurred to date in of days. (See previous section titled “Age proposing to make, a significant acquisition pursuing the acquisition; and of financial statements.”) Interim financial of a business—an investment that will be • significance of required regulatory statements include a balance sheet as of accounted for under the equity method or approvals. the end of the most recent interim fiscal multiple acquisitions of related or unrelated quarter, statements of comprehensive businesses—it may need to include audited The independent accountant that has income, stockholders’ equity and cash financial statements of the acquired audited the financial statements prepared flows for the period between the latest business, plus appropriate unaudited interim for purposes of complying with Rule 3-05 audited balance sheet and interim balance financial statements, to comply with Rule need not be registered with the PCAOB, sheet and those for the corresponding 3-05 of Regulation S-X.4 unless the acquired business is a public period of the preceding year. The interim Whether a proposed acquisition company in the US. The number of years financial statements can be presented requires inclusion of financial statements of audited financial statements required is in a condensed format but often are in a registered offering depends on the determined by the size of the acquisition presented in a noncondensed format. significance of the acquisition and whether and its significance relative to the company, The interim financial statements may be the acquisition is probable. The SEC has based on the following three significance unaudited, but the company’s underwriters issued no formal guidance on the standard tests under Rule i-02(w) of Regulation S-X: typically request them to be reviewed by of probability for business combinations.5 • the amount of the company’s an independent accountant prior to filing Generally, the determination is based on investment in the acquired business as part of their requested comfort letter the preponderance of evidence supporting compared to its total assets; procedures. the conclusion that an acquisition is • the total assets of the acquired business probable. However, the SEC views public compared to the company’s total Selected financial information. Item announcement of a business combination assets; and 301 of Regulation S-K requires a selected as strong evidence of a probable • the pre-tax income from continuing statement of comprehensive income acquisition. The company must assess the operations of the acquired business and balance sheet data for each of the probability of an acquisition by considering compared to the company’s pre-tax pre- last five fiscal years (or, if shorter, for the factors such as the following, in addition to income from continuing operations ( tax income from continuing operations life of the company and its predecessor the advice of its securities counsel: entities)—and the same financial data • progress of the negotiations, is income before income taxes, for the most recent interim period—to be considering such factors as progress of exclusive of amounts attributable to any included in the registration statement, discussions among senior executives, noncontrolling interests). together with comparative information for execution of confidentiality agreements, the corresponding interim period of the prior execution of letters of intent, conduct The rules should be consulted, as they year. The purpose of the selected financial contain specific instructions for modifying data is to highlight certain significant trends the calculation under certain circumstances. 4 in the company’s financial condition and The financial statements are generally the In May 2020, the SEC adopted a variety same as if the company were a registrant, with results of its operations. It must include: of amendments (the amendments, the the exception that a nonpublic entity need not amended requirements) to its rules for • net sales or operating revenues; provide certain public company disclosures (e.g., • income (loss) from continuing separate financial statements of acquired for segment information and earnings per share). 6 operations; PCC alternatives are not allowed. businesses. The amendments take effect • income (loss) from continuing operations 5 The SEC Codification of Financial Reporting January 1, 2021, but early adoption is per common share; Policies, Section 506.02(c)(ii), provides the permitted, as long as all the amendments • total assets; following: “Guidance as to when consummation are applied. • long-term obligations and redeemable of a transaction is probable cannot be given The test generally is performed using preferred stock; and because such a determination is dependent the company’s and the target’s most recent • cash dividends declared per common upon the facts and circumstances. In essence, audited financial statements prior to the however, consummation of a transaction is share. considered to be probable whenever the registrants’ financial statements alone would The selected financial data may not provide investors with adequate financial 6 SEC Release No. 33-10786, Amendments also include any additional items that information with which to make an investment to Financial Disclosures about Acquired and would enhance an understanding of the decision.” Disposed Businesses.

NYSE IPO Guide 29 Preparing to go public

date of acquisition. The table summarizes Audited statements of comprehensive dealerships, equipment rental operations the general rules for acquisitions that income must be provided for the three most and other businesses that are more occurred more than 75 days before the recent fiscal years for any such acquisition susceptible to variations in costs and offering.7 or probable acquisition that would be revenues over shorter periods due to market In addition, if audited financial significant (generally, that would account and managerial factors are not considered statements are required, applicable interim for 10% or more of the company’s total to be real estate operations. In such cases, financial information that would be required assets as of the last fiscal year-end prior the Rule 3-05 requirements will apply. according to the guidelines described to the acquisition). If the property is not The May 2020 amended reporting in the sections entitled “Age of financial acquired from a related party, only a one- requirements included amendments to statements” and “Unaudited interim year statement of comprehensive income Rule 3-14 with the intention of eliminating financial statements” must also be included. must be provided if certain additional differences from Rule 3-05 when no Staff Accounting Bulletin No. 80 (SAB textual disclosure is made. Rule 3-14(a) unique industry considerations exist.8 The 80) provides a special interpretation of Rule also requires certain variations from the amendments include the following: 3-05 of Regulation S-X. This is for IPOs typical form of statement of comprehensive • A new definition of a real estate involving companies whose operations have income. operation is included in the been built by the aggregation of discrete • If the property is to be operated by amendments, which is “a business businesses that remain substantially intact the company, a statement must be that generates substantially all of its after acquisition. SAB 80 allows first-time furnished showing the estimated taxable revenues through the leasing of real issuers to consider the significance of operating results of the company based property.” The term substantially all businesses recently acquired, or to be on the most recent 12-month period, is not meant to be a bright line and acquired based on the pro forma financial including such adjustments as can be therefore was not further defined by statements for the issuer’s most recently factually supported. If the property is to the SEC in the amendments. The completed fiscal year. Compliance with be acquired subject to a net lease, the application of the definition therefore this interpretation requires an application estimated taxable operating results shall will depend on specific facts and of SAB 80’s guidance and examples be based on the rent to be paid for the circumstances. on a case-by-case basis. However, this first year of the lease. In either case, the • Aligning the significance thresholds of interpretation allows currently insignificant estimated amount of cash to be made Rule 3-14 with those of Rule 3-05, other business acquisitions to be excluded from available by operations shall be shown. than for acquisitions greater than 40% the financial statement requirements. An introductory paragraph is required, but less than 50%. Simultaneously, it still ensures that the stating the principal assumptions • Eliminating the requirement to provide registration statement will include not less that have been made in preparing three years of financial statements for than three, two and one year(s) of financial the statements of estimated taxable acquisitions of related parties. statements for not less than 60%, 80% operating results and cash to be made • Explicitly requiring financial statements and 90%, respectively, of the constituent available by operations. for the most recent year-to-date businesses of the issuer. • If appropriate under the circumstances, interim period prior to the acquisition. The acquisition or probable acquisition a table should be provided. It should Rule 3-14 financial statements will be of real estate operations is subject to its own disclose the estimated cash distribution required in registration statements set of disclosure requirements under Rule per unit for a limited number of years, using the same timing requirements as 3-14 of Regulation S-X, which addresses with the portion thereof reportable Rule 3-05. income-producing real estate operations as taxable income and the portion • Allowing for the omission of required such as apartment buildings and shopping representing a return of capital, together financial statements once the acquired malls. Rule 3-14(a) requires the following: with an explanation of annual variations, real estate operation has been reflected if any. If taxable per unit will in filed financial statements for nine become greater than the cash available months. 7 An exception to the general requirements occurs for distribution per unit, that fact and the for an individual or multiple acquisitions that approximate year of occurrence should Financial statements of an equity exceed 50% of any of the significance criteria, for be stated, if significant. method investment. If the company which if they have closed within the 75-day period holds an investment in unconsolidated prior to the offering, or are probable at the time of The SEC staff has noted that one subsidiaries—or 50%-or-less owned the offering, the financial statements described element used in distinguishing a real estate entities accounted for under the equity previously will be required. operation from an acquired business method that exceed significance thresholds Audited financial statements for the earliest of subject to Rule 3-05 of Regulation S-X is as defined by Rule 3-09 of Regulation the three fiscal years required may be omitted if the predictability of cash flows ordinarily S-X—separate financial statements for the net revenues reported by the acquired business in its most recent fiscal year are less than $100 associated with apartment and commercial million. Unaudited interim financial statements property leasing, which generally includes may need to be included, depending on the time shopping centers and malls. Nursing 8 The amendments to Rule 3-14 take effect of year that the offering takes place. homes, hotels, motels, golf courses, auto January 1, 2021, but early adoption is permitted.

30 NYSE IPO Guide Preparing to go public

General rules for acquisitions more than 75 days pre-IPO

Acquisition criteria Reporting requirements(a) Amended reporting requirements(a) The acquisition does not exceed 20% for any No audited financial statements No change of the three significance criteria. required. The acquired business (or multiple acquisitions One year of audited financial One year of audited financial statements required. of related businesses) exceeds 20% but not statements required. No requirement to present financial statements if 40% for any of the three significance criteria. the acquired business has already been included in the registrant’s post-acquisition audited results for at least nine months. If an interim period is required due to the age of financial statements, a comparative period is not required. There have been multiple acquisitions of One year of audited financial Provide pro forma financial information depicting the unrelated businesses whose significance is less statements required for a aggregate effects of all such businesses in all than 20% individually but more than 50% for mathematical majority of the material aspects and audited financial statements any of the three significance criteria when individually insignificant for entities >20% individually significant. aggregated. acquisitions. The acquired business (or multiple acquisitions Two years of audited financial Two years of audited financial statements required. of related businesses) exceeds 40% but not statements required. No requirement to present financial statements if 50% for any of the three significance criteria. the acquired business has already been included in the registrant’s post-acquisition audited results for at least one year. The acquired business or any acquisition that Three years of audited financial This category has been removed. is probable at the time of the offering exceeds statements required. 50% for any of the three significance criteria (or securities are being registered to be offered to the shareholders of the acquired business).

(a) The number of years for which balance sheets and statements of comprehensive income are required to be presented is based upon the level of significance.

investee company may need to be filed with If either of these tests is met, separate investee in its report, the investee audit the registration statement, including an audit financial statements of the investee must be must be performed by an independent for certain periods. filed. Insofar as is practicable, the separate accountant registered with the PCAOB.9 Significance of investees is evaluated financial statements required shall be as of Under Rule 4-08(g) of Regulation S-X, under Rule 1-02(w) of Regulation S-X based the same dates and for the same periods for any unconsolidated subsidiaries—and on the following tests: as the audited consolidated financial 50%-or-less owned entities accounted • The company’s and its other statements required to be filed by the for under the equity method that meet subsidiaries’ investments in, and company. The required financial statements any of the three Rule 1-02(w) criteria at the advances to, the investee exceed 20% of the investee must be audited only for greater than 10% but not more than 20% of the total assets of the company and those fiscal years in which either of the significance level—summary financial its subsidiaries consolidated as of the aforementioned tests is met; the remaining end of the most recently completed years can be unaudited. These audited 9 fiscal year. financial statements may or may not require The auditor of the financial statements of • The company’s and its subsidiaries’ auditing by an independent accountant the nonissuer entity must be registered if, in performing the audit, the auditor played a equity in the pre-tax income from registered with the PCAOB, depending on substantial role in the audit of the issuer, as continuing operations of the investee the level of reliance placed on these audited that term is defined in PCAOB Rule 1001(p)(ii). exceed 20% of such income of financial statements by the company’s If the substantial role test is not met, the firm is the company and its subsidiaries principal independent accountant. If not required to be registered. The inclusion or consolidated for the most recently the registrant’s principal independent exclusion of such a report under Rule 2-05 of completed fiscal year. accountant references the audit of the Regulation S-X does not affect this determination.

NYSE IPO Guide 31 Preparing to go public

information as described by Rule 1-02(bb) Pro forma financial information. As a result, any pro forma adjustments must be presented in the notes to the Pro forma financial information may be for expected future cost synergies or other financial statements. required to assist investors in understanding similar adjustments that are not specifically the nature and effect of significant supported by the acquisition documents will Financial statements of guarantors acquisitions, dispositions, reorganizations, generally not be allowed.11 and for collateralizations. A guarantee unusual asset exchanges, debt restructurings If a business or assets are disposed of of a public security (e.g., a guarantee of or other transactions contemplated in (or planned to be disposed of) after the latest a public debt or public preferred equity the prospectus. In such cases, historical balance sheet presented in the registration security) is, itself, considered a security that financial information is adjusted in thepro statement, but before the effective date of must be registered under the Securities forma financial information to reflect the the IPO, the effect of the disposal should Act, absent an applicable exemption. transactions and the impact of the offering on be reflected in the company’s pro forma Rule 3-10 of Regulation S-X requires each the company’s capital structure. All significant financial statements that are prepared in guarantor of registered securities to file assumptions must be disclosed. accordance with Article 11. the same financial statements required Guidance regarding pro forma financial for the company in the filing. If certain information is provided in Article 11 of Segment reporting. For companies that criteria are met, condensed consolidating Regulation S-X.10 Rule 11-01 of Regulation operate in multiple lines of business or financial information may be provided in S-X specifies the circumstances under geographic regions, additional disclosure the company’s financial statements in lieu which pro forma financial information is data may be required to be presented, of separate audited financial statements, required in filings with the SEC and sets which includes separate revenues and unless a guarantor is newly acquired. forth general guidelines for the content of operating results information for each major Under Rule 3-16 of Regulation S-X, that information. Article 11 requires: line of business or geographic region. audited financial statements must also • a condensed pro forma balance sheet Accounting Standards Codification (ASC) be filed for each affiliate whose securities based on the most recent balance Topic 280, “Segment Reporting,” requires collateralize any class of registered sheet of the company included in the disclosures regarding segments for each securities if the greater of the aggregate filing, unless the transaction is already year in which an audited statement of principal amount, , or reflected in that balance sheet; and income is provided. Item 101(b) of Regulation market value equals 20% or more of the • a condensed pro forma statement of S-K requires disclosure of certain financial principal amount of the secured class of comprehensive income based on the information about industry segments. This securities being offered. company’s most recent fiscal year includes revenues from external customers, In March 2020, the SEC finalized and the interim period of the company profitability measures and total assets for amendments to Rules 3-10 and 3-16. included in the filing, unless the each of the last three fiscal years presented. The final rule amends Rule 3-10 and historical statement of comprehensive ASC Topic 280 establishes standards partly relocates it to new Rule 13-01. income reflects the transaction for the for the way that public business enterprises Amended Rule 3-10 allows more issuers to entire period. report information about operating provide certain financial and nonfinancial segments in annual financial statements. disclosures in lieu of separate audited Pro forma adjustments related to the It also requires those enterprises to report financial statements if the revised pro forma condensed balance sheet and selected information about operating eligibility conditions are met. Similarly, condensed statement of comprehensive segments in their interim financial reports the requirements to provide separate income must include adjustments, which and establishes standards for related audited financial statements in Rule 3-16 give effect to events that are: disclosures about products and services, are replaced with summarized financial • directly attributable to the transaction; geographic regions and major customers. and nonfinancial disclosures in new Rule • factually supportable; and It defines anoperating segment as a 13-02. New Rules 13-01 and 13-02 specify • expected to have a continuing component of an enterprise: the requirements of these disclosures, impact on the company (applicable • that engages in business activities which are permitted to be provided outside only to the condensed statement of from which it may earn revenues and of the notes to the company’s financial comprehensive income). statements. The new rules are effective for registration statements first filed or 11 Under the Amendments to the SEC’s rules 10 pro forma amended on or after January 4, 2021, but Certain disclosures are required by for separate financial statement of acquired GAAP—such as FASB Accounting Standards businesses adopted in May 2020, the pro early adoption is permitted. forma If any of the aforementioned situations Codification (ASC) Topic 805, “Business information may include management Combinations” and ASC Topic 410, “Asset adjustments to include forward-looking are applicable, Rules 3-10, 3-16, 13-01 and Retirement and Environmental Obligations”— information (e.g., synergies and dis-synergies 13-02 should be reviewed to determine and should be provided in the notes to the that would, in management’s opinion, enhance the extent of financial information required financial statements where applicable. Those an understanding of the pro forma effects of the to be included with the registration presentations may differ in style and content from transaction). This will take effect January 1, 2021, statement. the requirements of Article 11 of Regulation S-X. but early adoption is permitted.

32 NYSE IPO Guide Preparing to go public

incur expenses (including revenues • Its assets are 10% or more of the Supplemental schedules for certain and expenses relating to transactions combined assets of all operating transactions. Rule 5-04 of Regulation with other components of the same segments. S-X requires that a number of supplemental enterprise); schedules be provided for particular • whose operating results are regularly The company must disclose the industries and under certain circumstances. reviewed by the enterprise’s chief factors used to identify the enterprise’s Each of these schedules contains additional operating decision maker, to make reportable segments, including the basis financial information that must be audited by decisions about resources to be of organization and the types of products the company’s independent accountant: allocated to the segment and assess its and services from which each reportable • Schedule I—Condensed Financial performance;12 and segment derives its revenues. The company Information of Registrant must be • for which discrete financial information is must also report for each of its reportable filed when the restricted net assets of available.13 segments a measure of profit or loss, consolidated subsidiaries exceed 25% total assets attributable to that segment, of consolidated net assets as of the Determining whether the company revenues from external customers and end of the most recently completed has multiple operating segments involves a reconciliation to the corresponding fiscal year. For purposes of this test, an assessment of how management consolidated amounts. Furthermore, restricted net assets of consolidated runs its business. Aggregating two or disclosure of items such as interest revenue subsidiaries are the amount of the more operating segments may be highly and expense, depreciation and related company’s proportionate share of net subjective and involves consideration of the expense, equity method investments and assets of consolidated subsidiaries (after similarities in the economic characteristics capital expenditures may be required intercompany eliminations), which, as of and in other factors, such as the nature of under ASC Topic 280 if such amounts are the end of the most recent fiscal year, the products and services, the nature of included in the measure of segment profit may not be transferred to the parent the production process, customer type or or loss or in the determination of segment company by subsidiaries in the form of class, distribution channels and applicable assets, as reviewed by the company’s chief loans, advances or cash dividends without regulatory environment. operating decision maker on a segment the consent of a third party (e.g., lender, The company must provide required basis. regulatory agency or foreign government). disclosure information about an operating ASC Topic 280 also requires certain • Schedule II—Valuation and Qualifying segment if it meets any of the following enterprise-wide disclosures, regardless Accounts must be filed in support thresholds: of whether the company has multiple of valuation and qualifying accounts • Its reported revenue (including both reportable segments, if not already (e.g., allowance for doubtful accounts, sales to external customers and provided as part of the reportable allowance for obsolescence) intersegment sales) is 10% or more operating segment information. These included in each balance sheet. of the combined revenue (internal disclosures include revenues from • Schedule III—Real Estate and Accumulated and external) of all reported operating external customers for each product and Depreciation must be filed for real estate segments. service or each group of similar products, held by companies with a substantial • The absolute amount of its reported as well as services and revenues by portion of their business involving profit or loss is 10% or more of the geographic area. acquiring and holding investment in real greater, in absolute amount, of: For interim periods, disclosure for estate, interests in real estate or interests • the combined profit of all operating each segment must include revenues in other companies, a substantial portion of segments that did not report a loss; or from external customers, intersegment whose business is acquiring and holding • the combined loss of all operating revenues, a measure of profit or loss, real estate or interests in real estate segments that did report a loss. a reconciliation to the company’s for investment. Real estate used in the consolidated information and material business is excluded from the schedule. changes to total assets. • Schedule IV—Mortgage Loans on 12 The term chief operating decision maker The time and effort required in Real Estate must be filed by certain identifies a function, not necessarily a manager, identifying, gathering and reporting companies for investments in mortgage with a specific title. That function is to allocate financial information for operating loans on real estate. resources to, and assess the performance of, segments may be significant. A first- • Schedule V—Supplemental Information the segments of an enterprise. Often, the chief time issuer should carefully consider the Concerning Property- Casualty operating decision maker of an enterprise is its requirements for segment reporting and Insurance Operations must be filed CEO or COO, but it may be a group consisting of, revisit its reporting obligations whenever when the company, its subsidiaries for example, the enterprise’s president, executive (1) it enters into new lines of business, or 50%-or-less owned investees vice presidents and others. (2) it exits an existing line of business or accounted for under the equity 13 Discrete financial information is considered any measure of a business activity’s profit or engages in other restructuring activities or method have liabilities for property– loss. Depending upon the circumstances, this (3) the company’s chief operating decision casualty (P/C) insurance claims. The measure could be comprised of revenue and/or maker begins to analyze its business in a schedule may be omitted, if reserves expenses. new or a different way. for unpaid P/C claims—and claims

NYSE IPO Guide 33 Preparing to go public

adjustment expenses of the company comply with Item 1300 voluntarily prior to its • Audited annual financial statements— and its consolidated subsidiaries, its effective date. These include statements of income, unconsolidated subsidiaries and its cash flows, changes in stockholders’ 50%-or-less owned equity method Smaller reporting companies. Smaller equity and comprehensive income for investees—did not, in aggregate, reporting companies, as defined by Item the past two years, as opposed to three exceed one half of common 10(f)(1) of Regulation S-K, may be eligible years for large companies. The balance stockholders’ equity of the company for scaled reporting requirements. These sheet requirement is the same. and its consolidated subsidiaries as scaled requirements streamline and simplify • Financial statements for significant of the beginning of the fiscal year. the disclosure requirements to make it acquisitions—Rule 8-04 of Regulation For purposes of this test only, the easier and less costly for smaller reporting S-X requires two years of financial proportionate share of the company companies to comply. Under the rules, a statements for a business acquired and its other subsidiaries in the company qualifies as a “smaller reporting by a smaller reporting company if reserves for unpaid claims and claim company”14 if it: the acquisition is greater than 50% adjustment expenses of 50%-or-less • has a public common equity float of less significant. Under Rule 3-05, a third year owned equity method investees taken than $250 million as of the last business is required if the acquisition is greater in the aggregate after intercompany day of its most recently completed than 50% significant and the acquired eliminations shall be taken into account. second fiscal quarter; or business had revenues of at least $50 • had annual revenues less than $100 million in its most recent fiscal year. Companies in specific industries, million in the prior fiscal year and either • Audited financial statements for including insurance, may have additional • has no public float (e.g., companies significant equity method investments— supplemental information requirements with no common equity outstanding Article 8 does not require the filing that vary from those listed previously. The or no market price for their of separate financial statements of schedule information may be provided outstanding common equity); or investees as would be required under separately or in the notes to the audited • had public float as of its most Rule 3-09 but summarized financial financial statements. recently completed second fiscal information must be disclosed. quarter of less than $700 million. Industry guides. Item 801 of Regulation If the company qualifies as a smaller S-K sets out five industry “guides,” requiring In the case of a company filing an reporting company in an initial registration enhanced disclosure of financial and initial registration statement, the public statement, it must reassess this status at operational metrics for companies in certain float is computed as of a date within 30 the end of its second fiscal quarter in each industries: days of its initial registration statement subsequent fiscal year. If the company • Guide 3—Statistical Disclosure by Bank by multiplying the aggregate worldwide fails to meet the test, a transition to the Holding Companies; number of common equity shares held by larger company reporting requirements • Guide 4—Prospectuses Relating to nonaffiliates before the offering—plus the commences with the first quarter of the Interests in Oil and Gas Programs; number of common shares being offered— subsequent fiscal year. • Guide 5—Preparation of Registration by the estimated price of Statements Relating to Interests in Real the common equity shares. If a company Emerging growth company. The Estate Limited Partnerships; fails to qualify for smaller reporting status, it Jumpstart Our Business Startups (JOBS) • Guide 6—Disclosure Concerning Unpaid may recalculate its public float based on the Act created a new category of public equity Claims and Claim Adjustment Expenses results of the public offering. issuers called EGCs that are exempt from of Property-Casualty Insurance If smaller reporting company status is certain SEC reporting requirements for up Underwriters; and achieved, the registration statement may to five years. An EGC is a company that • Guide 7—Description of Property by comply with the SEC’s scaled disclosure has not had an initial sale of registered Issuers Engaged or to Be Engaged in system. The scaled disclosure requirements equity securities on or before December 8, Significant Mining Operations. are integrated into Regulation S-X (Article 8 2011 and has total annual gross revenues for financial statement requirements) and less than $1.07 billion for its most recently Guidance for disclosures for companies Regulation S-K (for nonfinancial statement completed fiscal year.15,16 with oil and gas operations is provided in disclosure requirements). A few of the Item 1200 of Regulation S-K. key differences in financial statement New guidance for disclosures by requirements are as follows: 15 companies engaged in mining operations An FPI may also qualify as an EGC. 16 take effect for fiscal years beginning on “Total revenues” means the revenues presented in a company’s most recent fiscal year’s financial or after January 1, 2021, superseding the 14 An FPI that meets the criteria of a smaller statements prepared under US GAAP (for guidance of Industry Guide 7— Description reporting company can take advantage of the domestic companies and foreign companies of Property by Issuers Engaged or to Be scaled disclosures, but in doing so, it must file that present a reconciliation to US GAAP) or Engaged in Significant Mining Operations. domestic company forms and provide financial International Financial Reporting Standards The new guidance is provided in Item statements under US GAAP. See section 10.3 for (IFRS) as issued by the International Accounting 1300 of Regulation S-K. Companies may a further discussion of FPIs. Standards Board (IASB).

34 NYSE IPO Guide Preparing to go public

Among the reduced reporting EGC will also be allowed to apply the entity must follow certain transitional requirements permitted for an EGC under these accommodations to any other rules and commence complying with non- the JOBS Act are the following: registration statement it files. EGC reporting requirements during the • An EGC may limit presentation of • An EGC may apply the effective date year in which the entity no longer qualifies audited financial statements in the initial provisions applicable to nonpublic as an EGC. registration statement of its common companies for adoption of new or equity securities to the two most recent revised accounting standards issued Summary. Planning an IPO is a complex fiscal years.17–19 The JOBS Act does not by the Financial Accounting Standards undertaking that requires the compilation change the existing requirement that Board (FASB) but must make this choice and collection of numerous financial registrants present unaudited financial at the time the company is first required statements and related information. statements for the most current interim to file a registration statement, periodic Knowing what financial statements period and comparative prior year period report or other report with the SEC.20 and other information will be required in registration statements.18,19 • An EGC is exempt from the requirement to complete a registration statement is • An EGC may comply with the for auditor attestation of internal control a critical step in planning an IPO. The management’s discussion and analysis over financial reporting (ICFR).21 company should consult the SEC rules (MD&A) and selected financial data • An EGC may report using the scaled and regulations, as well as its auditor requirements of Regulation S-K by disclosure requirements available and other advisors, to determine what presenting information about the same to smaller reporting companies for financial information requirements might periods for which it presents financial executive compensation disclosures. be applicable in its circumstances to allow statements in an initial registration for the planning of sufficient time and statement. An EGC retains this status until the resources to complete the filing within • As an EGC is not required to present earliest of: manageable time frames. more than two years of audited financial • the last day of its fiscal year in which it statements in a registration statement has total annual gross revenues of $1.07 (b) Transition to a public company for an IPO of its common equity billion or more; The completion of an IPO marks the start securities, the SEC will not object to • the last day of its fiscal year following the of life as a public company. One of the first limiting the years of financial statements fifth anniversary date of the first sale of challenges for a successful transition is provided under Rule 3-05 or 3-09 to common equity securities pursuant to adapting to the new, often more complex, two years. The SEC staff would also not an effective registration statement; requirements of operating as a public object if an EGC voluntarily provides the • the date on which the issuer has issued company. New processes may need to third year of audited financial statements more than $1.07 billion in nonconvertible be adopted, and management must now in the initial registration statement but debt during the previous three-year consider how decisions affect a much larger chooses to provide only two years of period; or group of stakeholders and be conscious audited financial statements under • the date on which the issuer is deemed of ensuring regulatory compliance. Some Rules 3-05 or 3-09 when three years to be a large accelerated filer. of the transition areas that should be of audited financial statements may considered going forward are outlined in the otherwise be required based on the An EGC must continually revaluate its following section. significance of the acquired business ability to qualify for EGC status. If an entity or equity method investment. An fails to qualify for EGC status at any point, Controls and procedures. The level of investor confidence in the reliability of

17 20 financial disclosures can be a key factor in a The JOBS Act that permits an EGC to EGCs must adhere to public company effective public company’s success. To help ensure file only two years of audited financial statements dates for all standards issued prior to April 5, investor—and market—confidence, a public is limited to the registration statement for the 2012. Any update to the FASB’s ASC after April 5, EGC’s IPO of common equity securities. However, 2012 would be eligible for adoption according to company’s internal controls systems must an EGC will not be required to include—in its first the private company timetable. If an EGC elects comply with all regulatory requirements. on Form 10-K or on Form 20-F— to comply with public company effective date These requirements include quarterly audited financial statements for any period prior provisions, it must comply with them consistently certifications by executives and an audit to the earliest audited period included in the for all new and revised standards throughout the report on the effectiveness of ICFR required registration statement filed in connection with its period it qualifies as an EGC. by Section 404 of the Sarbanes–Oxley 21 IPO of common equity securities. Under existing SEC rules and regulations, newly (SOX) Act, typically as of the second fiscal 18 If an EGC is not a smaller reporting company, public entities, other than nonaccelerated filers, year-end after the IPO. However, an EGC it must include three years of audited financial begin complying with Section 404(b) auditor is exempt from the auditor attestation statements in its initial registration statement for attestation of the Sarbanes–Oxley (SOX) Act with debt securities. their second annual report filed with the SEC. An requirement in Section 404(b) of the SOX 19 An FPI qualifying as an EGC may comply with EGC will be exempt from this requirement as long Act for as long as it qualifies as an EGC. the scaled disclosure provisions in a Form 20-F. If as it qualifies as an EGC; however, management’s Complying with Section 404 requires an FPI takes advantage of any benefit available to reporting on internal control is still required, as a significant investment of resources over an EGC, then it will be treated as an EGC. according to Section 404(a). several months to move through a project

NYSE IPO Guide 35 Preparing to go public

plan that includes a number of phases, and reporting requirements of public organizational changes that the company such as: companies; should consider: • assessing financial statement and • develop or enhance its budgeting, • Review business strategies, forecasting general and specific risks; forecasting and financial modeling processes and cost infrastructure in • evaluating the control environment, processes to reflect its operations order to help ensure its competitiveness entity-level controls and general as a stand-alone entity with public and meet shareholder expectations. information technology (IT) controls; shareholders; and • Develop an IR infrastructure and • identifying significant accounts and • change underlying business processes resources. disclosures; to meet appropriate metrics or best-in- • Develop or enhance budgeting, • defining significant locations and class services. forecasting and financial modeling business units; processes. • documenting processes involving major After the IPO, the company will be • Determine key performance indicators classes of transactions; subject to strict SEC reporting timelines for to be used to communicate business • identifying significant risk points and key quarterly and annual reporting. It will also be performance to stakeholders that are in mitigating controls; required to file current reports on Form 8-K line with industry practices. • providing preliminary assessment of after the occurrence of certain specified • Design appropriate compensation effectiveness of design and operation of material events within four business days programs that align and incentivize key controls; of the occurrence. Many private companies employee behavior and focus with • remediating missing and ineffective are unaccustomed to formal accounting the overall business strategy and key controls; closes for interim reporting periods and the objectives. • demonstrating consideration of the strict reporting timelines for both quarterly regulatory risks and environment; and and annual periods. In anticipation of going The company’s strategic plan should • conducting final tests that support an public, the following are some actions that the encompass both external and internal assertion of effective internal controls company should take in advance of the IPO: factors that span the entire organization. over financial reporting. • Evaluate the current financial The plan establishes the framework for close process in light of post-IPO the annual , providing the top- Section 7.1 contains a more detailed requirements and consider early down direction, financial targets and key discussion of the SOX Act compliance implementation of an accelerated assumptions. requirements. close timeline that will be required of The annual budget should focus on an SEC issuer, including the gathering key operational drivers of the business Financial accounting department. The of disclosure information for notes to for both revenue and cost, with key inputs process leading up to filing the registration the financial statements. Reducing from senior management. The budget statement requires gathering various pieces the financial close cycle time will most process should be flexible and have a short of financial information. The company likely involve changes in processes, IT cycle time to accommodate market-driven can utilize external advisors to assist in systems and possibly resources. The changes. gathering this information, but once an IPO transition to an established process can Forecasting should be a periodic is completed, internal resources should be take time, but it is imperative that these update to the budget (and strategic plan) in place to support the ongoing reporting modifications be in place before the first that reflects changes and impacts actually needs of a public company. The company Form 10-Q or Form 10-K is required. experienced in the . Although will need to: • Evaluate the finance and accounting implementation of forecasting is generally • prepare ongoing reports that provide departments’ organizational structure the domain of the finance department, financial and nonfinancial information at and skill sets of key personnel in light of ownership of the process belongs with a level of detail and in a time frame that post-IPO reporting requirements, and the recipients of the results, including generally was not required in the past; then identify gaps. Gaps can be filled by operational management. The process • develop a public entity organizational recruiting additional staff and providing should involve a focused, bottom-up structure and recruit appropriate training for current personnel. process based on specific, measurable personnel to satisfy its public reporting • Draft an accounting policy manual. drivers, and it should closely involve requirements; Many private companies have informal operational managers. • develop sufficient resources or policies and procedures, but public If the company does not have adequate processes to perform regular and companies should have documented sales forecasting, it may consider using key consistent financial close and accounting policies as a component of performance indicators, industry trends or reporting processes to meet reporting their internal control environment. other third-party data to benchmark target requirements; sales numbers. Similarly, external cost • develop or enhance its accounting and Budgeting and forecasting. After the trends and industry averages can help reporting policies and procedures; IPO, investors will expect the company quantify or even qualify expense forecasts. • enhance the training and skills of its to implement the plans presented in the Creating standardized relationships existing workforce involving accounting prospectus. The following are some of the between internal and external financial and

36 NYSE IPO Guide Preparing to go public

operational sources can provide both insight separate exhibit to a filing. Prior to adopting obtaining an audit of ICFR should not and consistency in the forecasting process the inline XBRL requirement, companies be underestimated. IT plays a large role and also identify a baseline to measure are required to continue submitting XBRL- within the internal control structure and is the company’s performance relative to the formatted financial information as exhibits. an integral part of SOX Act compliance. industry. The inline XBRL rule is currently effective A systems-embedded approach to the At a minimum, forecasts should be for large accelerated and accelerated filers financial reporting process can include updated semi-annually, but more frequent that use US GAAP and for all other filers, automated key controls to reduce the overall updates are preferable. The actual results including International Financial Reporting number of controls. may prompt changes in strategies, priorities Standards (IFRS) filers, beginning with the IT strategy can be a key driver in and resource allocation, with subsequent first periodic filing for a period ending on or accelerating the accounting close process period forecasts reflecting the impacts of after June 15, 2021. through the reduction or of such changes. Ideally, the subsequent year’s XBRL/inline XBRL is not required for multiple general , charts of accounts budgeting process should be embedded in IPOs, but a company with an IPO that and reporting systems. For systems that the forecasting process during the latter part becomes effective will be required to have disparate interfaces or lack real-time of the current fiscal year. comply with the applicable XBRL rules, reporting capabilities, modifying the existing commencing with periodic filings, starting system’s capabilities or building the case Extensible business reporting with its first Form 10-Q filed after the for an enterprise resource planning system language. SEC rules and related registration statement becomes effective. may be warranted. guidance require public companies (both The rules should be consulted regarding Greater use of IT systems can also domestic and FPIs) to provide their financial when initial compliance with the rule enhance the budgeting and forecasting statements to the SEC in a separate exhibit commences, as this will be dependent on process and allow for the leveraging of 22 containing certain reports and registration the timing of the IPO. information more effectively. Communication statements in an interactive data format requirements to key stakeholders after the using extensible business reporting Technology considerations. IT is a IPO about the performance of the company language (XBRL). The rules are designed critical enabler for the company in creating should be aligned with external reporting. to make it easier for analysts and investors value and achieving financial reporting and Implementation of an integrated system to locate and compare data on financial regulatory compliance. Public companies providing both external and management and business performance in a standard that have not adequately invested in reporting can provide timely, quality format across all public companies. The technology and tools for financial reporting information. XBRL rules also require public companies and business operations may struggle to post their XBRL filings on their corporate with technology and system limitations Summary. Becoming a public company websites. With interactive data, all of the in meeting their needs. This may require often requires management to make items in a financial statement are labeled additional resources to ensure business numerous improvements to business with unique computer-readable “tags,” processes are adapted to meeting IT processes and the underlying systems as which make financial information more system needs. In addition, the company they react to the demands of investors, searchable on the Internet and readable by may need to implement new technology government regulators and other and other software. and systems or customize existing systems stakeholders. Preparing for this change In June 2018, the SEC finalized and reports. in status may require considerable time amendments to the XBRL rules, requiring The IT effort required for compliance and effort. To achieve a more seamless the use of inline XBRL, which embeds with establishing, evaluating and transition, the company should consider the XBRL-formatted information into the taking steps to operate and report like a financial statements rather than including public company before the IPO becomes the XBRL-formatted information only in a 22 Applicable for the first Form 20-F filed for an FPI. effective to ease the post-IPO transition.

NYSE IPO Guide 37

4 The IPO process

www.nyse.com/ipo The IPO process

4.1 Process timeline auditors. The company relies heavily on • comfort letter; and J.P. Morgan (Investment Banking) the bookrunners to craft an appropriate • press releases announcing the filing marketing story and consults closely with (optional), launch and pricing of the Planning and executing an IPO is time- its auditors when preparing the financial transaction. intensive and typically takes 16–20 weeks disclosure. or more from organizational meeting to Determining listing venue. The closing. The exact time taken can vary Due diligence. The purpose of due company, with the assistance of the lead depending on the company’s readiness diligence is twofold: first, and most bookrunners, should determine whether prior to embarking on the IPO process, importantly, to ensure the accuracy it is eligible to list on the NYSE or another the complexity of the transaction, market and completeness of the company’s exchange, hold discussions with the conditions and numerous other factors. registration statement; second, to protect exchange and a . Achieving this timeline requires significant the underwriters (and certain other offering preparation, including the completion of participants) against liability arising in (c) Week 6 required financial disclosure, which is critical connection with any material misstatements Valuation update with the lead for the drafting of the registration statement. and/or omissions in the offering disclosure. bookrunners. It is prudent to hold A large team of professionals is Due diligence is conducted by all members periodic valuation updates with the lead involved in the IPO process, overseeing of the working group and is iterative in bookrunners, particularly as market the key workstreams: drafting of the nature, continuing right up to closing of conditions shift and as the company registration statement, due diligence, the IPO, though it should be substantially achieves key milestones throughout the IPO preparation of transaction documentation complete by the time of the initial filing of the process. This ensures that all parties are and other marketing materials (e.g., analyst registration statement. aligned on valuation expectations. presentation, roadshow presentation). The underwriters and their counsel will The preparation process can be broken conduct extensive business, financial and Legal and other documentation. down into the following key stages: accounting due diligence on the company, Continue drafting and negotiating legal focusing primarily on the company’s documentation and comfort letter. The pre-filing phase operations, procedures, financials (both historical and prospective), competitive Equity research analyst briefing. The (a) Week 1 position and business strategy, as well as underwriters’ or syndicate’s equity research on the management team and key board analysts also conduct due diligence on Organizational meeting. All key members members. As part of this process, the the company, with a particular focus on the of the IPO working group meet to discuss underwriters will have detailed discussions business and financials. The timing of the the offering, including timing, key tasks and with the company’s management, fulsome research analyst day can vary, but roles and responsibilities for the IPO process. customers, suppliers and any other relevant it is common for the syndicate analysts to The lead bookrunners typically prepare parties and will review agreements with speak with management in advance of the an organizational book that details the and documentation relating to any of the initial filing. aforementioned items. During this meeting, aforementioned parties, workforce, creditors the CEO, CFO, general counsel and other or other related parties. Prior to key executives typically provide an overview Underwriter internal approvals. Counsel to the company and the filing the initial draft registration statement of the company, to ensure the working group underwriters will also conduct legal due with the SEC, the underwriters will typically has a good understanding of the company’s diligence, which is primarily documentary need to clear internal committees. This business, financial position and any key in nature and focuses on verifying the involves presenting the company to an issues affecting it, as well as clarity on the company’s legal records, material contracts, internal committee, a review of the draft critical path for execution of the IPO. any litigation and compliance with local, registration statement disclosure and a state and federal laws and regulations. discussion of any issues that came to light (b) Weeks 2 to 5: during the due diligence process. This is a Registration statement drafting. Legal and other documentation. prerequisite, regardless of whether the initial The registration statement is the principal In addition to assisting with drafting the filing is confidential or public. SEC document for an IPO, with the dual registration statement and participating in due purpose of registering the securities with diligence, the company’s and underwriters’ Submission of draft registration the SEC and educating investors on the counsel will work with the underwriters, statement to the SEC. While drafting the opportunity. Domestic issuers utilize an S-1, the company and the auditors to draft and registration statement can be completed while foreign private issuers utilize an F-1. complete the following documentation: in six weeks or fewer, this workstream The drafting of the registration statement • underwriting agreement; often takes longer. The speed at which is a collaborative process among the • lock-up agreements for existing a company is able to file its registration company, the underwriters (typically led by shareholders (typically signed before statement is contingent upon its readiness the lead bookrunners), the company’s and filing of the registration statement); at the outset of the process. The availability underwriters’ counsel and the company’s • legal opinions; of audited financials is particularly important.

40 NYSE IPO Guide The IPO process

To commence the process of the SEC’s Legal and other documentation. (g) Weeks 16 to 17 review of the registration statement, the Continue drafting and negotiating the legal Launch IPO. File an amendment to the company must file it together with various documentation and comfort letter. registration statement with price range exhibits. All issuers have the ability to (the so-called red herring). Conduct file confidentially. Companies that elect Roadshow presentation. Continue management presentations to the to undertake a confidential review must refining the roadshow presentation and hold underwriters’ equity salesforces and publicly file the draft registration statement rehearsals with CEO/CFO and any other commence the roadshow, typically at least 15 days before the start of the IPO members of the roadshow team. consisting of up to seven and eight days of roadshow. Upon the public filing, all prior investor meetings. confidential filings are made available. Agree on offering structure. The company, in conjunction with the lead bookrunners, Pricing and closing. After building a book The waiting period should determine the appropriate proceeds to of demand, the lead bookrunners will agree raise in the IPO in order to be well capitalized on the offering price with the company and (d) Weeks 7 to 8 after the IPO, taking into account its strategic shareholders, execute the underwriting goals, as outlined in the registration statement. Roadshow presentation and marketing agreement and allocate the IPO to investors. In addition, the company should approach its strategy. While the IPO working group The following day, the company begins shareholders and discuss the extent to which awaits comments from the SEC on the publicly trading on the NYSE or another they may wish to sell part of their holdings in draft registration statement, it is prudent exchange, rings the opening bell and hosts the IPO. In doing so, the company should be to further develop the marketing story for other key marketing events associated with mindful of any IPO participation rights granted the IPO roadshow. The lead bookrunners being a public company. Two business days to shareholders under registration rights and will generally spearhead this process, later, the IPO closes, at which point stock is other similar agreements that may exist with while working closely with the company delivered to investors against payment of existing stockholders. to create an impactful slide deck to be the offering price, and various legal opinions shown to investors during the roadshow. are delivered by counsel. Valuation and price range discussions. This presentation is typically 20 to 30 Continue periodic valuation discussions slides in length and details the offering, (h) Aftermarket with the underwriters and formulate a the company’s products and/or services, Depending on the trading performance preliminary price range to be provided key selling points, industry trends, growth of the stock, the underwriters may either confidentially to the SEC as an indication of stabilize opportunities, competitive positioning and intervene to the stock in order what is to be expected when the offering is financial performance. to smooth out short-term volatility (if the launched. This often involves a share split or Many companies elect to test the waters stock falls below issue price post-IPO) or consolidation to achieve the desired dollar prior to the launch of the IPO roadshow, exercise the (if the stock trades price range. which entails a series of investor meetings. comfortably above issue price post-IPO). An abbreviated version of the roadshow Agree on marketing strategy. The 4.2 SEC registration and prospectus presentation is utilized during these meetings, company and the lead bookrunners should Simpson Thacher & Bartlett excluding any mention of the offering itself. decide on ideal timing, the length of the roadshow and which investors to target as (a) The registration statement and the Legal and other documentation. potential buyers of the IPO. prospectus Continue drafting and negotiating legal In the United States, the basic regulatory documentation and comfort letter. The marketing/execution phase framework governing initial public offerings (IPOs) has been in place since the early (e) Weeks 9 to 13 (f) Weeks 14 to 15 1930s, when Congress enacted the Receiving and addressing SEC Registration statement and other and the Securities comments. The SEC takes approximately documentation. Having cleared all SEC Exchange Act of 1934 in reaction to the 30 days to complete its initial review of the comments and amended the registration crash of 1929. The Securities draft registration statement. The SEC will statement to reflect any and Act and the Exchange Act to this day respond to the company and its counsel via the offering price range, finalize all other continue to undergird the process by which a formal comment letter in which it makes documentation, including the underwriting companies conduct public offerings of certain observations on the draft disclosure agreement and comfort letter, and launch their securities and provide ongoing public and invites the company to address these the press release. A longer SEC review will reporting thereafter. The Securities Act by making revisions and filing a series of push out launch. requires a company to file a registration amendments. The initial comment letter is statement with the Securities and the beginning of an iterative process with Roadshow preparation. Finalize the Exchange Commission (SEC) and have that the SEC, which often requires at least two to roadshow presentation, hold roadshow registration statement be declared effective three amendments and can last six or more rehearsals and make all logistical by the SEC prior to publicly distributing its weeks, depending on a number of variables. preparations for the roadshow launch. shares in the United States for the first time.

NYSE IPO Guide 41 The IPO process

By far, the most common type of as the Chief of the Office for Energy & registration statement for an IPO in the (a company that has been public Transportation or the Chief of the Office for United States is Form S-1. (While real for at least twelve months, has filed Life , etc.). Generally, each industry estate investment trusts use Form S-11 and one Form 10-K, and has a public office is staffed with professionals, primarily most foreign companies use an alternate float of at least $700 million). accountants and lawyers but also those form, the basic concepts are the same.) with specialized expertise such as mining or The applicable SEC form specifies the petroleum engineers who may be involved information that must be included in the If you have not already, it would be with the reviews of companies in specific registration statement and refers to specific worthwhile to review the IPO registration industries. SEC regulations (Regulation S-K and statements or the prospectus that It is important to understand that when Regulation S-X) that provide instructions constitutes the most important part of the SEC staff reviews filings they are not on what information must be presented these filings and subsequent SEC reports doing so to determine whether or not an and how. If your company qualifies as an of other public companies in your industry. IPO or any other investment is a good one. emerging growth company (EGC) or smaller We will not go through in extensive detail Rather, they are focused on ensuring that reporting company (SRC), you will be able to the specific requirements for the content the SEC’s disclosure requirements for the benefit from reduced disclosure obligations of the registration statement, but in short registration statement are being adhered to in the IPO registration statement and in your the registration statement is intended to and that the financial presentation complies subsequent ongoing SEC reporting. We be a comprehensive document that gives with applicable authoritative accounting highlight some of these benefits throughout investors a balanced view of the company. literature and SEC staff interpretations and this guide. In addition to describing the terms of policies in regard to accounting and auditing the offering itself, it includes financial issues. The SEC does not pass on whether statements and a discussion and analysis the registration statement is adequate or smaller reporting company A (SRC) is of the company’s results of operations and accurate (in fact, it is against the law to say any issuer that: financial condition, a description of the that they have done so). • has public float of less than $250 company’s business, disclosure regarding When your IPO registration statement is million or the material risks relating to the company’s first submitted to the SEC, the staff will take • has less than $100 million in business and an investment in its stock, about a week to assign it to a review team. annual revenues and and information relating to the company’s Typically, this will include a lawyer and an • no public float or directors, executive officers and significant accountant who are the primary examiners, • public float of less than $700 stockholders. Although the rules can be and a more senior lawyer and accountant million. technical, you should assume that the who are the reviewers. This team will be registration statement will be required to overseen by the relevant office chief. After emerging growth company An (EGC) disclose any dealings in which the company the team is assigned, the legal examiner is any issuer that had total annual is a participant that also directly or indirectly ordinarily will reach out to your outside gross revenues of less than $1.07 involve any of its directors, officers or counsel to notify them that the filing will billion (adjusted for every significant stockholders. be subjected to a full review and to obtain five years) during its most recently (The SEC also has specific and e-mail addresses to which the staff should completed fiscal year. A company that sometimes complex rules regarding the eventually send their initial comment letter is an EGC on the first day of its fiscal content and age of the financial statements and subsequent correspondence. Your year will no longer qualify as an EGC that must be presented in a registration counsel thereafter ordinarily maintains open upon the earliest of: statement. Such requirements are explained lines of communication with the SEC staff • the last day of its fiscal year in Chapter 3.2 of this guide.) while the registration statement is being following the fifth anniversary of reviewed. the first sale of its common equity (b) Overview of the SEC review process A word on the level of review—the SEC securities in a public offering; The SEC’s Division of Corporation Finance staff does not review each and every SEC • the last day of a fiscal year during is tasked, among other responsibilities, with filing and, for those filings that are pulled for which it had total annual gross reviewing the registration statements of IPO review, the staff conducts differing levels of revenues of $1.07 billion or more companies as well as the SEC filings of the review. Although the SEC does not reveal (adjusted for inflation every five thousands of already reporting companies. the criteria that it uses to select filings years); The Sarbanes–Oxley Act requires that some for review, IPO registration statements • the date on which it has, during level of review of each reporting company almost always get a full review (with rare the previous three-year period, be undertaken at least once every three exceptions relating to companies that issued more than $1 billion in years, and the SEC reviews a significant have publicly traded debt, already have nonconvertible debt; or number of companies more frequently. their common stock registered under the • the date on which it is deemed Corp Fin assigns filings by companies Exchange Act for compensation or other large accelerated filer to be a based on their industry to one of seven reasons or that were recently public and offices, each headed by a chief (such are re-registering).

42 NYSE IPO Guide The IPO process

The SEC staff will take approximately months. Statistically, studies have shown there may be questions concerning the four weeks to perform their initial review that in recent years the median time age, form or content of financial statements of the registration statement and issue from initial submission to effectiveness required to be included in a filing. In these their first comment letter. When this is for IPO registration statements (which circumstances, it may make sense to received, it is usually the catalyst for a also includes the marketing phase, as consult with the accounting staff of the frenzy of activity as the company and its effectiveness of the registration statement SEC (typically, the SEC’s Office of the Chief counsel and auditors, in consultation with occurs after the roadshow just prior to Accountant addresses the former types the underwriters and their counsel, rush to pricing) is approximately 15 to 16 weeks. of questions while the accounting staff prepare appropriate responses. The basic (For purposes of blocking out timetables, within Corp Fin resolves the latter) prior to format is to resubmit an amended version the authors generally assume that the the initial submission of the registration of the registration statement that has been SEC staff will take four weeks to respond statement, which may take additional revised to reflect the SEC staff’s comments to the submission of the initial registration time on the front end but can save time and, if required, to provide updated financial statement, two weeks to respond to the and aggravation overall. Less frequently, statements and other recent developments, submission of the first amendment, one there may be uncertainty about a legal accompanied by a letter explaining the week to respond to the submission of the aspect of the proposed transaction and company’s responses to each of the staff’s second amendment, and several days pre-filing consultation with the legal staff of comments. It usually takes at least a week for subsequent amendments. With the the SEC may be warranted. The SEC has and a half to two weeks (or more) for this exception of the staff’s response to the published specific guidelines as to how process to be completed in a thoughtful initial submission [which almost invariably such consultations should be handled, way and to allow time for internal layers appears close to the four-week time frame], and your counsel and auditors should have of review both within the company and response times can vary significantly practical experience in doing so. It should its auditors. Different practitioners have based on the workload of the review team be on your pre-filing work plan to expressly different approaches to the process, but and other factors, including the difficulty of consider with your auditors and counsel the general advice is to comply with the specific issues that are raised.) To the extent whether there are any items that warrant staff’s comments on specific disclosures that the overall review period takes longer such a pre-filing consultation with the SEC where possible, notwithstanding that this than this, it is usually due to the fact that staff. In recent years, the SEC staff has been may result in edits to wording that were the company has decided not to move as increasingly open to communications and painstakingly written during the drafting quickly as it could have, has chosen to take encourages outreaches where necessary. process leading up to the initial submission a resistant posture to staff comments, or or, when a comment is simply inapposite, because problematic questions relating to 4.3 Underwriting, marketing, and sale to explain clearly and respectfully in the its historical accounting have been raised. J.P. Morgan (Investment Banking) response letter why this is the case. Where While legal comments on the disclosure can staff comments relate to accounting usually ultimately be resolved by revising (a) Underwriting matters, the participation and advice of the relevant disclosure, comments relating the company’s auditors and accounting to historical accounting may result in the Role of the bookrunners. The advisors are critical—the experienced firms need to restate the financial statements company should carefully choose the lead will have a wealth of practical experience included in the registration statement, a bookrunners for the IPO because of the on just about every issue that the SEC process which can take time and result in a significant role that they play throughout staff may raise. (The big firms each have great deal of attention from the company’s the process. The lead bookrunners advise partners in their national offices who have auditors. Avoiding this unfortunate situation the company on all facets of the IPO backgrounds working in senior capacities should be a key objective of the company process, assist the company in shaping at the SEC.) When the SEC staff has issued as it is preparing the financial statements its investment thesis to be used while a comment questioning or seeking to to be included in the registration statement marketing the transaction, drive investor understand the company’s accounting in a and is another reason why it is advisable to engagement and make recommendations particular area it is important to respond in a engage auditors and accounting advisors around deal timing, sizing, composition way that is explicitly grounded in the relevant with significant relevant experience. In and pricing. Oftentimes the most senior lead active accounting standards and literature. Note order to make the SEC review process banks are considered or bookrunners that the SEC staff’s comment letters and as expeditious as possible, a company , while more junior banks passive bookrunners the company’s responses will eventually should draw on the well of experience of its are considered or co-managers become publicly available on the SEC’s counsel, accounting advisors and auditors . website after the IPO occurs. when preparing the entire registration In an IPO there will typically be statement, while anticipating the areas that Advising the company. There are many several rounds of SEC staff comments will be of particular interest and concern to complexities in an IPO process, including: and resubmissions of the registration the SEC staff. • IPO sizing, including the primary versus statement, with the overall time required In some cases, the appropriate secondary component; for the SEC review phase commonly application of generally accepted • leverage levels and overall capital taking from two-and-a-half to four accounting principles may not be clear or structure at and post-IPO;

NYSE IPO Guide 43 The IPO process

• investment thesis development for the company. Once the appropriate Role of the passive bookrunners and/or registration statement and roadshow range is determined, the lead bookrunners co-managers. The passive bookrunners presentation; will advise the company on an appropriate and/or co-managers on an IPO are typically • valuation; price range with which to market the offering, significantly less involved in day-to-day • timing and marketing strategy; and which is most frequently $2 wide and falls advisory roles. They are, however, involved • roadshow logistics. in the teens (e.g., $14–$16). The company in the majority (if not all) of the diligence will often need to execute a stock split—or a conducted. Their research analysts will Shaping the investment thesis. One —to solve for this desired also take part in all analyst diligence that is of the most important contributions that price range. conducted. The primary role of the passive the lead bookrunners make during the IPO bookrunners and co-managers is to process is helping the company shape its Key players in the investment bank. underwrite additional shares in the offering, investment thesis. From the registration • Investment banking coverage: The provide additional research coverage post- statement that is filed with the SEC to the investment banking coverage team IPO and assist in market making once the roadshow presentation that is presented consists of industry experts who stock is public. to investors, the marketing message typically own the client relationship. This that the company uses during the IPO is team will be the key point of contact for (b) Roadshow critical to its success. Through intensive the company throughout its lifecycle The roadshow is the pivotal portion of diligence and drafting sessions, the lead for any investment banking advice or the IPO process, where the company bookrunners will become well versed in the assistance it may need, including on (accompanied by representatives from the company’s strategy and key selling points the IPO, , lead bookrunners) conducts a series of one- and will assist the company in effectively debt and capital structure. As such, the on-one and group meetings with investors communicating those messages to team understands the company and its who will potentially purchase the shares investors. The registration statement and strengths and areas for development, being offered in the IPO. Several weeks the roadshow presentation are the two most as well as its overall vision and strategy. prior to launching the roadshow, the lead important marketing documents, allowing The coverage team will act as a liaison bookrunners will work with the company investors to understand the equity story and with the company and the equity capital to determine the length and scope of the evaluate their investment decision. markets professionals, who will be the roadshow and to identify specific investor captains of the IPO process, as well as targets. Marketing the transaction. While any subsequent that is Once the prospectus has been creating the marketing materials, the lead desired. filed with the price range on the cover, bookrunners will also develop a cohesive • Equity capital markets: The equity the roadshow typically launches with marketing strategy for the company. In order capital markets team sits between the a management presentation to the to maximize the success of the offering, the investment banking coverage team and underwriters’ salesforces. The underwriters lead bookrunners will determine the ideal the syndicate, and will also create internal memos timing and roadshow strategy with the goal research functions. This team advises that will be used as a “cheat sheet” by the of reaching the largest number of high- the company on all the execution- salesperson when speaking to investors, quality investors that will become long-term related decisions, liaises with research giving him or her sufficient background to shareholders of the company. Another to collect public-side feedback and answer key questions. topic of discussion with the bookrunners is coordinates with the sales, syndicate The lead bookrunners handle all whether to test the waters prior to launch of and trading functions on market and roadshow logistics for the company. The the IPO, which entails a series of investor investor color. roadshow typically lasts up to seven to eight meetings. This enables the company and • Syndicate: During the roadshow, the days, depending on the timing and size its lead bookrunners to assess potential syndicate coordinates with sales in of the IPO and the scope of the business, demand for the offering and identify and engaging investors, developing the among other things. address any issues or questions that roadshow and marketing strategy, The roadshow typically consists of some investors may raise. entering investor orders into the book, combination of the following /regions assisting in a pricing recommendation globally: Setting the price range. Throughout and allocating the order book. • ; the IPO preparation process, the lead • Sales and trading: The salesforce is • Boston; bookrunners will keep the company responsible for reaching out to investors • Mid-Atlantic (Philadelphia, Baltimore); apprised of market conditions and valuations upon deal launch, scheduling meetings, • Mid-West (Chicago, Minneapolis, of its key comparables and the potential soliciting feedback on the transaction Kansas , Denver); implications for the company’s proposed (both qualitative and quantitative) • West Coast (San Francisco, Los IPO valuation. The lead bookrunners will and ultimately entering orders. The Angeles); evaluate comparable companies’ valuations, salesforce also works closely with the • London; market conditions and recent IPO valuations traders in order to execute trades for the • /Milan; and to determine the appropriate valuation for the investors post-IPO. • Hong Kong/Singapore.

44 NYSE IPO Guide The IPO process

While meetings have historically price for the company, while still balancing pricing and sizing recommendation to the occurred in person, given the COVID-19 appropriate value for investors and ideally company and give the pricing committee pandemic, many roadshows are virtual. achieving a day-one trading performance of time to deliberate. The typical goal of the A typical roadshow day involves: approximately +15%. Retail orders are also pricing recommendation is to achieve the • five to seven one-on-one meetings and/ valuable, but typically retail demand is not a best possible price for the company while or conference calls; driver of overall pricing. allocating to the highest-quality shareholder • a group event; and There are numerous ways to assess base and ensuring that the stock trades • travel to the next day’s city, if applicable. the strength of the order book, including well on the first day and beyond. It is in the the level of subscription or subscription rate, best interest of the company, key beneficial Each investor meeting typically lasts 45 which shows the number of shares in the shareholders and the bookrunners for the to 60 minutes and can take the format of order book relative to the number of shares stock to trade well in the aftermarket. either a formal management presentation being offered. When the offering is well Once the company and its pricing of the roadshow slides with subsequent oversubscribed, demand for the IPO is high committee have formally agreed on an Q&A or simply informal Q&A, depending and investors’ orders will likely be cut back. IPO price with the lead bookrunners, the on the investor’s familiarity with the story. The amount of price sensitivity in the book is underwriting agreement is executed by Investors have access to the management also critical. Another key metric of success the company, any selling shareholders presentation (audio and video), as well as for the company is the one-on-one hit ratio, and the underwriters, pursuant to which the roadshow slides via NetRoadshow or which is the percentage of investors that the underwriters make a firm commitment another similar site. The SEC also requires management met with one-on-one during (subject to certain customary conditions) similar information to be made available the roadshow that subsequently placed to purchase the IPO shares and resell to retail investors via RetailRoadshow or orders. The goal of the company and the them to investors at the IPO price. The lead another similar site. Both sites make the bookrunners is to achieve as high a hit ratio bookrunners begin the allocation process, management slides available during the as possible, as this typically represents the determining exactly how much stock to marketing period only; upon pricing, all highest-quality demand. allocate to each account. The goal of the materials are taken down and are no longer For most IPOs, the majority of orders will allocation process is to create a high- accessible. After each investor meeting, the come in the last several days of the roadshow. quality, long-term focused shareholder salesperson responsible for covering each The lead bookrunners will scrub the demand base for the company. Once allocations to respective account will follow up with the to identify how much is truly allocable. The each account have been agreed upon by investor to get feedback on the meeting, the overall demand in the order book is known as the lead bookrunners and the company, company, modeling, valuation and whether gross demand, while the actual shares that the syndicate breaks prior to the market they are inclined to place an order. the bookrunners can prudently allocate is opening the day after pricing and allocations known as allocable demand. are communicated to each of the individual (c) Bookbuilding process investors. The goal of the lead bookrunners is to (d) Pricing, trading and closing On the first trading day, the NYSE will convert accounts into the order book as The pricing meeting typically includes the determine the approximate time at which early as possible. On an IPO roadshow, it company, key selling shareholders and the newly public stock will officially open. is not uncommon for accounts to begin the lead bookrunners. In advance of the The Designated (DMM) coming into the book during the first offering, the board establishes a pricing is responsible for opening the stock. In several days of the roadshow. Often, committee to formally approve the offering. addition, the stabilization agent is the these accounts are positioning for larger When pricing a deal, numerous factors chosen to open the trading allocations. that occurred over the roadshow are taken in the stock and to provide support to the When the book begins to build, investors into account, including demand in the stock price, if needed. The market will look will fall into two camps: Those without a order book (quality and quantity) and the to the stabilization agent as the syndicate price limit (market order) and those that performance of the overall market and the bid in trading support for the offering. have scaled orders at various prices. For company’s peers during the roadshow. The stabilization agent can use the short example, if the IPO filing range is $16 to $18 Additionally, new issuance activity and the position created by the IPO over-allotment per share and Investor A has a market order performance of recent, relevant transactions option or greenshoe to repurchase up to of 1 million shares, the order stands at 1 can have an overall effect on the company’s 15% of the shares offered in the event the million shares at $16, $17, $18 and potentially IPO price, either positively or negatively. shares fall below the offer price. even above the filing range. A scaled order After reviewing an overview of accounts The IPO will officially close two business by Investor B, in contrast, may indicate 1 with which management met and key days after the first trading day of the stock million shares at $16, 750,000 shares at feedback, as well as gross demand, (T+2). At that point, all funds will be wired, $17 and 500,000 shares at $18. The goal of allocable demand, the hit ratio and stock transfers will be completed, the legal the bookrunners is to get as many market price sensitivity in the order book, the documentation will become unconditional orders as possible in order to maximize lead bookrunners will communicate the and the IPO will officially close.

NYSE IPO Guide 45

5 Direct listings

www.nyse.com/ipo Direct listings

Latham & Watkins IPO book-building process. In a sense, (c) Direct listing process the direct listing pricing mechanism Throughout a direct listing process, it is (a) Introduction to direct listings skips the negotiation step of the book- critical to ensure that all parties understand A direct listing is a relatively novel alternative build process and goes straight to their respective roles and responsibilities, method of becoming a public company in the market-based pricing that applies including the limitations on the types of the United States. In a direct listing, existing daily to public company stocks on their activities in which the parties may engage. To stockholders can list and sell shares on respective exchanges. ensure a smooth process overall, all parties a national stock exchange without an • Ability to provide greater liquidity should agree on the rules of the road at the underwritten offering, enabling them to for existing stockholders. As part of outset, since responsibilities and limitations freely sell their shares on such exchange. a traditional IPO process, lock-up differ in important ways from the traditional Additionally, due to an NYSE rule change agreements typically restrict additional IPO process. approved by the SEC in December 2020, a sales of shares outside of the IPO Similar to an IPO, a direct listing process company can now offer its own shares in a by existing stockholders and the may begin with an organizational meeting primary direct floor listing, as described more company for a period of 180 days to introduce key players, discuss a timeline, fully later in this discussion. Except where post-listing to help manage supply and and formulate a plan for drafting the indicated, the below discussion relates to reduce volatility. In a direct listing, a registration statement. Once a registration selling shareholder direct floor listings.1 company is able to provide liquidity to statement is prepared, it is submitted to the existing stockholders without lock-up SEC, typically confidentially, for the SEC’s (b) Advantages of a direct listing agreements (though they can be review and comment. After a company has A direct listing offers certain advantages to used if desired), and, as a result, such cleared SEC comments, the registration companies looking to go public compared stockholders are free to sell their shares statement becomes effective and shortly to a traditional IPO, including: immediately. thereafter, trading commences. This • Market-driven . In a • Unfettered access to buyers and sellers process will typically last five to six months. traditional IPO process, the underwriters of shares. A direct listing provides the • Role of the NYSE. One of the early build an order book by collecting possibility for existing stockholders decisions a company makes in a direct indications of interest from potential to sell their shares immediately after listing is choosing the exchange on investors. Based on this order book listing at market prices. The traditional which it will list its stock. The company and discussions with investors and the IPO process includes a limited set of will need to meet the applicable listing company (and in some cases its existing participants: a company and possibly criteria for the particular exchange. The equity sponsors), a price is set for the existing stockholders who are offering NYSE has been the home of major first sale of shares to investors in the IPO. to sell their shares in the IPO, an of their kind direct listings, having led the By contrast, in a direct listing, the price underwriting syndicate of investment way with direct listings for and per share in the opening trade on the banks that builds an order book of Slack. The NYSE provides a Designated first day of trading is determined based indications of interest from a limited Market Maker (DMM) to assist companies on buy and sell orders submitted by a group of potential investors and the with the opening and the trading of their much broader pool of potential investors subset of investors who receive the initial stock on the NYSE. The DMM plays two and sellers through the facilities of a allocations of shares being offered in the key roles in a direct listing: (1) to open the national stock exchange. In theory, due IPO at the price to the public appearing stock at the right (i.e., stable) price, which to increased market size and the fact on the front page of the prospectus. involves a thorough price-discovery that bids can be more exactly calibrated Institutional buyers tend to feature process; and (2) to maintain price for size and price, the resulting stock prominently in the initial allocation. continuity and minimize the effects of price set by this public market should Because a direct listing does not involve temporary disparity between supply and be a truer market-driven price than the allocations available at a set public demand by supplying its own capital, both one set through the more constrained offering price, prospective purchasers of at the open and through the early days shares can place orders with their broker as a public company. The NYSE may list of choice at whatever price and size they private companies that previously have 1 While a direct listing is an innovative structure, believe is appropriate, and that order not been registered with the SEC if the there are examples of certain analogous structures would be part of the opening trade price- company can demonstrate a $100 million in which companies have listed on a US exchange setting process on the stock exchange. aggregate market value of publicly held without an underwritten offering. These structures This open access feature and the ability shares based on a combination of both include: (1) a spin-off by a public company of a of virtually all existing holders to sell their (1) an independent third-party valuation; subsidiary without registration under the Securities shares on the first day of listing, and of and (2) the most recent trading price for Act in accordance with Staff Legal Bulletin No. a much broader group of investors to the company’s shares in a trading system 4; (2) the of a public company from bankruptcy under Chapter 11 of Title 11 of the United buy those shares, create a powerful, for unregistered securities operated States Bankruptcy Code; and (3) a listing on a US two-sided, market-driven dynamic for by a national securities exchange, a exchange by a foreign private issuer (FPI) that is the efficient pricing of the shares upon registered broker-dealer or a so-called already listed on a non–US exchange. opening of trading. market. With respect

48 NYSE IPO Guide Direct listings

to this second prong, the NYSE looks for • Registration statement. Just like in a existing stockholders whose shares a sustained trading history over several traditional IPO, the company will be are registered on the registration months. Companies that are not able responsible for preparing a registration statement to resell their shares as long to satisfy the second prong may rely on statement on Form S-1 or, if an FPI,3 as the registration statement remains an exception to this rule if the company: Form F-1. Because a direct listing effective and the prospectus contained (1) has a recent valuation from an does not involve a sale of shares by within the registration statement is independent third party indicating at least the company and because there current. While most of the information $250 million in aggregate market value are no coordinated sales by any in the registration statement for a direct of publicly held shares; and (2) engages existing stockholders, the registration listing tracks the information ordinarily a financial advisor to be consulted by statement takes the form of a resale included in a registration statement for the DMM in determining the opening registration statement.4 This permits an IPO, there are important differences, trading price. Looking ahead, the NYSE is including: working with the SEC to further streamline 1. Shares registered on the registration the direct listing rules to enable more a company in a direct listing, a direct listing does statement: In an IPO, the registration companies to use a direct listing. not trigger the filing and approval requirements statement registers the shares • Role of financial advisors. In the absence that apply to a traditional IPO under the corporate to be sold by the company and of an underwriting syndicate, the financing rules of the Financial Industry any selling stockholders, and financial advisers assist the company Regulatory Authority, Inc. (FINRA). Moreover, since substantially all other shares would in connection with the drafting of the there is no “allocation” of shares in a direct listing, typically be locked up from sale FINRA’s new issue allocation rules (Rules 5130 registration statement and prepare for a period of 180 days after the and 5131) are likewise not applicable. presentations and other public IPO. In a direct listing, for existing 3 An FPI is an entity other than a foreign communications. Unlike a traditional stockholders to sell, a company government incorporated or organized under IPO process, in order to avoid traditional the laws of a jurisdiction outside of the US needs to either register all or a 5 underwriter liability and other potential unless: (1) more than 50% of its outstanding portion of existing stockholders’ regulatory issues, the financial advisors voting securities are directly or indirectly owned shares on a registration statement in a direct listing should not engage in of record by US residents; and (2) any of the or allow existing stockholders to any book-building activities, participate in following applies: (i) the majority of its executive sell their shares at such time and investor meetings (but may have certain officers or directors are US citizens or residents; in such amounts as they choose interactions with investors in connection (ii) more than 50% of its assets are located in the when an exemption from Securities with their stock exchange designated United States; or (iii) its business is administered Act registration, such as pursuant to role), or provide any price support or principally in the United States. FPIs enjoy a Rule 144 under the Securities Act of number of key benefits not available to domestic stabilization activities. The financial US issuers, including: (1) FPIs may file financial advisors in general conduct no price statements in US GAAP, the English-language discovery activities except as permitted version of International Financial Reporting a post-effective amendment or prospectus under stock exchange rules. For Standards (IFRS) as issued by the International supplement. However, in order to be eligible to example, in accordance with NYSE rules, Accounting Standards Board or local GAAP; (2) use a Form S-3 or F-3 registration statement, certain financial advisors will be selected FPIs are not required to file quarterly reports on a company must, among other requirements, by the company to consult with the DMM Form 10-Q or current reports on Form 8-K; (3) have been subject to the reporting requirements in opening its stock for trading when the financial information of FPIs goes stale more of Section 13 or 15(d) of the Exchange Act for at there is not a recent sustained history of slowly in a registered offering; (4) FPIs are exempt least 12 months. As a result, in a direct listing, a from the US proxy rules; (5) FPIs are exempt from company will file its resale registration statement trading in the company’s stock prior to Regulation FD; (6) FPIs are exempt from Section on Form S-1 or F-1 and during the period in which listing. In such a capacity, the financial 16 reporting; (7) annual reports of FPIs on Form the registration statement remains effective, will advisors are expected to provide the 20-F are not due until 120 days after fiscal year- also file prospectus supplements to update the DMM with an understanding of the end; and (8) FPIs enjoy exemptions from SEC and resale registration statement for material changes ownership of the company’s outstanding stock exchange corporate governance and other to the company’s business, including the release shares and pre-listing selling and buying requirements. of earnings for any new quarterly period. Due in interest that they are aware of from 4 A resale registration statement is a registration part to the registration on Form S-1 or Form F-1 potential investors and stockholders. statement filed with the SEC that registers under being a Securities Act form, a company should quiet period Importantly, the financial advisors the Securities Act the resale of outstanding observe a traditional for public should not consult with the company securities by the holders of such securities communications. during the direct listing process and while the registration statement remains regarding any of its activities related to pursuant to the registration statement as long effective. its consultations with the DMM.2 as the registration statement remains effective. Typically, a resale registration statement is filed 5 Determining how much stock of affiliates should on Form S-3 or F-3 because such forms allow be registered is an art, not a . On the a company to forward-incorporate reports filed one hand, it is important that enough shares are 2 Because financial advisors do not act as under the Exchange Act and therefore keep the to ensure an efficient market. On underwriters or otherwise participate in investor registration statement up-to-date with all material the other hand, registration entails expense and solicitation or distribution activities on behalf of information regarding the company without filing attendant potential Securities Act liability.

NYSE IPO Guide 49 Direct listings

1933, as amended (the “Securities the reporting requirements of the should explain that the opening Act”) is not available. To achieve Securities Exchange Act of 1934, as public price of the shares will this, a company will typically look to amended (the “Exchange Act”) for be determined by buy and sell register all or a portion of the shares at least 90 days and has timely filed orders collected by the NYSE from held by affiliates and non-affiliates all required reports, an affiliate or broker-dealers. The NYSE’s DMM, who had not held their shares for non-affiliate that has held shares for in consultation with a company’s at least one year or otherwise did at least six months may sell those designated financial advisors and not meet the requirements for shares, subject to compliance with as required by applicable NYSE selling under the Rule 144 safe the other requirements of Rule rules, will use those orders to harbor. Additionally, a company 144. Prior to being subject to those determine an opening price for may choose to register shares reporting requirements, neither the shares. Additionally, in order to held by employees to address affiliates nor non-affiliates who had provide supplemental information any regulatory concerns that held shares for less than a year to investors, companies should resales of shares by employees would have been able to sell shares consider disclosing recent high around the time of the direct listing pursuant to Rule 144. and low sale prices per share in may not have been entitled to an 2. Bona fide estimate of the recent private transactions on exemption from registration under price range for the preliminary the cover page of the preliminary the Securities Act. All non-affiliated prospectus: In a traditional IPO, prospectus and the final stockholders who have held their the cover page of the preliminary prospectus. A company may shares for at least one year are prospectus contains a price range want to allow pre-listing private free to resell their shares without of the anticipated sales price of placement market trading, which registration pursuant to Rule 144.6 the shares. That range, which will help develop this disclosure In addition, a company will need is required by the SEC’s rules and inform pricing expectations. to decide how long to keep the (in particular, Item 501(b)(3) of 3. Plan of distribution: Since there is registration statement effective. Regulation S-K), is usually arrived no underwritten offering in a direct A company may choose a period at by the company, any selling listing, the registration statement of 90 days after the effective stockholders and the underwriters does not include an underwriting date to align the effectiveness of based on the anticipated section. Instead, the registration the registration statement to the price for the IPO. Because no statement will include a plan of availability of the Rule 144 resale specificshares are being offered distribution section that looks like safe harbor. Under Rule 144, once and traditional price discovery is what is typically seen in a resale a company has been subject to not conducted in a direct listing, registration statement.8 However, and the company plays no role in given that there are no underwriters the initial pricing, it is not possible and no organized sales by 6 If an issuer has not been subject to the to include meaningful disclosure the existing stockholders, the reporting requirements of Section 13 or 15(d) on this topic in the preliminary method of distribution is narrower of the Exchange Act for a period of at least 90 prospectus. However, under than many resale registration days immediately before a sale, then Rule 144(d) applicable gun jumping rules, a statements and is limited to requires that a minimum of one year must elapse company may not conduct investor brokerage transactions on national between the latter of the acquisition date of the education without an appropriate securities exchanges or registered securities from the issuer or an affiliate and any preliminary prospectus.7 The alternative trading venues. The resale of such securities in reliance on Rule solution in a direct listing is to rely plan of distribution section also 144 for the account of either the acquirer or any on the instructions to Item 501(b)(3) subsequent holder of those securities. Rule 144(d) applies both to sales by an affiliate or a of Regulation S-K to explain how non-affiliate of an issuer. Additionally, any person the price would be determined. 8 Forms S-1 and F-1 require the inclusion of the who is an affiliate of a reporting issuer, or any For example, for a direct listing information required by Item 508 of Regulation person who was an affiliate at any time during on the NYSE, the cover page S-K. While Item 508 of Regulation S-K is entitled the 90 days immediately before a sale, must of the preliminary prospectus “Plan of Distribution,” it is market practice in a also satisfy, among others, Rule 144(c)(1), which registration statement for an underwritten IPO requires the reporting issuer to have been subject that the information required to be disclosed to the reporting requirements of Section 13 or 7 In a traditional IPO, the cover page of the under Item 508 is included in a section entitled 15(d) of the Exchange Act for a period of at least preliminary prospectus contains a bona fide “Underwriting,” mainly because of the disclosure 90 days immediately before a sale. As a result, for estimate of the range of the maximum offering requirements regarding the underwriters in that the first 90 days after an issuer is subject to the price. That range, which is required by the Item section. In resale registration statements, for reporting requirements of Section 13 or 15(d) of the 501(b)(3) of Regulation S-K, is usually arrived at which no underwriters are typically named, it is Exchange Act, neither affiliates nor non-affiliates by the issuer, any selling stockholders, and the market practice that the information required to who have had held shares for less than a year underwriters based on the anticipated clearing be disclosed under Item 508 of Regulation S-K is would be able to sell shares pursuant to Rule 144. price for the IPO. included in a section entitled “Plan of Distribution.”

50 NYSE IPO Guide Direct listings

describes in detail the roles of the of trading. Instead, in a direct listing, statement and commencement of NYSE’s DMM, including the NYSE’s a company will engage in investor trading on the exchange. There are requirement that the DMM consult education without the assistance of two primary reasons for such a gap. with the company’s designated underwriters or financial advisors. For First, in direct listings, a company financial advisors with respect to efficiency, in direct listings, a company may choose to issue standard public the establishment by the DMM may choose to host an investor day company-style guidance to the market of the opening price. The plan of presentation that is publicly streamed after the effectiveness of the registration distribution also clarifies that the live to the investor community, which may statement. To the extent a company activities of the DMM in opening the offer the opportunity for investors to ask chooses to release guidance, it will shares for trading and facilitating an questions of company management. In need to allow investors some time with orderly market for the company’s addition, a company pursuing a direct this information before listing and the shares will be conducted without listing may elect to meet individually with beginning of trading. Based on guidance coordination with the company. potential investors (effectively conducting from the SEC, this period should be • Investor education. In a typical IPO, the a version of its own roadshow), subject to at least five trading days. Additionally, underwriters take representatives from certain limitations.10 Overall, there is no a company will want to ensure that the company on a one or two-week “one size fits all” for investor education in existing stockholders have sufficient roadshow, a series of group meetings a direct listing. However, each company time to establish brokerage accounts (as with buy-side institutional investors, will need to calibrate the amount and necessary) and deposit their shares in and one-on-one meetings with large type of investor education activities it such accounts so that the shares will be institutional investors. Retail investors undertakes based on various factors, ready for trading through the Depository are offered a video recording of the including the profile of the company, the Trust Company (DTC).11 Much of the roadshow, which is made freely available , and any existing interest work required to effect such deposits on the Internet.9 These meetings are from institutional or retail investors, as it is needs to occur after the effectiveness designed to help the underwriters critical for the market-based pricing of a of the registration statement, when the build an order book of indications of direct listing that the buy-side understand company would be eligible to transfer interest from investors, which helps the company’s business. shares through DTC. them gauge the level of demand for a • Post-effectiveness of the registration • Commencement of trading on the NYSE. stock. By contrast, in a direct listing, a statement and prior to listing on the This is the time to celebrate and join the traditional roadshow with underwriters NYSE. In an IPO, effectiveness of the NYSE in ringing the opening bell. The is not conducted prior to the opening registration statement would mark the inaugural NYSE direct listing, Spotify, end of the roadshow process and would opened at $165.90 per share and closed

9 mean that the offering was ready to the first day of trading at $149.01 per Securities Act Rule 433(h)(4) provides the formal price and begin trading the following share. Slack opened at $38.50 per share definition ofroadshow as an offer (other than a morning. In a direct listing, that is not and closed the first day of trading at statutory prospectus) that “contains a presentation regarding an offering by one or more members of the case; rather, there typically will be a $38.62 per share. With Spotify’s intraday an issuer’s management … and includes discussion gap of at least five trading days between volatility of 12.3% and Slack’s intraday of one or more of the issuer, such management and effectiveness of the registration volatility of 8.9%, their shares both the securities being offered.” Securities Act Rule experienced low volatilities compared to 433(h)(5) defines a bona fide electronic roadshow other large technology IPOs in the past as a roadshow that is a written communication 10 Despite its unique features, investor education transmitted by graphic means. Although free activities by the company in a direct listing are likely writing prospectuses (FWPs) are generally required to constitute a roadshow under the SEC’s rules. to be filed with the SEC and a roadshow for an As a result, if a company confidentially submits 11 DTC acts as depository for shares held at a offering that is a written communication is an FWP, its registration statement for review with the SEC, brokerage firm, bank, or other Rule 433(d)(8) clarifies that such roadshows are not then it must publicly file its registration statement and facilitates the clearance and settlement of required to be filed (unless an issuer at the time of at least 15 days before commencing any roadshow securities transactions among its participants. In the roadshow is not required to file reports pursuant activities. The publicly filed registration statement a traditional IPO, the shares sold by the company to Section 13 or 15(d) of the Exchange Act, which is needs to include a “red herring” prospectus would normally be held through Cede & Co., the case in a traditional IPO). Even in the context meeting the requirements of Section 10(b) of the which acts as the nominee for DTC. In a direct of an IPO, a roadshow is not required to be filed Securities Act. One of the key features of a red listing, for the shares to be eligible for trading on pursuant to Rule 433(d)(8)(ii) if the issuer makes herring prospectus is a bona fide estimate of a the applicable exchange, a stockholder interested “at least one version of a bona fide electronic road price range on the cover, which, as noted above, in selling shares must transfer such shares from show available without restriction by means of is satisfied in a direct listing by explaining the being held directly as a stockholder of record graphic communication to any person, including method by which the price would be determined to being held in street name through DTC. To any potential investor in the securities … .” In an IPO, and by providing the high and low sales prices per complete this transition in time for the listing, the first roadshow presentation is often recorded share of recent private transactions. Finally, as is each individual stockholder will need to work with and posted on the Internet for viewing by all typical practice in an IPO, any investor education their broker and the company’s transfer agent prospective investors. This version is usually called materials should be consistent with the information to ensure that the shares are made available for the retail roadshow. contained in the registration statement. trading on day one.

NYSE IPO Guide 51 Direct listings

decade. Further, Spotify’s trading volume start and end dates for the Regulation M preferred stock shortly prior to the direct on the first day of trading was 17% of restricted period, to the extent they apply to listing and issuing convertible notes that outstanding shares, and Slack’s trading a direct listing, are unclear. convert into common stock of the company volume on the first day of trading was To provide some certainty to this in connection with a direct listing. 27% of outstanding shares. The relatively question, but without conceding that its Companies considering a capital raise low volatility and high volume of Spotify direct listing constituted a distribution for after a direct listing may consider, among and Slack’s shares in the opening days of Regulation M purposes, Spotify sought other options, registered equity offerings, trading have reduced concerns regarding and received a no-action letter from the issuing debt, and issuing unregistered the novel pricing structure and the SEC staff. The SEC staff agreed (subject convertible notes. For companies seeking potential for high volatility and low volume to the facts and circumstances presented) to issue equity or other registered securities, in the opening of trading. However, given that it would not recommend enforcement during the first 12 months following the the very small sample size of direct action against Spotify, Spotify’s financial company’s registration under Section 12 of listings to date, volume and volatility advisors, or the registered shareholders if the Exchange Act under certain conditions, should remain considerations for working the restricted period observed in this context the company can sell securities in a primary groups in light of the particular pre-listing (in relation to communications or activities offering using a Registration Statement on ownership of the company. not otherwise excepted under Regulation Form S-1 or Form F-1. M) both: (1) commenced five business days Given that the resale Registration (d) Regulation M (the typical pre-pricing period in a traditional Statement for the direct listing would In the Spotify direct listing, the direct listing IPO) prior to the DMM’s determination of normally be effective for at least 90 days, process started a number of conversations the opening price of the Spotify shares we expect companies to wait until after with the SEC staff as to whether the on the NYSE; and (2) ended with the this initial 90-day period to sell registered registration of shares for resale from time commencement of primary shares of the company in an to time by existing shareholders under a trading on the NYSE. underwritten offering. In addition, after registration statement constituted an offering, 12 completed months from the date and, if so, whether such offering, particularly of registration under Section 12 of the when viewed together with the company’s (e) Direct Listings with a Capital Raise Exchange Act, the company may be eligible investor relations and education activities, In November 2019, the NYSE proposed a to sell shares using a Shelf Registration would constitute a distribution for purposes rule change to the SEC to allow companies Statement on Form S-3 or Form F-3, which of Regulation M under the Exchange Act. to raise capital through a primary direct offers greater flexibility and speed in selling Regulation M contains a set of rules floor listing, which is a listing in which either shares to the public in a registered offering. intended to protect the integrity of the (i) only the company itself is selling shares Unlike at the time of the IPO, the pricing of process by preventing in the opening auction on the first day of these offerings would be able to take into persons with a financial interest in a trading or (ii) the company is selling shares account an existing trading market and securities offering from taking particular and selling shareholders may also sell trading history on an exchange to inform the actions that might manipulate the market for shares in such opening auction. Under the pricing in such offering. the securities being offered.12 In a traditional NYSE’s rule proposal, a company must As always, companies can issue debt to IPO, the application of Regulation M is sell at least $100 million in market value raise capital to fund operations, or they can simply assumed and the requirements, of shares in the opening auction, or if less, establish a revolving debt facility to allow including with respect to the delineation a company could qualify to conduct a immediate access to debt to fund operations. of the applicable pre- and post-pricing primary direct floor listing if the aggregate In addition, companies can issue convertible restricted period, are well-understood of the market value of publicly-held shares notes that are available for resale pursuant to and easy to implement. In the case of a immediately prior to listing, together with Rule 144A of the Securities Act, to qualified direct listing, however, in which there is the market value of shares the company institutional buyers. no underwriter to establish the offering will sell in the opening auction, totals at price and no specific number of shares least $250 million. The rule proposal was to be allocated and sold to the public, the approved by the SEC on August 26, 2020, (f) Conclusion but was subsequently stayed by the SEC. The NYSE has led the way for direct On December 22, 2020, the primary direct listings, which can be a very attractive 12 Among other restrictions, Regulation M prohibits floor listing was approved by the SEC. As of way for the right company to go public, issuers, selling securityholders, and other the time of this writing, no direct listing under particularly in light of the new rules allowing distribution participants (and their respective the primary direct floor listing rules of the companies to effect a primary capital raise affiliated purchasers) from bidding for, purchasing NYSE has been effectuated. In addition concurrently with a direct listing. Even if a or attempting to induce any person to bid for or to primary direct floor listings, companies company chooses not to do a direct listing, purchase the security that is the subject of the distribution during a specified period of time prior with an immediate need for capital also elements of the direct listing process, such to pricing and ending at the completion of the have options for raising capital prior to, or as innovations around investor education distribution, unless the activity falls within one of shortly after, a direct listing. These include a and lock-up arrangements, may find their certain enumerated exceptions. traditional private placement of convertible way into the traditional IPO process.

52 NYSE IPO Guide 6 IR and communica­tions

www.nyse.com/ipo IR and communications

6.1 Preparing an IPO communications While the IPO will attract attention on its investors and other stakeholders around strategy own, the company should establish and environmental, social and governance FTI Consulting maintain relationships with key industry (ESG) matters. Investors are increasingly reporters and influential media outlets integrating ESG into their investment There is a strong temptation to approach to ensure they accurately understand decisions, focusing on a wide range of (IPO) communications the company’s business strategy and potential risks ranging from climate change solely as a listing-day event, planning competitive differentiation in advance to employee health and safety (and many meticulously for the inevitable publicity of the initial registration statement filing. more in between). As a result, ESG-related surrounding the first day of trading. In reality, Media relations efforts could include a funds have become one of the fastest day one is not the finish line but the start of series of reporter briefings and interviews growing asset classes, with total assets a company’s new life in the public markets. for executives, identification of speaking under management of over $20 trillion. Preparation should begin early, potentially opportunities at conferences and industry Given the size and prominence of this asset even before the registration statement is events and thought leadership focused on class, the cost of neglecting ESG matters filed. This will ensure the narrative being relevant and timely content that highlights during the IPO process may simply be too shared with the investment community is aspects of the equity story in action. great to ignore. An ESG program should be one that highlights the company’s unique Importantly, communications made developed before listing and fully integrated position within the market, is sustainable more than 30 days before the filing of into the registration statement and and is delivered consistently across the registration statement will not be prospectus, ideally serving as a potential all communication channels. It is also considered impermissible gun jumping as driver of incremental demand in the IPO critical to establish the communications long as the offering is not discussed. As a from ESG-focused investors that might have infrastructure needed to operate successfully result, companies should proactively review otherwise overlooked the listing. as a public company and to recognize the their press-release strategy well ahead A successful ESG program is paradigm shift in communications that of the listing to maximize opportunities authentic, grounded in data, aligned with newly public companies face in addition for a consistent flow of corporate the company’s strategy and the needs of to increased scrutiny. Anticipating risks as announcements during the IPO quiet period. key stakeholders and integrated across well as addressing the needs of a variety of In other words, establishing a baseline of the organization. When done well, it can stakeholders before and after the listing are of new product and customer announcements, generate significant value for not only paramount importance to ensure sustained key milestone updates and other corporate investors but also employees, customers and success in the aftermarkets. news will help to avoid the appearance of and partners. This includes personnel- gun jumping during the registration period. related benefits, such as enhanced talent- (a) Value of starting the IPO Similarly, building direct relationships acquisition capabilities and increased process early with targeted members of the investment employee satisfaction and retention, as Over the past decade, passive investment community will be critical to attracting well as benefits related to the ongoing strategies like exchange-traded funds have anchor investors that can take sizable sustainability of operations, been on the rise. On the other hand, active positions in the IPO allocation. In addition diversity and overall business resilience. asset managers who run mutual funds and to pre-loading the IPO book, proactive Accordingly, companies should the like have been under pressure, resulting outreach to investors ahead of the filing will approach the exercise thoughtfully and in smaller investment teams and lower help avoid a concentration of short-term strategically; this includes conducting . In a normal IPO flippers and minimize shareholder in-depth benchmarking to identify best environment, the attention span of active base turnover following the listing. Having practices relating to ESG disclosure, investors is relatively short as they have the support of large, long-term–oriented strategy and communication within the been asked to do more with less. It is even investors that can serve as a safety net for industry and among peers. Further, harder to attract the attention of investors newly public companies can help to mitigate management and key decision makers during an IPO roadshow, where companies downward pressure on the share price need to be well-informed about the have only 30 minutes to pitch their business through the critical first few weeks of trading. competitive landscape in which they are to potential shareholders. Companies that In addition, it is beneficial to start engaging operating and aligned internally with agreed- recognize this challenge and raise their with a targeted set of sell-side analysts who upon and defined objectives and goals. corporate profile in the capital markets could act as a sounding board for message This includes developing risk mitigation ahead of their listing often secure higher- development and potentially cover the strategies to avoid potential investor quality shareholder bases and stronger company post-listing. concerns and other issues that have proven overall support for their shares on listing day to be major points of contention in other IPO and beyond. (c) Establishing the company’s listings. environmental, social and governance In regard to IPOs in particular, (b) Raising the company’s profile to strategy to mitigate risks and access a companies will need to evaluate potential elevate its corporate reputation wider pool of capital disclosures that could be included in the Financial media can be influential in driving Companies contemplating an IPO need a prospectus while also ensuring they have awareness of a company’s equity story. strategy in place for communicating with robust processes in place to source, gather

54 NYSE IPO Guide IR and communications

and quality-check relevant sustainability interpret results and provide additional providing timely and relevant data and data material to their businesses, including qualitative commentary on business information. To effectively prepare for relevant medium-to-long–term goals developments via the earnings the quarterly earnings announcement and key performance indicators (KPIs) to release and conference call. These cycle, companies should develop a measure success. communications should go beyond the project plan including a timeline of prescribed financials and discuss the activities and deliverables with assigned (d) Preparing for a new company’s progress toward its long- responsibilities. Conducting earnings communications paradigm as a public term strategic plan as well as important dry runs can also be helpful in identifying company industry trends. and addressing any potential issues Increased attention, intensified scrutiny • Online communications tools— while also training management on and new regulatory requirements all Establishing a website to house all how to handle difficult questions from contribute to new risks associated with investor relations (IR) content is a investors and analysts. the paradigm shift of becoming a public critical step of infrastructure building, • IR policies and procedures—To company. This includes increased as it is often the first point of contact for ensure messaging consistency and regulatory oversight from the Securities and prospective investors, sell-side analysts protect against improper disclosure, Exchange Commission (SEC) and the stock and media representatives seeking it is strongly recommended that exchange. In addition, enhanced reporting more information about the company. management establish from the outset a requirements force public companies As such, it should be user-friendly, formal disclosure policy and necessary to provide extensive disclosures about interactive and easily accessible, protocols to manage incoming investor operating results, financial conditions, particularly for investors looking to and financial media inquiries. In addition, management compensation and other conduct initial due diligence on the most companies decide to implement internal matters that might not otherwise company. an earnings quiet-period policy, which have been disclosed. Public companies • Peer benchmarking research—As part essentially serves as a safeguard to also face increased liabilities should they of the pre-IPO preparation process, it is reduce the chance of any inappropriate make any material misrepresentations to critical to review the IR and disclosure or subjective communications with shareholders or omit required information practices within the industry and among investors in the weeks leading up to the under applicable securities law. It is peers that the company expects to be reporting date. It is also advisable to therefore critical to establish protocols for evaluated against once it becomes develop financial and corporate news- how the company will engage with investors, public. This would include evaluating dissemination protocols as well as a what information and operating metrics it how peers communicate their quarterly social media policy. Lastly, companies will provide, how it will report its financial results and outlook, with an emphasis must have the proper policies and results and what communication channels on the earnings release and earnings procedures in place to prevent insider it will use. By developing a comprehensive call presentation. This will be particularly trading and address crisis situations strategy that provides for consistent important for determining the quickly and effectively. communications, meets or exceeds appropriate financial guidance policy as • IR toolkit—Building an effective IR peer standards and provides required a publicly traded company. In addition, infrastructure requires the selection disclosures, the company can effectively it is advisable to monitor peer activities of appropriate IR vendors and tools, prepare during the pre-IPO phase to thrive on an ongoing basis, including earnings including an IR website provider, an in the public markets. and other corporate announcements as audio webcast provider for earnings • Consistency—Investors seek new well as stock performance and sell-side calls, a financial database, investor information in every interaction with feedback. intelligence capabilities and CRM tools, management. As a result, messaging, • Quarterly reporting protocols— among others. content, tone, frequency and timing Quarterly earnings announcements of communications are all heavily are critical interactions between (e) Preparing for a successful IPO scrutinized by investors to detect any a company and the investment roadshow and listing day changes that may have implications community that can set the bar for • Equity story development—A key step of for the company’s outlook and, exchanges with other stakeholders in pre-IPO preparation is the development ultimately, its stock price. While terms of both metrics and tone. As a of a clear and compelling equity story. consistency in communications is result, the company should develop This not only underpins the extent to paramount, the company must also its approach to communicating its which investors are willing to commit strike the appropriate balance and allow financial performance on a quarterly capital to a company, but also has the sufficient flexibility to adjust to business basis well before the listing. This potential to impact the company’s status conditions and changes within the would include creating templates for in its industry, management credibility industry. the earnings release, conference call and ultimately the valuation of its • Nonfinancial disclosures—In addition to transcript and earnings presentation. securities in the market. Equity stories meeting SEC disclosure requirements, The company should also ensure that resonate best with investors often investors expect management to it has internal systems capable of contain simple, focused messages

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that reflect the company’s leadership, bell-ringing ceremony and other events (a) Preparing for the first earnings competitive differentiation and strategy facilitated by the exchange. As a newly announcement, a critical milestone for for growth and value creation. public company, it will also need to a newly public company • Roadshow presentation—While the activate its IR infrastructure, including Reporting earnings is one of the most bankers and legal team will drive the the investor website and hotline. important ways to provide business updates roadshow presentation, IR professionals • Multi- communications— to the investment community. It is critical can play a key role in developing As a company approaches its IPO, to properly plan for the inaugural ’s prepared remarks. It there are a few important steps it announcement as it sets a precedent for is important to tell the equity story in needs to take to ensure an effectively subsequent quarterly announcements. management’s own words while also integrated communications strategy. For many newly public companies, the ensuring it will resonate during and after These include the creation of a timeline initial earnings period can present unique the IPO. Conducting presentation dry and action plan that incorporates all challenges as they find themselves runs and mock Q&A sessions will also communications-related activities and reporting results for the first time while ensure management is both prepared the development of multi-stakeholder still in a quiet period. It is important to and confident in telling the company’s communications materials. Establishing effectively balance quiet period restrictions story and responding to investors’ a common messaging framework for with the desire to set a strong precedent questions. any significant, transformational event for transparency and good corporate • Executive training—To maintain will help facilitate understanding of governance. consistency in its communications and buy-in for the company’s strategy The typical earnings process commonly with the market and avoid any among key stakeholder audiences, includes issuing a press release and related inappropriate disclosure of material including employees. The company Form 8-K and hosting a conference call nonpublic information prohibited should also educate and train its with sell-side analysts and institutional under Regulation Fair Disclosure (Reg. employees ahead of the IPO on investors. The related and additional SEC FD), the company should designate disclosure and reporting obligations as filings—Form 10-Q or Form 10-K—are more the role of discussing business and well as rules to coach formal and much more extensive; these financial results with the public to a them on how to best operate within the can be filed concurrently with the earnings very limited group of thoroughly-trained new regulatory environment. Finally, release or at a later point. Collectively, these spokespersons. In preparation for the appropriate engagement strategies communications provide an opportunity to listing, management teams without and tactics should be developed for demonstrate transparency and establish public company experience should be communication with key customers and credibility through the way management trained to understand the parameters business partners in order to articulate speaks about the company’s successes, of what they can appropriately the positive IPO story and better challenges and outlook, all while taking into communicate to investors within the address any concerns or implications for consideration the period’s results versus regulatory framework. Trainings may their relationship with the company. expectations, the company’s long-term also be helpful for executives unfamiliar strategic objectives and key messages with the investment community to better 6.2 Communicating with the market conveyed during the IPO. Effective understand the different roles of the sell post-IPO preparation is essential to do this well while side and and how that may FTI Consulting ensuring that management can anticipate impact their interactions with different and appropriately address investor and individuals. Lastly, presentation training While an IPO marks a significant milestone analyst questions. sessions are a helpful tool for executives in a company’s history, it is only the to prepare for IPO roadshows, listing-day beginning of a longer journey. An effective (b) Proactively managing the broadcasts and print media interviews. IR program can sustain momentum and transition in the shareholder base • Media and listing-day activities— optimize valuation following the listing following the IPO Leveraging the company’s listing-day by providing useful information and • Buy-side targeting—Following the IPO, media opportunity is an important disclosures, driving demand from existing the IR function will be responsible step in building its corporate profile and new investors, and gaining support and for managing the transition in the and supporting its longer-term validation from key influencers such as sell- shareholder base, which can be communications efforts. While a side analysts and journalists. The IR function significant. Based on research company is allowed by SEC rules to must also handle daily communications FTI Consulting has conducted, participate in media activities on the with investors and analysts, carefully approximately 70% of the shareholder day of listing, it is strictly limited to manage expectations and forward-looking base in the US will turn over within two discussing only the material that has estimates, drive the quarterly earnings years of listing. To manage this risk, been published in the prospectus. process and organize a marketing calendar newly public companies should analyze In addition to day-of media activities, that includes investor conferences and their shareholder base to gauge its the company may also participate in a nondeal roadshows. overall stability post-IPO, focusing on

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investors with buying potential and those within the investment community. of ESG reporting frameworks, including at risk of selling. Companies should also Companies should target and ultimately the most prominent and widely followed: widen the aperture of the analysis to secure the appropriate level of coverage the Sustainability Accounting Standards include potential new investors that have from sell-side analysts in order to Board (SASB), the Task Force on Climate- significant ownership in industry peers strike the right balance between time related Financial Disclosures (TCFD) and as well as those that have a predilection and resource commitment and overall the Global Reporting Initiative (GRI). Each for investing in companies with similar quality of research. Having too many reporting framework has its own unique, fundamentals and/or ESG profiles. analysts requires considerable attention and in many cases complementary, areas • Investment community marketing— from the company’s internal staff of focus. Companies should evaluate the Once the investor engagement plan is whereas having too few can jeopardize use of one or more frameworks based, established and the IPO quiet period quality by giving too much prominence in part, on the type of disclosures being is lifted, priority should be given to to ill-informed analysts. This dynamic recommended, the extent to which the effectively leveraging management’s has been challenged in the post-MiFID II company has access to the relevant time spent on marketing to existing environment, as the required unbundling data and whether the company has the and potential new investors. Nondeal of research and trading fees has caused appropriate internal controls to consistently roadshows, investor conferences and some banks to exit the equity research report on these measures. Additionally, company-sponsored events such business entirely or reduce their number companies should ensure the chosen as investor days (in-person or virtual) of publishing analysts. frameworks align with their ESG goals and all present valuable opportunities • Setting expectations—The financial associated KPIs and that both remain in to contextualize financial results models generated by the remaining line with best practices. Adherence to a and explain growth strategies and sell-side analysts are still used by many reporting framework can help to provide competitive differentiators while investors. These models are developed a clear, fact-based and substantive ESG developing a deeper set of relationships independently by the sell-side analysts narrative that will enable companies with high-priority investors. Considering but can be highly influenced by a to meet heightened expectations from the more challenging corporate access company’s disclosure and guidance investors who are increasingly voicing their landscape following the implementation policies. For companies that choose to frustration with the lack of standards and of the European Union’s second Markets provide some form of financial guidance, comparability of ESG disclosures among in Financial Instruments Directive (MiFID it is important to balance the need to corporate issuers. II), forming direct relationships with communicate a compelling, best-case In addition to initiating ongoing investors has never been more critical. outlook with achievable and realistic engagement with investors and analysts, That said, sell-side–sponsored activities targets that can be met consistently. newly public companies should begin such as nondeal roadshows and Expectations can be established by establishing relationships with influential investor conferences remain important providing quantitative and/or qualitative third parties such as ESG rating agencies engagement venues to meet existing guidelines, such as growth rates and and proxy advisory firms. ESG ratings are and new investors. However, they should margin targets or market share over one of several tools that investors use to be prioritized and vetted beforehand. varying timeframes, depending on evaluate potential investment opportunities. This includes prioritizing meetings with industry visibility and the predictability These are also a major factor in determining long-only institutions and global of the business. Additional important a company’s eligibility for sustainability funds that are either current holders factors to consider include the size and index inclusion. Therefore, it is important or prospective targets, with a focus on seasonality of the business, accuracy that companies ensure ESG rating agencies those that are long-term–oriented or of internal forecasting and industry have access to all relevant ESG information front page holders as opposed to high- peer practices. Once these parameters as well as context to guide interpretation turnover hedge funds. The IR function are established, companies should of existing disclosures during assigned will also be responsible for revising the continuously monitor sell-side analysts’ review and response periods. Companies investor presentation and providing expectations and carefully consider should also engage regularly with proxy corresponding talking points and whether a variance from consensus advisory firms (which provide proxy voting pertinent Q&A materials to ensure that expectation is material enough to recommendations to investors on a range management is adequately prepared for warrant proactive disclosures. of ESG-related shareholder proposals) and these meetings. targeted sustainability indices to help inform (d) Executing a high-impact, a strategy for gaining inclusion. multi-stakeholder ESG program Overall, companies should understand (c) Engaging with the to With a proper foundation in place (as the rapidly evolving ESG landscape and provide support for a higher valuation described in the previous section), where they fit in so they can best develop • Sell-side targeting—Sell-side newly public companies should focus the appropriate strategies, goals and sponsorship continues to play a key on enhancing their ESG disclosures, plans that align with their overall business role in validating what companies say reporting standards and accountability. objectives. This will help ensure ESG directly while also increasing visibility This begins with exploring the adoption programs are executed with authenticity

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and impact and that they remain relevant to a better understanding and alignment prior provided guidance that social media key stakeholders. to any proxy-related issue surfacing. can be a Reg. FD-compliant means of broad dissemination, if the company (e) Successfully navigating events and (f) Leveraging perception research has taken adequate steps to alert critical moments of change and media channels to enhance the IR the market that it intends to disclose Newly public companies will undoubtedly program such information through that channel. face critical events and moments of • Perception research—Public companies Companies should consider both the change, which can threaten or enhance often leverage perception research risks and opportunities of using social their valuation and reputation. Whether to inform their IR program and refine media platforms for IR purposes. introducing new leadership, launching a post-IPO investor messaging. While Notwithstanding, there is a wealth of new strategy, announcing an important the company’s core investor messages data that can and should be analyzed transaction or executing a business should build on those developed in the on social media. Leveraging an active transformation, IR will be at the center of a pre-IPO phase, adjustments should be social listening program can help company’s communications strategy. made as needed to dispel any lingering companies understand the general During significant moments of change, concerns or misperceptions about the conversation and perceptions about the objective of the communications company’s positioning in the market, its them, including which messages are strategy should be to effectively performance and the dynamics of the resonating, how they are stacking communicate the strategic, operational industry as a whole. Perception studies up relative to competitors and and financial benefits of the event or are particularly useful in uncovering potential issues and concerns among announcement to all relevant stakeholders, areas of interest, concern or potential stakeholders. including at least investors, employees and knowledge gaps within the investment customers. Companies should prepare and community as well as analyzing drivers 6.3 Legal framework for execute a multi-stakeholder engagement behind buying and selling activity communications strategy and rollout plan, supported by all post-IPO. The research will also set Simpson Thacher & Bartlett materials necessary to execute stakeholder- a benchmark against which the IR specific communications. Depending program and specific messages can be Under the relevant legal framework in the on the importance and complexity of the measured over time. United States, a company that is pursuing announcement, it may be necessary to • Financial, business and trade media— an IPO is generally not allowed to offer hold a conference call or webcast for the Companies should capitalize on the use to sell its stock before filing a registration investment community, which can create of multiple communication channels and statement (and this is the public filing as an opportunity for management to provide ongoing engagement opportunities with opposed to a confidential submission). additional insight on the announcement, the media to augment their IR program During the period between the public filing discuss how it will affect the company going and reinforce their key​ messages, of the registration statement and the time forward and respond to questions. This particularly during times of crisis or it becomes effective at the conclusion of might also include facilitating investment change​. Print and broadcast media the roadshow, oral offers are permitted community engagement after the allow the company to communicate and written offers through the use of the announcement. Companies should also information to a much wider audience preliminary (or red herring) prospectus engage with key influencers and media while also bolstering credibility through included in the registration statement may to garner support for the announcement objective third-party commentary. be made once an anticipated price range and alleviate related risks, including the Whether they are established to position has been included. (While SEC rules permit potential for a leak to the media prior to the financial results or underscore themes written offers other than the traditional announcement. related to management strength and prospectus, referred to as free-writing Finally, as shareholder activism market position, effective financial, prospectuses, in certain circumstances, IPO continues to gain momentum, IR must play business and trade media relations issuers are subject to significant constraints an active role in mitigating a company’s strategies can influence investment on the use of these nontraditional offering vulnerability to these potential threats. decisions and provide a reputational documents and counsel should be Proactively engaging with shareholders, cushion in difficult times. consulted if consideration is being given benchmarking the company’s performance • Social and online media—Social to the use of any such documents.) Only against peers and monitoring market media has taken a more prominent once the registration statement becomes sentiment will help the company assess and role in the communication strategies effective at the conclusion of the roadshow proactively address any vulnerabilities that of public companies. However, and prior to pricing, however, may buy may be brought to light. In addition, meeting disclosure of material nonpublic orders be accepted and the stock actually with leading proxy advisory firms during information through social media sold. the off season to discuss the company’s channels, such as and There is a limited exception to these strategy, corporate governance and other , has occurred at a much slower rules permitting IPO issuers and their ESG-related topics can be beneficial in pace, with higher concentration in representatives to test the waters (TTW) providing necessary context and in creating the technology sector. The SEC has by communicating with certain institutional

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investors, either prior to or following publicly in this area if you simply avoid the following periods.” In light of increased use of filing the registration statement, in order actions: social media by companies, the SEC to determine whether the investors have • public references to the IPO prior to looks at more than the company’s an interest in the offering. The meetings the public filing of the registration website. Prior to the initial submission provide feedback for management that statement or outside of legally compliant or filing of the registration statement, can be used later in the actual roadshow. communications after filing, including via review the company’s website and This may prove to be especially valuable press interviews whether on or off the social media to confirm that they do if the company’s story is complicated or record, speeches or conferences; not contain or link to information that when management has limited experience • communications with analysts not in the is problematic. Information relating to making investor presentations. Any TTW underwriting syndicate; the company’s services, products and meetings or other forms of pre-deal investor • communications with potential investors factual business developments that education should be carefully vetted in prior to the public filing (except for are directed at customers, potential advance by counsel, as this exception does legally compliant TTW) or outside legally customers and business partners in not obviate the need to comply with the compliant process after the filing; accordance with past practice should more generally applicable constraint on • public disclosure of forward-looking not pose any problems so long as they offers. information regarding the company’s are not inconsistent with the statements It is important to be familiar with these financial or operational results; and made in the IPO registration statement. rules about publicity and communication • unduly hyping statements about the Projections or other forward-looking because the SEC and the courts construe company or its prospects. information and information promoting an offer to sell broadly to include the the company’s business and financial publication of information and publicity More detailed guidelines for specific prospects should be avoided. efforts made in advance of a proposed situations: • Press releases. Continue to issue press offering that has the effect of conditioning • Employees. Continue to communicate releases regarding factual business the public mind or arousing public interest with employees in accordance with developments in accordance with in the company or in its securities. A established preexisting practices. established preexisting practices. It communication may be construed as an Be careful, however, to avoid any may be prudent to implement a protocol offer to sell even if it does not reference written communications (including by during the IPO process where counsel is either the securities being offered or the video, voice mail, the Internet, e-mail consulted before the issuance of press offering itself. Moreover, the term writing is and replay of conference calls, all releases. similarly broadly construed, and can include of which may be viewed as written) • Speeches. Senior company personnel television and press coverage where there outside of the IPO working group that should consult with counsel before has been company involvement. discusses the IPO. Counsel should be accepting invitations to speak or giving However, the SEC rules specifically consulted regarding communications a speech pursuant to a preexisting state that communications made by a with employees if the company is obligation. Of particular concern are company more than 30 days prior to considering implementing a directed speeches given at financial conferences filing the registration statement without share or friends and family program in or those made with the financial press in reference to the proposed offering are which employees may participate. attendance. generally permissible, provided that the • Media. Except for communications issuer takes reasonable steps to prevent constituting ordinary business activities 6.4 Market​ intelligence and further distribution or publication of the consistent with established preexisting surveillance communication within the 30-day period. practices that do not relate to the IPO IHS Markit In addition, the SEC’s rules also expressly or to the company’s performance or permit a company, subject to a number of prospects, all requests from the media Sections 6.5 through 6.8 cover a group limitations, to continue to release factual (but should be the subject of consultation of advisory services and tools that allow not forward-looking) information about its of counsel and may be required to be investor relations officers to stay informed business in a manner consistent with past met with a statement that the company of ongoing market activity and perceptions, practice to persons (such as customers) is unable to comment or respond to access the most detailed information other than in their capacities as investors or inquiries. Counsel should be consulted possible on investment community potential investors in the issuer’s securities. prior to any communications with the participants, effectively implement an These express rules, taken together with the media. investor relations strategy to prospect for general principle that only communications • Website and social media. The SEC new investors, manage interactions with that are offers (even as broadly defined) are now routinely reviews a company’s the investment community efficiently and problematic in the first place, should give website in connection with its review of measure the success of their investor companies significant comfort that they that company’s registration statement relations efforts. These services and can go about their day-to-day business and has urged “issuers to take special tools are used widely by investor relations throughout the IPO process. You will care in what they put on their websites officers individually and collectively at listed substantially mitigate the risk of a problem during the pre-filing and waiting companies around the world.

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Once a company successfully inability to get a clear signal from the their assets. These custodians, in turn, completes the IPO process and begins market to determine drivers of trading have accounts at DTCC that allow for the trading in the secondary market, information on a daily basis. electronic transfer of assets when equities regarding that trading and the ownership are bought and sold. In the United States, changes that result are difficult to come by Let’s first address the time lag in the the settlement of a trade—the time at which in the absence of a market intelligence and reporting of institutional ownership. SEC a buyer delivers cash to the seller and the surveillance program. A market intelligence Rule 13f-1 mandates that institutional seller delivers shares to the buyer—occurs and surveillance program should act as a investment managers with at least $100 two days following a trade, which is known company’s eyes and ears to the investment million in equity assets disclose to the SEC as T+2. This transfer of assets almost market and serve as a fundamental service their entire portfolios of equity securities always occurs via DTCC. The issuer of for investor relations officers at a majority and some equivalents on a quarterly the equity, the publicly listed company, of US-listed companies. The type of basis. These filings, commonly referred has access to these DTCC records for a information and support provided by this to as 13Fs, are to state the investment nominal annual fee. The market intelligence program on a regular basis include: managers’ complete equity portfolios as of and surveillance provider, who will gain • day-of-trading feedback from active the end of each calendar quarter. However, access to the DTCC settlement records market participants that provides color the SEC allows investment managers 45 with an issuer’s permission, utilizes DTCC and context on unusual volatility or days following the end of each quarter settlement records as a roadmap for the trading volume; to submit the filing. For example, an research process to uncover the ultimate • updates on material institutional investment manager’s Form 13F stating buyers and sellers of the company’s ownership changes as they are holdings as of June 30, 2013, would not shares. uncovered and a systematic update of need to be submitted to the SEC prior to US-listed companies are also at institutional ownership on a monthly August 15, 2013. a disadvantage because there is no basis; The second issue of fragmentation regulation mandating that custodians • insights on the motivation behind has been a steady topic of discussion at holding the company’s shares via DTCC institutional ownership changes and the exchange operators, regulators, trading disclose the identities of the investors strengths, weaknesses, opportunities firms, institutional investors and publicly behind their DTCC accounts. This means and vulnerabilities of the structure of the traded companies themselves. Equities that the market intelligence and surveillance shareholder base; and in the United States now get traded on provider must utilize its expertise to • access to resources—human, data- more than 50 venues, which include understand the multitude of relationships oriented and technical—that an investor multiple exchanges, private alternative between portfolios relations officer can leverage to extend trading systems (commonly referred to and each DTCC nominee to get an initial the capabilities of the investor relations as “dark pools”) and internally at specific understanding of who may be buying or team. broker-dealers. Additionally, the size of selling shares. The inability to access the average trade in a US-listed equity information via custodians requires the Publicly traded companies in the has been in steady decline over the past market intelligence and surveillance United States are considered by the 10 years and has moved from an average provider to then engage in an outreach investment community to be among the size of more than 1,000 shares to less or survey process to the institutional most transparent in the world. The investor than 300 shares today. The fragmentation community to gain information on the relations profession is well advanced of the market overall and of the actual current holdings of their portfolios. Although and the quality of communication from transactions have made it challenging institutions are not required to disclose this companies to investors is second to to understand the drivers of day-to-day information, many are comfortable doing none. The transparency provided to trading in equities. so to a and established market companies listed in the United States by The role of a company’s market intelligence and surveillance provider that the investment market, however, lacks intelligence and surveillance provider is will also furnish a letter of authorization from timeliness, and its opaqueness continually to overcome the hurdles put in place by the issuer stating its role in conducting this frustrates investor relations officers whose SEC regulations relating to institutional research. organizations are in continuous need of ownership and today’s equity market Identifying the buyers and sellers of a information regarding the trading and structure. To do this, the market intelligence US-listed equity is an ongoing and iterative ownership of their equities. and surveillance provider undertakes a process for any market intelligence and The two principal areas of frustration in thorough research process that starts surveillance provider. Given the lack of terms of information flow for publicly traded with a complete understanding of the mandated disclosure rules in the United companies are: ownership registration of a company’s States outside of Rule I3f-1, an issuer should 1. the time lag in the disclosure of security via the Depository Trust & Clearing not expect that every institutional position institutional ownership positions with the Corporation (DTCC). The vast majority reported by a market intelligence and SEC; and of investors, institutional and retail alike, surveillance provider is an exact accounting. 2. the fragmentation of equity trading in hold equities in “street name” via banks However, the issuer should expect high- the United States and the resulting and that act as custodians of quality information. Most issuers define

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accuracy of market intelligence and of outreach to prospective institutional (either the ability to expand positions surveillance information as follows: shareholders and the assessment of the in existing portfolios or the ability to • Ownership trends are accurate (i.e., investment opportunity and portfolio risk build new positions in new portfolios firms reported as purchasing shares are that is inherent in the company’s current managed by the same firm). in fact buying the stock). institutional shareholder base. Investment 3. Identify potential investors: delivering • Ownership positions are within a +/- managers continue to place a high level both qualitative and quantitative range of 20% (i.e., it is acceptable if of importance on gaining access to the information describing not just the a firm is reported as buying 900,000 senior management teams of publicly listed match between the company’s shares when it actually bought companies. These interactions play a critical investment story and the portfolio, but 800,000). role in the research process that could lead also the communication conduits within • There is transparency and a conviction to investment (or ) in the stock the firm (who the decision makers are level with each position. A credible or peer companies. Given the importance and how to approach them). market intelligence and surveillance of these interactions to the investment 4. Communicate with current and potential provider will give detailed background community, the investor relations officer investors: offering real-time information on material position changes in order for is often deluged with meeting requests to support the company’s interactions the issuer to understand its accuracy, as directly from investment managers or in any format (conferences, nondeal ownership information is often shared through sell-side brokerage firms, which roadshows, analyst days, phone with senior management teams and the provide corporate access as a key service conversations). board of directors. to their clients. Of 5. Monitor and measure effectiveness course, time is not unlimited for the investor of outreach: including both backward- Identifying ownership changes, while relations officer and the senior management looking and forward-looking advice on important, is just one aspect of a market team, and not all investment managers are the communication process, identifying intelligence and surveillance program. equally worthy of time and attention. “success stories” as well as those The provider should be the company’s An effective investor-targeting program situations where your time may have connection to the capital markets and act as requires five processes: been used better. an extension of its investor relations team. 1. understanding the company as an Feedback from market participants, such investment; A provider of targeting and outreach as traders, sell-side analysts and buy-side 2. evaluating the current shareholder base; advice will help guide a company to a plan portfolio managers and analysts, should 3. identifying potential investors; that best utilizes the investor relations be expected. This feedback should assist 4. communicating with current and officer’s and the management team’s time the company and its senior management potential investors; and and puts the officer in front of the most team in understanding the primary 5. monitoring and measuring effectiveness appropriate and impactful investment drivers behind both short-term trading of outreach. managers. The type of analysis and and longer-term institutional ownership reporting provided generally includes top- trends. Additionally, a credible market Each of these is an ongoing process, down/strategic and bottom-up/tactical. intelligence and surveillance provider has and an effective provider will be able • Top-down/Strategic encompasses: a broad client base, a deep talent pool to contribute to the actions the IR team • global analysis of the market-by- and access to a variety of data sources. conducts in each step, as well as help to market opportunity for additional Combined, this exposure, expertise and optimize the usage of scarce resources investment from prospective access to data will allow a company to in maintaining communication with the investors; and leverage the team to understand and investment community. The investor • a view of positions within your implement best practices across a variety relations officer should look for a provider current shareholder base potentially of investor relations functions, such as of services that can contribute by providing at risk. internal and external communications as both information and advice at each step: • Bottom-up/Tactical includes: well as investor outreach, and will allow it 1. Understand the company as an • real-time money center analyses to be at the forefront of market issues and investment: having the flexibility to view prior to any nondeal roadshows; developments. the company’s investment story in the • analysis of attendees and meeting same context as potential investors interest at brokerage-sponsored 6.5 Investor targeting and outreach managing diverse strategies—relative to events to prioritize exposure to the IHS Markit industry-specific fundamentals, regional best investors; and focus or even a global perspective—as • detailed pre-meeting briefing on Knowing the owners of the stock and well as transparency on the inputs to the current exposure and portfolio their motivations, as described in the process. trends for each investor in advance market intelligence and surveillance 2. Evaluate the current shareholder base: of an interaction. section, are both fundamental to investor helping to identify risk within existing relations. Just as fundamental to investor positions, as well as opportunities With an effective investor-targeting relations are the strategy and execution available from current shareholders provider, the investor relations officer will be

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able to confidently approach the investment disclosure and communication practices. focusing on , the United community with the knowledge that time This understanding allows the perception Kingdom, Continental and , and resources are being used effectively. feedback consultant to design an effective should also be included, as participants’ questionnaire and ask appropriate probing expectations often vary by region. When 6.6 Market perception feedback questions during the telephone interviews. creating the participant list, investors should IHS Markit The goal is to keep the questions open- be chosen based on their familiarity with ended to allow the participants to freely the company as well as the management The market intelligence and surveillance discuss the critical factors driving their and IR teams. The optimal places to locate and investor targeting and outreach investment or rating decisions. Themes to this information include the company’s functions provide critical data and insights cover may include: pre-IPO roadshow agenda, recent meeting on the current and potential states of • Overall view as an investment: schedules, conference call and webcast the shareholder base, which are both competitive strengths, weaknesses, participant lists and notes entered in the imperative to running an impactful IR risks, opportunities, reasons for a investment community database and CRM. program. Perception feedback provides stock’s discount, suggestions for The consultant will also provide a largely qualitative complement that will achieving a premium, events that would guidance on the most favorable times enable an in-depth assessment of the cause a decrease/increase in position, to conduct a study. Avoid launching the investment community’s view on various fundamental metrics used to assess the interviewing period if a major company facets of the company. The key to gaining stock, relative valuation; announcement is expected to affect valuable feedback from investors and • Business and capital allocation participants’ opinions or during earnings sell-side analysts is the utilization of a third strategies: confidence in the current season, major holidays or well-attended party to conduct the research. Not only will strategy and business model, strategic industry conferences. a third party bring expertise to the design concerns, how investors would prefer Once the interviews are complete, and execution of perception research the company to utilize their excess cash, expect the consultant to provide a but the indirect connection it has with the potential growth areas for the company; comprehensive analysis of the study company will foster an environment that • Earnings and guidance: reaction to results that includes in-depth, topic-by- allows for the free exchange of thoughts latest earnings release, expectations for topic summaries, which are supported by and opinions. Perception feedback can be the full year, biggest challenges going verbatim comments from the participants. used in advance or after major events, such forward from a results perspective, The final study will also identify any as an investor day or quarterly earnings opinion on information presented; disconnects between what the company is announcement, to assess expectations or • Peer and industry intelligence: preferred communicating and what the investment judge performance. Perception feedback investment choice in the space, best- community is hearing and will include can also be used on a more routine basis in-class disclosure and communication actionable, best-in-class communication to keep a constant finger on the pulse of practices for the sector; recommendations to address the investor opinion. Regardless of the option • Senior executive team: overall opinion investment community’s concerns. Based chosen, expect the following from the and quantitative benchmarking of on these findings and recommendations, market perception feedback providers: senior management’s strategic the company can tailor its disclosure and • assistance and guidance on topics that vision, execution, credibility, capital messages to shift perceptions closer to the should be covered and the design of the management, corporate governance preferred state. questionnaire; structure and expectations for Companies most commonly utilize • consultation with regard to the shareholder interactions; and large-scale perception studies annually participants most applicable for the • IR efforts: overall satisfaction with in order to get an in-depth assessment of study and the timing of the project; and and quantitative benchmarking of investor sentiment. These studies are a • a comprehensive analysis of the study IR’s articulation of the company story, terrific benchmarking tool, and the results, results that provides a synthesis of accessibility, credibility, frequency in part or in their entirety, are typically a the feedback topic by topic and puts and content of communication, and component of the information reviewed by forth recommendations to address addressing misperceptions in the the company’s board of directors. the concerns held by the investment marketplace. community. 6.7 Investment community database Equally important is choosing the and CRM When conducting an initial perception appropriate study participants to ensure IHS Markit study, a third party will host a series unbiased, comprehensive feedback. of conference calls with the investor Participants to be interviewed are typically One of the biggest challenges faced by relations officer to better understand the dispersed among five segments: current investor relations professionals is not only company’s strategic direction, what was buy-side institutional holders, potential buy- the amount of investor intelligence and data discussed during the pre-IPO roadshow side institutional investors, recent buyers they are inundated with on a daily basis but and what has been accomplished since and sellers, current sell-side analysts and also the challenge of obtaining the high- the IPO, as well as the company’s current potential sell-side analysts. Global investors, quality information that is required to plan

62 NYSE IPO Guide IR and communications

and implement smart strategy and tactics. To • management-ready reports that and establishing customized views and navigate the sea of data effectively, a global highlight the effectiveness of IR data tags relevant to the company’s story. investor community database and CRM and executive meetings with the The activity data from the IPO will provide are required. A global database system will investment community; a perfect foundation for future investment provide access to a wide array of information • ability to export data and reports into community interactions. from the desktop and on the road. Critical Excel, Word, and PDF formats; and Another opportunity for getting elements of a database system include: • integration of proprietary CRM immediate value from the database is to • a secure, web-based environment that data with surveillance ownership utilize the final share allocations provided allows for individual log-in credentials information, investor targeting and by the investment banking team. The among team members along with perception feedback information. database provider will be able to map the the ability to share information and investment firms on the allocation list with collaborate across the team; The investment community database the investment firms in the database and • support from a dedicated, and CRM system are typically the import the number of shares that were knowledgeable and global account central tools utilized by investor relations purchased by each firm at the time of the management team that provides departments of any size to coordinate and IPO. This will allow tracking the progression 24/7/365 access; manage activities daily. A database system of the shareholder base from day one of • access to global investment community has the ability to grow along with investor trading to the time it is first updated by the data and analytics, including: relations needs and requirements. At its surveillance provider or by ownership via • detailed contact and background core, a database system provides the user public filings and beyond. information on investment staff at with a wealth of information that is critical An investment community database buy- and sell-side firms; and essential to any IR professional. For also allows moving beyond the current • comprehensive information on the instance, when an incoming call or meeting ownership of stock to access the global background, investment styles and request is received from an unfamiliar portfolios of investment managers and investment approaches of buy-side investor, the database user can quickly pull funds from around the world. The owners institutions at the firm and fund up the investment firm by name and review of the company’s peer group can be easily levels; its background, investment philosophy, tracked, and the strengths, weaknesses and • complete portfolio information for activist history, portfolio composition and opportunities of each company’s ownership every publicly listed equity around metrics such as investment style and profile can be analyzed. The database will the world; portfolio turnover. Additionally, the user can also allow the user to run detailed screens • detailed, global fixed-income also view background information such as of investors by categories, such as location, portfolio information; employment history, coverage details and investment style, portfolio turnover or recent • advanced screening capabilities educational background of the analyst or buying and selling activity in a particular enabling access to the information portfolio manager making the call. This stock or across a sector or peer group. required; data educates the user as to the investor’s Investor screening will enhance the user’s • sell-side research reports and relevance and allows the user to make an ability to make informed decisions on detailed earnings estimates; informed decision about the amount of upcoming investor relations activities. • calendar of investment community time he or she will provide to the investor. Nothing can replace the personal events as well as real-time and Is a phone call sufficient? Should there be interactions that investor relations officers corrected transcripts of results and a one-on-one meeting with this investor? and management teams have with the investor presentations; and Should this investor be given access to the investment community. However, e-mail • real-time market data and news; and CFO or CEO? These are all critical questions communication and other methods • a robust CRM system to manage that need to be answered on an ongoing of distribution to broad audiences are and report on the team’s interactions basis by investor relations professionals necessary. The database should allow with all participants in the investment to properly manage their own time and the the user to easily create and edit lists of community, including: time of their management team. investment staff so that regular distributions, • ability to easily manage, input and For a company that has successfully such as quarterly results, and one-time track one-on-one meetings, group completed the IPO process, the first events, such as investor days, can be easily meetings, phone calls and e-mails; step in using its investment community managed. These investor lists can then be • ability to customize CRM data points database is to seed historical investor utilized to quickly send a uniform e-mail to best fit the company’s issues and activities with the itineraries from the IPO to a broad distribution group along with a requirements; roadshow. Additionally, the notes from personalized salutation, embedded links • list management tools; the IPO roadshow meetings should also and graphics. • e-mail distribution; be brought into the system. The IPO is a Tracking interactions with the investment • one-click reporting to view items perfect opportunity to utilize the support of community is certainly a worthwhile such as event itineraries, institutional the database provider to understand best endeavor, as it will inform future interactions and contact profiles and post- practices for managing the data, leveraging with each investor. Additionally, by closely roadshow feedback reporting; their tools to import the company’s data tracking interactions, the ownership and

NYSE IPO Guide 63 IR and communications

other data available in the system can be An investment community database • Benchmarking and competitive utilized to run reports following investor and CRM system are tools that are critical analysis—Awareness of industry relations activities in an effort to measure for a one-person IR department or a large “best practices” in both operations the success of an event through real-world IR team located in offices around the world. and disclosure, reviewing the metrics. A sell-side investor conference is The one-person department can use the progression of similar companies an example. database to leverage limited resources in the industry and their material Companies are often bombarded by and access critical information; the larger items and disclosures to gauge requests from the sell-side to attend their IR team can additionally use the database stakeholder expectations, conferences. If the company has accepted as a tool for collaboration and internal is generally conducted. It is an invitation to a conference, a database communication. Regardless of the size recommended to combine user would be able to preview its series of the department, it is hard to imagine both quantitative and qualitative of meetings with investors not only from a conducting investor relations in the absence assessment of “gaps” in order to qualitative perspective (Who are these firms of a global investment community database also stay ahead of the very dynamic and what are they all about? Is this firm a and integrated CRM. nature of the development of ?) but also from a quantitative international ESG requirements. perspective (How many shares of the 6.8 ESG and the newly public • assessment—A formal company’s stock do they own? What is their company process that gathers information average turnover? What is their exposure IHS Markit and recommendations of each to the company’s sector?). Following the stakeholder group facing a company conference, as ownership data streams into As part of the transition from private (including, but not limited to, major the database, the user will be able to run to public company status, not only will institutional investors, asset owners, reports to assess the impact of meetings companies’ financial disclosures become debtholders, customers, vendors, from an ownership perspective (Did any a matter of public record, but increasingly, employees and communities) potential investors initiate a position? How stakeholder groups will expect to receive is undergone to lay out the did the existing shareholders react?). The information about the nonfinancial complete picture of “interest” for data from these reports can be used the and extra-financial characteristics of a disclosure. Items that are material following year to assist in investor relations company that are important to making to the company as an investment planning, including decisions on which an investment or voting decision on the story need to be disclosed, but conferences to attend. company’s equity. These characteristics nonmaterial items that otherwise Another key attribute of an investment are broadly referred to as environmental, generate value for one or more community database is the integration of social and governance (ESG) measures, stakeholder groups and the information from the provider of market and when delivered properly, they company are typically reviewed and intelligence and surveillance, investor can become a conduit to attracting disclosed as well. targeting and market perception feedback. additional investment from both active 2. ESG program design By employing one provider for all of these and passive investment vehicles. In • Internal—Company representatives services, the user will be able to seamlessly addition, an improved standing among facing each stakeholder group integrate critical real-time and client-specific these stakeholders carries both direct and interface to produce a central ESG intelligence with the database information and indirect benefits, as well as financial and strategy designed to maximize value CRM activity, allowing more powerful analysis nonfinancial benefits. for the organization. This includes and a deeper qualitative understanding of A common roadmap for a company at a central ESG investment thesis, current and prospective investors. the outset of an ESG program includes the strategic messaging, ESG Q&A and The database should also allow quick following four categories. often targets and scenarios for ESG- access to sell-side research reports 1. Diagnostics related goals. and earnings estimates for not only the • Regulatory review—Companies • External—A communications company’s stock but also for that of peer may be covered by different strategy for each stakeholder companies and others. The sell-side regulatory and legal jurisdictions group is then originated with the remains an important input into investor that may require disclosures of ESG appropriate message, channel and sentiment, and integrating this information characteristics either to the specific cadence. While for many companies into the investment community database body or the general public—a this will include a formal corporate is critical. Additionally, a calendar of events, comprehensive view of legal social responsibility or sustainability such as investor conferences and the requirements here is an important report, there are numerous other earnings calls of peer companies, is critical input to the overall mix of disclosure. methods of reaching each group, in that it enables better planning and Voluntary industry standards and including digital presence, ESG management of the company’s own events. ESG reporting frameworks are data packages, fact sheets, Access to the verbatim transcripts of these typically reviewed as well, often management/board statements, events is also a standard requirement for a acting alongside or in place of press and external communications, database tool. regulatory bodies. social media and others; each

64 NYSE IPO Guide IR and communications

company’s set of stakeholders • Reporting cycle management— needs. Some ESG programs and market is unique, as is each While most ESG disclosures are generate a clear financial ROI in program. long-term in nature, collecting terms of, say, improved customer 3. ESG program execution information internally to meet or employee retention; others are • Stakeholder engagement—Two-way external demands requires robust measured in terms of increased communication is necessary for processes. Building the system investor interest. any successful program; eliciting to evaluate information prior to • Feedback—Processes to collect feedback on the program is done disclosure can help the company and review stakeholder feedback through both formal and informal meet regulatory, as well as other are considered, along with the methods. Often management stakeholder, needs. “repeatability” of each part of the will be directly involved in the 4. Return on investment (ROI) and iteration process. No disclosure from any communication process. Training • Measurement—Companies will often company is made only once, so and workshopping the message evaluate their progress on individual each new inbound and outbound with each member of the key performance indicators that communication is made with future, organization facing each stakeholder need to be defined and achievable not just current, stakeholder needs is recommended. while aligning with stakeholder in mind.

NYSE IPO Guide 65

7 Obligations of a public company

www.nyse.com/ipo Obligations of a public company

7.1 Ongoing reporting annual report on Form 10-K. Thereafter, the Simpson Thacher & Bartlett A large accelerated filer is any issuer timetable for a large accelerated filer and an meeting the following conditions as of accelerated filer is 40 days. We should point As discussed earlier in this guide, the the end of its fiscal year: out that a new issuer is permitted to file its preparation for being public should happen 1. The aggregate worldwide very first quarterly report within 45 days in parallel with the IPO. Take stock of your market value of the voting and following the effective date of its registration processes and infrastructure so that you nonvoting common equity held statement if this is later than the due date can address any gaps well in advance of by nonaffiliates of the issuer was for the report that would otherwise have the IPO date. This preparation process can $700 million or more as of the applied. often be lengthy, depending on the maturity last business day of the issuer’s of existing processes. How significant the most recently completed second Public float required improvements are will determine quarter; : For purposes of the number of resources required. Many 2. The issuer has been subject to determining accelerated filer and companies have resource constraints reporting requirements under large accelerated filer status, public during the going public process, where the Exchange Act for at least 12 float represents the aggregate market there is so much attention being paid to the calendar months; value of the voting and nonvoting IPO filings and marketing efforts that other 3. The issuer has filed at least one common equity held by nonaffiliates efforts may find themselves deprioritized. annual report under the Exchange of the issuer computed by use of the It is worthwhile to find a way to keep these Act; and price at which the common equity efforts at the forefront. 4. The issuer had annual revenues of was last sold, or the average of the bid An understanding of the basics of the $100 million or more. and asked prices of such common ongoing public reporting obligations can equity, in the principal market for inform the work that is needed to prepare An accelerated filer is any issuer such common equity, as of the last your company’s finance organization and meeting the following conditions as of business day of the issuer’s most other functions for the rigors of being public. the end of its fiscal year: recently completed second fiscal 1. The aggregate worldwide quarter. (a) Annual and quarterly reporting market value of the voting and The SEC requires public companies to nonvoting common equity held file quarterly reports on Form 10-Q and by nonaffiliates of the issuer The Sarbanes–Oxley Act requires the annual reports on Form 10-K (these 10-Qs was $75 million or more, but chief executive officer and chief financial and 10-Ks sometimes being referred to less than $700 million, as of the officer of an issuer to make certifications periodic reports collectively as ), with current last business day of the issuer’s pursuant to Sections 302 and 906 of the information regarding the company’s most recently completed second Sarbanes–Oxley Act with respect to its business and financial condition. In a way, quarter; and annual reports on Form 10-K and quarterly these reporting obligations can essentially 2. The issuer meets conditions reports on Form 10-Q. These certifications be viewed as a requirement to periodically 2.—4. of the definition oflarge relate to the accuracy of the annual report, update the registration statement that the accelerated filer. including financial statements. The 906 company used in the IPO. For example, certifications also cover compliance just as the registration statement used in with applicable SEC rules and the 302 the IPO included the company’s financial accelerated filer (generally, a company that certifications also cover the issuer’s statements, the company’s periodic reports has been reporting with the SEC for at least internal control over financial reporting and must update those financial statements. a year and has a public float of at least $700 disclosure controls and procedures. These Thus, the company’s annual report on million and annual revenues of $100 million certifications must be filed as exhibits to Form 10-K will need to contain an updated or more) is 60 days and the timetable for such reports. audited balance sheet and audited income an accelerated filer (generally, a company Commencing with their first quarterly statement, cash flows and changes in that has been reporting with the SEC for at report on Form 10-Q, issuers must submit shareholders’ equity. And for the quarterly least a year and has a public float of at least with their periodic reports (and any current reports on Form 10-Q, the company will $75 million (but less than $700 million) and report on Form 8-K that contains a revised need to provide the public with its interim annual revenues of $100 million or more) version of previously filed audited annual financial statements (not typically audited is 75 days. Note, the thresholds for exiting financial statements) specified financial but a review by the outside auditors is accelerated and nonaccelerated filer status information in such financial statements required). differ from those used to determine initial in an interactive data format known as A new issuer has 90 days after the filer status. A new issuer has 45 days after eXtensible Business Reporting Language completion of its fiscal year to file its the completion of each of the first three (XBRL). XBRL consists of computer- first annual report on Form 10-K with the fiscal quarters of the year to file its quarterly readable tags which are used to identify SEC. Thereafter, the timetable for a large reports on Form 10-Q prior to its second each piece of financial data with the goal of

68 NYSE IPO Guide Obligations of a public company

Category of filer Form 10-K deadline Form 10-Q deadline Large accelerated filer 60 days 40 days

Accelerated filer 75 days 40 days Nonaccelerated filer 90 days 45 days

enabling more efficient retrieval and analysis Companies should carefully consider the principles (GAAP) financial measures. of the information. process they adopt for releasing earnings Particular care should be taken with respect to ensure it comports with all applicable to the initial quarterly earnings releases and (b) Earnings releases regulatory requirements. Among other conference calls following the IPO, as any As part of the periodic process for reporting things, earnings releases are required to be “surprises” can be used as the basis for a earnings, many companies will issue furnished on a Form 8-K report to the SEC lawsuit under Section 11 of the Securities Act quarterly earnings releases and conduct and must satisfy SEC rules relating to the asserting that the IPO prospectus contained related conference calls with investors. use of non-generally accepted accounting a material misstatement or omission.

Form 8-K Quick Reference Guide1

Triggering Events Business and Operations • Execution, amendment or termination of a material definitive agreement not made in the ordinary course of business (Items 1.01/1.02). • Bankruptcy or receivership; court or governmental order confirming plan of reorganization, arrangement or liquidation (Item 1.03).

Financial Information • Acquisition or disposition of a significant amount of assets other than in the ordinary course of business (Item 2.01). • Public announcement or release (including any update to earlier announcement or release) disclosing material nonpublic information regarding results of operations and financial condition for a completed quarterly or annual fiscal period (Item 2.02). • Creation of a material (i) direct financial obligation or (ii) direct or contingent obligation arising out of an off-balance sheet arrangement (Item 2.03). • A triggering event causing (i) the increase or acceleration of (A) a direct financial obligation or (B) an obligation under an off-balance sheet arrangement or (ii) a contingent obligation under an off-balance sheet arrangement to become a direct financial obligation, and such events under (i) and (ii) having material consequences (Item 2.04). • Committing to an exit or disposal plan or otherwise disposing of a long-lived asset or terminating employees under certain plans that results in a material charge under GAAP (Item 2.05). • Conclusion that a material impairment charge to assets is required under GAAP (unless conclusion is made as part of a quarter/year-end process and is disclosed in the next periodic report); includes impairments of securities or goodwill (Item 2.06).

Securities and Trading • With respect to a national securities exchange/association: (i) notice therefrom of non-satisfaction of Markets a listing rule/standard or of delisting; (ii) notice thereto of a material noncompliance with a listing rule/ standard; (iii) a public reprimand letter or similar communication therefrom for a violation of a listing rule/standard; or (iv) the taking of definitive action to delist therefrom or transfer listing to another securities exchange/association (Item 3.01). • Unregistered sales of equity securities that in the aggregate constitute 1% or more of the outstanding shares of the class sold (Item 3.02). • Material modifications, limitations or qualifications to the rights of holders of any class of registered securities (Item 3.03). (Continued)

NYSE IPO Guide 69 Obligations of a public company

Triggering Events Accountants and Financial • Resignation or dismissal of an independent accountant or engagement of a new independent Statements accountant (Item 4.01). • Concluding, being advised by or receiving notice from the independent accountant that previously issued financial statements should no longer be relied upon (Item 4.02).

Corporate Governance and • Change in control (Item 5.01). Management • Director’s or certain executive officers’ resignation, retirement, termination or removal or director’s refusal to stand for reelection. Election of new director or appointment of certain new executive officers. Entry into or adoption of a material compensatory plan, contract or arrangement to which the principal executive officer, principal financial officer, or a named executive officer is a party or participates; all material amendments to such plan, contract or arrangement; or material grants or awards thereunder to any such persons. Calculations of compensation figures for named executive officers if omitted from Summary Compensation Table (Item 5.02). • Amendments to the articles of incorporation or bylaws (not disclosed in a proxy statement) or a change in fiscal year (Item 5.03). • Temporary suspension of trading under an employee benefit plan (Item 5.04). • Amendment to, or waiver from, a provision of the code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions (Item 5.05). • Submission of matters to a vote of security holders (Item 5.07). • Shareholder director nominations (Item 5.08).

Regulation FD • Disclosure of information pursuant to Regulation FD (Item 7.01). Other Events • Optional disclosure of other events deemed of importance to security holders (Item 8.01). Financial Statements and • Disclosure of financial statements,pro forma financial information and exhibits, if any, filed as part of Exhibits the 8-K (Item 9.01).

1 This guide is only a summary and does not include all situations under which a Current Report on Form 8-K is required to be filed.

(c) Current reporting the NYSE by telephone at least ten minutes required in a proxy statement. Certain A public company is also required to file a prior to release of the announcement. information required to be disclosed current report on Form 8-K (generally within (including the required compensation four business days) when certain specified (d) Proxy statements disclosures) in an issuer’s annual report events occur. The above quick reference A proxy statement contains information on Form 10-K may be incorporated by guide summarizes these events. provided to shareholders so they can reference to the issuer’s later-filed proxy In addition to the obligation to file current decide how to vote in connection with a statement as long as the proxy statement reports on Form 8-K with the SEC, the company’s shareholder meeting. Stock is filed within 120 days after the end of the NYSE expects listed companies to release exchange rules and, typically, state law issuer’s fiscal year. timely information to the public that might require a company to hold an annual reasonably be expected to materially affect shareholder meeting, and stock exchange (e) Internal control over financial the market for their securities, except under rules require a company to solicit proxies reporting and other disclosure very limited circumstances where it is for all meetings of shareholders. In controls and procedures possible to maintain confidentiality of the connection with such solicitation, a proxy A public company must maintain internal information and immediate public disclosure statement must be prepared, filed with the control over financial reporting, which would prejudice the ability of the company SEC and disseminated to the shareholders. is a process designed by, or under the to pursue its legitimate corporate objectives. In cases where a company’s stockholders supervision of, the issuer’s principal When the announcement of news of a vote or act by written consent without the executive and principal financial officers, to material event or a statement dealing with solicitation of proxies, SEC rules require provide reasonable assurance regarding a rumor that calls for immediate release is the company to provide stockholders with the reliability of financial reporting and the made between 7:00 a.m. and 4:00 p.m., an information statement, which contains preparation of financial statements for New York time, the company must notify disclosure substantially similar to that external purposes in accordance with GAAP.

70 NYSE IPO Guide Obligations of a public company

The company must include in its annual disclosed by the issuer in the reports that (a) Financial and distribution reports on Form 10-K a management’s it files or submits under the Exchange standards assessment of the effectiveness of its Act is recorded, processed, summarized The NYSE and NYSE American have internal control over financial reporting. The and reported, within the time periods established quantitative and qualitative rules provide that companies are exempt specified in the SEC’s rules and forms. standards for initial listings of US and from this requirement for their first annual An issuer must evaluate the effectiveness non-US companies. The financial standards report on Form 10-K, so it commences with of its disclosure controls and procedures for operating companies listing on the the second annual report on Form 10-K and describe its evaluation quarterly in its NYSE or NYSE American are summarized that is filed. In addition, companies that quarterly reports on Form 10-Q and annual in the appendices. Standards reflect the are accelerated filers or large accelerated reports on Form 10-K. different types of issues and issuers. Listed filers must also, starting with their second companies must meet continued listing annual report on Form 10-K (if the company (f) Regulation FD standards on an ongoing basis. These is an accelerated filer or large accelerated Whenever a public company, or any too are summarized in the appendices. filer for purposes of that report), include an person acting on its behalf, discloses, If companies fall below continued listing opinion from the issuer’s outside auditors whether intentionally or not, any material standards, generally they are afforded a on the effectiveness of the issuer’s internal nonpublic information regarding that period of time to return to compliance. control over financial reporting. However, issuer or its securities to Please see the appendices for more details. under the JOBS Act a company that professionals or security holders (if it is qualifies as an emerging growth company reasonably foreseeable that the security (b) Governance requirements (EGC) is excepted from the requirement holder will trade on the basis of the In addition to these quantitative listing to include the opinion from the issuer’s information), Regulation FD requires the standards, the company must meet NYSE outside auditors on the effectiveness of the issuer to make general public disclosure or NYSE American corporate governance company’s internal control over financial of the information. Public disclosure must listing standards, as applicable. The reporting. Due to SEC rule updates in be made simultaneously for intentional company must comply with corporate 2020, a smaller reporting company with disclosures and promptly (but in no governance requirements at the time of annual revenue of less than $100 million event after the later of 24 hours or the listing and throughout the life of its listing. likewise does not have to include an annual commencement of the next day’s trading) As with the quantitative standards, different attestation report of its auditors, although in the case of inadvertent disclosures. standards are applicable to different types larger companies (other than EGCs) must Regulation FD does not apply to disclosures of issuers. In addition, for a company listing do so. made to persons who owe a duty of trust in conjunction with an IPO, some of the A public company must also disclose or confidence to the issuer, persons corporate governance requirements can in its quarterly reports on Form 10-Q and with a confidentiality obligation or to be phased in. Governance requirements annual reports on Form 10-K any change certain offering-related communications. for NYSE American–listed companies, materially affecting its internal control over Regulation FD also does not apply to designed to accommodate smaller financial reporting that occurred during communications to employees, but for any companies, differ from NYSE requirements. the issuer’s last fiscal quarter, beginning broadly-based employee communications, To learn more about the NYSE and with its first periodic report following its a company should consider whether public NYSE American financial, distribution and IPO. The issuer’s principal executive officer disclosure is prudent under Regulation FD. governance requirements, please refer and principal financial officer must certify to the complete requirements outlined that they have disclosed to the issuer’s 7.2 Listing standards in the NYSE Listed Company Manual, a auditors and audit committee all significant NYSE comprehensive online resource, which can deficiencies or material weaknesses in the be accessed online at https://nyseguide. design or operation of internal controls. When a company’s shares are listed on srorules.com/listed-company-manual, In addition, a public company the NYSE or NYSE American, investors or to the NYSE American LLC Company must maintain disclosure controls and generally expect compliance with ongoing Guide, which can be referenced at https:// procedures, which are controls and other financial standards, disclosure policies and nyseamericanguide.srorules.com/ procedures of the issuer that are designed corporate governance practices designed company-guide. Alternatively, contact the to ensure that information required to be to promote integrity and accountability. NYSE or NYSE American directly.

NYSE IPO Guide 71

8 A public company and its shareholders

www.nyse.com/ipo A public company and its shareholders

8.1 Proxy statement and annual or view the live meeting, and in other ways receive advance notice of the record date meeting participate without being on-site. In the 2018 and meeting date, at least 20 business days AST proxy season, virtual meetings increased before record date. The notice includes the by 30%. In 2020, due to the COVID-19 name of the company, the CUSIP number (a) Annual meeting requirements pandemic, an even larger number of of the security(ies) entitled to vote, the United States federal regulations require companies sought virtual meeting services record date and, while not required, may all public companies to hold an annual as an alternative to in-person meetings. also include the annual meeting date. The meeting where shareholders can cast Most transfer agents provide virtual meeting notice must be sent to brokers, banks and votes in one of two ways: either in advance services. their agents (as applicable), so that they of the meeting by proxy or at the meeting can indicate the quantity of materials they in person. Shareholders are given the (b) Timeline need to send their beneficial holders to opportunity at each year’s annual meeting Generally, the date of the annual meeting enable them to vote. The company can thus to cast their vote on the election of directors is determined by the company’s fiscal print a sufficient quantity of all materials. of the corporation and the ratification year-end. Meeting dates do not usually Increasingly, shareholders may opt for of the company’s auditors; in many vary greatly from year to year, but rather electronic receipt of materials, but the print cases, shareholders may provide their meetings are held at or around the same quantity remains critical for those who do advisory vote on the past year’s executive time annually. Numerous important events not consent to electronic delivery. compensation (known as Say on Pay). preceding the annual meeting are critical for The annual meeting provides an the company to remain in compliance with Assess whether a proxy solicitor is opportunity for management to build and state laws, federal government regulations, needed. A professional proxy solicitation strengthen shareholder relationships various regulatory agency policies, and firm can assist with timing and tactical and engagement. Annual meetings are, (if applicable) stock exchange listing requirements for an annual meeting, as generally, formally scripted and planned. requirements. well as offer advice on the best strategy The company usually selects the meeting and approach for presenting proposals to place, which must accommodate (c) Preparation shareholders to optimize achieving desired the anticipated number of attending Determine agenda and dates. results. A proxy solicitor can help the issuer shareholders and others. Management Management and the board of directors will navigate the proxy process, whether the and the board of directors decide whether together decide on any additional matters issuer has only routine agenda items or, to hold the annual meeting at the same to present to shareholders besides the as is often the case, has nonroutine ballot location or at alternative sites. standard ones. They will also decide on the items involving equity plans or shareholder An individual shareholder or group of timing for the annual meeting. The board is proposals. shareholders may submit a resolution, charged with setting the record date (the In the current proxy landscape, issuers known as a shareholder proposal, for date of stock ownership that determines often engage a proxy solicitor to help with action at a company’s next available eligibility to vote) as well as the meeting an array of required actions and related annual meeting. Any shareholder can date. Management is responsible for functions, ranging from complying with submit a proposal if they own at least communicating this information to all parties regulations to proxy solicitation advisory $2,000 in stock of the company or 1% of impacted. State law sets the length of time services. Increasing support for certain a company’s outstanding shares for at between record date and meeting date. For types of shareholder proposals, notably least a year. The company must include example, in Delaware, the record date cannot environmental, social and governance (ESG) the proposal in proxy materials unless exceed 60 days before the meeting and proposals, the considerable influence of it receives SEC authorization to omit it. must be at least 10 days before the meeting. institutional and activist investors and the Generally, shareholder proposals are influential guidelines of proxy advisory firms contrary to the company’s corporate policy Communication. Close and seamless have all converged to heighten the urgency and, in its communications, the company communication is requisite among the of annual meeting planning as well as greatly will encourage other shareholders to vote issuer, their transfer agent, outside counsel, complexify it and extend the time allotted for against the proposals. In some cases, and (if engaged) the proxy solicitor in order adequate preparation. The requirement for a the company may seek to negotiate with for the entire process to be efficiently and shareholder vote on executive compensation activists in hopes of avoiding a shareholder correctly executed. (Say on Pay) adds yet another level of proposal. complexity. Additionally, NYSE regulations In recent years, some annual meetings Notification of record date and (which govern member firms, such as have either been held via virtual meeting meeting date (broker search). Generally, brokers, and not only listed companies) services with no physical location or the transfer agent will handle the broker significantly affect the voting landscape for included a virtual component in addition search notice unless the company has public companies. For example, brokers to the in-person meeting (a hybrid retained a proxy solicitor. In either case, SEC are not permitted to vote on the election of meeting). Virtual meeting services enable Rule14a-13 requires all street name holders directors unless they have received specific shareholders to vote online, listen to and/ (brokers, banks and other custodians) to instructions from their clients.

74 NYSE IPO Guide A public company and its shareholders

8.2 Providing shareholders with proxy Issuers generally take advantage of this SEC Full-set mailing. An issuer can mail full material provision for the purpose of realizing often packages to all shareholders, consisting AST significant savings on printing and postage. of the annual report, the proxy statement, Issuers may promote email distribution the proxy card and a return envelope. The (a) Material preparation of materials to shareholders via email; decision will depend on such factors as the printed communications like the proxy card, number of shareholders, share distribution Required shareholder materials. proxy statement and annual report; or on of holders, and items up for voting. An issuer The issuer must furnish shareholders with the online voting site (for future receipt of should also consider the size and weight three critical documents in order to solicit materials). of the printed documents not only for the their votes for the annual meeting: a proxy economic aspect of printing but also the statement with the text of any proposals and/ SEC rules mail method as this will determine the time or information on other items to vote on; a Notice and Access (E-Proxy). permit issuers to mail shareholders a one- it takes for shareholders to receive the proxy form to cast votes; and an annual report page notice with information on accessing material and be able to submit their proxy in which may either precede or accompany the their proxy materials online, without prior a timely fashion. This should be taken into other materials. The issuer must file these shareholder consent for electronic delivery. consideration if the solicitation period from documents with the SEC concurrently with The SEC prescribes the form the issuer mailing to meeting is less than five weeks. mailing them to shareholders (file in use). must use, which must include, among other Depending on the nature of the proposals, information, the issuer’s name, the date of the proxy statement may need to be pre-filed (c) Phase three: solicitation and voting the annual meeting, and a brief description Institutional investors in the US typically in preliminary draft; this should be discussed of items to be voted on. The issuer must vote more than 90% of their positions, with counsel. In light of the fact that the proxy include a link to the proxy material and/or while generally less than 30% of retail (or statement not only must meet applicable the voting site if different, as well as a control noninstitutional) shareholders vote. When legal and regulatory requirements, but also number specific to the shareholder and contentious or high-vote proposals are serve as management’s advocacy piece which the shareholder uses to access the being voted on, some issuers will seek to for their position, it is critical that the proxy site. Importantly, the issuer cannot attach motivate higher voting turnout from retail statement is clearly written and readily a proxy card to the Notice and Access investors. Retail shareholders more often intelligible as to its purpose and design. mailing. The mailing must also advise support management proposals and Shareholders should be engaged by the shareholders how to request printed proxy management may often look to them for an proxy statement such that they will support materials if desired. The issuer must fulfill additional margin of support. management’s proposals as being of benefit. requests for printed copies up to a year Three voting methods are generally As for the proxy form shareholders will use after the meeting. A Notice and Access provided to shareholders: (1) traditional to cast votes—often called a proxy card—the mailing must be sent a minimum of 40 mail-in voting, in which the shareholder format is usually determined by the transfer days before the meeting date, and website signs and returns the proxy card in a agent because the completed card must be links for accessing material must be live postage-paid return envelope; (2) telephone readable by the transfer agent’s systems. at the time of mailing. Failure to meet the voting, in which a shareholder calls a toll- In-house counsel typically ensures that the 40-day time frame reverts the company to free number, enters the control number proxy card meets any applicable legal or its regular print mailing of material. Issuers from the proxy card, and votes via phone regulatory requirements. can decide to use Notice and Access for prompts; and (3) online voting on a secure all shareholders, or they may only use it website or mobile-device voting app, in (b) Material distribution for select shareholders and mail regular which the shareholder visits a specified Online provision of materials. SEC rules packages to others. This depends on the website, enters the control number for require all companies soliciting proxies to company’s shareholder base and historical secure access to a voting portal, and votes. post their annual meeting material online vote returns. Generally, the proxy solicitor The holder will also be able to opt into future and inform shareholders of the material’s will advise on such matters based on items electronic delivery of material. electronic availability. Importantly, the to be voted on, vote requirements for each issuer cannot only link to the SEC’s EDGAR proposal, and other pertinent factors. Professional proxy solicitation firm website, where materials submitted by the versus in-house solicitation. It is issuer to the SEC are hosted. Rather, the Householding. Issuers can mail one common for public companies to engage a issuer must provide a link to a cookie-free set of materials to a household (known professional proxy solicitation firm to work website hosted by either the issuer or a third as householding) when two or more with them on various aspects of annual party the issuer has engaged. The site must shareholders with the same last name meeting planning and preparation. Proxy meet all requirements for accessibility and reside at the same address. This SEC solicitors offer a wide range of services privacy protection. rule helps reduce the amount of printed which may be difficult for a company to materials required. However, it is necessary perform on its own, as many necessary Email distribution of materials. for the issuer to include separate proxy components of the annual meeting process Consenting shareholders may receive cards in the mailing, one for each require specialized staffing and services. proxy material electronically via email. shareholder. These services can include, for example,

NYSE IPO Guide 75 A public company and its shareholders

the tactical aspects of the solicitation such some cases, the transfer agent can provide serve as motivation for an activist investor as the distribution and mailing of material; the necessary ownership data to determine to seek to influence board composition strategic advisory services regarding the the balance of ownership among various and/or other aspects of how the company presentation of the information in the proxy types of shareholders, such as institutional operates. Board and management statement, including potential likely voting investors, hedge funds, and activists. Ideally, preparedness are critical, and ownership outcomes on proposals; and campaign the transfer agent will be able to provide a data management and analytics are the key management to help ensure optimal voting complete picture of ownership, including to understanding and planning for emergent turnout. In addition, the proxy solicitor will registered shareholder and institutional shareholder concerns. send the company daily voting reports and insider (street) ownership data. All and/or may also provide online, real-time this ownership data converges to help the Understanding the role and influence access to voting data, campaign trends, and company and the proxy solicitation team of the proxy advisory firms. Institutional other analytics and reporting related to the develop and execute an effective, efficient Shareholder Services and Glass, campaign as it progresses. proxy campaign strategy. Lewis & Co. are the two major proxy advisory firms. They provide institutional Proxy solicitation team. The corporate Executing an effective campaign. investors with annual analyses and voting secretary’s office, working together with the Based on an analysis of the ownership recommendations on virtually all US-listed general counsel and the legal department, data available from the transfer agent companies, as well as many foreign conducts the annual meeting at most and/or proxy solicitor, the office of the companies, and are generally viewed as public companies. The investor relations corporate secretary will be well-positioned highly influential in shareholder voting department, which can assist in gaining to develop an effective message strategy trends. While most major institutions have support from institutional investors with for the proxy statement, designed to their own voting policies and guidelines, whom it has relationships, is also often motivate shareholders toward the desired many also factor in the proxy advisory involved. The department voting results. The proxy statement has firms’ guidance. In addition, some may may also have a role due to the requirement the dual function of both satisfying SEC engage one of the proxy advisory firms for allowing shareholders to cast an and state law disclosure requirements, to vote their proxies, based on that firm’s advisory vote on executive compensation. as well as serving as a public company’s recommendations. The SEC responded If engaged, the proxy solicitor will often help most broadly distributed investor relations to increasing concerns that the proxy coordinate both individual and institutional communication. advisory firms may hold excessive shareholder communications. The board of directors is charged with sway over voting results, and in 2019 Many public companies have learned determining which policies and practices issued guidance regarding proxy voting the benefit of hiring a proxy solicitor will best serve the collective interests of the responsibilities of investment advisers to provide strategic advisory services company as a whole, taking into account to help institutions that work with proxy on proposals, especially in the current shareholder concerns and preferences advisory firms stay in compliance with environment in which achieving a and balancing the two where necessary proxy voting responsibilities. Proxy solicitors successful vote is increasingly challenging. to achieve the best overall results for can help in understanding the impact of The proxy solicitor can help in determining all stakeholders. Ongoing shareholder recommendations, and implications based whether a given issue is controversial or monitoring and engagement help the board, on a company’s governance structure. not, and if so, can offer a broad-based as well as executive management and their For example, the solicitor may seek to perspective on how to obtain a vote. teams, stay in touch with investor concerns address such questions as, how much Generally, the corporate secretary and and anticipate potential issues that may of the shareholder base is influenced by corporate legal counsel retain the proxy arise at the annual meeting. The proxy the guidelines? Where does the company solicitation firm. solicitor monitors the voting and identifies profile run afoul of the guidelines? institutional investors and how they vote. Shareholder profiles. Ownership data Additionally, the board and management Understanding the index funds. Large management and analytics are critical must be aware of any implications for the index funds are sizable investors in every functions for public companies as they seek company owing to the annual guidelines of company. BlackRock, Vanguard and State to monitor and engage their shareholders at the proxy advisory firms. Street, for example, are significant holders potentially critical junctures for the company, At specific times, shareholders generally in most companies. Index funds are such as the annual meeting and a proxy may be engaged in one or more topical passive investors. This means that when vote (especially in cases where an activist issues that have come to the fore. For a private company goes public and meets investor is involved). Ongoing monitoring example, in 2020, ongoing shareholder with investors, the index funds as passive and engagement of shareholders, including concerns continue the trend of the past investors are not included. As a result, a new a solid understanding of the composition several years in revolving around board company may have no information about of types of shareholders and how they may diversity, executive compensation, and index funds which may own 15% of the vote on certain types of issues, help the ESG proposals. Any or all of these or other company. Investor stewardship committees public company determine an effective proxy currently trending issues may impact help assess corporate governance at solicitation strategy. The proxy solicitor and, in corporate governance, and can for example, companies.

76 NYSE IPO Guide A public company and its shareholders

8.3 Ownership reporting by A group is formed for Section 13(d) and A Schedule 13D is to be filed with the shareholders 13(g) purposes when persons agree to act SEC within 10 days after the acquisition Simpson Thacher & Bartlett together, whether through a syndicate, that causes such person to cross the 5% or other group, for the purpose threshold. After a company’s IPO, Sections 13(d) and of acquiring, holding, voting or disposing of Amendments to a Schedule 13D must 13(g) require filings by any person (or group equity securities of a company. The group be filed promptly if any material change in the aggregate) that beneficially owns formed through such an arrangement is occurs in the facts set forth in that Schedule more than 5% of a class of voting equity deemed to be a person for purposes of 13D. Any acquisition or disposition of securities registered under the Exchange Sections 13(d) and 13(g) of the Exchange beneficial ownership of 1% or more of the Act. The filings must be made with the Act and will be required to file, either jointly class of securities is deemed material for Securities and Exchange Commission or separately, a Schedule 13D statement this purpose. Acquisitions or dispositions (SEC) electronically. The main purpose or Schedule 13G statement (described of less than 1% may also be material, of the Section 13(d) and 13(g) reporting herein) concerning all of their holdings. No depending on the facts and circumstances. requirements is to put a company and written agreement is required to form a its stockholders on notice of large group. In connection with an IPO, certain (b) Reporting on Schedule 13G shareholders and possible attempts by agreements such as voting agreements Schedule 13G is a short-form version of them to control or take over the company. and shareholder agreements may include Schedule 13D and, unlike Schedule 13D, Whether a person can file a Schedule 13D provisions that could create a group. If a does not require the reporting person or 13G statement is often based on facts person is part of a group that collectively to disclose such person’s intentions and circumstances, including when the beneficially owns more than 5% of the with respect to his or her ownership of securities were acquired and whether such applicable class, such person will be the company’s securities, any plans or a person is passive (as discussed further required to file a Schedule 13D or 13G, even proposals relating to certain events, or herein). if such person individually beneficially owns most of the other information required by The term beneficial ownership is less than 5%. Schedule 13D. A Schedule 13G primarily defined to include any person who, discloses the identity of the reporting directly or indirectly—through any contract, (a) Reporting on Schedule 13D person and such person’s beneficial arrangement, understanding, relationship, or In accordance with the provisions of Section ownership. There are three categories otherwise—has or shares: 13(d) of the Exchange Act, any person who under which a person may be eligible to file • voting power, which includes the power after acquiring (directly or indirectly) the a Schedule 13G instead of a Schedule 13D, to vote, or to direct the voting of, a beneficial ownership of any shares of a which are discussed herein. security; and/or voting equity security of a class registered Pursuant to the rules promulgated • investment power, which includes under the Exchange Act, owns (directly or by the SEC under Section 13(d) of the the power to dispose, or to direct the indirectly) more than 5% of that class of Exchange Act, certain 5% beneficial owners disposition of, a security. securities is required to file a Schedule 13D, (e.g., brokers/dealers, banks, insurance unless such person otherwise qualifies to companies, investment companies and In addition, a person is deemed to be file a Schedule 13G (as discussed herein). employee benefit plans meeting certain the beneficial owner of securities that the A Schedule 13D requires disclosure requirements—collectively, Institutional person has the right to acquire, generally of the reporting person’s identity, the Investors) that have acquired such securities within 60 days. The practical consequence means of payment for such acquisition, in the ordinary course of its business and of this rule is that the person is deemed to the purchaser’s intentions concerning not with the purpose or effect of changing be the beneficial owner of equity securities control of the company, plans or proposals or influencing the control of the company, which may be obtained on the conversion with respect to the company, 60-day nor in connection with, or as a participant or exercise of convertible securities, trading history, and disclosure of certain in, any transaction having such purpose or such as convertible debt, convertible agreements relating to the company’s effect, may instead report their beneficial preferred stock, warrants, or certain securities, among other things. Schedule ownership on a Schedule 13G that is options. Notwithstanding the foregoing, 13D reporting is triggered by the acquisition due within 45 days after the end of the if a person acquires beneficial ownership of shares of a registered class of voting calendar year during which that person over a security with the purpose or effect equity securities. However, acquisitions by became subject to Section 13(d) reporting of changing or influencing the control of a 5% beneficial owner—which, together with requirements (if such person beneficially the issuer—or in connection with or as a all other acquisitions by the same person owns more than 5% at the end of such year) participant in any transaction having such of securities of the same class during or, if earlier, within 10 days after the end of purpose or effect—such person shall be the preceding 12-month period, do not the first calendar month when that person deemed to immediately beneficially own exceed 2% of that class—are exempt from beneficially owns more than 10% of the such security, even if such security cannot Schedule 13D reporting. Accordingly, large class. be converted or exercised within 60 days pre-IPO owners may not be required to file In addition, persons who (1) have not (assuming no other material conditions to a Schedule 13D if they do not acquire 2% or purchased the securities with any purpose, convert or exercise exist at such time). more following the IPO. or with the effect of, changing or influencing

NYSE IPO Guide 77 A public company and its shareholders

the control of the company, or in connection be filed within 45 days after the end of the company. As a result, the company may with or as a participant in any transaction calendar year in which such person became not be able to directly communicate with having that purpose or effect and (2) a 5% beneficial owner, provided that such a beneficial holder. beneficially own less than 20% of the person beneficially owns more than 5% at registered class of voting equity securities the end of such year. As stated, the beneficial shareholder (collectively, Passive Investors) may also file Additionally, this Schedule 13G does not decides whether to disclose their identity to a Schedule 13G instead of a Schedule 13D. require the reporting person to be passive. the company. Thus, beneficial holders fall In the case of Passive Investors, however, However, if such a person acquires more into two categories: the Schedule 13G must be filed within 10 than 2% in any 12-month period, such • Objecting beneficial owners (OBOs) do days after the acquisition that causes such person will lose eligibility to file such a not allow their identity to be disclosed person to cross the 5% threshold. Schedule 13G, and must either qualify as to the company. OBOs will only receive If, however: (1) any of the foregoing an Institutional Investor or Passive Investor communications from the company persons acquires or holds the securities to remain on a Schedule 13G or switch to a through their broker, bank or custodian. with a purpose or effect of changing or Schedule 13D. If part of a group, acquisitions • Nonobjecting beneficial owners (NOBOs) influencing the control of the company, by all group members should be aggregated waive the right to remain anonymous and or in connection with or as a participant for purposes of the 2% test. will accept direct communications from in any transaction having that purpose or Amendments to Schedule 13G must, the company. For a fee, the company effect, (2) an Institutional Investor no longer with limited exceptions, be filed within 45 can request a list of NOBO holders, has acquired or holds the securities in the days after the end of any calendar year including names, addresses and ordinary course of business or (3) a Passive in which any change occurs in the facts shareholding amounts (but not which Investor beneficially owns 20% or more set forth in the Schedule 13G. Moreover, custodian holds the shares). of the registered class, then such person Institutional Investors and Passive Investors must file a Schedule 13D within 10 days after have additional amendment requirements Book entry and printed share such event. Moreover, in the case of (1) or (3) upon the occurrence of certain events. certificates. Registered holders can above, such persons will be prohibited from document their ownership by either a voting the securities, and from acquiring any 8.4 Share ownership mechanics physical, printed share certificate (which additional beneficial ownership in any equity AST was traditionally how shares were held) securities of the company or any of its or book entry, which records ownership controlling persons for a period beginning (a) Types of share ownership electronically on the transfer agent’s on the date such person is no longer Shareholders fall into two broad categories: register of shareholders, without issuing a passive or crossed the 20% threshold, as registered holders and beneficial holders. physical certificate. Book entry is usually applicable, and ending 10 days following The type of share ownership is determined the norm in today’s digital environment. It the filing of the Schedule 13D. Having board by how and where shares are held and has greatly facilitates transfer or sale since no designees typically disqualifies such person a significant impact on the company’s ability certificate needs to be presented to make from being eligible to file a Schedule 13G as to monitor and engage its shareholders. the transaction. Additionally, book entry an Institutional Investor or Passive Investor. • A registered holder (which may be an removes the risk of losing a certificate and, if In addition, under Section 13(g) of the individual, group or other entity) owns a certificate is lost, the need to post a Exchange Act, persons that beneficially own shares directly in their own name. to replace it. more than 5% of a registered class of voting Their identity and share ownership is All beneficial holders are automatically equity securities as of the end of a calendar recorded on the company register. book entry holders since their ownership is year who may not fall into the foregoing Shares may be held either by physical recorded by their custodian and no physical categories but who are otherwise not or electronic entry on certificate is ever printed. required to file a Schedule 13D (for example, company records. In general, a transfer a person who has not acquired more than agent is engaged by the company to . An important 2% of the outstanding shares over any maintain the register of shareholders consideration for a private company before 12-month period, a person who acquired and keep track of ownership and the it goes public is to ensure its capitalization his or her beneficial ownership prior to the transfer of shares. Companies have table is in proper order. This is especially company’s registration under the Exchange information on registered holders and true as more private companies are waiting Act or a person who became a 5% owner can communicate directly with them. longer before going public, and their cap without an acquisition due to a reduction • A beneficial holder does not keep tables become more complex. Ownership in the number of ) are stock in their own name; rather, data management tools (sometimes eligible to report their beneficial ownership ownership is held by a broker, bank or called cap table software) exist for private on such a Schedule 13G. Therefore, holders other custodian. This is often called companies to manage their ownership of 5% of a registered class of stock who holding in street name. The company’s records and must be reviewed by the acquired their shares before the company’s shareholder records do not include the attorneys and auditors prior to an IPO. Cap securities are registered in an IPO may file beneficial holder who, furthermore, may table tracking software allows information on a Schedule 13G. This Schedule 13G must opt not to disclose their identity to the and analysis of current executive ownership,

78 NYSE IPO Guide A public company and its shareholders

equity value across investment rounds, and exceed the number of shares authorized with the advantage for the company of equity dilution to flow seamlessly across in the company charter; and working with a one-stop shop and benefiting valuation, regulatory, and compliance • annual and special meeting services, from having the full range of relevant functions. Systems utilizing private such as mailing proxy material to all services managed in an integrated fashion. blockchain technology allow a company registered holders and tabulation of For street name shares held by brokers, to understand the historical ownership of returned votes. banks or other custodians, which as a result their shares, as well as tracking sales and do not appear on the ownership record transfer. Transfer agents are regulated by both maintained by the transfer agent, a different the SEC and their state of incorporation. procedure governs. The street name shares (b) Recordkeeping The regulations govern many aspects of are held by the Depository Trust & Clearing As follows from the above distinctions on securities transactions, including: Corporation (DTCC). DTCC in turn has a types of share ownership and categories • processing time for transfers; subsidiary, the Depository Trust Company of shareholders, a public company will • responsiveness to inquiries; (DTC), which shows as owner on the register likely have two records of ownership. One • accuracy of recordkeeping; under the name of its nominee, CEDE & Co. is the transfer agent, who is retained by • records retention; DTC was established to help the the issuer, and maintains a direct record • secure handling of stock certificates; industry adopt and use book entry of share ownership which includes holder • safeguarding of funds and securities; instead of physical stock certificates, and names and addresses. The second record and thus expedite securities transactions of ownership is maintained by brokers, • search for and track lost shareholders. via electronic trading. When shares are banks or other custodians and consists of bought and sold, DTC allocates them shares held in their name on behalf of those States govern the handling of lost the participating broker, bank or other who actually own the shares. The company shareholders and the process for turning custodian for whom they hold the shares. is not automatically privy to this second over securities in inactive or abandoned Since the shares in DTC’s name are not type of ownership record, though it may be accounts (known as escheatment). State actually owned by them, DTC maintains obtained via public records and other data requirements for escheatment processes its own list of beneficial holders and their compilation. In some cases, the transfer vary greatly and can only be addressed share ownership. The brokers and banks in agent may gather information on beneficial on a state-specific basis. Also, the Internal turn maintain record of beneficial holders, holders and provide it to the company along Revenue Service requires transfer agents including contact information. with the record of registered holders. to report payment of dividends and shares Corporate dividends are paid on behalf The transfer agent handles the transfer, sales via Form 1099 and may require of an issuer by the transfer agent directly issuance and cancellation of shares. They the transfer agent to begin or cease tax to registered holders. For the shares held can provide the company with a list of all withholding. in street name at DTC, a single payment registered holders upon request. In today’s is made to CEDE & Co. (DTC’s nominee). digital environment, the record of registered Equity compensation plan. As a private DTC apportions the payment to each shareholders is often maintained via an company going public reassesses its participating broker, bank or other custodian, online database and accessible by the equity compensation plan, it may choose who in turn apportions payments to company via a secure portal. Most often, to work with a transfer agent that also offers beneficial holders. the registered holder list becomes critical employee equity plan solutions. Having all For purposes of mailing in relation to the record date for an annual shareholder data (including your employee communications to shareholders, including meeting (or special meeting) and is used to shareholders) in one centralized location, for material for proxy voting: determine holders eligible to vote. Generally, both shareholder registry and equity plan • The transfer agent mails all materials the transfer agent custodies the record of award purposes, reduces potential issues of all types to all registered holders, common stockholders and may also record- around data transfer and simplifies another including proxy voting material. keep other types of securities, such as complexity of life as a public company • The brokers, banks or other custodians preferred stock or bonds. by consolidating services with a single mail to all street name beneficial Transfer agent responsibilities also provider. holders. When a proxy vote is involved, include: the underlying process is somewhat • payment of dividends; (c) Transfer of shares and voting complex, beginning with DTC formally • tax reporting; As stated above, the transfer agent handles disclaiming share ownership and • reinvestment plan (DRIP) the transfer of shares for registered holders, providing participating brokers, banks and administration; and generally also handles the mailing of other custodians with an omnibus proxy. • escheatment and lost shareholder proxy material and vote tabulation. The The brokers, banks and other custodians reporting; transfer agent may also provide strategic in turn mail material to the actual • stock option issuance; advisory services on the annual meeting. beneficial holders of the shares. Any • restricted stock transfers; Some transfer agents are part of a larger proxy cards are sent back to the brokers, • registrar of shares, acting to ensure professional services firm that may banks and other custodians, who send the number of shares issued does not additionally offer proxy solicitation services, them to the transfer agent for tabulation.

NYSE IPO Guide 79 A public company and its shareholders

Virtually all brokers, banks and other or abandoned. Uncashed dividend validation occurs, the transfer agent (on custodians outsource mailing of proxy checks or returned mail may point to a lost behalf of the issuer) will file unclaimed material to beneficial owners for efficiency shareholder. Inactivity or abandonment of property reports with the states, then turn and cost savings. They will use an property triggers escheatment, the process over the property to the state. intermediary who mails and tabulates votes by which abandoned property is transferred Accurate records help protect all parties, on their behalf, and then returns votes to the to the state or territory. ensuring compliance with all lost shareholder transfer agent. The intermediary may also Property is deemed abandoned once and escheatment regulations; timely be engaged in the distribution of non-proxy a certain period of account inactivity has completion of all required escheatment; and materials. passed. This is known as the dormancy proper conduct of the escheatment. States period. Each state’s regulations define regularly conduct escheatment audits of (d) Escheatment the dormancy period, and the types of companies and their transfer agents. All 50 states and all US territories require shareholder activity that avoid dormancy. Additionally, records must be issuers’ transfer agents to report unclaimed Each jurisdiction requires the transfer maintained following escheatment, in the or abandoned property. Complete, accurate agent (on behalf of the issuer) to perform case of a lost shareholder seeking return records must be maintained on all account due diligence mailings prior to escheating of property at a later date. The shareholder activity for the purpose of determining the the property. Upon completion of due must directly contact the state to retrieve status of property as potentially unclaimed diligence, if no activity or shareholder property.

80 NYSE IPO Guide 9 Managing risk

www.nyse.com/ipo Managing risk

9.1 Liability under the federal than the issuer itself) are afforded, with the purchase or sale of securities. securities laws among other defenses, an affirmative A claim can be brought concerning Simpson Thacher & Bartlett due diligence defense if they can show statements made in connection with that “after reasonable investigation, a public offering or with secondary Given the legal regime in the United States, [they had] reasonable ground to believe market trading based on misstatements inherent in conducting an IPO and life as a and did believe” that statements made made in press releases, officer or public company thereafter is the reality that in the registration statements were not director communications and periodic you can be exposed to frequently frivolous misleading. reporting, among other things. Unlike lawsuits. • Securities Act, Section 12 liability: the Securities Act claims discussed Liability under the US securities Under Section 12(a)(2), the issuer, its previously, however, in order to establish laws in connection with an IPO primarily officers and directors, its underwriters a violation of Section 10(b), a defendant arises under the Securities Act and the and other persons can be liable if they must be shown to have had “scienter”— Exchange Act. The Securities and Exchange sell or solicit the sale of a security an intent to defraud or otherwise engage Commission (SEC) has broad powers to by means of a prospectus or an oral in reckless conduct. The plaintiff must investigate public companies and their communication containing a material also demonstrate “loss causation”—a directors and officers. It also has powers to misstatement or omission. Section 12(a) connection between the defendant’s bring civil enforcement proceedings that (2) permits a purchaser of securities in a alleged misconduct and the economic could result in fines and monetary penalties registered offering, or whose securities harm suffered. or other sanctions (such as a bar from are “traceable” to those distributed in • Exchange Act, Section 20(a): Similar serving as a director or officer of a public such an offering, to obtain rescission to Section 15 of the Securities Act company). In addition, a public company and of the sale or damages in certain discussed previously, Section 20(a) its directors and officers could also become circumstances. Nonissuer defendants of the Exchange Act provides for subject to criminal liability for, among similarly have an affirmative defense if secondary liability. Any person who other things, willful violations of securities they “did not know, and in the exercise of “controls” a primary violator of Section laws or interference with a government reasonable care could not have known,” 10(b) or Rule 10b-5 can also be held investigation. Finally, many of the provisions of the misrepresentation. liable under a theory of secondary of the securities laws also provide for • Securities Act, Section 15 liability: liability. Section 20(a) provides an private rights of action in which investors Under Section 15, any person who affirmative defense for persons who individually, or as representatives of a class, “controls” a primary violator of Section acted “in good faith and did not directly can bring a lawsuit against the company 11 or 12 can also be held liable under a or indirectly induce […] the violation.” and its directors and officers. These private theory of secondary liability. “Control” class action lawsuits are the most common exists if the defendant has the direct As mentioned previously, Section 11 proceedings to which companies and their or indirect power “to direct or cause of the Securities Act provides nonissuer directors and officers are subject for alleged the direction of the management and defendants (including directors, officers misstatements or omissions in connection policies” of the primary violator (typically and underwriters) with an affirmative with registered securities offerings. the issuer) through stock ownership, “due diligence” defense if they can show • Securities Act, Section 11 liability: contract or other means. Control person that “after reasonable investigation, Under Section 11, the issuer, its claims are frequently asserted against [they had] reasonable ground to believe directors, its principal executive, its officers and directors of issuers and and did believe” that statements made financial and accounting officers, its can be brought against a controlling in the registration statement were not underwriters and a foreign issuer’s shareholder or group of shareholders, misleading. Similarly, nonissuer defendants authorized US representative can be in connection with Section 11 and 12 have an affirmative defense to a claim liable for material misstatements or lawsuits. Defendants have an affirmative under Section 12 of the Securities Act if omissions in the issuer’s registration defense if they “had no knowledge of or they “did not know, and in the exercise of statement. “Experts,” such as the reasonable ground to” know the facts reasonable care could not have known” of issuer’s accountants, can also be underlying the violation. the alleged misrepresentation. Defendants held responsible and sued directly • Exchange Act, Section 10(b) and Rule in a Securities Act, Section 15 or Exchange for misrepresentations made on their 10b-5: A Section 10(b) and SEC Rule Act, Section 20 “control person” claim authority. Section 11 entitles a purchaser 10b-5 claim is the most commonly have an affirmative defense if they “had of securities in a registered offering, asserted claim against public no knowledge of or reasonable ground or whose securities are “traceable” to companies, officers and directors, to” know the facts underlying the violation those distributed in such offering, to underwriters and accountants and other or acted in “good faith,” respectively. A obtain damages for a violation. While persons. A claim can be brought for use defendant in an Exchange Act, Section 10(b) the issuer is subject to strict liability for of “any device, scheme or artifice to or Rule 10b-5 claim must be shown to have material misstatements and omissions defraud,” any material misstatement or had an intent to defraud or been reckless. A in its registration statement, nonissuer omission, or “any act, practice, or course nonissuer defendant that is able to establish defendants (i.e., all defendants, other of business” that deceives in connection that he, she or it performed a reasonable

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investigation sufficient to establish an under these statutes are frequently brought With the US Supreme Court’s March affirmative defense under Section 11 will as class action litigation, where damage 2018 ruling in Cyan, Inc., et al. v. Beaver typically also be thereby able to defeat awards and settlement proceeds go directly County Employees Retirement Fund, et al. claims under each of the other provisions to the shareholders allegedly harmed. There (138 S. Ct. 1061, 2018), Section 11 claims as well. It is for the purposes of establishing are also statutes that may have industry- have become increasingly problematic such a defense under Section 11 and these specific application. for companies contemplating an IPO. In other provisions that underwriters and other The Securities Act is designed to Cyan, the Court held that state courts have offering participants engage in extensive prevent fraud in securities offerings and to concurrent subject matter jurisdiction over due diligence on the issuer and its business assure that investors receive full disclosure class actions alleging Section 11 violations. in connection with an IPO. It should be noted in connection with the offer and sale of Allowing Section 11 litigation to take place in that, as a procedural matter, the affirmative securities by the company. As such, the federal, state or federal and state court at due diligence defense, typically, is not Act imposes a high standard of conduct the same time, the Cyan decision creates available at the incipient “motion to dismiss” on directors and officers of the company. the possibility for inconsistent outcomes, stage of a securities litigation (when a Section 11(a) of the Act states that a person increased defense costs and settlement plaintiff’s allegations must be assumed to who purchased a security covered by a values. be true), but rather only after discovery has registration statement (e.g., an IPO and A related but separate issue is whether been taken and the defendant moves for secondary public offering of equity or debt) directors and officers liability (D&O) “summary judgment.” An issuer arriving at may recover damages from, among others, insurance policies should also include this later stage of a securities litigation will the company and its directors and officers affirmative coverage for violations of typically have already incurred significant who sign the registration statement if the Section 15 of the Securities Act. Section 15 expense, and companies accordingly registration statement: provides that any person who is deemed have a significant incentive to settle these • contained a misstatement of material to control any person found liable under actions. fact; or Section 11 or 12 will share liability for the • omitted to state a material fact that damages imposed on the controlled 9.2 Class action and derivative either was required to be stated or was person. Companies undergoing an initial lawsuits necessary in order for the registration public offering might seek such affirmative Marsh statement not to be misleading (this coverage, particularly companies whose includes anyone who has consented directors and officers might be deemed (Note: Some information in the following to be a director of the company and is control persons following the IPO. sections is taken from Recent Trends in named as a director in the registration Turning to the Exchange Act, the Securities Class Action Litigation: 2019 Full- statement, not just those who have objective of this legislation is to increase Year Review, published by NERA Economic signed the registration statement). the information available to public company Consulting, a unit of Group. investors through the implementation of Marsh and Oliver Wyman are both wholly While the company is strictly liable disclosure requirements and to prevent owned subsidiaries of Marsh & McLennan for violations of Section 11 (i.e., there is no unfair practices in US securities markets. Companies.) need to prove intent), directors and officers As discussed earlier, Rule 10b-5 has broad Imagine the shock if the newly public may avoid liability if they are successful application and includes statements or company were to be served with a federal in establishing their own defense. If the omissions in the company’s Exchange securities class action lawsuit within three misstatement or omission occurred Act filings (e.g., Forms 10-K, 10-Q and days following the initial public offering (IPO). in a part of the registration statement 8-K). The rule prohibits any practice This happened to a significant new issuer not passed upon by an expert (e.g., an to defraud investors, including making in 2012. In fact, most securities claims are auditor’s report), the director or officer any untrue statement of material fact or filed within three years of an IPO and there must demonstrate that he or she had, after omitting a material fact in the company’s is a significantly higher probability that a reasonable investigation, sufficient grounds filings. Actions may be brought against the securities class action will arise if an IPO to believe that the disclosure statements company and/or its officers or directors by is involved. As such, when managing risk were true or that material statements private parties, the Securities and Exchange in a newly public company, it is critical were not omitted. If the misstatement Commission (SEC) or the Department to understand the primary civil liability or omission occurred in a part of the of Justice. In general, Rule 10b-5 liability exposures faced by directors and officers. registration statement passed upon by an is broader than Section 11 liability as expert, a director or officer need only show applied to the directors and officers of the (a) Direct class actions that he or she had no reasonable grounds company. Moreover, plaintiffs’ lawyers must The primary exposure for directors and to believe that that portion was materially demonstrate scienter, which is an intention officers of US-listed companies continues untrue or omitted to state a material fact. by a defendant director or officer to defraud. to come from federal securities laws—in There is no requirement under Section 11 to particular, sections of the Securities Act of show that directors and officers intended to (b) Shareholder derivative suits 1933, the Exchange Act of 1934 and SOX. defraud investors. This is often referred to Another frequent source of potential liability Claims made against directors and officers as scienter. and expense is what is commonly called a

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derivative suit. These are lawsuits brought decision by presuming that in making decisions concerning D&O insurance, by shareholders on behalf of the company the decision, the directors and officers including limits purchased, coverage against individual directors and officers were informed, acted in good faith and selection and premium trends. and typically allege violations of state and honestly believed that the decision was In 2019, there were 433 federal common law fiduciary duties owed to the in the best interests of the company and securities class action filings, which company or other wrongdoing. Historically, its stockholders. To support application matches the record number of filings in most shareholder derivative suits were of the business judgment rule, 2018. Filing activity in 2019 continued to resolved through payment of fees to directors and officers generally should illustrate the shift in case types observed plaintiff’s counsel and by the company’s be proactive and attentive, regularly in 2018—an increasing number of standard adoption of certain corporate governance attend board meetings, meaningfully cases (Rule 10b-5, Section 11, or Section and management reforms negotiated evaluate alternatives and deliberate as 12) and a decreasing number of merger between the company and the plaintiffs, a board with adequate and complete objections filings. the purposes of which are to strengthen information. Where appropriate, the While the number of filings has protections for investors and enhance board of directors should also consider increased since 2014, the number of . retaining financial advisors, counsel publicly listed companies in the United Until recently, derivative actions had and other experts to provide input and States has decreased. The result is that the rarely resulted in substantial monetary guidance. average listed company in the United States recoveries. But over the last five years, there • Duty of loyalty—Directors and officers was more than twice as likely to be the have been a number of derivative actions owe the company and its stockholders target of a securities class action lawsuit in with settlements exceeding $175 million. a duty of loyalty. Again, they must act the last five years (2015 to 2019) than it was When monetary settlements or damages in good faith and in the reasonable from 1996 to 2000. are involved, such awards generally go belief that their actions are in the best After an uptick in 2018—driven almost to the benefit of the company itself and interests of the company. Loyalty entirely by one $3 billion mega-settlement— not directly to shareholders. Shareholder issues arise when a director or officer the average settlement value of these derivative lawsuits, which have been has a conflict of interest or lacks lawsuits declined in 2019. The median increasing in frequency, usually settle in independence with regard to a particular settlement value in 2019 was $12.8 million, tandem with outstanding class action business decision or personally profits the highest recorded since 2012 and litigation and are often called companion from an opportunity at the expense approximately $1.3 million more than the or tagalong cases. These suits are often of the company. In evaluating claims 2018 inflation-adjusted value. brought in multiple jurisdictions and can for breaches of the duty of loyalty, sometimes involve inconsistent outcomes courts generally will examine the 9.3 Indemnification (In re Oracle Corp. Derivative Litigation, 2003 decision-making process but may also Marsh/Simpson Thacher & Bartlett WL 21396449 [Del Ch June 17, 2003]). evaluate the substance of the business Two common bases of liability in decision to determine fairness to the Generally, indemnification of officers shareholder derivative actions include company and its stockholders. To and directors is governed by the law of violations of the duty of care and the duty help avoid liability, interested directors the state of incorporation. All 50 states of loyalty, discussed in more detail in the should disclose potential conflicts and provide for corporate indemnification and following section, but may also include opportunities to other directors and address situations where the company excessive officer compensation, proxy abstain from deliberations and voting on may indemnify its officers and directors violations, option plan violations, related any decisions where an actual conflict and situations where the company must party transactions, misappropriation of exists and consider abstaining where indemnify its officers and directors. To corporate opportunities and corporate the appearance of a conflict exists. understand when indemnification is waste: permitted by the company, look to the • Duty of care—Directors and officers company bylaws or charter. owe the company and its stockholders (c) Frequency and severity of In Delaware, for example, the statute a duty of care. They must act on an securities class action suits merely authorizes indemnification where informed basis and in a manner that Based on filing activity between 2015 and not considered mandatory by statute (as they reasonably believe to be in the 2019, there is an annual average probability further discussed later), meaning a director company’s best interests, exercising the of 6.9% that a public company will face a or officer is not necessarily entitled to degree of care that an ordinarily prudent securities class action lawsuit, according indemnification unless the company charter person in a similar position would to NERA Economic Consulting. If you look or bylaws contain necessary authorizing exercise. The duty of care focuses on at the last three years alone, the average language to permit indemnification. the decision-making process. When chance of facing a litigation is 8.1%. Delaware may structure directors or officers are accused of It is important to recognize recent their certificates of incorporation to limit breaching their duty of care, generally trends in securities class action litigation. An the liability of their directors to situations the business judgment rule shields their understanding of these trends can impact involving:

84 NYSE IPO Guide Managing risk

Federal Filings and Number of Companies Listed in the United States January 1996 to December 2019 600 10,000 IPO laddering lings 8,884 Filings, excluding IPO laddering 550 9,000 Listings 8,200 500 8,783 8,448 8,000 450 7,994 7,288 7,000 400 6,154 6,757 6,029 5,941 310 5,454 6,000 350 6,097 6,005 5,283 5,235 5,179 4,988 5,008 5,401 300 5,248 5,343 5,000 5,095 5,204 4,916 250 4,000 429 433 433 200 Number of federal ling s 3,000 Number of companies listed 150 299 274 274 245 248 241 234 237 228 230 232 2,000 205 210 220 220 100 201 198 188 195 131 133 50 1,000

0 0 0 1 7 13 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 201 2012 20 2014 2015 2016 201 2018 2019 Filing year

Source: NERA Economic Consulting. Note: Listed companies include those listed on the NYSE and . Listings data from 2016 through 2019 obtained from World Federation of Exchanges (WFE). The 2019 listings data is as of October 2019. Data for prior years were obtained from Meridian Securities Markets and WFE.

• breaches of their duty of loyalty for enforcing the company’s obligation to to mandatory indemnification (including improper personal benefit) to indemnify; and under Section 145(c) will generally be (1) the the company and its stockholders; and • a provision that forces a director or corporation’s president, chief executive • acts or omissions not in good faith or officer to bear the burden of proof officer, chief operating officer, chief financial that involve intentional misconduct or a to demonstrate entitlement to officer, chief legal officer, controller, treasurer knowing violation of the law. indemnification. or chief accounting officer and (2) any individual identified in public filings as one It is important for directors and officers Several common questions that arise of the most highly compensated officers of public and nonpublic companies to regarding indemnification follow. of the corporation. The amendments also seek counsel on and understand the When must the company indemnify its provide that a corporation has the flexibility indemnification provisions of company directors and officers? Section 145(c) of the to specify other officers who will be entitled bylaws and/or indemnification agreements Delaware General Corporation Law requires to mandatory indemnification. to which they will be subject. Review of the a corporation to indemnify a director or What is the nature of the conduct provisions and/or agreements should occur officer when the person to be indemnified required for the company to indemnify its not simply prior to an IPO, but on a periodic has been successful on the merits with directors and officers? Under Section 145(a) basis as well. respect to a claim against him or her. In of the Delaware General Corporation Law, a Be mindful of features (or absence of other words, if the director or officer defends corporation may (but need not) indemnify a features) in the company bylaws, charter the claim on the merits and is vindicated director or officer only “if such person acted or corporate indemnification agreements of any wrongdoing, it is mandatory that the in good faith and in a manner reasonably that could impair one’s ability to seek company indemnify that individual for the believed to be in or not opposed to the best indemnification. Two examples of such costs and expenses, including attorneys’ interest of the corporation.” In the criminal provisions include: fees, incurred in connection with the claim. context, a director or officer must also have • a provision that fails to obligate the Section 145(c) was recently amended and had no reason to believe his or her conduct company to reimburse a director’s or now provides that, effective December 31, was unlawful in order to be indemnified. officer’s claim for costs and expenses 2020, the “officers” entitled by statutory Outside of the mandatory indemnification

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Federal Filings by Type January 2010 to December 2019

500 Section 11 or 12 filings

450 Rule 10b-5 and Section 11 or 429 433 433 12 filings 400 Rule 10b-5 filings Merger-objection filings 350 170 Other filings 299 205 200 300

228 230 232 250 220 220 93 16 210 17 12 42 61 13 200 71 53 41 55 13 18 20 18 150 17

Number of federal filings 28 204

189 191 100 148 173 122 137 103 118 135 50 16 10 18 7 13 14 8 11 8 8 27 0 16 9 13 6 11 15 12 12 17 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Filing year

Source: NERA Economic Consulting. discussed in the prior paragraph, or officer’s liability to the company is limited In the absence of specific provisions companies frequently provide broader as a matter of law. Almost all states have related to who evaluates and approves indemnification protections in recognition adopted statutes that limit the liability requests for indemnification, the decision that only a small proportion of situations of directors—and, in some instances, is generally made by a majority vote of may require a company to indemnify with a officers—under state law. Like Delaware, disinterested (nondefendant) directors, a larger proportion of situations permitting a many states allow companies in their committee of disinterested (nondefendant) company to indemnify. charters to limit or eliminate the personal directors or upon the recommendation Even if a director’s or officer’s conduct liability of directors for damages in claims of independent legal counsel in a written is of the type that can be indemnified, by the company and its shareholders opinion. the company’s ability to indemnify him or (Section 102(b)(7) of the Delaware General If the company is either unwilling or her may be limited or prohibited by state Corporation Law). Notably, the Delaware unable to indemnify a director or officer statute. For example, the Delaware statute statute does not eliminate liability for for expenses, damages or settlement authorizes the company to indemnify conduct not taken in good faith or for breach amounts, the director or officer may be able directors and officers only for expenses of a director’s duty of loyalty. to seek payment directly from insurers, incurred by them in defending shareholder From whom does a director or officer depending on the nature and breadth derivative suits brought by or on behalf of seek indemnification? In short, it depends. of insurance coverage under insuring the company. The Delaware statute does Indemnification is not self-executing. The agreement A of the company’s D&O not authorize indemnification of settlements company bylaws, charter and any corporate insurance policy (commonly called Side A). or judgments in such actions. The rationale indemnification agreement between a Notably, the ability of a director or officer to is that if the company indemnified the director or officer and the company will seek timely reimbursement directly from directors or officers for amounts they determine: insurers may differ significantly, depending owed to the company, the result would be • who evaluates and approves requests on the exact terms, conditions, exclusions a return of funds back from the company, for indemnification; and and limits of liability of insurance that rendering the debt owed to the company • whether a director or officer may be are purchased by the company. Today, meaningless. indemnified in a particular case and, most Side A policies are poised to begin To what extent is an individual’s liability if so, whether the director or officer responding to a loss on behalf of a director limited as a matter of law? The state in may receive an advancement from the or officer within 60 days if the director or which the company is incorporated will company to pay for expenses incurred in officer has not received a response from determine the extent to which a director’s connection with the matter. his or her company regarding whether it

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will indemnify the director or officer for the effect of Schoon v. Troy Corp, it serves • Side A: Personal asset protection matter in question. to highlight the potential importance for officers and directors—Insuring Does the company have to advance the for directors and officers to consider Agreement A, commonly referred to costs and expenses incurred in defending separate indemnification agreements with as Side A, covers a loss incurred by against a claim made against a director the company that specifically address individual directors and officers resulting or officer? The ability of the company to advancement of expenses, including from claims for which the company advance defense costs in a timely manner provisions that prohibit modifications to has not indemnified them. A director to its directors and officers can be critical in such an agreement without the written or officer need not pay a retention or attracting independent directors because consent of the director or officer. deductible in the event Side A insurance the cost of defending a lawsuit can be proceeds are sought if the company immediate and substantial and may directly 9.4 D&O liability insurance is unable or unwilling to indemnify the influence both the nature and quality of the Marsh individual director or officer directly. defense presented on behalf of the directors • Side B: Corporate reimbursement and officers. It is clear that companies and their boards insurance—Insuring Agreement B, also Rights to advancement are governed of directors may well face lawsuits at called Side B, reimburses the company under a combination of state law, corporate some point. While most boards take for its indemnification of an officer or bylaws and corporate indemnification their responsibilities seriously and try to director for claims made against them. agreements of the company and are execute them properly, that intent does Side B coverage is commonly referred to separate and distinct from the obligation not confer immunity. Shareholders and as corporate reimbursement coverage. of indemnification. For example, a right other stakeholders—often prompted by an A deductible or retention applies for to advancement of defense costs may aggressive plaintiffs’ bar—can be expected claims made under Side B. be broader and less restrictive than an to sue when they see themselves as • Side C: Corporate coverage against individual’s right to indemnification. Because having been wronged. Thus, in addition to securities claims—Insuring Agreement the determination as to whether an officer’s doing everything possible to execute their C, also called Side C, protects the or director’s conduct is indemnifiable responsibilities properly and effectively, company against a loss resulting generally cannot be made until the end those charged with corporate governance from, in the public company context, a of a claim or proceeding, Section 145(e) should also protect themselves with D&O securities claim made directly against it. of the Delaware General Corporation insurance. Side C coverage is commonly referred Code permits (but does not require) a Most D&O insurance policies for public to as balance sheet protection. A corporation to advance defense costs, companies provide financial protection deductible or retention also applies for including attorneys’ fees, to defend against to more than just individual directors and claims made under Side C. a claim for something that, if true, would officers. They also afford a significant be an indemnifiable claim; but only if the degree of protection for certain financial A D&O insurance program can be claimant submits to the company a written obligations of the company. As a result of customized to meet the particular demands undertaking to repay the amounts advanced this dual protection, directors and officers of a public company and its officers and if it is ultimately determined that he or she must be aware that, at certain times, their directors. Many companies, however, is not entitled to indemnification. Specific interests and those of the company may commonly purchase a D&O insurance attention also should be paid to other diverge, particularly if claims are made that policy in which a single limit of liability is conditions that may have to be met in order may approach or exceed the shared limits of shared equally among all three insuring to receive timely advancement. liability for all the insureds taken as a whole. agreements. The effect of this is that A note of caution: in light of a 2008 Directors and officers should understand a single policy limit protects both the Delaware court decision in Schoon the basic coverage and limits of their personal assets of directors and officers ν. Troy Corp (948 A 2d 1157 [Del Ch particular policies. and certain financial obligations of the 2008]), directors and officers relying on D&O policies are generally written on a company. Companies also frequently indemnification provisions in company claims-made basis. Under such policies, the purchase additional, dedicated limits of Side bylaws should understand whether: making of a claim against the insured during A coverage, with broad policy terms and • the bylaws include language stating the term of the policy—not the occurrence of conditions, and a difference in conditions that the rights of directors and officers injury or damage—is the operative threshold (DIC) feature (see discussion in (b) D&O to advancement of legal expenses vest event to which the policy responds. Some insurance and indemnification). Companies upon commencement of services; policies also require that the insured report purchase these additional limits for a • these rights are contract rights; and the claim to the insurer within the policy number of reasons, including considerations • the bylaws state that they cannot be period (or within a brief window of time related to premium pricing, philosophical amended retroactively to impair those thereafter). predispositions and the dedicated nature rights. Most D&O insurance policies have one (the company cannot access the limits) of or more of the following three basic insuring the broader protection afforded individual Although Delaware has since amended agreements (see chart in (a) Overview of officers and directors in such Side A its corporations code to reverse the D&O Contract Construction): policies.

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(a) D&O policy provisions the company itself). Severability imposes a officers, it could result in the depletion of Certain provisions in a D&O policy may limit on the extent to which the knowledge limits, leaving less in available limits to affect the extent to which the policy of one individual insured is imputed to the protect “white hat” directors and officers. responds favorably. Some of the key company and other insured individuals. As concepts are discussed in the following a result, nearly all D&O insurance policies Priority of payment provisions. Unlike section. contain provisions which state that no many other types of commercial insurance, insured person’s knowledge will be imputed traditional D&O policies protect two distinct Rescission. Material misrepresentations to any other insured and which limit the sets of beneficiaries: the company’s or nondisclosure of material information in identified individuals—usually the CEO and individual directors and officers and the the course of the application process for CFO—whose knowledge will be imputed to company. Because there is a limit of liability a D&O insurance policy may result in the the company (as an insured itself). for D&O insurance programs, situations may insurer seeking the drastic remedy of policy arise in which insurance proceeds may have rescission or avoidance. Through rescission, Conduct exclusion. Almost all D&O to be prioritized among the insured parties. an insurer voids coverage under the policy policies contain exclusions barring coverage Typically, a priority of payments provision for all insureds and returns the premium for certain “bad conduct” by directors or requires that the claims against the individual paid by the company. Rescission of an officers. Generally, they include: directors and officers be satisfied first, before insurance policy by an insurer may result • intentionally dishonest acts or claims against the company are satisfied. in severe consequences for the company omissions; However, sometimes this provision and its directors and officers. A successful • fraudulent acts or omissions; may have unintended consequences. For rescission results in all or a portion of the • criminal acts; example, a situation may arise in which a D&O insurance policy becoming null and • willful violations of any statute, rule or number of concurrent claims are made void and, ultimately, can result in a loss of law; against the company and its individual coverage for all named insureds on the • an insured’s obtaining an illegal profit; directors and officers. This could include policy, including innocent directors and and shareholder derivative suits (settlements officers. Many D&O policies today can be • an insured’s obtaining an illegal of which may not be indemnifiable by the negotiated to make some or all insuring remuneration. company) and securities class actions agreements nonrescindable. (settlements of which are indemnifiable). If As another—and perhaps better— From an insured’s perspective, each the securities class action suits are settled alternative, the company may seek a policy of these exclusions should be limited as before the settlement of the shareholder that is not rescindable for any reason. much as possible. For example, as noted derivative actions, insurers may delay Obtaining a fully nonrescindable policy previously, it is important to consider payment of any proceeds under the policy may involve trade-offs in other coverage or enhancements to a policy so that the for a securities claim until settlement of the additional premium. conduct of any one insured director or shareholder derivative action. A delay in Frequently, the company’s periodic officer will not be imputed to any other such a settlement payment may adversely securities filings and financial statements insured. This should limit the exclusion affect timing or funding of a proposed under the Exchange Act and registration of coverage to the individual directors settlement of such a claim. statements under the Securities Act are or officers who actually committed the expressly made part of the application excluded conduct, while maintaining Entity versus insured exclusion. for D&O insurance. Claims of inaccurate coverage for other insureds. Many D&O policies contain a so-called or incomplete disclosure in such filings It is also important to clarify the point entity versus insured exclusion, which bars incorporated into the application for at which coverage exclusions apply or coverage for a claim brought by an insured insurance may be the basis for claims are triggered. Some policies might state company against an insured director or made by insurers that the application was that the exclusions apply if the excluded officer or another insured corporate entity. materially false or misleading. As a result, conduct in fact occurred. This can be This exclusion has historically been broader accounting restatements—depending on troublesome because of the ambiguity than it is today, so many of the concerns their nature, scope and magnitude—may involved in interpreting what in fact actually about the overreaching nature of this provide insurers with an additional basis to means. Insureds should consider seeking exclusion have been eliminated. However, attempt to rescind a D&O insurance policy. a more clearly defined parameter for there remain certain exceptions to this determining when a conduct exclusion may exclusion that should be considered, most of Severability of the application. apply. Policies stating that the exclusions which relate to situations in which a company Rescission raises the concept of severability. apply only if the excluded conduct was finds itself in or bankruptcy. In this context, severability simply relates established in connection with a final non- to the question of whether the knowledge appealable adjudication in the underlying (b) ​D&O insurance and indemnification of one or a limited number of covered claim generally better protect directors Directors and officers no doubt find it officers or directors will be imputed to (and and officers. However, although pure final especially troubling when the company is potentially result in a loss of coverage for) adjudication language provides broad financially able to indemnify or advance all the insureds named in a policy (including protection for individual directors and defense costs to them but chooses not

88 NYSE IPO Guide Managing risk

Overview of D&O Contract Construction

Covered Claim Covered Claim Against Directors & Against Corporate Officers Entity

Indemnification?

No Yes

Insureds - Insured - Directors & Officers Corporate Balance Sheet Insured - (including full time and part (Directors & Officers including full Corporate Entity time employees) time and part time employees)

Personal Assets Corporate Assets Corporate Assets

D&O Insurance D&O Insurance D&O Insurance Insuring Agreement A: Insuring Agreement B: Insuring Agreement C: Executive Liability Corporate Reimbursement Corporate Entity Coverage NO RETENTION RETENTION APPLIES RETENTION APPLIES

“Personal Asset Protection” “Corporate Risk Transfer” “Corporate Risk Transfer”

to or simply ignores their requests. Many extent to which their D&O insurance policies the following section are some specific directors and officers assume that in such allow directors and officers to access the circumstances where an individual officer or a circumstance, the company’s D&O policy proceeds in the event the company director may expect such protection. insurance policy would respond. But that is able but unwilling to indemnify or advance might not be the case. In a traditional defense costs to them. In fact, most Derivative suit judgments or D&O policy, if the company is permitted to traditional primary D&O policies, similar to settlements. The ability of the company indemnify an officer or director but chooses Side A D&O policies, are now responding to to indemnify its officers and directors for not to, the insurer often will first seek the a loss on behalf of a director or officer within judgments or settlements resulting from application of a self-insured retention 60 days if the director or officer has not a shareholder derivative action may be (in other words, a deductible) that under received a response from his or her company significantly limited or prohibited by statute ordinary circumstances would not apply. regarding whether it will indemnify the in a company’s state of incorporation. For This is sometimes called a presumptive director or officer for the matter in question. example, Delaware generally does not allow indemnification requirement. Under this This has significantly reduced the punitive indemnification of settlements or judgments circumstance, the self-insured retention aspect of presumptive indemnification. in an action brought by or on behalf of the would have to be paid by an officer or director A properly constructed D&O policy company unless the court permits such prior to accessing any proceeds of a D&O generally is meant to provide a level of action. In such circumstances, Side A policy. In some cases, the self-insured protection for individual directors and coverage may apply as long as the conduct retention may be substantial. Directors officers in the event the company’s of individual directors and officers also and officers should seek clarification from indemnification or advancement obligation complies with the limitations and exclusions their insurance brokers and counsel on the inadequately protects them. Outlined in of the insurance policy.

NYSE IPO Guide 89 Managing risk

Public policy prohibition against a circumstance where the board or other is permitted to but fails to indemnify indemnification. Indemnification for claims authorized designee declines to indemnify such an individual; and related to registration of securities and an individual as described previously, Side • what—if any—language exists in the antifraud provisions of the federal securities A DIC insurance, or excess Side A only policy to waive an automatic stay as laws (and other federal statutes, such as coverage, could be called upon to provide regards the company’s policy. the Racketeer Influenced and Corrupt directors and officers coverage at the Organizations Act and antitrust laws) may primary level of the program (no retention). Choosing a D&O policy structure, be precluded by public policy. The SEC’s limits, retention and insurers. The view is that such indemnification is against Near insolvency. Should the company company should consider several questions public policy because it undermines the approach insolvency, it will approach the before selecting the limits and structure of securities laws’ deterrent effect. However, zone of insolvency, where officers and its D&O policy, including the following: the SEC does not regard the maintenance directors may be deemed to owe certain • How susceptible is the company to of D&O insurance as against public policy, fiduciary duties to creditors of the company. a class action lawsuit or government even where the company pays the premium. Although not yet insolvent, the company enforcement action? As a result, it may be possible for insurance might choose not to indemnify a particular • If the company suffers a class action to respond to protect individual directors director or officer for fear that such act lawsuit, what might it cost to defend and and officers in such circumstances where may be a breach of fiduciary duty owed settle? indemnification from the company is to creditors of the company or may be • What limits, structures and retentions do prohibited as a matter of public policy. the subject of an order by a bankruptcy the company’s peers purchase? trustee to return those proceeds. Insurance • How can the balance between Conduct not in good faith and may respond if limits of the policy are not coverage, limit, retention and price be reasonable belief. The company may otherwise eroded. optimized? indemnify a director or officer only if such • What is the overall financial stability of person acted in good faith and in a manner Actual insolvency or bankruptcy. The each insurer on the program? that he or she reasonably believed to be in, company either may be insolvent or, in • How can the program most cost- or not opposed to, the best interests of the the context of US bankruptcy laws, may effectively address exposure for foreign company. As a result, acts that do not satisfy be unable or unwilling to indemnify an directors and officers? the good faith and reasonable belief standard officer or director if the bankruptcy trustee • What is the claims-paying reputation of may not be indemnified by the company. In determines that such indemnification is each insurer on the program? such circumstances, claims made against an either unwarranted or improper. Moreover, individual director or officer may be insurable assuming that such indemnification of an Constructing a D&O liability program so long as the conduct of such individual also officer or director was warranted and proper, leading into an IPO is a dynamic process. complies with the limitations and exclusions the proceeds of the policy might be deemed The goal is to understand the choices of the insurance policy. an asset of the estate and subject to an and trade-offs and to achieve an optimal automatic stay. The obligation to indemnify balance that properly reflects the values Refusal by board to indemnify. If the may be deemed an unsecured obligation, of the company and its directors and board or other authorized designee either placing the affected officer’s or director’s officers. For example, many companies declines in writing to indemnify an individual interest behind the interests of secured purchase policies that protect both the or fails to make or initiate a determination creditors and on par with other unsecured company and the individual directors and to indemnify an individual, insurance may creditors awaiting payment or settlement. officers for nonindemnifiable claims. This respond to protect individual directors and If there is some risk that the company structure involves a shared limit of liability officers, but it may be subject to a retention may avail itself of the protection of US that protects the company and its directors or deductible depending on the structure of bankruptcy laws, it may be useful to and officers. If a very large claim is made the program. seek an explanation from the company’s against the company, it may exhaust the To avoid a circumstance where an insurance advisor and counsel as to how limits made available to individual directors individual insured might be personally the company’s D&O insurance policy may and officers. One potential solution is to responsible to pay a retention, many respond to a number of potential issues. purchase additional limits of coverage public companies today purchase either Key issues to understand would include dedicated solely to protect individual excess Side A coverage or a variation of identifying any issues related to: directors and officers. Alternatively, Side A insurance often referred to as Side • how limits in the policy are either dedicated coverage may also be purchased A DIC (the DIC refers to the difference in allocated or prioritized to coverage other solely for independent directors of the conditions provisions that are contained in than coverage of claims made against a board, excluding nonindependent board this type of insurance policy). Side A DIC director’s or officer’s personal assets; members and officers. insurance provides broader coverage and • whether the design of the company’s Selecting an appropriate level of is often purchased in addition to and in D&O insurance program is such that limits is now more science than art. Peer excess of the traditional D&O (Sides A, B directors or officers will not be subject to benchmarking data is only one element and C) insurance described previously. In a retention or deductible if the company to consider in choosing the right amount

90 NYSE IPO Guide Managing risk

of insurance and retention. Analysis of the passage of the JOBS Act in 2012, protection for their property, liability, family a particular company’s susceptibility to a draft registration statement might be and lifestyle. And because you and your securities class actions and projections of filed confidentially with the SEC. In such company will now be more prominent, it realistic settlement amounts can provide event, additional time and consideration is imperative to have total coordination greater confidence in limit decisions. should be given to obtaining nondisclosure between your business and estate plans. Turbulence affecting the financial agreements with insurers from which a condition of insurers several years ago has company wishes to solicit a quote. The (a) Protecting​ yourself and your assets raised concerns regarding insurer stability; submission, combined with calls and/or an in-depth comparative analysis of an face-to-face meetings with the underwriters, Personal liability. Multi-million dollar insurer’s creditworthiness and financial will allow the insurers to assess the liability lawsuits are more common in the strength is a precursor to an assessment company’s D&O risk profile. US than ever before, and affluent individuals of the company’s counterparty risk. Just as and families may find themselves targets of important is the ongoing monitoring of the Meetings with underwriters. It is generally expensive, high-stakes litigation. financial condition of the company’s partner expected that senior representatives of the There are many reasons someone might insurers. company will meet with the underwriters, legitimately have a large claim against you One of the more complex and either in person or by teleconference, before for personal damages. These can include evolving areas of D&O coverage involves a premium quotation will be given for a D&O a fatality or catastrophic injury in an auto subsidiaries located outside the United policy. It is an opportunity for the insurers to accident, an accidental injury that occurs States. It is important to understand the tax, better understand the company’s financial on your property, or accidental damage that regulatory and coverage issues associated and operating conditions and its prospects you cause to someone else’s property. Even with D&O exposures outside the United and to speak directly with management about reputational damage that you may cause by States to ascertain whether exposure exists. corporate governance issues and concerns. an offhand public remark or hasty online post There are a number of solutions to address These meetings typically take place in the can create liability on your part. A personal such exposure, depending on location and days leading up to the roadshow detailed in excess liability insurance policy is designed magnitude, some of which may impact the Chapter 3. to protect against multimillion-dollar company’s choice of primary insurer. settlements resulting from personal injury, Analysis. Once quotes have been bodily injury, or property damage lawsuits. (c) Timing the D&O liability insurance submitted by the insurers, insurance Consider this example: The teenage purchase for an IPO advisors—sometimes working in concert son of a wealthy business owner is involved A D&O policy for a newly public company with outside counsel—provide the in an auto collision with a cyclist. Although generally becomes effective on the date the company’s management and/or board with there is no indication that the driver acted company’s registration statement covering a detailed comparative analysis to allow the irresponsibly, the court awards a $20 million the traded securities becomes effective. company to ultimately make a number of judgment to the cyclist. The young driver The process and timeline leading up to decisions on the nature of its D&O program, carries only $5 million in excess liability the commencement of the policy period including the appropriate structure, limits, insurance, meaning his family’s financial differ depending on the situation and can retentions, coverage and insurers. situation may be severely harmed for years be tailored to meet the specific needs of to come. Consulting with a personal risk the company. The following is a suggested Binding of insurance. Once decisions management expert can help you set timeline for meeting key milestones in the have been made by the company, insurance appropriate liability limits for your lifestyle. process of obtaining D&O coverage. advisors will execute those decisions to build the D&O program and bind the Personal property. As you acquire D&O strategy meeting. It is insurers in time for the effectiveness of the additional wealth, it’s likely you will also recommended that the company meet with registration statement. acquire valuable property and assets. Key its insurance brokers and outside counsel, areas of risk to consider include the following: if needed, sometime within 90 days before 9.5 Personal risk management • Homes—High-value homes are often the filing of Form S-1. The purpose of this Marsh built with unique materials and features. meeting is to strategize on D&O program Not all insurance policies provide design options, selection of carriers, An IPO will certainly have an impact on for appropriate replacement costs coverage issues, limit analysis, timeline and your professional life, but it will also have in their loss settlement provisions. cost. Being beneficiaries of D&O insurance, a considerable effect on your personal Homeowners policies from premier the entire board of directors or certain key lifestyle. The complexity of a high-net-worth insurance companies typically offer members may need to be engaged. lifestyle requires a new way of thinking guaranteed replacement cost coverage, about risk and customized solutions to help which covers replacement with Filing of Form S-1. Once the company’s address it. Many ultrawealthy individuals and materials of similar kind and quality, registration statement is filed, a submission families find they benefit by working with as well as replacement coverage for can be made to the underwriters, which a personal risk manager that can provide other structures, such as cabanas or would include the draft Form S-1. Given comprehensive resources to properly align detached garages.

NYSE IPO Guide 91 Managing risk

Timeline

–90–0 days 0 days 30 days 35–50 days 45–60 days 60–75 days 90–180 days

Organizational Initial S1 filed Comments from Amended S1 Roadshow IPO Public meeting confidentially the SEC filing of filed publicly company an amended S1 confidentially

Quote D&O program Bind public company D&O Present D&O quotes D&O strategy Information to Insurer meeting program board presentation meeting insurers execute NDAs decide on program Cancel or Run- with insurers limits and structure off private company D&O program

• Automobiles—Individuals who have working with a single broker who specializes from taxes and creditors. Many wealthy accumulated wealth often invest in in addressing the risks associated with individuals choose to fund trusts with antique and exotic car collections. successful individuals and families, you can assets and life insurance. The proceeds For adequate protection of extensive, benefit from innovative solutions and access of a life insurance policy that is properly highly valued car collections or a new to broad, customized coverage. owned by an irrevocable trust are paid into luxury car, premier insurers offer policy the trust, free of both income and estate enhancements that may ensure original Protecting yourself and your business. tax and unavailable to creditors. Careful equipment parts are used in repairs or There’s no doubt that you are now looking planning in this manner with your tax and/ may include an agreed value provision to the future with the anticipation that your or legal advisors can allow wealth and to get you back on the road sooner after business and family will long benefit from all assets you have created to pass to your a total loss. of your hard work. Now is the time, however, to family intact. • Valuables—Valuable possessions, consider the effects that events beyond your such as jewelry, fine art, silver, antiques control—such as death and disability—may Key person. You may be the “brains and furs, are afforded only limited have on your business. It is critical to evaluate behind the business,” but you also may financial protection under homeowners the risks inherent in your business and in your have irreplaceable employees. Would your insurance, even when covered through a estate plan. Coordination of the two will help business suffer if something unexpected premier insurance provider. Specialized protect your business and ensure continuity happened to one of them? Key person valuables coverage purchased through of the legacy you have created. insurance helps you cover additional costs an insurance broker can help properly when such a situation arises. You may protect these assets and investments. Wealth transfer. It is important to evaluate even be able to combine protection for an IPO’s impact on your estate plan, your business with an agreement designed Benefits of working with a single including the risks in transferring wealth to to reward a vital employee for continued insurance broker. When individuals succeeding generations. Those potential employment. accumulate new property—such as new risks can include: These are just some of the concerns homes in different states across the • significant taxes upon your death; or that may arise as a result of your new wealth. US—homeowners insurance is typically • unwise dissipation by heirs, their Again, you may benefit greatly by working purchased, as needed, through a local divorcing spouses, and creditors. with a personal risk manager to design the broker. However, working with various right protection for your family and your agents or brokers in different states can Properly drafted and executed wills business. lead to gaps or overlaps in coverage. By and trusts can protect your assets

92 NYSE IPO Guide 10 Foreign private issuers

www.nyse.com/ipo Foreign private issuers

10.1 American depositary receipts shareholder base, reducing the issuer’s can increase its visibility not just in the J.P. Morgan (Depositary Receipts Group) dependence on investors in its home US investment community, but in the market for its capital needs. Moreover, the commercial and consumer markets that The of shares that foreign incremental demand from investors in the make up the world’s largest economy. Many issuers sell to US investors when going US market can enhance the valuation— US citizens own equities and tend to follow public often takes the form of American lowering a company’s —over publicly traded companies. Consequently, depositary shares, commonly known as the long term. a US listing can raise a foreign issuer’s ADRs. These instruments subsequently corporate profile as well as capital. trade just like ordinary shares on the US acquisition currency. Because the The effectiveness of ADRs is why 458 NYSE, another US stock exchange or in ADRs used to raise capital in the United foreign issuers have used this instrument the over-the-counter market. States are dollar denominated, they can to raise $8.4 billion in capital in the United eventually be used to make stock-based States during the past decade alone. As of (a) Advantages for issuers acquisitions of US companies. Generally, US December 31, 2019, 231 foreign issuers had For foreign issuers, having publicly shareholders are more likely to accept ADRs ADRs listed on the NYSE.1 traded securities in the United States has than foreign shares. numerous advantages beyond an initial (b) Advantages for investors capital raise. Stock-based compensation for US The effectiveness of ADRs for raising employees. Because ADRs are dollar capital in the United States is due to their Ready access to world’s largest equity denominated, they allow foreign issuers appeal to investors—these instruments market. A US listing affords access to the to establish stock purchase and option are a convenient way to directly invest in world’s largest equity market, facilitating plans for US-based employees. Absent international companies while avoiding future capital raising. these plans, foreign issuers can be at a many of the risks typically associated with significant disadvantage when competing securities held in other countries. For US Diversification of shareholder base for talent in the US labor market. ADRs investors, ADRs: and valuation support. By going public in also allow for the creation of direct • are easier to purchase and hold than the United States and maintaining a listing purchase and dividend reinvestment a foreign issuer’s underlying ordinary there, US investors can more easily invest plans, which can enhance the investment shares; in a foreign issuer. For some foreign issuers, appeal of a foreign issuer. a US listing results in higher corporate governance standards, further increasing Enhanced corporate visibility in the 1 Source: J.P. Morgan, Bloomberg, other its appeal. Attracting US investors helps United States. Finally, by going public depositary banks, stock exchanges, December broaden and diversify a foreign issuer’s in the United States, a foreign issuer 2019.

Capital raised using ADRs, by region – 2010 to 2020 ($MM) Capital raised using ADRs, by sector – 2010 to 2020

$28,227

$28,227

$20,725

30.5% – LATAM 25.3% – Technology 19.7% – Consumer, non-cyclical 19.3% – EMEA 4.8% – Industrial 6.6% – Consumer, cyclical 50.2% – APAC 6.5% – Energy 24.6% – Communications 8.8% – Financial 3.7% – Basic materials Source: J.P. Morgan, Bloomberg, other depository banks, stock exchanges

94 NYSE IPO Guide Foreign private issuers

• trade easily and conveniently in US foreign issuer—either those currently trading ADRs. However, the share prices of sector dollars and settle through established in its local market or newly in peers should be taken into consideration clearinghouses; connection with an offering of securities— to establish a ratio that will result in an initial • pay dividends in US dollars; are deposited with a depositary bank’s price per ADR that investors will perceive to • eliminate local custody arrangements; and custodian in the issuer’s home market. The be appropriate. • provide notifications of corporate actions depository then issues ADRs representing The ratio initially selected may affect in English. those shares to investors. At any time the transaction costs that a foreign issuer’s thereafter, an investor can sell these ADRs investors will pay. For instance, since fees (c) Establishing an ADR program in the secondary market (e.g., the NYSE) for issuance (and cancellation) are assessed or have the sponsoring depositary bank in cents per ADR, an ADR that is priced “too ADR structures. A Level III ADR program cancel the ADRs and receive the underlying low” can add incremental transaction costs listed on the NYSE (or on another US stock ordinary shares that can be sold in the for investors. exchange) allows a foreign issuer to realize foreign issuer’s local market. all of the aforementioned benefits of ADRs, Parties that work with the foreign issuer. including raising capital from individual Setting up an ADR program. Once a Establishing an ADR program requires investors. Alternatively, capital can be raised foreign issuer has chosen an ADR structure, close coordination between the foreign from qualified institutional investors only via it will work closely with a depository bank to issuer, its chosen depositary bank and each a private placement, known as a Rule 144A establish and maintain the ADR program. firm’s legal counsel. When raising capital offering. Time frames and requirements for launching in the United States, the issuer also relies A Level II ADR program allows a foreign a program will vary. However, certain on other advisors, such as accountants, issuer to list on a US stock exchange, but characteristics are common to any ADR investment bankers and investor relations not raise capital. structure. firms. The chart “Establishing an ADR Under a Level I program, the ADRs are program: roles and responsibilities of foreign not listed and are instead traded in the over- Setting the ADR-to-share ratio. Each issuer, depositary bank and other parties” the-counter market. ADR issued will represent a certain number summarizes the roles and responsibilities of of underlying ordinary shares held in custody each party involved. On page 101 is a sample How ADRs are created. ADRs are in the foreign issuer’s home market. There timetable for the establishment of a Level III normally created when the shares of a is no official rule for setting the ratio for ADR program.

US investment in foreign equities (ADR and local shares), 1992–2019 ($bn) % of all holdings Market value, foreign holdings ($BN) 10,000 25%

Key drivers: 9,526 9,500 8,980

US Investors seeking growth/diversification 8,930 8,743 9,000 8,720 Foreign issuers seeking capital/valuations 8,500 8,000 Changing geopolitical/regulatory landscape 7,898 20% 7,500 6,997 6,803 6,732 7,000 6,720 6,500 6,000 15% 5,500 4,920 5,000 4,786 4,500 4,403 4,097 3,941 4,000 3,86 3 10%

3,500 3,31 8

3,000 2,67 8 2,56 0 2,500 2,07 9 2,00 4 2,000 1,85 3 1,61 3 5% 1,47 5 1,37 5

1,500 1,20 8 1,00 3 77 7

1,000 628 544

500 314 0 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q19 2Q19 3Q19 4Q19

Source: , March 2020

NYSE IPO Guide 95 Foreign private issuers

Establishing an ADR program: roles and responsibilities of foreign issuer, depositary bank and other parties

Custodian Depositary Receive local Provide advice/perspective on type of program, exchange or shares in market on which to list or quote. issuer’s home Advise on ratio of depositary shares to ordinary shares. country. Appoint custodian. Confirm File Form F-6 if Level I, II or III program. deposit of Review draft registration statement or offering memorandum, underlying depending on type of program to be established. shares. Coordinate with all partners to complete program implementation Hold shares steps on schedule. in custody for Coordinate with legal counsel on deposit agreement and the account securities law matters. of depositary Prepare and issue certificates and/or direct registration statements. in the home Announce DR program to market (brokers, traders, media, retail/ market. institutional investors via news releases and internet.

Issuer Legal counsel (depositary’s Provide depositary and custodian with and issuer’s) notices of dividends, rights offerings and Prepare draft deposit agreement other corporate actions, including notices of (depositary bank’s counsel) and file annual and special shareholder meetings. required registration statements with Ongoing compliance with stock exchange the SEC. and SEC regulations, including disclosure Manage compliance with US and reporting (coordinating with legal securities laws, rules and regulations counsel/accountants). and perfect any securities law Execute US-focused, investor relations exemptions (if Rule 144A/Reg S plan. program) (issuer counsel).

Accountants (Level ll/lll ADRs only) Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP or accepted IFRS standard. Review registration statement or offering circular and provide requisite opinions.

Investor relations advisor/firm Develop long-term plan to raise awareness of issuer’s program in the United States. Develop communications plan and information materials for launch activities (roadshow and presentations to investors, launch day promotion, meetings with financial media). Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image in the United States.

Investment banks/Underwriters (Level ll/lll/Rule 144A/Regulation S ADRs only) Advise on type of program to launch and exchange or market on which to list or quote. Advise on ratio of depositary shares to ordinary shares. Cover issuer through research reports/promote DRs to investors. Advise on roadshows, investor meetings, investors to target. Advise on issues. Where applicable, advise on potential merger/acquisition candidates, and other matters such as rights offerings, stock distributions, spin-offs, proxy contests, etc. If concurrent public offering: Advise on size, pricing and marketing of offering. Act as placement agent or underwriter in offering. Conduct roadshows with management/introduce issuer to institutional and other investors. Line up selected dealers and co-underwriters for offering.

96 NYSE IPO Guide Foreign private issuers

Level III ADR program—Sample timetable

Parties involved Weeks Action I D L A IB IR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Ongoing Establish and organize transaction team. • • • • • • Begin US roadshow and ongoing investor • • • • relations program: create communications materials, target institutional investors, organize direct purchase programs for retail investors and establish employee ownership plans. Select ratio. Underwriter conducts preliminary due • diligence. Prepare and submit to SEC offering • • • • • circular/prospectus and Form F-1. Commit to file Form 20-F within 12 months (if not already being filed in conjunction with an existing Level II ADR). Resolve any and all matters involving registration and disclosure. Negotiate deposit agreement. • • • Submit exchange listing or exchange • • • quotation application and agreement. Receive approval. Prepare Form F-6 and submit to SEC with • • • deposit agreement. Receive SEC comments on Form F-1 and • • • other forms. Amend if necessary. Complete requirements for trading and • • • • settlement: obtain DTC eligibility, CUSIP number and ticker symbol; and prepare ADR certificates. Receive SEC declarations of effectiveness • • • on Forms F-1 and F-6. Execute DA. Conduct roadshow meetings with US • • • investors (group and one-on-one). Print final prospectus, price offering and • • sell ADRs. ADRs are listed and begin trading. Closing. Underwriter delivers cash • • • proceeds to issuer, depositary’s custodian receives underlying shares and depositary delivers ADRs to syndicate for forward delivery to investors. Distribute press release and broker • • • • • announcements to media and investment community. Place tombstone advertisement. • • • • • Time frames provided are indicative. Regulator’s involvement and issuers’ program specifics may vary and can materially affect timing. The SEC generally provides comments on Form F-1 registration statements within 30 days of the date filed. Key to parties involved: I = Issuer; D = Depositary Bank; L = Legal Counsel (for depositary and/or issuer); A = Accountant; IB = Investment Bank; IR = Investor Relations firm.

NYSE IPO Guide 97 Foreign private issuers

The deposit agreement. As a first step 10.2 The IPO process for foreign country or otherwise publicly disclosed by toward establishing an ADR program, the private issuers the company. Additionally (as discussed foreign issuer and its chosen depositary Simpson Thacher & Bartlett more extensively in Chapter 10.3), FPIs can bank negotiate a deposit agreement. This take advantage of certain financial reporting contract details the legal relationship and (a) Foreign private issuer accommodations and are allowed prepare obligations of the depositary bank and determination their financial statements in accordance the issuer, describes the services the Foreign companies that pursue an IPO in with (1) US generally accepted accounting depositary and issuer will provide and the United States may qualify as foreign principles (GAAP), (2) International Financial sets forth the rights of ADR holders and private issuers (FPIs). An FPI is defined Reporting Standards (IFRS) as issued by the the fees they must pay the depositary as a foreign issuer other than a foreign International Accounting Standards Board bank. Some terms are standard, but government, except if: (IASB) or (3) local GAAP with a reconciliation deposit agreement provisions may vary • more than 50% of its outstanding voting to US GAAP. from program to program depending securities are directly or indirectly owned on the legal requirements of the foreign of record by US residents; and (c) Ongoing reporting requirements issuer’s home market, the objectives of • any of the following: FPIs are subject to reduced, ongoing the depositary bank and individual issuer • the majority of executive officers reporting requirements compared to specifications. or directors are US citizens or domestic issuers. The deposit agreement includes residents; provisions relating to the following: • more than 50% of the assets of Annual reports. An FPI’s annual report • deposit of the issuer’s shares; the issuer are located in the United is on Form 20-F, which includes CEO and • execution and delivery of the ADRs; States; or CFO certifications (as described in Chapter • issuance of additional shares by the • the business of the issuer is 7.1), and is due within four months after the issuer in compliance with applicable administered principally in the end of the fiscal year. The annual report securities laws; United States. of FPIs listed on the NYSE must include a • transfer and surrender of the ADRs; In the case of pre-IPO companies, the summary of any significant ways in which • setting of record dates by the FPI determination is made within 30 days the company’s corporate governance depositary; prior to the filing of the initial registration practices differ from those followed by • voting of the foreign issuer’s underlying statement with the Securities and US domestic companies under the listing shares (i.e., the shares evidenced by the Exchange Commission (SEC). Thereafter, standards of that exchange. ADRs); the FPI determination is made annually • obligations and rights of the depositary as of the last business day of the most Interim reports. FPIs are not required bank and the holders of the ADRs; recently completed second fiscal quarter. to report quarterly results on Form 10-Q • distribution by the depositary In the event a company fails to qualify as an unless otherwise required in their home of cash dividends, stock FPI as of the last business day of its most country. NYSE-listed FPIs are required to dividends, rights to acquire additional recently completed second fiscal quarter, submit a Form 6-K to the SEC containing shares of the issuer and other it will no longer be eligible to use the semiannual unaudited financial information distributions made by the issuer; SEC forms and rules designated for FPIs no later than six months following the end • circumstances in which reports and beginning on the first day of the next fiscal of the company’s second fiscal quarter. proxies are to be made available to ADR year. FPIs may also be large accelerated FPIs are not subject to Form 8-K’s current holders; filers, accelerated filers, a controlled reporting requirements. However, FPIs are • tax obligations of depositary receipt company or an emerging growth company required to promptly report on Form 6-K holders; (EGC) (see Chapters 4.2 or 7.1 for further whatever information such company: • fees and expenses to be incurred by the discussion). • makes or is required to make public issuer, the depositary and ADR holders; pursuant to the laws of its home country; • prerelease of ADRs; and (b) Registration statement • files or is required to file with a stock • protections for the depositary and the While the registration statement exchange on which its securities are issuer (i.e., limitations on liabilities). requirements for FPIs and domestic traded and that was made public by that issuers are similar, an FPI registers its IPO exchange; or SEC registration. As a US-listed company, on form F-1, and Form F-6 for American • distributes or is required to distribute to a foreign issuer must comply with the depositary receipts (ADRs). Form F-1 requires its security holders. registration provisions and continued substantially similar disclosure as Form S-1, reporting requirements of the Securities except that Form S-1 has more extensive Proxy rules. FPIs are not subject to the Exchange Act, as amended, as well as executive compensation disclosure SEC’s proxy rules and instead comply with certain registration provisions of this act. For requirements. FPIs can provide aggregate local rules. To the extent an FPI provides a more information about the SEC registration data for executive compensation; disclosure meeting circular, proxy statement or similar and reporting requirements, please refer to is only required on an individual basis if it document to shareholders in accordance Chapter 6. is also required in the company’s home with home market requirements or

98 NYSE IPO Guide Foreign private issuers

voluntarily, such information must also be (e) Accounting and disclosure control issuer’s predecessor entities (if any) disclosed on Form 6-K. requirements may need to be provided; • if a jurisdiction outside the US does Internal control over Fair Disclosure (FD). FPIs are not require a balance sheet for the reporting. Similar to domestic companies, exempt from Regulation FD, although it is earliest year of the three-year period, FPIs are required to maintain a system recommended that they comply and adopt that balance sheet may be omitted; of internal control over financial reporting an internal policy to facilitate compliance. and (ICFR). Management is required to assess • audited financial statements the effectiveness of ICFR as of the end Related party transactions. While FPIs are required only for the most of each fiscal year and the company is must disclose related party transactions, recent two years if the financial required to disclose whether or not ICFR there is no required review and approval statements presented are prepared is effective. Newly public companies are process, nor are they required to disclose in accordance with US generally required to make this disclosure for the first their policies for approval of such accepted accounting principles time in the second 20-F filed after their IPO. transactions. (GAAP). • FPIs may use GAAP other than US (d) Corporate governance Disclosure controls and procedures. FPIs are required to maintain disclosure GAAP, but they may need to reconcile NYSE requirements. FPIs are generally controls and procedures similar to domestic to US GAAP. This reconciliation is allowed to follow home country practices in issuers and management must evaluate the not required if the company uses lieu of NYSE requirements, subject to a few effectiveness of the company’s disclosure International Financial Reporting exceptions: controls and procedures and disclose in Standards (IFRS) as issued by the • FPIs must meet SEC requirements for the issuer’s annual report on Form 20-F International Accounting Standards audit committees; its conclusions about the effectiveness Board (IASB). • FPIs must notify the exchange of of disclosure controls and procedures, • Regardless of the basis of presentation, noncompliance with exchange as of the end of the fiscal year. Unlike the audited financial statements must corporate governance rules; and domestic companies that must disclose be accompanied by an audit report • FPIs must provide an annual written their management’s assessment of the issued by independent accountants affirmation to the NYSE. effectiveness of the company’s disclosure that are registered with the Public controls every quarter, FPIs are only required Company Accounting Oversight Board Audit committees. Like domestic to make such disclosures annually. (PCAOB) and audited in accordance with issuers, FPIs are required to have an PCAOB standards. Financial statements audit committee whose members are (f) Stockholder filing requirements audited under the International Auditing independent within the meaning of SEC Stockholders that beneficially own more Standards (IAS) or other local country Rule 10A-3. FPIs can take advantage of the than 5% of an FPI’s listed voting security are generally accepted auditing standards IPO transition period, which provides that required to file reports under Sections 13(d) (GAAS) would not be considered only one member must be independent at and 13(g) of the Exchange Act. See Section “audited” financial statements for SEC the time of the initial listing, a majority must 8.3 for further information on these reporting purposes. The accountants must be independent within 90 days and the requirements. Stockholders of FPIs, meet SEC and PCAOB standards for committee must be fully independent within however, are not subject to Section 16 of the independence. The SEC staff will not one year of listing. In cases where SEC Exchange Act, unlike US domestic issuers. object if the audit report states that the audit committee requirements conflict with audit was also conducted in accordance home country legal requirements, corporate 10.3 Financial information with home-country GAAS. governance standards and the methods KPMG LLP • The latest audited annual financial for providing auditor oversight, several statements included in the registration limited exceptions may apply. These The financial statement requirements for statement must be as of a date not include exceptions relating to employee an initial registration statement of a foreign older than 12 months prior to the date representation, two-tier board systems, private issuer (FPI) is found in Items 3, 8, the registration statement is filed. The controlling shareholder representation, 17 and 18 of Form 20-F and in Regulation SEC will waive this requirement in cases foreign government representation/foreign S-X. The financial statement requirements where the company can represent governments and boards of auditors or differ in a number of significant ways from adequately that it is not required to similar bodies. those of domestic US issuers. Some of the comply with this requirement in any key differences in the requirements are as other jurisdiction outside the US, and Other committees. Unlike domestic follows: that complying with the requirement issuers, FPIs are not required to have an • Audited financial statements generally is impracticable or involves undue independent compensation committee or must cover each of the latest three fiscal hardship. Regardless, the latest audited nominating committee. FPIs also do not years, with certain exceptions: annual financial statements included in have to comply with NYSE requirements • if the issuer has been in existence the filing cannot be more than 15 months to have a majority independent board of less than the required three years, old as of the date the registration directors. financial information covering the statement becomes effective.

NYSE IPO Guide 99 Foreign private issuers

• If a registration statement becomes competitive and operates very differently they are less visible and less known to US effective more than nine months after than markets in other parts of the world. In investors. Additionally, the corporate access the end of the last audited fiscal year, addition to overcoming any cultural hurdles, challenges and related global ramifications the company must provide unaudited there are a few imperatives for successfully spurred by the implementation of MiFID II interim financial statements in becoming and remaining a US-listed regulations make thoughtful sell-side and accordance with, or reconciled to, US company. buy-side targeting strategies even more GAAP (this reconciliation is not required vital to the ultimate success of a global if the company uses IFRS as issued by (a) Elevating the foreign company’s IR program. Based on FTI Consulting’s the IASB) covering at least the first six profile in the US experience and research, US investors months of the year. While profile raising ahead of an IPO can be expect to meet with management teams • FPIs may report in any currency. beneficial to any company, it is particularly between two to four times on average • Financial statements of an acquired imperative to foreign companies that may before making an investment, indicating that foreign business need not be be relatively unknown outside of their home successful programs require a robust and reconciled from local GAAP to US country or region. This, however, comes consistent approach to investor marketing. GAAP1 when the acquired business with its fair share of challenges given the To expand and diversify their is less than 30% for any of the Rule limitations of executive travel schedules, shareholder base geographically, foreign S-X 1-02(w) significance tests. This language differences and cultural barriers, companies should maintain a prioritized reconciliation is not required if the among others. At the same time, the target list of active, high-quality investors. acquired business uses IFRS as success of profile-raising campaigns Marketing to target investors in regions issued by the IASB. is often determined based on the level, in which the company does not have • Financial statements of a significant duration, consistency and robustness of sell-side coverage will also require more equity method investment meeting the outreach activities as well as the degree to time and effort, and therefore should be significance threshold of Rule 3-09 of which these activities are coordinated and contemplated in the overall marketing Regulation S-X need not be reconciled complementary to the company’s future plan. To maximize the return on investment to US GAAP (or, if applicable, IFRS listing goals. These campaigns should (ROI) of time spent marketing overseas in a as issued by the IASB), unless either leverage US executives, where available, non-COVID-19 environment, the target list of the two tests is greater than 30% to serve as external spokespeople and should be segmented by region with a focus as calculated on a US GAAP (or, if company advocates in the US market. In on key investors that have been deemed applicable, IFRS as issued by the IASB) addition, it is imperative to leverage the a priority. The shift towards virtual investor basis. A description of the differences executive team’s time spent in the US, events presents a number of advantages in accounting methods is required, including setting up desk-side briefings including the ability to target a large number however, regardless of the significance with US reporters from top-tier and target of high quality investors regardless of levels. media outlets. It is also advisable to develop geography. Regardless of the format of a thought leadership agenda in which the meeting, investor-related content and centrally created content and messaging materials should be aligned with the types 10.4 IR and communications can be used to engage US stakeholders of information generally required by US FTI Consulting and influencers across various channels. investors to make an informed decision Lastly, foreign companies will need to on investing in foreign companies. There From an IR standpoint, going public in the ensure they deliver a consistent narrative are also some nuances that should be US—through either a cross-border or dual across all communication channels incorporated to reflect the preferences and listing—can present several benefits for and regions to help protect and drive behaviors of investors in the region. foreign companies, including increased their in the US and around the visibility and prestige, as well as access world. (c) Adjusting to high environmenal, to the largest pool of capital in the social and governance (ESG) demands world. However, the US market is highly (b) Building an effective global IR While the pre- and post-IPO environmental, program following the US listing social and governance (ESG) Cross-border listings, including dual listings, communications strategy for a foreign 1 In May 2020, the SEC adopted a variety of require greater commitment from the company going public in the US should be amendments to its rules for separate financial management team. This is particularly true aligned with the strategy noted previously, statements of acquired businesses, one of which in investor marketing, where companies there are special considerations these allows the financial statements of an acquired must compete for capital across borders companies should assess to ensure they foreign business prepared in accordance to local to attract attention, and ultimately secure are communicating effectively with the US generally accepted accounting principles (GAAP) ownership from US-based and international investment community. to be reconciled to either US GAAP or International Financial Reporting Standards (IFRS) as issued investors. This is particularly challenging From a governance standpoint, it by the International Accounting Standards Board for small- and mid-cap companies, which is imperative that foreign companies (IASB). The amendments take effect January 1, often have less resources to commit to IR, proactively address any potential areas of 2021, but early adoption is permitted. yet would benefit from this the most given concern to mitigate the risk of shareholder

100 NYSE IPO Guide Foreign private issuers

activism. US investors tend to have higher sustainability-related disclosures into policies and strategy around a variety thresholds when evaluating corporate financial reporting. While the focus on of issues, such as employee safety, governance risks of foreign companies and individual components of ESG-programs environmental impact, human rights issues, may place particular emphasis on key, hot- often varies by region, foreign companies— and anti- button issues, such as minority interests, particularly those operating in countries corruption efforts. pay-for-performance plans, dual- or multi- honoring the Paris Agreement and Specifically, these companies should class share structures, existing geopolitical United Nations Framework Convention proactively provide US investors with a uncertainty, extensive insider or family ties, on Climate Change—may determine their breakdown of ethics policies and historical board structure and the separation of the existing disclosures related to climate and data to alleviate potential concerns and Chairman and CEO roles. From a social environmental concerns are sufficient for enhance regulatory compliance. and environmental standpoint, foreign the US investment community. However, Finally, foreign companies with existing companies need to prepare themselves for in order to be viewed as more in line with ESG programs should engage with difficult proposals from environmental and US-based peers, foreign companies US-centric ESG rating agencies to ensure social activists, which have accounted for a may determine further refinement to their efforts are being properly recognized. significant portion of shareholder proposals their social and governance strategies, Proactive rating-agency engagement will in the US over the past few years. communications and disclosures would be help ensure key disclosures are presented As compared to the US, other parts required. in the correct format and through the proper of the world, including the European For companies operating in emerging channels. In turn, this will help ensure the Union, have established more concrete markets, investors will desire a higher level information is being interpreted accurately guidance on incorporating ESG- and of transparency regarding the company’s by the rating analysts.

NYSE IPO Guide 101

Appendices

www.nyse.com/ipo Appendices

Appendix I: NYSE domestic original listing standards, domestic operating companies, REITs and funds

US domestic companies applying to list on the NYSE must meet the financial requirements of either the Earnings Test or the Global Market Capitalization Test as detailed in the table below. Real Estate Investment Trusts (REITs) with less than three years of operating history and Business Development Companies (BDCs) can qualify if they meet the financial requirements of the applicable REIT or BDC tests detailed below. Non–US companies that are foreign private issuers (FPIs) may meet the financial requirements applicable to US domestic companies or those applicable to FPIs (see Appendix II). For a complete discussion of original listing financial requirements, please see Section 102 of the NYSE Listed Company Manual.

Earnings test Global market REIT test BDC test capitalization test Listed company manual 102.01C(I) 102.01C(II) 102.05 102.04B section Adjusted pre-tax income A. At least $10 million in the aggregate for the last three fiscal years with at least $2 million in each of the two most recent fiscal years. Positive amounts in all three fiscal years,or

Adjusted pre-tax income B. At least $12 million in the aggregate for the last three fiscal years with at least $5 million in the most recent fiscal year and $2 million in the next most recent fiscal year. EGCs only: At least $10 million in the aggregate for the last two fiscal years, with at least $2 million in each year.

Global market $200 million $75 million capitalization Shareholders’ equity (pro $60 million (<3 year forma for offering) operating history only)

EGC = emerging growth company. (Continued)

104 NYSE IPO Guide Appendices

Appendix I: continued

US domestic companies applying to list on the NYSE are required to meet certain distribution standards in order to ensure a liquid trading market for their securities. If a company is applying to list in connection with an IPO, spin-off or carve-out transaction, it must meet the applicable distribution metrics set forth in the table below. A company applying to transfer its listing to the NYSE must meet one of the three distribution tests applicable to transfers. For a complete discussion of original listing liquidity requirements, please see Section 102.01 of the NYSE Listed Company Manual.

IPO, spin-off, Direct listing Transfer (must meet the requirements of one of the three carve-out standards below) Listed company 102.01A-B 102.01A-B 102.01A-B 102.01A-B 102.01A-B manual section Number of 400 round lot 400 round lot 400 round lot 2,200 total 500 total shareholders Publicly held shares 1.1 million 1.1 million 1.1 million 1.1 million 1.1 million Market value of $40 million $100 million or $250 $100 million $100 million $100 million publicly held shares million (see 102.01B) Closed-end funds Closed-end funds Closed-end funds Closed-end only: $20 million only: $20 million only: $20 million funds only: $20 million BDCs only: BDCs only: BDCs only: $60 million $60 million $60 million BDCs only: $60 million

Share price $4.00 $4.00 $4.00 $4.00 $4.00 Average monthly N/A N/A N/A 100,000 1 million share trading volume

NYSE IPO Guide 105 Appendices

Appendix II: NYSE original listing standards, FPIs

Foreign private issuers (FPIs) may qualify for listing on the NYSE by meeting one of the financial requirements set forth below provided there is a broad, liquid market for the company’s shares in its country of origin, or by meeting one of the financial requirements applicable to US domestic companies (See Appendix I).

Earnings test Valuation/revenue with cash Pure valuation/ Affiliated company flow test revenue test test Listed company 103.01B(I) 103.01B(II)(a) 103.01B(II)(b) 103.01B(III) manual section Adjusted pre-tax At least $100 million in the income aggregate for the last three fiscal years with at least $25 million in each of the two most recent fiscal years. EGCs only: At least $100 million in the aggregate for the last two fiscal years, with at least $25 million in each year.

Adjusted cash At least $100 million in the flows aggregate for the last three fiscal years with at least $25 million in each of the two most recent fiscal years. EGCs only: At least $100 million in the aggregate for the last two fiscal years, with at least $25 million in each year.

Global market $500 million $750 million $500 million capitalization Revenues $100 million in most recent $75 million in most 12-month period recent fiscal year

Operating history 12 months

EGC = emerging growth company. (Continued)

106 NYSE IPO Guide Appendices

Appendix II: continued

Non–US companies that are FPIs and list under the standards set forth in this appendix must meet the liquidity requirements set forth in the table below. If an FPI elects to qualify to list under the US Domestic Company Original Listing Financial Requirements, it must then also meet the Liquidity Requirements applicable to US Domestic Companies (see Appendix I).

Affiliated company All other listings Listed company manual section 103.01A 103.01A Round lot shareholders 5,000 worldwide 5,000 worldwide Publicly held shares 2.5 million worldwide 2.5 million worldwide Market value of publicly held shares $60 million worldwide $100 million worldwide Share price $4.00 $4.00

NYSE IPO Guide 107 Appendices

Appendix III: NYSE American original listing standards

NYSE American has established certain quantitative and qualitative standards for initial listing of US and foreign companies, as follows. To learn more about NYSE American quantitative, distribution and governance requirements, please refer to the complete requirements outlined in the NYSE American Company Guide, which can be referenced at https://nyseamericanguide.srorules.com/company-guide.

Criteria Original listing standards

Standard 1 Standard 2 Standard 3 Standard 4 Pre-tax income(a) $750,000 n/a n/a n/a Market capitalization n/a n/a $50 million $75 million OR At least $75 million in total assets and $75 million in revenues in the last fiscal year, or two of the three most recent fiscal years Market value of publicly held $3 million $15 million $15 million $20 million shares Minimum stock price $3 $3 $2 $3 Operating history n/a 2 years n/a n/a Stockholders’ equity $4 million $4 million $4 million n/a Distribution(b) 800 public shareholders and 500,000 shares publicly held; OR 400 public shareholders and 1 million shares publicly held; OR 400 public shareholders, 500,000 shares publicly held and average daily trading volume of 2,000 shares for previous six months.

(a) Required in the latest fiscal year or two of the three most recent fiscal years. (b) Foreign companies which do not meet the share distribution requirements set forth above may be considered for listing under the alternate requirements set forth below:

Share distribution Round-lot public shareholders 800 worldwide Publicly held shares 1,000,000 worldwide Aggregate market value of publicly held shares $3,000,000 worldwide

108 NYSE IPO Guide Appendices

Appendix IV: NYSE financial continued listing standards, US companies

The NYSE has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, the NYSE will review the appropriateness of continued listing. The following is a summary of the NYSE’s quantitative continued listing standards. For a more complete discussion of the NYSE’s continued listing standards, as well as the procedures followed when a company falls below any of the continued listing criteria, see Section 802.00 of the NYSE Listed Company Manual, which can be accessed at https://nyseguide.srorules.com/ listed-company-manual.

Required to meet all of the following: Required to meet all of the following:

Total shareholders At least 400 Minimum average closing share price of at least $1.00 over a consecutive 30 trading-day period At least 1,200 total shareholders, if average monthly trading volume <100,000 shares (for most recent 12 months) Minimum of $15 million average global market cap over a consecutive 30 trading-day period Public shares At least 600,000 Market cap of at least $50 million or stockholders’ equity of at least $50 million

NYSE IPO Guide 109 Appendices

Appendix V: NYSE American continued listing standards

NYSE American has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, NYSE American will review the appropriateness of continued listing. The following is a summary of NYSE American’s quantitative continued listing standards. For a more complete discussion of NYSE American’s continued listing standards, as well as the procedures followed when a company falls below any of the continued listing criteria, see Part 10 of the NYSE American Company Guide, which can be accessed at https:// nyseamericanguide.srorules.com/company-guide.

A company falls below compliance if its stockholders’ equity is less than:

• $2 million and the company has two out of three years of losses from continuing operations and/or net losses. • $4 million and the company has three out of four years of losses from continuing operations and/or net losses. • $6 million and the company has five consecutive years of losses from continuing operations and/or net losses.

A company is not subject to stockholders’ equity continued listing requirements if it has:

• Market capitalization of $50 million; OR • Total assets AND total revenue of $50 million each (in last fiscal year or two of the last three); AND (in each case) • Distribution: 1.1 million shares publicly held, $15 million market value of public float, and 400 round-lot shareholders.

Common Stock Distribution Requirements: The Exchange will normally consider suspending dealing in, or removing from the list, a security when:

• The number of publicly held shares is less than 200,000; OR • It has fewer than 300 shareholders; OR • The market value of publicly held shares is less than $1 million (if below for 90 consecutive days).

110 NYSE IPO Guide Appendices

Appendix VI: Summary of filing and other requirements based on issuer category KPMG LLP

The following table summarizes some of the most common financial statement filing requirements, Regulation S-K disclosure requirements, and other rules for nonaccelerated filers, smaller reporting companies, emerging growth companies (EGCs) and foreign private issuers (FPIs).

Requirement Nonaccelerated Categories with modified reporting requirements reporting company

Smaller reporting EGC FPI company Audited financial statements in initial registration statement Balance sheet Most recent two fiscal Most recent two Most recent two fiscal Most recent two fiscal year-ends fiscal year-ends year-ends year-ends if financial statements are presented in accordance with US GAAP. Most recent three fiscal year-ends if presented in accordance with IFRS as issued by the IASB(a) Statement of comprehensive Most recent three fiscal Most recent two Most recent two fiscal Most recent three fiscal income, cash flows, changes years fiscal years years years(b) in shareholders’ equity Financial statements of a Up to three years may be Limited to up to Limited to up to two Up to three years may be significant acquired business required, depending upon two years, years, depending upon required, depending upon level of significance depending upon significance level of significance(d) significance(c) Initial SOX Act compliance after an IPO Quarterly section 302/906 First periodic filing First periodic filing First periodic filing First Form 20-F filed after certifications (10-Q/10-K) after the IPO (10-Q/10-K) after (10-Q/10-K) after the the IPO the IPO IPO(e) Section 404(a) management Second 10-K filed after the Second 10-K filed Second 10-K filed after Second 20-F filed after report IPO after the IPO the IPO the IPO Section 404(b) auditor Second 10-K filed after the Not required Transition period of up to Second 20-F filed after attestation(f) IPO if an accelerated filer five years the IPO

(Continued)

NYSE IPO Guide 111 Appendices

Appendix VI: continued

Requirement Nonaccelerated reporting Categories with modified company reporting requirements

Smaller reporting company EGC FPI Select Regulation S-K disclosure requirements Selected financial Last five fiscal years and interim Not required Last two fiscal Last five fiscal information periods presented years and interim years and interim periods periods presented presented(g) Smaller reporting company EGC FPI MD&A three years two years two years three years Initial compliance with First 10-Q filed after the IPO First 10-Q filed after the IPO First 10-Q filed First 20-F filed XBRL after the IPO after the IPO

GAAP = generally accepted accounting principles; IASB = International Accounting Standards Board; IFRS = International Financial Reporting Standards; MD&A = management’s discussion and analysis; SOX = Sarbanes–Oxley; XBRL = eXtensible Business Reporting Language. (a) IFRS requires a first-time adopter to present an opening IFRS statement of financial position at the date of transition to IFRS, which results in the presentation of three statements of financial position. An FPI that is not a first-time adopter of IFRS is also required to provide three statements of financial position if it makes retrospective revisions to its financial statements, which is required upon adoption of a new accounting policy, a restatement or a reclassification in the financial statements. Even if an FPI is an EGC, it would still be required to provide three statements of financial position in these instances to assert that its financial statements are prepared in compliance with IFRS as issued by the IASB. (b) In an initial registration statement, if the financial statements are presented in accordance with US GAAP (rather than reconciled to US GAAP), the earliest of the three years of financial statements may be omitted if that information has not previously been included in a filing made under the Securities Act of 1933 or the Exchange Act. This accommodation does not apply to financial statements presented in accordance with IFRS as issued by the IASB, unless the issuer is applying IFRS as issued by the IASB for the first time. Instruction G to Form 20-F provides for an accommodation that permits an FPI in its first year of reporting under IFRS as issued by the IASB to file two years rather than three years of statements of income, changes in shareholders’ equity and cash flows prepared in accordance IFRS as issued by the IASB. (c) A third year is required if the acquisition is greater than 50% significant and the acquired business had revenues of at least $100 million in its most recent fiscal year. (d) An FPI is required to comply with the reporting requirements of Rule 3-05 for material acquisitions when registering securities. An FPI is not subject to the ongoing reporting filing requirements of Rule 3-05 for a material acquisition (FPIs are not subject to the reporting filing requirements of Form 8-K). (e) If an FPI qualifies as an EGC, this is required with the first Form 20-F filed after the IPO. (f) Under existing SEC rules and regulations, newly public entities, other than nonaccelerated filers, begin complying with Section 404(b) auditor attestation of the SOX Act with their second annual report filed with the SEC. An EGC will be exempt from this requirement as long as it qualifies as an EGC; however, management’s reporting on internal control is still required. (g) After going public, an EGC will file annual, quarterly and periodic reports under existing SEC rules and regulations. An EGC filing that includes selected financial data in a filing is not required to provide this information for periods earlier than those presented in the EGC’s initial registration statement.

112 NYSE IPO Guide Contributor profiles

www.nyse.com/ipo Contributor profiles

NYSE AST 11 6201 15th Avenue New York, NY 10005 Brooklyn, NY 11219 Tel: +1 212 656 4050 Tel: +1 877 814 9687 Web: www.nyse.com Web: www.astfinancial.com

John Tuttle Robert M. Carney, Sr. control situations such as proxy contests, Vice Chairman & Chief Commercial Officer, President, Issuer & Investor Services mergers and acquisitions, unsolicited tender NYSE Group [email protected] offers and corporate governance issues. [email protected] Rick has extensive experience advising Robert (Bob) Carney oversees all operational clients in efforts to maximize support for the John Tuttle is Vice Chairman and and procedural functions of AST, including board of directors, anti-takeover matters Chief Commercial Officer for the NYSE supervising AST’s relationship management and comprehensive institutional and retail Group, a wholly-owned subsidiary of the teams. Bob has spent over 30 years in the solicitation programs, including strategy Intercontinental Exchange, Inc. (NYSE: ICE). industry, beginning his career at Mellon formulation, shareholder profile analysis, As a member of the senior leadership Investor Services, now The Bank of New design of effective communications initiatives team, John leads the NYSE’s Global York Mellon. During his tenure at Mellon and message development to maximize Listings, Capital Markets, and Exchange Investor Services, he managed product support for the board’s position. Advice Traded Products businesses and is development, marketing, management, on such matters includes experience with responsible for managing the Exchange’s operations and technology investments for known institutional investor voting guidelines, relationships with more than 2,300 NYSE- its Shareholder Services Group and was the influence of voting recommendations of listed companies and with the investment instrumental in merging each company’s proxy advisory firms and the coordination with banking, , and stock transfer business units. board members and senior management on legal communities. Bob is a member of the Shareholder effective solicitation programs to maximize In addition, he leads the NYSE’s Services Association and Unclaimed positive results. business development efforts for IPOs, Property Liaison Group. He also served as Recent representations in contested direct listings, exchange-traded funds, Vice President and Board Member of the assignments includes representation of structured products, closed-end funds and Stock Transfer Association. He graduated eBay, GCP Applied Technologies, Colony real estate investment trusts (REITs) listing summa cum laude from Saint Peter’s Capital, Bed Bath & Beyond and Procter & on NYSE or NYSE American. College with a BS in business management Gamble. Rick also provides annual proxy Since joining the NYSE in 2007, John and an MBA in . solicitation advice to corporations in the has served in a succession of roles telecommunications, chemical, defense, including COO, Global Head of Listings, technology and retail industries, among Chief of Staff, Head of Corporate Affairs, and Richard Grubaugh others. as Managing Director of Global Affairs and Senior Vice President, D.F. King & Co., an Prior to joining D.F. King, Rick was a Government Relations for NYSE , AST Company founding partner of Beacon Hill Partners. then-parent company of the NYSE, as [email protected] Rick began his proxy solicitation career at the well as five other financial exchanges in Carter Organization, joining that firm in 1986. Europe. Prior to joining the organization, Richard (Rick) Grubaugh serves as John held various roles in the United States co-Director of D.F. King’s corporate government, including at the United States proxy division, with experience in proxy Carine Schneider Department of State and at the White solicitation, corporate actions and investor President, Private Company Solutions House. communications businesses. Rick primarily [email protected] John holds an MBA from the University advises corporations and shareholders of Notre Dame and a BBA from Eastern involved in complex shareholder Carine Schneider, Fellow of Global Equity, Michigan University. transactions specializing in corporate President, AST Private Company Solutions,

114 NYSE IPO Guide Contributor profiles

FTI Consulting 555 12th St., NW Suite 700 Washington, D.C., 20004 Tel: +1 202 312 9100 Web: www.fticonsulting.com

is an experienced and well-connected Bryan Armstrong, CFA Melanie develops and implements entrepreneur in the private company market Senior Managing Director best-in-class investor relations programs and global compensation industry. She [email protected] for a large variety of US-based and non–US has held positions including President of based public companies. She also supports Nasdaq Private Market Equity Solutions, Bryan M. Armstrong is a Senior Managing clients with strategic communications and CEO and Board Director at Certent and Director in the Strategic Communications research-driven counsel on initial public Founder, CEO and Board Director at Global segment of FTI Consulting and offerings, SPAC transactions, mergers and Shares. serves as head of the Capital Markets acquisitions, business transformations, Carine was formerly a partner with Communications practice in the Americas. proxy fights, environmental, social and PricewaterhouseCoopers and Nua Group For over 20 years, Bryan has provided governance strategies and restructuring and has held senior roles at strategic communications advice on activities. She has worked with a range of and Towers Watson. Schneider was also mergers and acquisitions; initial public industry-leading companies in the retail, named one of ’s 100 “Women offerings; SPAC transactions; environmental, consumer, technology, industrial and energy of Influence” by the Silicon Valley Business social and governance and other complex sectors. Journal in 2017, among other honors. issues facing public clients. Melanie graduated with a MSc in In 1993, Carine founded the National Bryan’s experience also includes Management from HEC Paris. In addition, Association of Stock Plan Professionals; advising clients through a variety of crises, Melanie earned the Investor Relations  in 1999, she founded the Global Equity including shareholder activism and other Charter (IRC ) from the National Investor Organization; and over the years, she has dissident shareholder relations issues, Relations Institute and received a Certificate launched several other related industry financial restatements, exchange delistings, in Investor Relations from New York organizations. unplanned leadership departures and University School of Professional Studies. strategic transformations. Bryan received his BBA in finance at Ben Herskowitz the University of Wisconsin–Madison with Managing Director a concentration in international business. [email protected] In addition, Bryan holds the Chartered (CFA) designation and is a Ben Herskowitz is a Managing Director in member of the CFA Institute. the Strategic Communications segment at FTI Consulting and is based in New Melanie Dambre, IRC York. He is part of the segment’s Financial Managing Director Communications practice, working [email protected] across its capital markets, activism defense, mergers and acquisitions, and Melanie Dambre is a Managing Director in environmental, social and governance the Strategic Communications segment at specialty teams. He is also a member of the FTI Consulting and is based in New York. industrials sector team. She is part of the segment’s Financial Ben has extensive experience covering Communications practice, working across multiple industries including greater its capital markets, activism defense, and industrials, FinTech, renewables, consumer mergers and acquisitions specialty teams. lending, online gaming, and cloud software,

NYSE IPO Guide 115 Contributor profiles

IHS Markit 450 West 33rd Street, New York, NY, 10001 Tel: +1 212 931 4900 Web: www.ihsmarkit.com

among others. In these sectors, Ben’s Kelly McGeehan to increase efficiency and standardize experience encompasses optimizing Managing Director & Global Head, third-party due diligence and assessment investor messaging, capital-allocation- IHS Markit Issuer Solutions processes. Previously, he worked at focused strategic repositioning, enhancing [email protected] where he was Global Head shareholder engagement, maximizing of Vendor Management, Global Head of around transformative Kelly McGeehan is the Managing Director Procurement and Vendor Management announcements, sustainability program & Global Head of IHS Markit’s Issuer and Global Co-Head of Supply Chain. construction, and shareholder activism Solutions, responsible for all aspects of He was accountable for the firm’s third- preparedness. strategy and execution for the business, party risk management, shared services Ben has worked on a variety of M&A which provides investor relations clients with management as well as all aspects of transactions during his career, in addition to the intelligence, technology and expertise procurement including strategic sourcing, perception due diligence studies, investor/ required to run successful investor relations procurement operations, supply chain sell-side targeting and nondeal roadshow programs. She leads a global team, with environmental, social and governance formation, and IPO-readiness strategies. offices across North America, Europe, (ESG) and enabling technologies. Richard Ben graduated cum laude from Wake Asia-Pacific and Africa. Prior to her current also represented Goldman Sachs as a Forest University in 2014 with a BS in role, Kelly drove revenue growth and client member of the KY3P Board from 2017 to finance. acquisition as Global Head of Client Service 2019. Prior to his time in the financial service and Sales for the business. industry, Richard held a number of supply Kelly has over 20 years of experience chain leadership roles across fast-moving in corporate investor relations and capital consumer goods (Coca-Cola), construction markets. Prior to IHS Markit, she held senior (Anglo America) and manufacturing (Rolls- leadership roles in product, client service, Royce). He holds a BSc in Applied sales and operations at Ipreo and Thomson from Nottingham Trent University and is Financial. qualified with the Chartered Institute of She is a graduate of the University of Purchasing and Supply. California at Berkeley, and currently serves as the Vice President of Programs for NIRI Andreas Posava San Francisco. Executive Director, Head of Global ESG, M&A and Governance Advisory, IHS Markit Richard Blore [email protected] Chief Executive Officer, KY3P, IHS Markit Andreas Posavac runs a global team that [email protected] supports companies and their C-suite and investor relations teams as well as their Richard Blore leads strategic business banking and legal advisers with market  initiatives for Know Your Third Party (KY3P ), intelligence, risk analytics and advisory the industry standard for third-party risk services focused on institutional investors management. in the lead up to M&A transactions, general Richard is responsible for managing meetings or special situations. His team product and business development teams also works with companies to develop a for KY3P, a solution designed in partnership coherent ESG and engagement strategy with leading global financial institutions to follow legal and industry best-practice

116 NYSE IPO Guide Contributor profiles

JPMorgan Chase & Co. 383 Madison Avenue New York, NY 10017 www.jpmorgan.com

standards and take advantage of the Elizabeth Myers Michael Millman opportunities in sustainable investments Global Chairman of Investment Banking Co-Head of Global Equity Capital Markets and increased ESG integration. Andreas has [email protected] [email protected] deep knowledge of the ESG and corporate governance sensitivities of institutional Elizabeth Myers is a Global Chairman Michael Millman is the Co-Head of Global investors, their relationships to external of Investment Banking at J.P. Morgan. Equity Capital Markets at J.P. Morgan. advisors as proxy advisory and ESG rating Elizabeth joined J.P. Morgan 28 years Michael previously served as the Co-Head firms and can help stakeholders better ago. Prior to assuming the Chairman of Americas’ Equity Capital Markets and understand how to address governance role, she served as the Head of both Head of both Technology, Media and and ESG in order to have the greatest Global Equity Capital Markets and Telecom (TMT) Equity Capital Markets and impact in minimizing risks and maximizing Americas Equity Capital Markets (ECM). Investment Banking. Michael began his opportunities in the current capital markets Over the past 23 years in ECM, she has career at J.P. Morgan in 1997 and currently landscape. executed numerous IPOs, follow-ons and oversees a wide variety of equity mandates convertibles for clients across the globe, including structuring and executing IPOs, spanning a range of industries including follow-on offerings and specialized capital- financials, technology, real estate, raising alternatives such as convertibles industrials, healthcare, natural resources and equity private placements. Michael and consumer/retail. Prior to joining holds a BA in Economics and ECM, she worked for several years in J.P. from Rutgers University and an MBA from Morgan’s mergers & acquisitions group Columbia University. and focused on transactions across a range of industries. Elizabeth has an MBA Jeff Zajkowski from Harvard Business School and a BA in Head of Americas Equity Capital Markets Economics from Princeton University. [email protected]

Achintya Mangla Jeff Zajkowski is the Head of Americas Co-Head of Global Equity Capital Markets Equity Capital Markets at J.P. Morgan. [email protected] Prior to this role, Jeff was the Head of the Asia-Pacific Equity Capital Markets Group. Achintya Mangla is the Co-Head of Global Previously, he managed the Equity-Linked Equity Capital Markets at J.P. Morgan. Prior Capital Markets group in New York for J.P. to this, Achintya was the Head of European Morgan. Jeff joined J.P. Morgan in 2002, ECM. He has been with J.P. Morgan for after spending his career at Goldman Sachs over 19 years and, prior to taking the global and Lynch. Jeff has worked on a wide responsibility, held various roles at the range of complex financing mandates for firm in Asia-Pacific and Europe. Achintya clients. He received his bachelor’s degree originally trained as an engineer and from the Wharton School of the University of holds an MBA from the Indian Institute of Pennsylvania and his MBA from the Harvard Management Ahmedabad (IIMA). Graduate School of Management.

NYSE IPO Guide 117 Contributor profiles

Brittany Collier Stephanie Casey AI and exchange-traded funds (ETFs) to Executive Director Vice President Client Advisory, passive investing to environmental, social [email protected] Global Lead and governance (ESG) and beyond. Ex-Asia Pac, London Stephanie tracks trends and identifies Brittany Collier is the Head of Consumer [email protected] the real challenges for IR as the market Equity Capital Markets at J.P. Morgan ecosystem continues to evolve (i.e., strong and also helps lead the special purpose Stephanie Casey re-joined J.P. Morgan emergence of buy-side in-house corporate acquisition company (SPAC) effort. Brittany in 2016 having had a career in corporate access teams post MiFID II). Stephanie has worked within ECM since 2009. Prior to access for over 10 years. Leading the client develops relationships across strategic her current role, she was a member of the advisory services, Stephanie brings a deep market participants, for example with the Financial Institutions Investment Banking knowledge of the institutional investor heads of ESG research at institutional houses. coverage group, focusing on mergers landscape, strategic engagement with the Additionally, Stephanie curates and and acquisitions (M&A) advisory as well buy-side and leveraging the J.P. Morgan distributes a number of strategic, economic as equity and debt capital raising for bank Corporate Investment Bank. Prior to joining and thematic research pieces published by clients. Brittany received a BS in Commerce J.P. Morgan, Stephanie played a similar role J.P. Morgan. with Distinction from the McIntire School of at Citi, UBS and Morgan Stanley. Stephanie also offers insight and Commerce of the University of Virginia. Stephanie advises J.P. Morgan DR advice relating to corporate access and clients on various aspects of investor can assist in formulating an IR strategy, relations within the equities markets. building an effective IR infrastructure, Scanning the IR landscape, Stephanie training executives new to investor relations assesses the range of key topics impacting and analyzing changes in institutional the industry, from the rise of blockchain, ownership.

118 NYSE IPO Guide Contributor profiles

KPMG LLP 345 Park Avenue New York, NY 10154-0102 Tel: +1 212 758 9700 Web: www..com

Aamir Husain services to a global client base including has led engagements that assist clients Global and National Leader Capital Markets IPOs, special-purpose acquisition with meeting initial listing and post-listing Readiness company (SPAC) transactions and 144a regulatory requirements on the US, London Partner, New York debt offerings. His experience includes a and Hong Kong stock exchanges. He [email protected] three-year rotation in KPMG’s Department specializes in SPAC and IPO transactions of Professional Practice and a three-year and has led more than 50 IPOs and 10 Aamir Husain is a Partner at KPMG in secondment in a capital market’s European SPAC transactions during his career at the firm’s New York office where he is headquarters. He received his MA and BBA KPMG. the global and US national leader of the from the University of Texas at Austin. IPO Advisory practice. He has more than 25 years of experience providing capital Shari Mager markets advisory services to global private Partner, Silicon Valley equity funds, investment banks and other [email protected] strategic investors. Aamir advises clients with technical and Shari Mager is a Partner at KPMG in the advice on complex accounting and firm’s Accounting Advisory practice. She is finance reporting issues associated based in the Silicon Valley office, providing with the SEC registration process, IPOs, capital markets advisory services to private SPAC transactions, 144a debt offerings, equity and venture-backed companies. carve-outs and conversions to and Shari provides clients with accounting, from International Financial Reporting financial reporting and project management Standards (IFRS) and US generally advice for both public and private equity accepted accounting principles (GAAP). and debt offerings, including IPOs, SPAC He has extensive experience in cross- transactions and 144a debt offerings, border transactions and has assisted as well as mergers, acquisitions and major international institutions in the US, divestitures. This includes assisting clients Europe and Asia list on the New York Stock with SEC filings and reporting matters, as Exchange, as well as on exchanges in well as sell-side assistance including carve- London, Hong Kong and Toronto. During his outs, US GAAP technical accounting issues career, Mr. Husain has worked on more than and post-merger financial integrations, such 50 IPOs. He received his BA from Boston as accounting conversion and business University and is a member of the American combination issues. Institute of Certified Public Accountants (AICPA) and the Institute of Chartered Sarmed Malik Accountants in England and Wales (ICAEW). Partner, New York [email protected] John Lambert Partner, Dallas Sarmed Malik is a Partner at KPMG in the [email protected] firm’s Accounting Advisory practice. He is based in the New York office, providing John Lambert is a Partner at KPMG in mergers and acquisitions (M&A) and capital the firm’s Accounting Advisory Services. markets advisory services to private equity He provides accounting and advisory and venture-backed companies. Sarmed

NYSE IPO Guide 119 Contributor profiles

Latham & Watkins LLP 1271 Ave. of the Americas New York, NY 10020 Tel: +1 212 906 1200 Web: www.lw.com

advises on cross-border transactions, debt public and private equity offerings, debt exchange offers, high-yield debt offerings, exchange offers, tender offers and consent Marc Jaffe IPOs, public and private equity offerings, solicitations. In addition, Ben was part of the New York Office Managing Partner tender offers and consent solicitations. Latham team that represented Spotify in its [email protected] groundbreaking direct listing on the NYSE in Greg Rodgers 2018 and the financial advisers in the direct Marc Jaffe is the Managing Partner of Partner listings of Slack and . Latham & Watkins’ New York office. He [email protected] previously served as Global Chair of Alex Cohen the firm’s Corporate Department and Greg Rodgers is a Partner in the New York Partner & National Office Co-Chair Global Co-Chair of the Capital Markets office of Latham & Watkins and member of [email protected] Practice. Marc represents leading issuers, the firm’s Corporate Department and the investment banking firms and investors Capital Markets, Derivatives, and Public Alex Cohen is a Partner in the Washington, in both public and private debt and equity Company Representation Practices. In D.C. office of Latham & Watkins and offerings, as well as in lending transactions. matters, Greg represents Co-Chair of the firm’s National Office, a He handles high-profile and precedent- issuers, investors, and investment banks in central resource for clients and Latham setting corporate finance matters on public and private equity, debt and hybrid lawyers facing complex issues arising under behalf of prominent US and foreign capital markets transactions, commercial the US securities laws. Alex served as the investment banks, public companies, lending transactions, restructurings SEC’s Deputy General Counsel for Legal non-US corporations, private equity funds and other financing transactions, with a Policy and Administrative Practice and later and mezzanine investment funds. He particular focus on equity-linked securities as Deputy Chief of Staff. also advises on general securities and and investment grade and high-yield debt corporate matters. In addition, Marc co-led securities. In addition, Greg co-led the Paul Dudek the Latham teams that represented Spotify Latham team that represented Spotify in its Partner & National Office Co-Chair in its groundbreaking direct listing on the groundbreaking direct listing on the NYSE [email protected] NYSE in 2018 and the financial advisers to in 2018 and led the teams that represented Coinbase in its direct listing in 2021. the financial advisers in the direct listings of Paul Dudek is a Partner in the Washington, Slack, Asana, and Coinbase. D.C. office of Latham & Watkins and Co-Chair of the firm’s National Office. Paul Ian Schuman served for 23 years as Chief of the Office Partner & Global Capital Markets Practice Benjamin Cohen of International Corporate Finance in the Chair Partner US SEC Division of Corporation Finance. [email protected] [email protected] His practice covers all aspects of cross- border capital market transactions involving Ian Schuman is a Partner in the New York Benjamin Cohen is a Partner in the New non-US companies and sovereigns, as well office of Latham & Watkins and Global York office of Latham & Watkins. Benjamin as related regulatory matters. Chair of the firm’s Capital Markets Practice. is a member of the Corporate Department Ian represents issuers and underwriters and focuses on capital markets, general Joel Trotter in complex, high-profile equity and debt securities and corporate matters. He Partner & National Office Co-Chair offerings, both in the United States primarily handles a broad range of capital [email protected] and internationally. Ian also represents markets and other financial transactions, companies with respect to general including IPOs, direct listings, high-yield Joel Trotter is a Partner in the Washington, corporate and securities matters. He debt offerings, leveraged buy-outs, D.C. office of Latham & Watkins and

120 NYSE IPO Guide Contributor profiles

Marsh 1166 Avenue of the Americas, New York, NY 10036 Tel: +1 212 345 5000 Web: www.marsh.com

Co-Chair of the firm’s National Office. FINRA subcommittee. In addition, Dana was Matthew McLellan He is the former Global Co-Chair of the part of the Latham team that represented D&O Liability Product Leader, FINPRO, Public Company Representation Practice Spotify in its groundbreaking direct listing on Marsh Specialty and previously served for 10 years as the NYSE in 2018 and the financial advisers [email protected] Co-Chair of the Corporate Department in in the direct listings of Slack and Asana. the Washington, D.C. office. Joel’s practice As the Marsh Directors and Officers focuses on capital markets transactions, Brittany Ruiz (D&O) Product Leader, Matthew McLellan mergers and acquisitions, securities Associate is responsible for developing and regulation and corporate governance. He [email protected] implementing Marsh’s strategy with respect represents issuers and underwriters in the to the D&O product overall and with regard public offering process and other SEC- Brittany Ruiz is an Associate in the New to interactions with colleagues, clients and related matters. He counsels boards of York and Los Angeles offices of Latham prospects. Matt leads the team responsible directors on governance issues, corporate & Watkins. Brittany is a member of the for interactions with Marsh’s D&O insurer crises and business combination proposals. Corporate Department and her practice trading partners regarding coverage and As one of two lawyers on the IPO Task focuses on capital markets, general leads Marsh’s efforts in the creation and Force, Joel served as a principal author of securities and corporate matters. She delivery of D&O thought leadership. As a the IPO-related provisions of the Jumpstart advises issuers and investment banks on client advisor, Matt specializes in renewal our Business Startups Act of 2012, enacted a variety of equity and debt capital markets strategies and negotiations, as well as by a nearly unanimous Congress to reform matters, including IPOs, direct listings complex D&O liability coverage and the IPO process for emerging growth and high-yield debt securities. In addition, claims issues. He also advises on policy companies. Brittany was part of the Latham team that language and endorsements to seek the represented Spotify in its groundbreaking best possible coverage afforded by the Dana Fleischman direct listing on the NYSE in 2018 and insurance markets and produces content Partner represented the financial advisers in the for internal and external distribution. Prior to [email protected] direct listings of Slack and Coinbase. joining Marsh, Matt was in private practice at Troutman Pepper and Hunton Andrews Dana Fleischman is a Partner in the Kurth LLP. Matt also spent a year in an New York office of Latham & Watkins in-house legal role counseling financial and member of the Capital Markets and institution clients on risk relating to litigation Financial Regulatory Practices, as well as and M&A activity. the firm’s global Financial Institutions Group. She is well-recognized as one of the world’s Kate Friis leading securities law and broker-dealer Senior Vice President, Professional regulatory lawyers. Dana’s practice focuses Excellence Leader on matters involving the regulation of broker- Marsh Private Client Services dealers and securities markets, advising [email protected] clients on a wide range of corporate and regulatory compliance matters, including in Kate Friis leads the business compliance connection with mergers and acquisitions, and quality assurance functions for public offerings and private placements, Marsh Private Client Services as a part internal investigations and enforcement of the national client experience team. matters, and cross-border transactions. She has spent almost 20 years in the Dana serves in several prominent and personal lines industry, focused on influential capacities, including as counsel private client advising and the unique to The Securities Industry and management challenges of affluent Markets Association on various matters and individuals. As an experienced insurance as Chair of the American Bar Association’s

NYSE IPO Guide 121 Contributor profiles

Simpson Thacher & Bartlett 425 Lexington Ave. New York, Ny 10017 Tel: +1 212 455 2000 Web: www.simpsonthacher.com

industry professional, she has an extensive author for NERA’s annual securities class Joshua Ford Bonnie background in client/partner relationship action trends report series. She earned her Partner and Co-Managing Head of the management, compliance, data privacy and BA in and economics from Washington, D.C. Office organizational excellence. She has provided Grinnell College and her MS in statistics [email protected] subject matter expertise on insurance risk from Texas A&M University. and mitigation topics such as cybercrime, Joshua Ford Bonnie is the Co-Managing flood and wildfire to various publications. Partner of the Washington, D.C. office of Kate earned a BA in communications from Simpson Thacher & Bartlett LLP. Josh is one Western Connecticut State University, an of the preeminent IPO lawyers in the nation MS in management and organizational and regularly counsels public companies behavior from Benedictine University, on spin-offs and other significant strategic and a certificate in instructional design transactions, capital markets offerings from the University of Wisconsin’s Stout and general corporate and securities law Graduate School. She believes in the value matters. Josh has extensive experience with of continued learning and is in the process complex IPOs, including those employing of completing a second master’s degree as UP-C and other multiple-tier umbrella well as earning her Chartered Private Risk partnership structures. His experience also Insurance Advisor (CPRIA) designation. includes business combinations involving special purpose acquisition companies. Janeen McIntosh Josh has been featured as a “Dealmaker Senior Consultant of the Year” by The American Lawyer, is NERA Economic Consulting recognized by Chambers Global, Chambers [email protected] USA and The Legal 500 United States as one of the leading capital markets Janeen McIntosh has over 15 years of practitioners in the United States and is experience in financial and economic endorsed by PLC Which Lawyer? advisory and litigation consulting for securities and finance, product liability and William B. Brentani mass torts, and labor and employment Partner and Head of the Palo Alto Office matters. She has consulted on securities [email protected] class actions examining materiality, loss causation and liability. Her work on these William B. Brentani is a Partner in the cases has included estimating inflation, Corporate Department of Simpson Thacher damages and settlement ranges. She has & Bartlett LLP and serves as Head of the also done analyses for class certification firm’s Palo Alto office and Co-Chair of the and market efficiency. She frequently works firm’s Opinion Committee. Bill regularly with large data sets, designing models to works for issuers and underwriters in a evaluate liability and performing various broad range of public and private debt, statistical analyses. Janeen is also the lead equity and equity-linked offerings. Bill also represents private equity sponsors in acquisition financings and advises companies on corporate governance and securities law-related matters. He has worked on offerings involving issuers from a variety of industries, including technology, healthcare, real estate, entertainment,

122 NYSE IPO Guide Contributor profiles

energy and transportation, as well as SPAC private and public debt and equity offerings, Jonathan H. Pacheco and de-SPAC transactions. Chambers USA as well as on corporate governance, Counsel has recognized Bill as a leading lawyer for business combinations and general [email protected] a number of years and describes him as corporate and securities law matters. Joe “highly sought after for his expert counsel on has advised Avantor on its $4.37 billion IPO Jonathan Pacheco is Counsel in the transactions in diverse sectors.” Clients laud and HCA on its $4.35 billion IPO—the two Capital Markets Practice of Simpson him as “highly technically knowledgeable,” largest healthcare IPOs in US history. Joe Thacher & Bartlett LLP and based in “great to work with” and, tellingly, that “our has been recognized as a leading lawyer in the Washington, D.C. office. Jonathan needs are his needs” (Chambers USA). capital markets by Chambers USA and The represents issuers, private equity Legal 500 United States, and The National sponsors and underwriters in a wide range William R. Golden Law Journal has cited him as one of the top of securities offerings, including IPOs, Partner three “Most Influential Lawyers” in finance follow-on and secondary equity offerings, [email protected] and capital markets. preferred equity offerings and high yield and investment grade debt offerings, as William R. Golden is a Partner in the Capital Edgar J. Lewandowski well as exchange offers and other liability Markets Practice of Simpson Thacher & Partner management transactions. Jonathan Bartlett LLP and based in the Washington, [email protected] also advises clients on ongoing public D.C. office. Will represents issuers, private reporting, compliance and corporate equity sponsors and underwriters in a wide Edgar J. Lewandowski is a New York-based governance matters. range of securities offerings, including IPOs, Partner in the Corporate Department follow-on and secondary equity offerings, of Simpson Thacher & Bartlett LLP. spin-offs, high yield and investment grade Concentrating on securities law and Kenneth B. Wallach Partner debt offerings and acquisition financing corporate governance, he has wide-ranging [email protected] transactions, as well as exchange offers and experience advising a variety of issuers, other liability management transactions. private equity sponsors and investment Will also advises clients on ongoing public banks. Edgar advises on IPOs, spin-offs, Kenneth B. Wallach is a Corporate Partner reporting, compliance and corporate high yield and investment-grade debt in the New York office of Simpson Thacher governance matters. Will has experience with offerings and various other capital markets & Bartlett LLP. He regularly advises complex IPOs, including those employing transactions. He also advises boards corporate, private equity and investment UP-C and other multiple-tier umbrella of directors on general corporate and banking clients on a wide array of corporate partnership structures. He co-authored a compliance matters. He represents clients finance transactions, particularly in IPOs, practice note on UP-C IPO structures in in numerous industries, including real high yield offerings and restructurings, as Practical Law Corporate & Securities. estate, hospitality, health care, construction well as on corporate governance issues materials and information technology. and other general corporate matters. Ken Joseph H. Kaufman Edgar has been recognized as a “Next serves on the firm’s Executive Committee Partner Generation Lawyer” by The Legal 500 and and as a Co-Chair of the firm’s Business [email protected] as a “BTI Client Service All-Star,” an award Development Committee. Ken has been based solely on unprompted feedback from recognized by The Legal 500 United States Joseph H. Kaufman is a New York-based corporate counsel at large and Fortune and Chambers USA, where he was cited “as Partner in the Capital Markets Practice of 1000 organizations that are asked to identify one of the firm’s next generation of leading Simpson Thacher & Bartlett LLP. He has a outside counsel attorneys who deliver the specialists and an attorney who can easily rich and varied practice assisting clients on absolute best in client service. take on extremely complicated deals.”

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