The Road to the IPO: Late Stage Private Placements & IPO Readiness

January 28, 2020

Event Materials

1. Presentation: The Road to the IPO

2. Navigating your IPO (PwC)

3. IPO Prospectuses: Avoiding and Responding to Common SEC Comments (LexisNexis)

4. IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers (LexisNexis)

5. Market Trends 2018/19: Lock-Up Agreements (LexisNexis)

6. IPO Accommodations for EGCs, FPIs, and Non-EGCs (Mayer Brown)

7. JOBS Act IPO On-Ramp Accommodations (Mayer Brown)

8. Comparing the Registration, Reporting and Governance Requirements for Domestic (U.S.) Companies and Foreign Private Issuers (Mayer Brown)

9. Initial Public Offerings: At A Glance 2019 (Mayer Brown) The Road to the IPO Late Stage Private Placements and IPO Readiness

January 28, 2020 Rationale

• There may be a variety of different motivations for a late stage or pre- IPO private placement – Company may want to defer IPO and need to raise additional capital prior to the IPO – Company may want to take out early friends and family and angel investors and “clean up” capitalization table or provide partial liquidity for longstanding holders – Company may want to bring in strategic investors – Company may be advised that it should prepare itself for the IPO by gaining support and validation from key sector investors that are opinion leaders – Company and bankers may want to “de-risk” IPO by bringing in cross- over investors that will also invest in the IPO – Company may be advised that an up round will make higher IPO pricing easier for IPO investors to accept – May be quite sector dependent

2 Market Trends

3 Late-stage Private Capital – Last 3 years

973 $204B companies invested

$30.00B 160

$24.42B 140 $25.00B $22.60B $19.73B $20.11B 128 120 $20.00B $19.18B 119 $18.42B 100 111 $17.00B 83 139 120 $12.23B $14.97B 108 $15.00B $13.93B 80 $12.77B 77 103 95 60 $10.00B 66 $9.07B 61 40 $5.00B 20

$0.00M 0 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4

Capital Invested Deal Count Source: Pitchbook Data Includes Venture Capital and Growth-oriented Private Equity

PwC 4 Late Stage Investments

5 The Private Placement Road Map

Positioning Process Pricing

• Understand / develop / set • Review possible investor • Maximize process tension to your key capital raising universe and create set of key drive final investor(s) to the objectives targets best terms o Investor type(s), • Refine investor approach o Value sizing, timing, use of o Type of investor o Investor rights proceeds o Quantum of initial o Exit / liquidity • Develop expectations around outreach considerations / timing valuation and terms • Launch marketing process o Choose best investors • Create / update investor to match company narrative and key materials • Define investor timeline early with a structured process objectives o NDA, teaser, investor • Facilitate confirmatory presentation • Further screen investors based on feedback from diligence sessions and deliver • Prepare / update diligence management information in a timely manner information and data room • • Detailed analysis of terms Negotiate and finalize • Align all parties to the received purchase and sale agreement process (legal, accountants, and other required consultants) documentation

6 Late stage investment characteristics

• Impact on structuring and negotiating • Typically made into existing, relatively mature companies – Late stage • Proven product viability • Exhibits signs of increasing adoption and revenue growth • Focused on marketing and sales – Very late stage • Cash flow is dependable • Past initial hyper-growth period and reasonable to expect sale or IPO within 12 - 24 months

7 Types of securities

• Late stage equity – Typically equity deals based on the previous A-D series of preferred – However, later stage deal can depart greatly from venture – Can be greater upside depending on liquidation preference – Key is calculation of preference, whether there is participation and whether/how many additional rounds to exit

8 Types of securities (cont’d)

• Alternative is to take debt that looks like equity and includes: – Interest payments to match PIK dividends – Mandatory prepayment on trigger events to match redemption rights – More financial control in terms of covenants – Possible security interest in assets of issuer – Convertibility features and warrant coverage – Complications involve intercreditor/subordination issues with other lenders, particularly financial institutions – Less up-side, particularly in IPO, and therefore utilized more in pre-sale transaction – Consider tax issues (treated as equity)

9 Liquidation preference

• Liquidation preference of the investor’s preferred stock – Typically senior to all other outstanding classes or series of common stock and preferred stock – Sometimes pari passu to an existing series of preferred stock, particularly if the investment is priced as a flat or up round (using the same or higher pre-money valuation as the previous financing round) – Typically includes all accrued and accumulated dividends in the liquidation value of the preferred stock – Usually participating (sharing in any residual liquidation value of the common stock on an as-converted basis) – If participating, is generally not capped in a down round investment, but usually capped (by dollar amount or multiple of return on investment) in a flat or up round investment

10 Dividend rights

• Dividend terms for preferred stock: – Typically accrue a fixed dividend on the original liquidation value, with the dividend rate typically higher than in early stage deals (which typically have lower fixed dividend rates if they accrue a dividend at all) – Are more likely than those in an early stage deal to be payable periodically in cash and, if not, are usually cumulative, unlike those in early stage deals, which are usually non cumulative even when they do accrue a dividend. In addition, the cumulative dividend is often compounding (earning a dividend on the accrued dividends) on a quarterly or annual basis (whether or not declared by the board) – Often allow accumulated dividends to be convertible into common stock or, in some cases, are payable in cash on conversion (rather than forfeited on conversion as with many early stage deals that have cumulative dividends) – Participating, with the right to share pro rata on an as converted basis in any dividends paid on the common stock

11 Redemption rights

• Redemption rights — much more common in late stage deals – Not preferred exit method because investor relies on upside return of their underlying common equity value rather than minimal return of redemption and risk of non-payment of redemption price if company is struggling • Primary issues to consider: – What securities will be redeemed and how many shares? – Which particular stockholders will be redeemed or will redemption be pro rata for all stockholders? – Full redemption or partial redemption? – Tax implications of the redemption – Manner of redemption

12 Anti-dilution rights

• Specific issues for late stage private placements include: – Price for late stage investor that triggers rights, particularly if have to pay a much higher valuation – Full ratchet versus weighted average: can negotiate full ratchet if high valuation, however, this is very unusual; previous investors usually require weighted average using same formula as previous rounds – “Pay to play”: much less common in later stage rounds (unless down- round) but may be required as condition to consent from early investors; if don’t participate, then lose anti-dilution protection: late stage investor more likely to receive anti-dilution rights in such cases – Exempt securities: issuances that trigger anti-dilution; much more heavily negotiated in late stage; issuer often desires to use equity in acquisitions and third-party partnerships without triggering anti-dilution

13 Participation rights and restrictions

• Right of first refusal (“ROFR”) – Mirrors rights of previous investors to have the right to buy when designated stockholders sell – Issues around percentage trigger for stockholders who are subject to the right – Usual threshold is 1-5%; however, if retain same threshold, (a) aggregation of sales can have material impact and (b) may exclude senior management (if you don’t want them to sell out) because of dilution in round – Late stage investors typically not subject to ROFR • Right of first offer – Typical right to have securities offered by the issuer first to investors prior to third parties

14 Representations & warranties

• How much to rely on work of previous investors in diligence – Careful to distinguish between strategic and financial investors given risk profile and desired outcomes – Timing of last investment and composition of investors • Usually include more detailed representations and warranties and disclosure schedules – Longer operating histories – More “material” agreements, partnerships, joint ventures – More complex balance sheets – U.S. regulatory compliance — issues like privacy and environmental matters – International compliance — issues like FCPA – Intellectual property issues

15 Secondary purchases

• Secondary purchases — often combine investment directly in issuer with purchase in secondary directly from existing stockholders – “Cross-purchase” structure – Less cash from investment available for company – Typically purchase of common stock from management and employees to provide liquidity – Can also purchase preferred from previous investors particularly those that need exit given LP demands • Note issues particularly with liquidation preferences and other terms not desirable to late stage investor • Can’t change charter rights of class but can change contractual rights • In contract rights, particularly important to ensure that you can bundle secondary shares with primary securities for co-sale, tag and registration rights

16 Protective provision – charter/contractual

• High valuations at later stage yield minority investments and therefore protective provisions are usually stronger • Negotiate to include strong affirmative covenants – Financial and other information delivery rights – Registration rights and rights in M&A – Redemption rights • Negotiate to include strong negative covenants – Specify the actions that the company may or may not take without specific vote of the class – Usually include all of the “ordinary course” provisions from venture—related to sales of company or assets, bankruptcy, expansion of option pool, IPO or sale – Expanded to include financial covenants, additional of debt, acquisition strategy, partnerships, management changes, etc. • Contractual remedies for failure particularly with affirmative covenants—e.g., right to take over board if fail to redeem

17 Private placement timeline

Pre-engagement Preparation Launch Diligence/Negotiation Closing 1-2 Weeks 2-3 Weeks 2-4 Weeks 6+ Weeks 2-4 Weeks • Initial opportunity • Organizational call with • Distribute Teaser & • Investor follow-up • Company counsel drafts review by investment all parties NDA (potentially and feedback definitive documentation bank • Identify management Management • Facilitate investor due • Negotiate and finalize • Initial company call / and shareholder Presentation) to diligence legal documentation objectives and meeting with identified targets • Begin negotiating (finalize terms) preferences investment bank • Conduct additional • Investor discussions financial and strategic • Transaction closes • Gathering the facts business and financial (to gauge interest terms from the company due diligence and fit) • Finalize lead investor (subsequent material • Finalize marketing • Management / determine if and company review) materials (NDA, teaser, meetings and calls investor syndicate is • Determine status of management with interested necessary or valuable potential marketing presentation, PPM) investors • Circle additional materials and financial • Identify and tier • Give interested investors (if potential investors models accounts post-NDA necessary) based on transaction • Engagement letter terms and management access to data room • Finalize term sheet signed by company preferences • Initial investor (general and investment bank • Finalize financial models feedback, additional understanding of and term sheet / investor outreach terms) transaction structure • Set up electronic data room (to be managed throughout process) Key timing risk— • Company review and driven by investors signoff of all materials (marketing materials and data room contents) • Investment bank internal committee approval 18 Key Process Materials

ENGAGEMENT LETTER PROPOSED TERM SHEET MANAGEMENT PRESENTATION DATA ROOM • Engagement Letter • Security • Transaction • Marketing materials o Agreement between • Use of proceeds o Investment highlights • Financial / accounting placement agent and • Key terms o Use of proceeds o Historical financials the Company o Valuation o Summary of terms o Financial model o Redemption features • Company • Corporate documents EXECUTIVE SUMMARY o Board participation o Brief company history o Articles of incorporation, • Transaction overview o Voting rights o Company advantages bylaws, etc. o Brief company o Change of control o Growth strategy • Legal overview overview • Industry o Selected contracts / o Investment highlights FINANCIAL MODEL o Competitive landscape agreements o Use of proceeds • Detailed financial model • Sales and marketing o Overview of any litigation • Industry overview o Operating • Management team • Regulatory overview o Target market assumptions / inputs • Financials • Capitalization o Competitive landscape o 3-5 years of o Financial highlights o Detailed ownership table o Recent trends projections o Financial projections and o Existing stock documents • Business overview o Quarterly projections assumptions • Organization structure o Company history for 2019 o Sources and uses o Employees and Board of o Business objective and o P&L, BS and CFS o Pro forma capitalization Directors composition strategy o Sales and marketing NDA RISK FACTORS • Management, organization • Non-disclosure agreement • Disclosure about primary material and shareholders o Confidentiality risks associated with investing in • Financial summary agreement between the Company o Historical financials Company and o Often included in data room o Pro forma investor capitalization CLOSING DOCUMENTS • Share purchase agreement • Non-reliance agreement • Shareholder agreement

19 Outreach and Advocacy

• Contact targeted investors, highlighting the opportunity in a manner which maximizes interest • Distribute teaser and NDA (and potentially management presentation) to identified targets • Discuss with investors to gauge interest and fit • Grant interested accounts post-NDA access to data room • Set up management meetings and calls with interested investors • Track and analyze investor feedback and facilitate follow up Diligence Management

• The investment bank will usually work with management to facilitate the due diligence process for interested parties, including: – Organizing, maintaining and granting access to the virtual data room – Tracking the diligence requests and progress of each party – Scheduling follow-up meetings and diligence calls Process Management

• In order to ensure a competitive process and strict timing guidelines, the investment bank will present prospective investors with a process letter that outlines key components and deadlines for indications of interest – Setting a deadline for potential investors to submit bids will lead to closing the transaction in a timely manner – Creating a competitive tension process with investors will obtain the optimal price and terms – The company benefits from the investment bank’s knowledge and experience in dealing with the investor groups in selecting the best long term partner Considerations for Cross-Over Funds

23 Considerations

• Considerations – Deal structure and terms can be highly variable • Common stock, preferred stock, convertible preferred, though convertible preferred stock is the most common • Board representation • Affirmative and negative covenants • Information rights • Financial statement requirements • IPO/Qualified IPO provisions • M&A and IPO ratchet provisions – Time horizon • Pre-IPO investors may have a specific timeline in mind for the IPO and a target valuation Considerations (cont’d)

• Will cross-over investors participate in the IPO? – Ideally, the pre-IPO round investors will be the “anchor orders” in the IPO – No ability in the U.S. to obtain and secure cornerstone investors – Only two options: either obtain an indication of interest from the cross- over investor that can be disclosed in the IPO prospectus, or do a concurrent private placement to the cross-over investor at the IPO price concurrent with the IPO – Maybe more uncertainty with the indication of interest option if the market remains volatile and IPOs price below stated ranges • Did the cross-over investors receive confidential information during the pre-IPO process? Has that information been disclosed in the IPO prospectus? Are they cleansed of material nonpublic information? Involvement by Strategics

26 Transfer and investment restrictions

• Transfer to “competitors” – More heavily negotiated definition of competitors to whom investor may not transfer—current and future competitors – Negotiated “update” rights to list of competitors • Related — negotiation of the right for strategic investor to make investment in competitors of company – Particularly important to issuer if investment is coupled with a strategic partnership or commercial arrangement – Key is definition of competitor — by type of product and/or by name — and update rights over time – Also negotiation regarding steps to be taken if investor buys into a competitor either directly or indirectly Stand-still provisions

• Stand-still provisions more common in M&A transactions • Sometimes asked of investors in late stage deals, particularly of strategics – Investor is obligated to refrain from actions that relate to acquisition of control of the issuer including making proposals to acquire the issuer, buying shares, or launching a proxy contest – Exceptions • Negotiated sale • Agreed-to-limits Right of first look for M&A

• Right of first offer – Notice period – Negotiation period – Other potential rights • Right of first refusal – Investor friendly – Chilling effect on competitive M&A – Terms of transaction 2019 US IPO Market

January 2020 S&P 500 hits record highs

PwC 31 2019 IPO proceeds hit a five-year high

PwC 32 Foreign issuance has steadily increased since 2015

Number of IPOs via Form F-1 as a Portion of All IPOs, 2015 - 2019

250 18% 20% 16% 17% 18% 1 - F 200 39 16% a 33 14% i v

s 29 150 13 12% d e O

13% l i P 10% I F

f s

o 100 8%

13 8% 175 O

# 163 149 147 6% P I

50 4% f

87 o 2% % 0 0% 2015 2016 2017 2018 2019 (1) S-1 & Other F-1 F-1s as % of IPOs

Number of IPOs via Form F-1 by Country, 2015 - 2019 Country 2015 2016 2017 2018 2019 Total China 3 5 13 26 20 67 United Kingdom 3 2 5 10 Brazil 3 3 2 8 Israel 1 1 2 3 7 Canada 2 3 1 6 Germany 1 1 2 4 Argentina 1 2 1 4 Hong Kong 1 2 3 Other 4 6 3 2 3 18 Total 13 13 29 39 33 127

Source: Dealogic. Excludes IPOs with deal values under $25mm. (1) Other refers IPOs via SEC Form S-11, Form 10, and FDIC.

PwC 33 IPO windows open and close quickly

PwC 34 IPOs continue to outpace the broader markets

2018 IPO Returns: Offer to Year-End 2019 IPO Returns: Offer to Year-End

2018 S&P 2019 S&P Consumer Markets (25%) Return Return 56% (6%) 29% Energy, Utilities & Mining (24%) 2%

Financial Services (2%) 18%

Health Services 32%

Industrial Products (17%) 6%

Pharma & Life Sciences 4% 52%

TMT 7% 9%

All IPOs (1%) 30%

PwC 35 IPO Themes

PwC 36 2019 IPOs were primarily Pharma & Life Sciences and Technology

PwC 37 IPO Overview Are you ready? Why?

Anticipated Benefits

Access to capital

Demonstrate maturity (move out of your parents’ basement)

Enhance brand, customer & market profile

Publicly traded stock as currency (acquisitions)

Liquidity (exit for investors, compensation for employees)

PwC 39 When? Key Considerations Assessment Key Decision Points • Inflows into equity funds • An issuer can reassess • Attractive investment case – sooner the better to benefit market conditions and Macro and capital 1 from maximum investment opportunities valuations at different market conditions • Positive economic performance of US will be key phases in the preparation process as appropriate • Selection of the “right” comps • An SEC filing provides 2 Valuation • Timing will determine valuation multiples increased flexibility in time to launch – especially if the • Corporate and legal structure, financials and documentation ready for filing and launch company is an ECG 3 Company readiness • Well defined and compelling equity investment story • Confidence in predicting and delivering business results Considerations • Market volatility and • Sector equity pipeline peer valuation declines 4 Competing equity • Significant equity issuance to take advantage of positive could jeopardize pipeline investor appetite for equity offerings launch time frame • Scarcity value for high growth companies remains • Company must meet key operating and Investor appetite for • Sector specific financial milestones for 5 IPOs • Overall risk tolerance (risk “on/off”) marketing credibility

There is high option value in being ready to access the equity markets as windows of opportunity present 40 themselves – early preparation is key

PwC 40 Overview of the IPO process

Kickoff meeting IPO pricing

12-18 months 6-9 months Years

Pre-Kickoff/Planning IPO process execution Post-IPO/Public company

t Going public n

e Execution of the IPO process

m Readiness s

s planning and preparation e Being Public s s Application of a holistic framework to transform the company, enabling it A to operate as a public company

PwC 41 IPO timeline – key activities

Financial Financial Research Analyst Marketing and Hire Advisors Statements Due Diligence Projections Model Pricing • IPO Advisor • 2- 3 years audited • Bankers and Counsel • Develop detailed • Receive Company • Investor targeting • Bookrunners financials • Business financial model • Management dry-run • Auditors • 2- 5 years selected • Financial projections • Analysts develop • Salesforce presentation and • Company financials • Legal (5 years) own teach-ins counsel • SOX/internal financial • Accounting • Develop quarterly model/”haircut” • Roadshow (1x1s and group controls financial • Discussions with events) projections Company to refine • Bookbuilding • Bankers • Pricing and allocation triangulate All Hands Organization “Testing Research Final meeting the Analyst Due Valuation/$ Waters” Diligence Price Range

Marketing Pre-Organization Meeting Preparation SEC Review Filing Preparation (10-14 Weeks) SEC Review & Pricing (Up to two-years) (10-12 Weeks) 8-10 Weeks (1-2 Weeks)

Corporate Structure Corporate IPO & Capital Research Analyst Roadshow and Re-Organization Governance/ Board Structure IPO Prospectus Diligence Meeting Presentation • Suitability of current • Composition of board • Primary/secondary • Key marketing • Business overview • Equity story corporate organization • Search for independent • Use of proceeds document; • Senior exec. present • Investment thesis to vs. reorganization directors • Optimize capital Foundation to • Company projection guide presentation • Tax structuring and • Board committees structure & financing equity story model • Available online to retail implications (audit, nomination and needs • Outline/investment and institutional • Domicile determination compensation) • Dividend policy highlights in investors (NetRoadshow) • SOX • Eliminate preferred advance • Management equity, converts • Company counsel changes/additions drafts prospectus

Total 22–28 Weeks

PwC 42 Articulating the “equity story” – Step by step

Clearly define the business model, present a compelling case for executing the business plan and position the Company to be valued against the right comps

Review & refine Valuation drivers Identify KPIs Positioning business plan

• Review the business • Understand valuation • Should represent • Position the Company in plan, financial model, drivers and how your management’s view of the the context of market and and equity story with a story is being business, objectives, comps focus on growth communicated goals, and strategy • Review recent • Align the equity story • Reflect equity story in • Should support the equity “stories”/IPO comps and with the business model financial model story & effectively evaluate what structures – do not present the projections communicate it to the have worked company as something it Buyside is not • Do the research analysts • Analyze recent comps – understand the business • KPIs need to “work” now company may not have model and are they able to and in the future direct comps but will need model it to reflect to analyze the “comps” management’s vision? universe

• Segments?

PwC 43 IPO marketing process

Phase I Phase II Phase III Phase IV

Research Roadshow Documentation Investor “Testing the Educate Pricing and and Refine Analyst Bookbuilding Targeting Waters” Salesforce Allocation Equity Story Presentation Distribution

• Prospectus • Identify • Educate research • Brief sales forces • Comprehensive • Maximize • Develop key institutions that analysts on the on transaction, roadshow via a proceeds while selling points are potential long Company and key Company, key combination of 1 ensuring a stable • Ensure the term core strengths of the selling points, x1 and group aftermarket industry and the investors business issues and meetings • Allocate to high company’s • Analyze holders of • Forms basis for mitigants • Build early stage quality long-term

e positioning are comparable writing research • Education by demand investors at a level v i t

c clearly understood companies reports capital markets momentum to which ensures e j • Identify and craft • Identify recent • Obtain feedback team, research drive substantial demand in the b

O responses to investors of on equity analysts and subscription aftermarket and potential investor comparable story/key Company throughout the minimizes concerns offerings concerns in order management price range “flipping” • Prepare • “Testing the to refine equity • Enable salesforce • NetRoadshow® documentation to waters” can be story ahead of pre- to market offering • Sets stage for reflect key themes used to sound out marketing to institutional continued developed timing, valuation investors and dialogue with the and/or educate solicit feedback Buy-side Buy-side – occurs after S-1 filing

PwC 44 Buyers of an IPO

Retail / Long only private funds banking

International Small cap funds funds IPO buyers

Sector Hedge specific funds fund

Index funds

PwC 45 IPO Cost Estimation

The magnitude and scope of IPO costs can vary significantly from offering to offering based on a number of variables, such as the size of the offering, the complexity of the IPO structure, and your organization’s readiness to be a public company. Cost elements include:

Going public costs Being public costs

Offering costs Other incremental One-time Recurring (directly attributed organizational organizational costs incremental costs to the offering) costs

• Underwriter fee • Additional audit, SAS 100 • Costs to implement new • Incremental costs of new (typically 4-7% of review costs, Regulation S-X financial reporting systems FTEs (accounting, tax, gross proceeds) compliance, valuation reports and processes legal, HR, IT, internal • Legal and accounting fees • Tax and legal entity • Initial costs to document audit, IR) associated with drafting the restructuring costs in internal controls and comply • Professional fees for legal and registration statement and anticipation of the IPO and a with SOX accounting advice comfort letter potential Up-C structure • Costs to identify and • Incremental audit costs • Incremental road show • Drafting new articles of recruit a new board and 404 audit expenses incorporation, audit of directors committee charter, by- • Annual TRA laws, & other • Costs to implement compliances agreements new executive compensation plans

In addition to underwriter We estimate that on Based on our survey results, on Based on our survey results, average companies incur more on average companies incur fees, on average companies average, companies incur than $1 million of one-time costs more than $1 million of incur $4.2 million in more than $1 million of to convert their organization to annually recurring costs as a offering costs one-time costs as a result of a public company result of being public going public

PwC 46 Board Diversity

Source: PwC, Annual Corporate Directors Survey, October 2012-2016 and October 2018

Source: PwC, 2018 Annual Corporate Directors Survey, October 2018

PwC 47 Scope of the IPO readiness assessment A comprehensive IPO readiness assessment typically requires a thorough evaluation of the following areas of an organization:

Accounting and Finance effectiveness Internal controls Tax Executive compensation financial reporting and HR

Governance and Financial planning Treasury Legal Internal audit leadership and analysis

Engage with Media and Enterprise risk Corporate strategy Wealth management investment banks investor relations management and development planning

Project management, Technology change management, and communication

PwC 48 Key participants in the IPO working group

Company Investment Capital Company Underwriter’s Independent Advisory Personnel Banker or Markets Counsel or Counsel Auditors Accountant Underwriter Advisor Securities Counsel

Company A lead(s) or Capital markets A company’s Underwriter Independent An advisory personnel will managing advisors provide attorney will counsel's auditors provide accountant can need to provide underwriter, independent and become the principal audits of the offer advice and the necessary works with a objective advice quarterback of objective in company’s assistance to information with company to to companies on its registration reviewing the financial organizations which to prepare develop the key value-driving process and registration statements and with limited the document registration decisions and must have the statement is to advise on both experience in and be actively statement, judgments ability to clearly ascertain on preparing the IPOs and involved in all coordinate the throughout the explain behalf of the registration executing capital aspects of the roadshow, IPO process challenging underwriter that statement and markets registration underwrite concepts around the registration on potentially transactions and process certain risks and the transaction statement is sensitive or is generally not form a syndicate complete and not problematic restricted by misleading accounting independence issues standards

PwC 49 PwC’s Deals Practice IPO Services

Accounting and financial reporting: How do I develop and prepare my SEC Capital Markets Advisory: What comparables Capital Accounting financial statements and disclosures? should I look at for my IPO? How will my company Markets and financial be valued? How much capital do I need to raise? Advisory reporting

Financial planning and Governance Financial analysis: How do I and planning and improve my budgeting, Governance and leadership analysis planning, and analysis leadership: How do I meet my function? new governance requirements?

Internal audit and Corporate strategy and Corporate Internal audit controls: How do I development: How do I improve Strategy and and controls prepare to comply development my capital structure and evaluate with SOX? financing alternatives? IPO services

Tax: How do I Enterprise risk management: Enterprise risk develop my How do I evaluate my ability to management Tax jurisdiction and assess and manage risk? domicile tax plan?

Executive Treasury compensation Treasury: How do I manage the and HR Executive compensation and proceeds from my offering? HR: How do I benchmark, plan, and design my executive compensation Project management advisory: How can plan? l accelerate my IPO closing process?

PwC 50 Thank you

pwc.com

© 2019 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. www.pwc.com/us/iposervices

Navigating your IPO How PwC can help

PwC Deals IPO Services

Where to start?

You’ve decided to explore the potential for an Initial Public Offering. But where do you start your exploration? You know it’s going to be a transformational event. You know there are many advisors you will need on board to help you navigate the significant challenges of going public.

This is where PwC can help Most private companies are likely unprepared to be public and will need a significant investment of management time and funds to bring their capabilities up to public company standards. This period of preparation which PwC calls “readiness” can be 12-24 months depending on the maturity of the company. The first step to readiness is an assessment of where your company currently stands. You can’t change what you don’t measure. PwC can help you properly assess and identify gaps in your company’s public company preparedness.

Ask yourself a few basic questions to test your readiness to be public

Q1) Do you have the appropriate number of Q2) Are you currently constructed with an people with the requisite skill sets optimal tax and organizational structure needed in your finance department? from a tax perspective for an IPO? Consideration: Having the right number of people Consideration: Tax structure can have a significant in the finance function is not only critical to enabling impact on a public company’s financial reporting, the completion of key tasks like closing the books, legal, and tax outcomes and should be undertaken forecasting and the preparation of the ongoing early to avoid unnecessary costs, inefficient processes reporting requirements as a public company, but also or unexpected issues and delays. There are complex enabling that a strong control environment is tax structures that are becoming increasing popular, maintained. In PwC’s analysis of material weaknesses some of which can be extremely time consuming and (MW) a key issue is insufficient accounting personnel from our experience can take up to 6 months for a (27% of MWs) leading to issues with insufficient company to design and establish. segregation of duties (8% of MWs) (see figure 1). You will need to develop the right people and processes to prepare a thorough budget for at least 4 quarters in the future for earnings releases.

2 Navigating your IPO: How PwC can help | PwC

Figure 1: Material weakness disclosures Q4) Are your internal controls and audit procedures public company ready? Insufficient Other technology Consideration: Similarly, our review of newly systems Insufficient minted public companies shows 38% of MWs stem 5% accounting 5% Lack of personnel from a lack of procedures and review processes (see 27% figure 1). Prior to going public, you will need to segregation 8% of duties establish a process for your internal review and sign- off of internal controls to allow for the CEO and CFO Inappropriate to certify that the financial statements are fairly reconciliation 17% presented and contain no untrue statements of of complex or material facts. These certifications are required to be non-routine transactions 20% filed in the first SEC filings after going public. If any 18% Lack of review material weaknesses have been identified, they would processes be disclosed in the registration statement. Lack of

procedures

Source: SEC Filings, S&P Capital IQ, and PwC Analysis. Excludes SPACs. Excludes companies that raised less than $25M. Material weaknesses were Q5) Is your compensation plan competitive taken from S-1, S-11 and F-1 filings, however annual breakouts are by pricing date to allow for year over year analysis. Data from 1/1/2011 to with companies like yours in the 6/30/2018. public markets? Consideration: Over 90% of companies introduced at least one new equity compensation plan at IPO. Shifts from stock options to restricted stock and the introduction of performance plans in conjunction with options and/or restricted stock are common. It is Q3) How long does it take you to close your important to develop a compensation strategy that’s books and what does that include right for the company in order to retain key executives regarding management effort? and for long term incentive plans. Consideration: The close of the ledger may be within 10 days, however that probably doesn’t include the required footnote disclosures (US GAAP and SEC), preparation of the Management Discussion & Analyses and completion of the required internal certifications and reviews by auditors, audit committee and board of directors. As a public company, you’ll need to be able to meet all of this within 40 or 45 days following the close of the quarter The first step to readiness and 60, 75 or 90 days at the year-end. is an assessment of where your company currently stands.

Navigating your IPO: How PwC can help | PwC 3

IPO readiness

Getting started How do we deliver? PwC has committed over 500 partners and staff to We typically need just one day of your time supported helping companies like yours assess and then build the by selective follow up calls. PwC can mobilize a team capabilities to be a public company. We’ve developed in any region of the US, or the globe for that matter, to a proprietary IPO readiness assessment using a help you assess your readiness in a very efficient holistic framework which is both time efficient for manner. We will ask you for one day of your time senior management and thorough in scope. With one for a workshop where we will discuss with your call to our Capital Markets team, you can mobilize a most senior executives how you are managing team to be with you quickly and be ready to advise and and executing your business across everything assist you in your assessment. highlighted in the five questions we posed above. Beyond those core areas, which are often complex and time intensive to build, we will cover a wide range When should you know your state of other topics including risk management, of readiness? technology, cyber security, governance, corporate strategy, treasury, legal, investor relations and project Most companies underestimate the significant effort management. Selected follow up via conference calls and time needed to develop the capabilities needed to enables us to round out our picture of your be public. Twelve to 18 months ahead of an IPO kickoff readiness. with your legal and banking team would be the optimal time to assess your state of readiness. This affords your team the time needed to build out your What do you achieve? capabilities in such a way that your IPO process proceeds smoothly. It’s much more challenging to try In a matter of 3-4 weeks you will have our initial and develop your capabilities while in the middle of an recommendations by functional area to be public IPO process. You still have to be able to run your company ready. You will gain knowledge on how to company and the demands of a readiness are navigate the winding road to readiness and where you significant as are the calls on your time from the may need PwC or other advisors to help you. You will IPO process. be able to determine where the commitment of time and resources will likely be substantial, as well as where you already possess the appropriate level of capabilities—in keeping with a public company state of readiness.

We’ve developed a proprietary IPO readiness assessment using a holistic framework which is both time efficient for senior management and thorough in scope.

4 Navigating your IPO: How PwC can help | PwC

The big picture

Start early The portrayal of the timeline that needs to be in your mind is below. Unlike timelines that focus on the “going public” process typically signified by the kickoff meeting with bankers and lawyers, the PwC timeline is thorough. We know from experience that companies need time to transform their practices internally and move the organization into a public company mindset. If you are thinking about being public in 1-2 years, you are currently in the hot zone of this timetable. The PwC readiness assessment applies a holistic framework designed to help you guide your company through pricing into public company status. Again, your guiding principle should be to create an organization capable of “being” public vs simply “going” public.

The IPO timeline

Kickoff meeting IPO pricing

12-18 months 6-9 months Years

Pre-Kickoff/Planning IPO process execution Post-IPO/Public company

Going public Execution of the IPO process Readiness Planning and preparation Being Public Application of a holistic framework to transform the company,

Assessment enabling it to operate as a public company

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PwC as your IPO advisor

We offer:  A uniquely positioned firm that has mobilized a  A proven track record involving thousands of thorough set of integrated services to advise you complex IPOs to help you move forward quickly from your strategic planning stage through the and efficiently. execution of your IPO and then to prepare for life  Advising you in your proactive resolution of as a public company and beyond. issues hopefully decreasing surprises and delays  A dedicated team of professionals specializing in in your IPO process. IPOs, who can leverage the power of PwC’s global  Deep technical skills combined with in-depth reach, our broad advisory and tax capabilities, to industry knowledge and experience that helps us thoroughly address the components of provide services tailored to your unique needs. your offering.

What our clients are saying about IPO readiness and PwC

“We had a huge initiative to get to our IPO. PwC brought their ‘A game’– their “It was a huge undertaking to get through the depth of technical expertise, cross Registration process. PwC’s commitment and functional approach to an IPO and effort enabled our portfolio company to overcome overall leadership skills helped us to language, cultural and technical hurdles literally achieve our IPO in a very short on a global scale. They assembled a strong team, timeframe.” accessed critical internal channels and were highly responsive throughout the process.” – CFO, Energy Company – CFO, Private Equity

“The PwC team was outstanding and they certainly made the path getting to bell-ringing much more tolerable than it “A lot of firms can help with the would have been otherwise. We all project. The difference is the people. “PwC is a great firm, but appreciated their support very much.” PwC brings an experienced service service comes down to team that understands our company – Senior Vice President & Chief Accounting people, and they are truly a and the transaction challenges, and Officer, Hospitality Company fantastic service provider.” know how best to get the work done.” – CFO, Private Equity – Chief Accounting Officer/Controller, Manufacturing Company

“We really appreciate all the great work the PwC “We never did an IPO assessment and I team did on our offering. wish we would have. It would have made Your help got us through a the IPO process much easier. It was much critical junctures –technical “PwC is really the only choice more intense and time consuming than I accounting hurdles, due when it comes to IPO work.” had expected.” diligence support and S-1 crunch time. Great work!” – Corporate Controller & Chief – Corporate Controller & Chief Accounting Accounting Officer, Technology Officer, Technology Company – Treasurer, Energy Company Company

6 Navigating your IPO: How PwC can help | PwC

PwC’s IPO services*

PwC’s thorough IPO services brings together an integrated set Capital Accounting of capabilities to help companies markets and financial as they prepare for the public advisory reporting markets. The following chart illustrates many of the areas an Governance Financial organization will need to focus on and planning to improve as the organization leadership and analysis embarks on the going public process and transitions to operate as a public company. PwC’s Corporate Internal strategy and IPO audit and development services controls

Enterprise risk Tax management

Executive Treasury compensation and HR

Internal controls & internal audit Tax Advise client relating to: Advise client relating to:  Client’s development of an internal audit  Client’s application of ASC 740—tax accounting function and disclosures  Client’s evaluation of internal audit co-source  Client’s application of Foreign Account Tax and outsourcing solutions Compliance Act (FATCA) Advise client relating to:  Client’s tax department organizational design, tax processes and controls  SOX readiness assessment and development of a remediation plan, if needed  Internal control documentation, internal control testing and development of its CEO/CFO annual and quarterly certification process

* PwC may not be able to provide all of these services to PwC audit clients or clients with independence restrictions.

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Accounting and financial reporting Capital markets advisory  Advise client in its development and its Advise client relating to: preparation of SEC financial statements and  Development of its IPO story and identification disclosure of KPIs  Advise client in its development of MD&A,  Identification of methods to increase and summary/selected financial data, capitalization/ improve value dilution tables and other financial data in a  Identification of client’s comparables registration statement, prospectus or offering memorandum  Client’s advisor selection process including underwriters, research analysts, exchange  Advise client in improving its finance organization, close process, general finance and  Client’s analyst and roadshow presentations accounting processes and management reporting Project management advisory  Advise and assist client with its documentation, identification and advise client on its resolution Advise client relating to: of critical, complex and judgmental accounting  Development of flexible and scalable project issues and policies management solutions  Advise and assist client with its development of  Development of its project governance structure, responses to SEC comment letters communication framework and status reporting  Advise and assist client with its development of mechanism Article 11 pro forma support schedules with  Development of its readiness assessment, client’s financial data and client’s pro forma timelines and project plans adjustments  Development of an issue resolution framework and organization around complex workstream Financial planning and analysis structures  Advise client on improving its budgeting,  Options to accelerate its IPO closing process planning and analysis function and related processes Treasury Executive compensation and HR Advise client relating to:

Advise client relating to:  Development of its treasury strategy

 Benchmarking, program planning and design of  Improving its bank and cash management client’s executive compensation processes infrastructure

 Client’s preparation of compensation and  Selection and implementation of its treasury governance disclosures systems and processes  Client’s HR systems and processes Corporate strategy and development Enterprise risk management Advise client relating to:  Improvement of its capital structure and  Advise client with its implementation of risk evaluation of financing alternatives management framework and processes  Client’s development of its strategic plan to Advise and assist client relating to: increase value  Evaluation of its risk management assessment and evaluation of capabilities Governance and leadership  Client’s development or refinement of its risk Advise client relating to: management framework  Client’s new governance requirements  Client’s board and audit committee composition  Development of its charters, bylaws and whistleblower program * PwC may not be able to provide all of these services to PwC audit clients or clients with independence restrictions.

8 Navigating your IPO: How PwC can help | PwC

Our insights

From keeping abreast of the capital raising landscape, improving M&A processes to increase deal value, understanding how to help advise on executing an IPO and evaluating exit strategies, PwC Deals brings you research and insights on the business issues that matter. To keep abreast of the latest in capital markets, sign up for our Capital Markets Watch weekly mailing list.

Download these publications and more at: www.pwc.com/us/en/deals/publications

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PwC US at a glance

80 PwC provides assurance, advisory and tax locations services for over

PwC ranked 90% of FT Global 500 companies #1 Most powerful professional PwC advises and works with services brand by Brand Finance

100,000+ entrepreneurial and private businesses across the world

3,000+ 57,000+ Dedicated Deals Professionals people

We advise on over PwC firms provided services to:

5,500 422 410 transactions in the US each year Fortune Global US Fortune 500 companies 500 companies

Our project teams are supported by 157 countries seasoned deals research in our global and analytics capabilities delivery network

8 Navigating your IPO: How PwC can help | PwC

Contact PwC Deals

For a deeper discussion abou t IPO services, please contact one of our practice leaders:

Mike Gould IPO Services Senior Partner Chicago (630) 456 0729 [email protected]

David Ethridge US IPO Services Leader

New York (973) 615 1091 [email protected]

Daniel Klausner

US Capital Markets Advisory Leader New York (646) 573 6756 [email protected]

Derek Thomson Capital Markets Research Leader New York (646) 416 0386 [email protected]

Samantha Hauptman Deals Director New York (201) 602 9190 [email protected]

© 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. IPO Prospectuses: Avoiding and Responding to Common SEC Comments

A Lexis Practice Advisor® Practice Note by Anna Pinedo and Alexandra Perry, Mayer Brown LLP

Anna Pinedo Alexandra Perry

This practice note examines some of the issues most commonly raised in initial Securities and Exchange Commission (SEC) comment letters on registration statement filed for initial public offering (IPOs). It is intended to guide you, as counsel to an IPO company, in assisting your client in efficiently navigating the SEC comment and review process.

This practice note discusses comments that apply to IPO prospectuses generally, including comments on plain English principles and expert consent requirements, and comments on specific sections of a prospectus, including the risk factors, management’s discussion and analysis of financial condition and results of operations, and others. It provides excerpts from, and links to, representative SEC comment letters, and offers drafting and other tips to help issuers avoid receiving these types of comments or, failing that, to respond effectively to the SEC’s concerns.

This practice note does not provide a comprehensive list of the types of comments that the staff of the SEC’s Division of Corporation Finance (SEC staff or staff) can issue, and does not address SEC staff comments on executive compensation disclosure, which has become less important since the Jumpstart Our Business Startups Act of 2012 (JOBS Act) enabled emerging growth company (EGCs) to provide less detailed executive compensation disclosures in their registration statements, which most EGCs undertaking IPOs have done. It also does not discuss financial statement and related accounting issues, which are typically addressed by the issuer’s chief financial officer and its outside auditor. SEC staff comments can vary widely from offering to offering and depend on the issuer’s industry sector, the stage of the issuer’s business, and the issuer’s financial condition. Accordingly, each issuer must draft its IPO prospectus disclosures to accurately reflect its own unique facts and circumstances.

For information about preparing the registration statement and prospectus for an IPO, see Registration Statement and Preliminary Prospectus Preparations for an IPO, Top 10 Practice Tips: Drafting a Registration Statement, and Form S-1 Registration Statements. For information about the IPO process, see Initial Public Offering Process. For information generally on responding to SEC comment letters and the SEC staff review process, see SEC Comment Letter Responses and Understanding the SEC Review Process.

SEC Review Process After a company files a registration statement on Form S-1 (or Form F-1 for foreign private issuer), the SEC staff will perform a cover-to-cover review of the document to ensure compliance with the applicable disclosure and accounting requirements under the Securities Act of 1933, as amended (Securities Act). The SEC staff does not

1 IPO Prospectuses: Avoiding and Responding to Common SEC Comments evaluate the merits of an investment in an IPO but rather focuses on whether the disclosures provided in the registration statement provide investors with enough information to make an informed investment decision.

The SEC Staff’s Comment Letter Virtually all IPO registration statements receive comments. The SEC staff will generally issue a comment letter within 30 days from the date the registration statement is filed (whether submitted confidentially or publicly on EDGAR). According to the SEC’s Fiscal Year 2016 Annual Performance Report, available at https://www.sec.gov/ files/secfy18congbudgjust.pdf, in 2016 the SEC staff issued initial comments within an average of 25.5 days.

The SEC staff’s comments will include a description of any deficiencies identified in their review and may also include requests for supplemental information from the company if the staff believes the disclosures do not comply with SEC disclosure requirements or omit information that may be material to investors. Each comment letter is unique to the filing and may include comments that require substantial revisions to the registration statement. The number of comments in the SEC staff’s initial comment letter can range from just a few to 70 or more. There may be several rounds of letters from the SEC staff and responses from the company until the issues identified in the staff’s review are resolved.

Responding to SEC Staff Comment Letters You should work with your client, underwriters’ counsel, the company’s auditor, and the other members of the IPO working group to carefully address each SEC staff comment in the company’s response letter and in any amended registration statement filed with it.

When responding to the SEC, it is important to be mindful of your responses as they will eventually be made publicly available. If you do not fully understand a specific comment, you should contact the SEC staff reviewer for clarification so you can provide an appropriate response. Thoughtful, well-written response letters are crucial to resolve SEC staff comments efficiently. Responses should focus on the SEC staff’s specific questions and cite the SEC’s rules, guidance, and other authoritative sources (especially for accounting comments) wherever possible. Although it is helpful to review other registrants’ response letters, a company’s response letter should address its unique facts and circumstances. If an amendment to the registration statement is being filed with the response letter, the responses should indicate specifically where the revisions have been made to address the SEC staff’s comments.

You should not assume that receiving a comment means that the SEC staff reviewer disagrees with the company’s approach or disclosure. Often comments seek additional information and clarification to better understand the company’s position. You should not, however, respond to a comment by adding disclosures to the registration statement that you believe to be immaterial. If you believe that a comment concerns an immaterial matter, you should communicate that to the SEC staff reviewer (legal or accounting) responsible for the comment as early as possible in the review process to avoid causing any delays in resolving the comment. The response letter should thoroughly explain the judgments the company applied in drafting such disclosure to assist the SEC staff in understanding why additional disclosure is not material to investors or necessary to comply with the disclosure requirements.

Generally, SEC comment letters request responses within 10 business days. However, if you believe more time is needed to respond to the comments, you should discuss this with the appropriate SEC staff reviewer.

Once all the SEC staff’s comments on its registration statement have been resolved, the company can request that the SEC declare the registration statement effective, which allows it to proceed with the IPO.The SEC

2 IPO Prospectuses: Avoiding and Responding to Common SEC Comments staff will upload its comment letters and the company’s responses to EDGAR within 20 days of declaring the registration statement effective.

For additional information about the SEC review process, see Understanding the SEC Review Process.

To minimize the number of SEC staff comments on your client’s registration statement, you should review staff comment letters and company response letters from recently completed IPOs in the same industry to identify industry-specific issues that the SEC staff may have, as well as IPOs for companies that have adopted similar accounting principles to identify any accounting-specific issues that the SEC staff is focused on. Foreign private issuers should also review SEC comment letters and company response letters from recently completed IPOs for issuers with the same country of domicile. However, many comments tend to fall under the recurring themes discussed below.

Common SEC Comments on IPO Prospectuses The following types of comments apply to prospectuses generally.

Plain English Rule 421 under the Securities Act (17 CFR 230.421) requires companies to use plain English writing principles in their prospectuses. Here are some examples of comments received by issuers that failed to do so:

“Throughout the prospectus numerous statements in your disclosure are unclear because they are not written in plain English or the concept is not fully described. Please review your entire prospectus to ensure that your disclosure throughout is written in plain English and the concepts that you describe are fully explained. See Rule 421(b) of Regulation C.” (SEC Comment Letter to Achison Inc. (Sept. 20, 2016), Comment #1). “Please note that the summary is subject to the plain English principles under Securities Act Rule 421(d). Revise to eliminate unnecessary redundancy. For example, the fourth paragraph in this section appears to repeat much of the information in the first paragraph.” (SEC Comment Letter to UPAY, Inc. (Aug. 4, 2016), Comment #1).

“Throughout your registration statement you utilize industry jargon. For example purposes only, we note your reference to “commercial real estate CDOs” on page 6. Please concisely explain these terms where you first use them.” (SEC Comment Letter to TPG RE Finance Trust, Inc. (May 24, 2017), Comment #3).

“Please revise to explain industry jargon to an investor not in your business, such as “technology white space,” and eliminate marketing language.” (SEC Comment Letter to Ameri Holdings, Inc. (Mar. 6, 2017), Comment #9).

To avoid this type of comment, you should write in short declarative sentences, use definite and concrete everyday language, use active voice, present complex information in tabular format, and avoid legal and industry jargon and double negatives. Descriptive headings and bullet lists are also recommended. If highly technical or legal jargon cannot be avoided, then you should include a glossary in the prospectus to facilitate the reader’s understanding of the prospectus disclosure.

Eliminating Repetition The SEC staff may comment if there is too much redundant information in the prospectus.The problem of repetitive disclosure most commonly arises in the summary section of the prospectus. Here is an example of this type of comment:

3 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“Please identify those aspects of the offering and your company that are most significant, and highlight these points in plain, clear language. The summary should not, and is not required to repeat the detailed information in the prospectus. The detailed description of your business, competitive strengths, and strategy is unnecessary since you repeat them verbatim in the business section of the prospectus.” (SEC Comment Letter to Valvoline Inc. (Jun. 27, 2016), Comment #2).

In preparing the summary section, you should avoid repeating too much information from the business section. The summary should highlight the most significant aspects of the company’s business, with a lengthier description reserved for the business section. Item 503(a) of Regulation S-K (17 CFR 229.503) provides that the prospectus summary should be brief and provide an overview of the key aspects of the offering, and the SEC staff will object if it is too long. When drafting the summary, you and your client should consider and identify those aspects of the offering that are most significant and determine how to best highlight those points in clear, plain language.

Clarifying the Basis for the Issuer’s Statements Although the prospectus is, in part, a marketing tool, companies should avoid hyperbolic statements and marketing language. Statements of belief should be clearly labeled as such and be accompanied by an explanation of the basis for each belief. Companies should also be cognizant of potential liability under the federal securities laws for misstatements or omissions in the registration statement. Here are some examples of this type of comment:

“We note your statement that you believe Top Kontrol is “the most advanced anti-theft and personal safety automobile device of its kind currently available.” Please expand here and in all applicable places in the document to disclose the nature of the Top Kontrol device, such as how it is installed and how it works. Please also better explain the basis for your belief that it is the “most advanced” of its kind currently available. In this regard, we note that on page 25 you compare Top Kontrol to Viper and LoJack. As each of Viper and LoJack offer multiple products with multiple features, please clarify to which of their products you are referring in making the comparison to Top Kontrol.” (SEC Comment Letter to SecureTech Innovations, Inc. (Mar. 15, 2018), Comment #2).

“Disclose the basis for your assertion that nervonic acid “is known to be beneficial to memory related brain health, anti-aging, blood lipid regulation, and anti-fatigue symptoms.” Disclose whether this information is based upon management’s belief, industry data, reports/articles or any other source. In this regard, you state on page 14 that the benefits are claimed by studies. Elaborate upon the nature of these studies and whether you or a third party commissioned such studies.” (SEC Comment Letter to CAT9 Group Inc. (Jan. 23, 2018), Comment #6).

To avoid comments on statements about a company’s relative position in the industry, such as being a leader in a field, the company should disclose the relevant metric used for making the assertion, such as industry- wide sales figures or, if possible, a third-party source. It should also be clear when a statement is made based on management’s belief (i.e., “We believe that . . .”). Although phrasing a statement as a belief may weaken its impact, it can help companies avoid liability under federal securities laws for misstatements or omissions of material facts. If a company has a good faith basis for its belief or opinion, and does not omit any material facts necessary to make the statements not misleading, statements of belief and opinion should be insulated from liability under Section 11 of the Securities Act (15 U.S.C. § 77k). Additionally, a good faith belief can support a defense against claims asserted under Section 10(b) (15 U.S.C. § 78j) of the Securities Exchange Act of 1934, as amended (Exchange Act), and Rule 10b-5 thereunder (17 CFR 240.10b-5), which require proof of an intent to deceive, manipulate, or defraud to impose liability.

4 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

For more information about the liability under the federal securities laws of participants in IPOs, see Liability under the Federal Securities Laws for Securities Offerings and Liability for Securities Offerings Checklist.

The SEC staff may, nonetheless, ask for the company’s basis for a statement of belief. When responding to such comments, the company should carefully review how the statement of belief is phrased and provide support where possible, as in this example:

SEC Comment:

“Please tell us the basis for your belief that your company is ‘the only service available which is a patented methodology to effectively safeguard an individual’s personal rights.’” (SEC Comment Letter to Right of Reply Ltd (Nov. 27, 2017), Comment #2).

Company response:

“We have amended our disclosure to state that the Company is “one of the only…” in lieu of “the only…”. We have also attached as Exhibits A and B to this letter opinions of counsel for the Company which we believe supports the statement highlighted in your comment.” (Response to SEC Comment Letter to Right of Reply Ltd. (Jan. 3, 2018), Response #2).

The SEC staff will also typically ask the company to provide copies of all sources cited in the prospectus:

“Please supplementally provide the report by the National Institute of Health Research in the United Kingdom referred to in this section.” (SEC Comment Letter to OncoGenex Pharmaceuticals, Inc. (May 17, 2017), Comment #7).

“Please provide us with supplemental support for the factual assertions made throughout your prospectus. To the extent you do not have independent support for a statement, please revise the language to clarify the basis for the statement. In addition, to the extent that some of these statements are intended to be qualified to your belief, please revise your disclosure to state the basis, to the extent material, for your belief.” (SEC Comment Letter to FTS International, Inc. (Jan. 31, 2017), Comment #7).

To facilitate a timely response, you should prepare copies of all relevant third-party reports in advance and clearly highlight the relevant portions of the reports that support the statements included in the prospectus. Third-party reports and other supplemental information submitted in response to SEC staff comments are generally not filed on EDGAR and thus will not be made publicly available.

Experts’ Consents Rule 436 under the Securities Act (17 CFR 230.436) requires that the written consent of any expert (e.g., the issuer’s independent auditor) or counsel whose report is quoted or summarized in the prospectus be filed as an exhibit to the registration statement. Here are some examples of this type of comment:

“We note your response to comment 5 and your revised disclosure on page 12. It appears that this disclosure is being attributed to Savills PLC. Please provide an analysis as to why this third-party attributed disclosure is not expertized disclosure requiring a consent. Refer to Rule 436 of the Securities Act and Securities Act Compliance and Disclosure Interpretation Question 233.02.” (SEC Comment Letter to Majulah Investment, Inc. (Oct. 23, 2017), Comment #2).

5 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“We note your disclosure throughout that Egan-Jones has rated the CM Loan at “A+” and that you have rated the loan an “A.” Please file the consent for the Egan-Jones Ratings Company, as required by Securities Act Rule 436. Alternatively, please remove the references to the credit rating. For further guidance, please consider our Securities Act Rules Compliance and Disclosure Interpretations Questions 233.04 and 233.05.” (SEC Comment Letter to Korth Direct Mortgage, LLC (Sep. 8, 2017), Comment #13).

“We note references throughout your prospectus to third-party sources, such as Notch Consulting and ACT Research, for statistical, qualitative and comparative statements contained in your prospectus. Please provide us with copies of any materials that support third-party statements, appropriately marked to highlight the sections relied upon. Please also tell us if any reports were commissioned by you for use in connection with this registration statement and, if so, please file the consent as an exhibit. See Rule 436 of Regulation C of the Securities Act of 1933.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #4).

The SEC staff will not require a consent when the prospectus cites a publicly available report, but will require a consent when the report or other information was prepared by a third party at the company’s request. Third parties may be reluctant to be deemed to be “experts” because experts are subject to liability under Section 11 of the Securities Act for any material misrepresentations in or omissions from their reports or other information included in the prospectus. Therefore, before filing your client’s initial registration statement, you should determine whether any third-party information included in the prospectus will require a consent and whether the third party(ies) would be willing to deliver a consent.

If the company believes that an expert’s consent is not required, it should explain its position in its response to the SEC:

SEC comment:

“We note your reference to a study commissioned by you and conducted by Millward Brown regarding your brand awareness among women in the United States. Please file the consent of the named researchers as an exhibit to your registration statement or provide us with your analysis as to why you do not believe you are required to do so. Refer to Rule 436 under the Securities Act.” (SEC Comment Letter to Stitch Fix, Inc. (Nov. 1, 2017), Comment #2).

Company response:

“The Company respectfully submits that Millward Brown is not an “expert” under Rule 436. Rule 436 requires that a consent be filed if any portion of a report or opinion of an expert is quoted or summarized as such in a registration statement. Section 7 of the Securities Act of 1933, as amended, provides that an expert is “any accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him.” The Company respectfully submits that Millward Brown, the third party provider of this study, is not among the class of persons subject to Section 7 and Rule 436 as “experts” unless the Company expressly identifies such provider as an expert or the statements are purported to be made on the authority of such provider as an “expert.” Accordingly, the Company believes that Millward Brown should not be considered an “expert” within the meaning of Rule 436 and the federal securities laws.

In addition, the Company notes that the consent requirements of Section 7 and Rule 436 are generally directed at circumstances in which an issuer has engaged a third party expert or counsel to prepare a valuation, opinion or other report specifically for use in connection with a registration statement.The information from this study included in the Amended Registration Statement was not prepared in connection

6 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

with the Registration Statement or the Amended Registration Statement. In fact, the study was commissioned in November 2016, at which time the methodology, study details, key deliverables and price were set. As a result of the foregoing, the Company respectfully submits that the third party provider of this study is not an expert of the kind whose consent is required to be filed pursuant to Rule 436.” (Response to SEC Comment Letter to Stitch Fix, Inc. (Nov. 6, 2017), Response #2).

In the example above, the company, through its outside counsel, responded to the SEC staff’s comment citing the applicable rules to explain why an expert’s consent was not needed.

Signatures, Exhibits, and Material Agreements The SEC staff may question the completeness and adequacy of exhibits, audit reports, and management signatures included in or omitted from the registration statement. In particular, the staff often inquires about seemingly material contracts that have not been filed as exhibits to the registration statement, and a company may need to amend its filing to resolve these questions. Here are some examples of this type of comment:

“We note your disclosure that Dr. O’Neill currently has a consulting agreement with the company. Please file this agreement as an exhibit or tell us why you believe that you are not required to pursuant to Item 601(b) (10) of Regulation S-K and disclose the material terms of this agreement in this section.” (SEC Comment Letter to BioXcel Therapeutics, Inc. (Feb. 23, 2018), Comment #2).

“We note that on August 22, 2017, you received an in-process research and development product candidate from a related party together with an agreement with a third party for the development, manufacturing, and commercialization of the product. Please expand your disclosure, here and elsewhere, to identify the product and collaborative partner. Additionally, disclose the material terms of the agreement, such as the duration, termination provisions, and each party’s rights and obligations. File the agreement as an exhibit or provide an analysis supporting your determination that you are not required to file it pursuant to Item 601(b)(10) of Regulation S-K.” (SEC Comment Letter to Sol-Gel Technologies Ltd. (Jan. 12, 2018), Comment #1).

In determining which contracts to file as exhibits to the registration statement, you should apply the definition of “material” in Securities Act Rule 405 (17 CFR 230.405), which provides that information is material if “there is a substantial likelihood that a reasonable investor would consider it important in determining whether to purchase the security registered.” You should also carefully review Item 601(b)(10) of Regulation S-K (17 CFR 229.601), which lists the types of contracts that are considered to be material, including contracts not made in the ordinary course of business; contracts with directors, officers, or shareholders other than contracts involving the purchase or sale of securities at market price; contracts on which the company’s business is substantially dependent; contracts for acquisition or sale of substantial amounts of property, plant, or equipment; and leases for property held by the company.

See the SEC’s Compliance & Disclosure Interpretations for Regulation S-K, available at https://www.sec.gov/ divisions/corpfin/guidance/regs-kinterp.htm, for the SEC staff’s views on what may be required to be filed as an exhibit to the registration statement.

For further guidance on making materiality determinations, see Materiality Determination Guidelines, Materiality: Relevant Laws and Guidance, and Determining Materiality for Disclosure Checklist.

Emerging Growth Companies The JOBS Act created a new category of issuer, called an EGC, to encourage public offerings by small and developing companies. EGCs are subject to less stringent SEC disclosure and reporting requirements, including

7 IPO Prospectuses: Avoiding and Responding to Common SEC Comments scaled (reduced) disclosures in their IPO registration statements. In its comment letters, the SEC staff has primarily asked EGCs to discuss: (1) their EGC status and their elections under the EGC provisions of the JOBS Act; (2) how and when they may lose EGC status; and (3) their qualification for an exemption from Section 404(b) of the Sarbanes-Oxley Act of 2002 (i.e., the requirement to provide an auditor’s attestation report on the issuer’s internal control over financial reporting). These are some examples:

“Please update your disclosure throughout the prospectus describing how you may lose emerging growth company status. In this regard, we note that the gross revenue threshold is $1,070,000,000 and the non- convertible debt limit is $1,000,000,000. Refer to the definition of Emerging Growth Company found in Rule 405 of the Securities Act of 1933.” (SEC Comment Letter to Atlantic Acquisition II, Inc. (Dec. 5, 2017), Comment #4).

“We note your response to our prior comment 2 and your revised disclosure that you are ‘an emerging growth company’ as defined in the Jumpstart Our Business Startups Act. Please revise your registration statement to:

●● Describe how and when a company may lose emerging growth company status ●● Briefly describe the various exemptions that are available to you, such as exemptions from Section 404(b) of the Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Exchange Act; and ●● State your election under Section 107(b) of the JOBS Act:  o If you have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b), include a statement that the election is irrevocable; or  o If you have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2), provide a risk factor explaining that this election allows you to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Please state in your risk factor that, as a result of this election, your financial statements may not be comparable to companies that comply with public company effective dates. Include a similar statement in your critical accounting policy disclosures.”

(SEC Comment Letter to Achison Inc. (Oct. 19, 2016), Comment #1).

To avoid these types of comments, a company should include in its prospectus:

●● If it has elected to be an EGC ●● How it qualifies for EGC status ●● How and when it may lose its EGC status ●● The elections it has made under the EGC provisions ●● Any related risk factors

For more information about EGCs, see IPO Requirements for Emerging Growth Companies Checklist, Emerging Growth Company Practice Guide, and Top 10 Practice Tips: Emerging Growth Companies.

Foreign Private Issuers The SEC staff’s comments to foreign private issuers have included financial accounting and other disclosure topics, many of which are generally like those issued to domestic filers and relate to issues discussed in other

8 IPO Prospectuses: Avoiding and Responding to Common SEC Comments sections of this practice note (although SEC staff comments to foreign private issuers on financial statement issues may refer to international financial reporting standards (IFRS) rather than U.S. generally accepted accounting principles (GAAP)).

Comments That Apply to Specific Sections of the Prospectus The following types of comments relate to the disclosure included in specific sections of an IPO prospectus.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) SEC staff comments on MD&A are common and tend to focus on results of operations, critical accounting policies and estimates, and liquidity matters. Additionally, the SEC staff often comments on the use of financial measures not presented in accordance with U.S. (or IFRS) GAAP (non-GAAP financial measures), which, if included in the prospectus, typically appear in the MD&A section.

Results of Operations The SEC staff often requests that companies explain the results of their operations with greater specificity, including identifying underlying drivers for each material factor that has affected their earnings or that is reasonably likely to have a material effect on future earnings. Here are some examples of these type of comments:

“Please note that the purpose of Management’s Discussion and Analysis (MD&A) is to provide information necessary to a reader’s understanding of the registrant’s financial condition, changes in financial condition and results of operations, as required by Item 303(a) of Regulation S-K. Specifically, where the consolidated financial statements reveal material changes from year to year in one or more line items, the registrant shall discuss the underlying reason(s) for the changes to assist in understanding their business. In this regard, please revise your MD&A to provide a robust discussion of your financial statements as previously requested.” (SEC Comment Letter to International Land Alliance, Inc. (Feb. 17, 2017), Comment #1).

“We refer to your discussion of regulatory changes in Brazil affecting higher education. You state that these program changes had an adverse impact on you in 2015 and are likely to have an adverse impact on you in 2016. It is not clear how and to what extent these changes impacted your results of operations in 2015 and how you expect them to affect you in 2016. Accordingly, please expand your disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations to provide a more informative analysis and discussion of the effect on your results of operations in 2015 and how you expect these changes to impact your revenue and related income in 2016. Refer to Item 303(a)(3) of Regulation S-K and Section III of SEC Release No. 33-8350.” (SEC Comment Letter to Laureate Education, Inc. (May 26, 2016), Comment #1).

“We note your September 29, 2015 acquisition, from an entity under common control, of what appears to be a substantial custom design on-line educational platform. Tell us and include in management’s discussion a description of the operating history of this educational platform. Address those financial and non-financial metrics you use to assess its operating performance. Identify any known trends and uncertainties arising from the platform’s historic operations that you expect to have a material impact on your prospects for future revenues.” (SEC Comment Letter to British Cambridge, Inc. (Dec. 4, 2015), Comment #5).

To avoid these types of comments, you should carefully review the instructions to Item 303(a)(3) of Regulation S-K (17 CFR 229.303) for preparing disclosure about an issuer’s results of operations. The disclosure should

9 IPO Prospectuses: Avoiding and Responding to Common SEC Comments include the key metrics that are monitored by management and how those metrics correlate to material changes in the company’s results of operations. The company should also describe any:

●● Unusual or infrequent events or transactions that may materially affect its operations ●● Significant components of its revenues and expenses necessary to understand the results of operations ●● Known trends that have or are expected to have a material effect on its operations ●● Material changes to revenues resulting from a business combination or introduction of a new product/service line ●● Segment information needed to understand the company’s operations

The SEC staff often requests that companies provide a more granular quantification and discussion of specific factors, including any material offsetting factors, that contribute to material changes in the results of operations period over period, as well as the business or economic reasons that contributed to those factors.

Critical Accounting Policies and Estimates The SEC staff often requests discussion and analysis of critical accounting policies and estimates, and criticizes companies that merely repeat the disclosure provided in the financial statement footnotes. Here are some examples:

“Please revise your filing to include a robust discussion and analysis of the critical accounting policies you name here. This disclosure should supplement, not duplicate, the description of accounting policies in the notes to the financial statements, and should provide greater insight into the quality and variability of information regarding financial condition and operating performance.The discussion here should present your analysis of the uncertainties involved in applying a principle at a given time or the variability that is reasonably likely to result from its application over time. Refer to the guidance in FR-72.” (SEC Comment Letter to X Rail Enterprises, Inc. (Jul. 3, 2017), Comment #8).

“Please disclose and discuss the critical accounting policies and estimates that required significant management judgement. It appears to us, at a minimum, you should enhance disclosures related to business combination, intangible assets, taxes, and stock compensation.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #25).

“Your disclosure should supplement, not duplicate, the description of accounting policies that are already disclosed in the notes to the financial statements. Please revise to limit your disclosure to significant accounting estimates and assumptions. Your disclosure should address accounting estimates and assumptions where the nature of which is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or where the impact of the estimates and assumptions on financial condition or operating performance is material. Refer to Item 5 of Form 20-F and Section V of SEC Release 33-8350.” (SEC Comment Letter to AGM Group Holdings Inc. (Jun. 9, 2017), Comment #16).

To avoid this type of comment, companies should focus their MD&A discussion of critical accounting estimates on the quality and variability of management’s most significant judgments and assumptions. The SEC staff’s comments have frequently targeted repetitive discussions about critical accounting estimates in MD&A, and the SEC staff has reminded companies that MD&A should supplement but not repeat the disclosures in the significant accounting policies note of the financial statements.

10 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

Liquidity Matters SEC staff comments on liquidity focus on disclosure and analysis of the drivers of an issuer’s cash flow. Here is an example:

“In addition to the disclosures provided, your discussion and analysis of operating, investing, and financing activities should focus on the primary drivers of and other material factors necessary to understand your cash flows and the indicative value of historical cash flows. Please revise to provide disclosure and analysis of the underlying drivers that affect your cash flows that are not readily apparent from your cash flow statements. Ensure that your discussion includes an explanation of the cash received from deposit payable and the investment in transaction monetary assets. In this regard, clarify whether transaction monetary assets are available to fund your operations, or whether they are considered restricted solely for repayment to your clients. Refer to Item 5.B of Form 20-F and Section IV.B of SEC Release No. 33-8350.” (SEC Comment Letter to AGM Group Holdings Inc. (Jun. 9, 2017), Comment #14).

To avoid this type of comment, you should carefully review Items 303(a)(1) and (2) of Regulation S-K, which require discussion of known material trends, demands, commitments, events, or uncertainties that are reasonably likely to affect (either favorably or unfavorably) liquidity or capital resources.The MD&A section should therefore include a meaningful analysis and discussion of the material components that explain the variability of cash flows, including the underlying drivers for material changes. Especially when there are trends or uncertainties affecting liquidity, the MD&A section should focus on sources and uses of cash and the availability of cash to fund liquidity needs. For example, if there is an elevated risk of default on a company’s contractual obligations, or if management believes that is reasonably likely that the company may not continue to comply with its debt covenants, the company should include comprehensive disclosures on the potential risks and effects of covenant noncompliance and whether there are any possible waivers or covenant modifications available to the company to cure or prevent such covenant violations.

For information about preparing or reviewing MD&A, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and Management’s Discussion and Analysis Section Drafting Checklist.

Non-GAAP Financial Measures In recent years, the SEC staff has increased its focus on compliance with the presentation and disclosure requirements for the use of non-GAAP financial measures. All public companies are prohibited from presenting non-GAAP financial measures in ways that are misleading or give them greater prominence than GAAP measures. These prohibitions apply to both the order of presentation and the degree of emphasis given to these measures. In April 2018, the SEC staff updated its guidance on the use of non-GAAP financial measures, available at https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm, and identified certain uses that the SEC staff considers misleading or providing undue prominence. Here are some examples of comments on the use of non-GAAP financial measures:

“To the extent you provide the non-GAAP financial measure, total segment adjusted EBITDA, please reconcile it to the most directly comparable GAAP measure, net income, as required by Item 10(e) of Regulation S-K.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #23).

“We note your presentation on page 15 of the non-GAAP measures “Gross Merchandise Volume (GMV)” and “SPE Revenue”. We also note you define GMV “as the total of uSell revenue plus revenue generated by the SPE,” an entity whose revenues are neither reportable in your financial statements nor in accordance with GAAP. Your presentation of these non-GAAP measures is inconsistent with Question 100.04 of the

11 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

Compliance and Disclosure Interpretations guidance on non-GAAP measures issued on May 17, 2016. Accordingly, please revise your presentation to remove these non GAAP measures or tell us why you believe it is not necessary to do so.” (SEC Comment Letter to uSell.com (Dec. 14, 2017), Comment #1).

“Please balance your presentation by showing a GAAP gross profit percentage with equal or greater prominence to the incremental contribution margin percentage. In addition, please revise your reconciliation of the non-GAAP measure, incremental contribution, to begin with consolidated gross profit, the most directly comparable GAAP financial measure. Refer to Question 102.10 of the updated Compliance and Disclosure Interpretation Guidance on non-GAAP financial measures issued on May 17, 2016. Furthermore, expand your disclosure on page 65 to disclose why the presentation of this non-GAAP measure is useful to investors.” (SEC Comment Letter to WideOpenWest, Inc. (May 12, 2017), Comment #6).

“Your measure of adjusted net income includes an adjustment to exclude the loss from discontinued operations. This measure appears to use an individually tailored measurement method substituted for one in GAAP. Please revise to exclude this adjustment or advise. Refer to Question 100.04 of the Non-GAAP Compliance and Disclosure Interpretations.” (SEC Comment Letter to Bandwidth, Inc. (Oct. 19, 2017), Comment #3).

To avoid SEC staff comments about non-GAAP financial measures, companies should include clear and specific disclosure of why each non-GAAP measure is useful for investors and how management uses it. The statements a company makes about non-GAAP measures in its IPO prospectus may signal how it plans to communicate with investors in the future; therefore, it is important that you carefully review any non-GAAP disclosures in the registration statement. When disclosing non-GAAP financial measures, companies must include a reconciliation of such measures to the most directly comparable GAAP financial measures. Non-GAAP financial measures must also not use individually tailored measurement methods instead of GAAP methods, which could be viewed as misleading and violative of Rule 100(b) of SEC Regulation G (17 CFR 244.100). You and the other members of the IPO working group should carefully review Regulation G, Item 10(e) of Regulation S-K (17 CFR 229.10), and the SEC staff’s guidance for any non-GAAP disclosures included in the prospectus.

For guidance in preparing compliant non-GAAP financial measures, and for more information about the SEC’s regulation of non-GAAP financial measures generally, see SEC Regulation of Non-GAAP Financial Measures.

Risk Factors Item 503(c) of Regulation S-K (17 CFR 229.503) requires the disclosure of the most significant factors that make the IPO speculative or risky. Risk factors should be specific to the company’s facts and circumstances, and the SEC staff commonly questions risk factor disclosures that could apply generally to any public company. It also may question the completeness of a company’s risk factor disclosures based on information included elsewhere in the document or other public information. Here are some examples:

“This risk factor is overly generic in nature. Please remove the risk factor or address the specific risks posed to the Company.” (SEC Comment Letter to Franklin Hill Acquisition Corp (Jan. 11, 2017), Comment #9).

“We note that the Chief Executive Officer, Lin Yi-Hsiu, will be offering the company’s securities to the public while simultaneously offering his own shares for sale. Please add a risk factor that addresses this potential conflict of interest.” (SEC Comment Letter to Leader Capital Holdings Corp. (Dec. 11, 2017), Comment #4).

“We note your disclosure on page 18 that your Chief Executive Officer resides in Canada. Please provide a risk factor pertaining to the difficulty that U.S. stockholders would face in effecting service of process against

12 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

your sole officer. This risk factor should address the risk U.S. stockholders face in: effecting service of process within the U.S. on your officer; enforcing judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against the officer; enforcing judgments of U.S. courts based on civil liability provisions of the U.S. federal securities laws in foreign courts against your officer; and bringing an original action in foreign courts to enforce liabilities based on the U.S. federal securities laws against your officer. Alternatively, please advise as to why you believe such a risk factor is unnecessary.” (SEC Comment Letter to Hoops Scouting USA (Nov. 21, 2017), Comment #4).

“Given your disclosure on page 2 and elsewhere that you intend to focus on companies in the senior housing and care industry in the United States, please add risk factors that highlight the materials risks concerning companies in that industry.” (SEC Comment Letter to Big Rock Partners Acquisition Corp. (Nov. 9, 2017), Comment #5).

To avoid comments such as these, you should carefully draft the risk factors to:

●● Concisely summarize the major risks facing the company’s business or industry. ●● Provide sufficient information to place each risk in context and allow investors to assess the magnitude of the risk.

Each risk factor should have a clear heading and identify the risk facing the company, rather than simply stating facts about the company and its industry. For example, see the following SEC comment and resulting revisions made by the company to address the comment:

SEC comment:

“We acknowledge your response that you are unclear on the DEA’s position on CBD. Please expand your risk factor disclosure to discuss why this uncertainty exists and the potential impact on your business if your products are considered by the DEA to be Schedule I controlled substances, and highlight this possibility in your risk factor header.” (SEC Comment Letter to LBC Bioscience Inc. (Jul. 31, 2017), Comment #4).

Original risk factor:

We are subject to numerous potential regulatory matters.

The Drug Enforcement Administration (“DEA”) which enforces the controlled substances laws of the United States has issued various rules and announcements concerning various items considered to be marihuana extracts which may encompass Cannabinoids. The uncertainty involves the extent to which the DEA will try to restrict the marketing or distribution of any CBD product. If the DEA were to take any aggressive action against CBD products, it would likely result in LBC ceasing operations.

(LBC Bioscience Inc. Registration Statement on Form S-1 (Apr. 20, 2017))

Revised risk factor:

We are subject to numerous potential regulatory matters. If the DEA were to take actions against CBD products as Schedule 1 controlled substances, it could cause LBC to cease operations.

13 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

The Drug Enforcement Administration (“DEA”) which enforces the controlled substances laws of the United States has issued various rules and announcements concerning various items considered to be marihuana extracts which may encompass Cannabinoids. The DEA created a separate Administration Controlled Substances Code number for marijuana extract earlier this year, defined to cover an extract containing one or more cannabinoids, and stated that such extracts will continue to be treated as Schedule I controlled substances.

If the DEA were to take actions against CBD products as Schedule 1 controlled substances or restrict the marketing or distribution of any CBD product, it would likely result in LBC ceasing operations.

(LBC Bioscience Inc. Prospectus on Form 424(b)(3) (Sep. 28, 2017))

Additionally, risk factors should not include any mitigating language, as noted in this SEC comment:

“Please revise to eliminate the last two sentences of the second paragraph of this risk factor, as they mitigate the risk you discuss.” (SEC Comment Letter to Nine Energy Service, Inc. (May 15, 2017), Comment #2).

Accordingly, you should not include (or should delete) any language in a risk factor that appears to mitigate or otherwise lessen the impact of the identified risk, even statements of objective fact. However, mitigating language may be used in the business and MD&A sections of the prospectus.

Issuers must disclose all material risks. As shown in the following example, the SEC staff will object to any language in the prospectus disclaiming a company’s responsibility to do so:

“The second and third sentences in the introductory paragraph suggest that the risk factor disclosure is not complete because you may not be disclosing all material risks. Please revise or remove this language and disclose all material risks.” (SEC Comment Letter to NPQ Holdings Limited (Aug. 10, 2016), Comment #7).

An emerging area of SEC focus is cybersecurity risk. In February 2018, the SEC issued interpretative guidance on cybersecurity disclosures, providing a framework to assist companies in preparing disclosure about cybersecurity risks and incidents involving cybersecurity in registration statements filed under the SecuritiesAct and registration statements and current and periodic reports filed under the ExchangeAct, which is available at: https://www.sec.gov/rules/interp/2018/33-10459.pdf. With the increase in frequency and severity of cyberattacks and data breaches, you should carefully consider what, if any, material cybersecurity risks or incidents should be disclosed in the prospectus, as this is likely to be an area of continued staff focus in reviewing IPO filings.

For information about drafting risk factors, see Risk Factor Drafting for a Registration Statement, Top 10 Practice Tips: Risk Factors, and Market Trends 2016/17: Risk Factors. For a form of cybersecurity risk factor, see Cybersecurity Risk Factor.

Use of Proceeds Item 504 of Regulation S-K (17 CFR 229.504) requires companies to describe their planned uses and amounts of offering proceeds, including whether any proceeds will be used to discharge debt, complete an acquisition, or provide working capital. The SEC staff may request additional information or clarification, particularly if the disclosure is general or vague or the issuer states or implies elsewhere in the prospectus that it will use the proceeds in a manner inconsistent with, or not included in, the use of proceeds section disclosure. Here are some examples of these types of comments:

14 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“Please clarify your specific plans for the proceeds of the offering or if you have no such plans discuss the principal reasons for the offering. Refer to Item 3.C.1 of Form 20-F.” (SEC Comment Letter to Jinxuan Coking Coal Limited (Feb. 9, 2018), Comment #3).

“In addition to the table on page 13, please provide a narrative summary of your expected use of proceeds, including how each level will or will not advance your planned operations. To the extent you provide this detailed disclosure elsewhere in the prospectus, you may provide a descriptive cross-reference to that disclosure.” (SEC Comment Letter to SigmaRenoPro, Inc. (Nov. 28, 2017), Comment #10).

“Please revise your Use of Proceeds table to quantify, at each level of gross proceeds received, how much you will spend for your major categories of expenditures, such as advertising, officer compensation, new personnel, platform expansion and the development of the CCMP software. Please also clarify whether you will use any offering proceeds to repay related party debt pursuant to Instruction 4 of Item 504 of Regulation S-K.” (SEC Comment Letter to Yappa World Incorporated (Sep. 28, 2017), Comment #5).

“We refer to your statement that you intend to use the net proceeds for ‘general and administrative expenses and the remainder for working capital and other general corporate purposes.’ Please clarify whether the ‘general and administrative expenses’ will cover costs related to the development of your nasal and/or oral Lorazepam spray, and state the approximate amount intended to be used for each such purpose. Refer to Item 504 of Regulation S-K for guidance.” (SEC Comment Letter to Axium Pharmaceuticals, Inc. (Sep. 15, 2017), Comment #18).

To avoid these types of comments, you should review Item 504 of Regulation S-K carefully when drafting the use of proceeds section. The instructions to Item 504 provide useful guidance and detailed requirements that apply to specified uses of proceeds, including to discharge debt and to acquire businesses or other assets.You should also make sure that disclosures elsewhere in the prospectus are consistent with that in the use of proceeds section.

Industry and Market Data Prospectuses that include industry and market data taken from industry publications or other third-party sources sometimes include cautionary language that the third-party information has not been independently verified and may not be reliable. The SEC staff will object to such cautionary language because a company is responsible for all the information in its registration statement. Even if the company files the consent of a third party as an exhibit to the registration statement (making the information provided by that person an expertized disclosure), the accuracy and completeness of the information remains the company’s responsibility under the federal securities laws. Here are some examples of this type of comment:

“We note your statements, “However, we have not independently verified any of the data from third-party sources. Similarly, our internal research is based on upon our understanding of industry conditions, and such information has not been verified by any independent sources.” It is not appropriate to infer that you are not liable for information included in your registration statement. Accordingly, please delete the statements referenced above or state specifically that you are liable for the disclosure included in the registration statement that is based on third-party sources.” (SEC Comment Letter to Immuron Limited (Jan. 18, 2017), Comment #2).

“We note your statement that “the accuracy and completeness of the [industry and market data included in the prospectus] cannot be guaranteed.” Please delete such statement or revise as necessary, so that you do

15 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

not suggest that you could lack a reasonable belief as to the accuracy and completeness of the market data that you elect to include in the filing.” (SEC Comment Letter to Global Water Resources, Inc. (Feb. 11, 2016), Comment #14).

To avoid this type of comment, you should carefully consider whether any cautionary language in the prospectus could be viewed by the SEC staff as disclaiming liability. Including this type of language could prompt the SEC staff to request that the company include an affirmative statement regarding its liability for all the information in the prospectus, which, although accurate, is disclosure that most companies would prefer not to include in their IPO prospectuses.

16 IPO Prospectuses: Avoiding and Responding to Common SEC Comments

Anna Pinedo Partner at Mayer Brown LLP Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd- Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters.

Alexandra Perry Associate at Mayer Brown LLP Alexandra (Ali) Perry is an associate in Mayer Brown’s New York office and a member of the Capital Markets practice.

Ali earned her JD from the University of Pennsylvania Law School where she was the managing editor of the Journal of Business Law and a member of the Entrepreneurship Legal Clinic. She also received a Certificate of Management from The Wharton School of Business. She received her BBA in Accounting and Finance from Emory University’s Goizueta School of Business and is a certified public accountant.

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LexisNexis, Lexis Practice Advisor and the Knowledge Burst logo are registered trademarks of RELX Inc. Other products or services may be trademarks or registered trademarks of their respective companies. © 2018 LexisNexis 17 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

A Lexis Practice Advisor® Practice Note by Anna Pinedo and Vanessa Browder, Mayer Brown LLP

Anna Pinedo

This practice note provides answers to questions frequently asked by securities lawyers and their clients regarding the federal securities laws applicable to communications and publicity matters involving companies conducting initial public offerings (IPOs) and other securities offerings under the Securities Act of 1933, as amended (Securities Act).

Specifically, this practice note includes questions relating to:

●● Publicity Guidelines during IPOs ●● Publicity Guidelines for Follow-On Offerings ●● Road Shows and Non-deal Road Shows ●● Earnings Guidance Issued Close to a Registered Offering

For more information about communications during an IPO, see IPO Process: Permitted Communications, Permitted Communications Memorandum (IPO), and SEC Communications Rules for Issuers in Registered Offerings (Chart). For additional information about road shows, see Preparing for a Road Show and Pre-Road Show Checklist. For more information about issuing earnings guidance, see Earnings Guidance, Earnings Releases: Regulatory Framework and Disclosure Process, and Filing an Earnings Release for a Public Company Checklist. For a general overview of, and links to available resources regarding, these disclosure and publicity issues, see Publicity and Communications Resource Kit.

Publicity Guidelines during IPOs Under the Securities Act, and rules adopted by the Securities and Exchange Commission (SEC), a company engaged in an IPO is restricted in what it may communicate to the public and potential investors, and the methods of communication it may use, for the IPO.

The following questions discuss the SEC’s rules that seek to ensure that a company’s communications do not improperly condition the market during the three phases of the IPO process: the quiet (or pre-filing) period, the waiting (or post-filing) period, and the post-effective period.

1 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

What is gun jumping? “Gun jumping” generally refers to unlawful offers made during the IPO process. More specifically, it refers to written or oral offers made before the registration statement is filed, and to written offers made after the registration statement is filed other than by means of a prospectus that complies with Section 10 of the Securities Act (15 U.S.C. § 77j) (a so-called statutory prospectus), a free writing prospectus, or a communication falling within one of the SEC-created safe harbors (discussed below) for communications made in proximity to an offering. While gun jumping is a serious concern, the SEC’s safe harbors provide considerable flexibility for companies. In addition, the ability of emerging growth companies (EGCs) (and, perhaps, in the future, all companies, as being considered by the SEC) to test the waters before filing a registration statement, together with the recent elimination of the ban on in connection with certain exempt offerings, have significantly reduced concerns about gun jumping.

What are the consequences of engaging in gun jumping? If the SEC determines that a company is conditioning the market or gun jumping, the SEC may require the company to delay the offering or to add disclosure to the registration statement regarding the risk that the company has violated Section 5 of the Securities Act (15 U.S.C. § 77e).

Additionally, Section 12(a)(1) of the Securities Act (15 U.S.C. § 77l) provides a rescission right to an investor who buys securities in a transaction that violates Section 5, which enables the investor to recover the purchase price paid or, if it no longer owns the securities, the difference between the purchase and the sale price of the securities, plus interest, less any amount (e.g., dividends or interest) received on the securities.

For more information about liability under Section 12(a) and other federal securities laws applicable to IPOs, see Liability under the Federal Securities Laws for Securities Offerings.

May a company publicly announce that it may go public in the next two to three years? Yes, if that is its intent. However, if the company is actively working on its IPO at the time and estimates a two- year process, counsel may recommend not making the statement for fear of a potential gun-jumping violation. See “When does the company need to start to take steps to prevent leaks about its upcoming IPO?”, below.

When does the company need to start to take steps to prevent leaks about its upcoming IPO? The company should consider itself to be “in registration” when it decides to proceed with the IPO, which is generally considered to be at the time of the initial “all-hands” organizational meeting to discuss the proposed IPO, or, if underwriters are not yet involved, an equivalent starting point. The quiet (or pre-filing) period begins at this time and continues until the registration statement is publicly filed on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

During the quiet period, the company is not permitted to make offers to sell its securities.The SEC has broadly construed an offer to include “every attempt or offer to dispose of, or solicitation of an offer to buy” as well as any publicity that has the effect of “conditioning the public mind or arousing public interest in the company.” Consequently, certain activities or types of publicity (including information appearing on the company’s website or hyperlinked to it), may result in a gun-jumping violation, even if that activity or publicity is not expressly phrased in terms of an offer to sell securities.

2 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

What steps should a company take? At the beginning of the quiet period, the company and its counsel should review the company’s website and social media accounts and remove information that is inaccurate or could conflict with the registration statement, as well as anything that could be construed as an offer of securities.The company should also implement internal controls and adopt a communications policy that, among other things, requires that all press releases and public statements about the company undergo review by counsel, limits the ability of employees to talk to or comment to the press or on social media about the company, identifies which channels of communication are approved for business use, and identifies the persons authorized to speak (or post) on the company’s behalf.

If a company is large or there is a high risk of leaks, the company may consider requiring employees working on the IPO to sign confidentiality agreements.

A company starts working on its IPO but has not publicly filed its registration statement. May the company continue to communicate to the public about its business? Yes, within certain parameters. The following communications with the public are permitted during the quiet period:

●● Communications made more than 30 days before the registration statement is filed. A communication made 30 days before the company first files the registration statement will not constitute an unlawful offer if all of the following are true: ○○ The communication (whether written or oral) does not mention the IPO and is made by or on behalf of the company and not any underwriter or proposed underwriter. ○○ The company takes reasonable steps to prevent further distribution or publication of the communication during the 30 days immediately preceding the initial public filing of the registration statement. ○○ The company is not (and during the last three years was not) a blank check company, a shell company, an issuer offering penny stocks, a registered investment company, or a business development company. See Securities Act Rule 163A (17 CFR 230.163A). ●● Regularly released factual business information. A company may continue to release factual business information during the quiet period, if it satisfies all the following requirements: ○○ The communication does not mention the IPO. ○○ It is an ordinary course communication that provides only factual business information. ○○ The timing, manner, and form in which the information to be released or disseminated is consistent in all material respects with past releases or disseminations (this requirement may disqualify issuers lacking a track record of making such disclosures). ○○ The information is intended for persons, such as customers and suppliers, other than in their capacities as investors or potential investors. ○○ The company is not a registered investment company or a business development company. See Securities Act Rule 169 (17 CFR 230.169). ●● Notice of a proposed registered offering. A company may publish a brief written notice that provides the company’s name, certain basic statements about the IPO, including its size and anticipated timing, and the securities to be offered, and a legend stating that the communication is not an offer, but does not name any underwriter or potential underwriter or describe the company’s business. See

3 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

Securities Act Rule 135 (17 CFR 230.135). ●● Offshore communications by foreign private issuers. A foreign private issuer, a foreign government issuer, or a selling securityholder of either of such issuers, may engage in certain offshore communications that mention the IPO if all of the following are true: ○○ The IPO is not conducted solely in the United States. ○○ Access to any meetings or press conferences is provided to both U.S. and non-U.S. journalists. ○○ Any written press-related materials state that the materials do not constitute an offer of securities in the United States and specify whether the issuer or any selling security holder intends to register any part of the proposed offering in the United States, and do not include any purchase order or coupon that could be returned indicating an interest in participating in the offering. See SecuritiesAct Rule 135(e) (17 CFR 230.135e).

In addition to these permitted communications, EGCs may test the waters for a proposed IPO by communicating with qualified institutional buyers (QIBs) and institutional accredited investors, as discussed below.

Companies may conduct exempt offerings in the United States (e.g., private placements made in reliance on Section 4(a)(2) or Regulation D), and outside the United States in compliance with Regulation S, concurrently with conducting an IPO. See “May a company concurrently pursue an IPO and a private placement?” and “May a company concurrently pursue an unregistered offshore offering and an IPO?”, below.

A company submits its IPO registration statement on a confidential basis to the SEC. May the company now tell the public about the IPO? Yes. Although the SEC will keep the registration statement confidential (i.e., it will not be made available on EDGAR), the company may communicate in compliance with one of the safe harbors discussed above, and EGCs may make testing-the-waters communications to QIBs and institutional accredited investors, as discussed immediately below.

What are “testing-the-waters” communications? The JOBS Act amended Section 5 of the Securities Act (15 U.S.C. § 77e) to provide that an EGC, or any other person, such as an underwriter, that it authorizes to act on its behalf, may engage in oral or written communications with QIBs and institutional accredited investors to gauge their interest in a proposed offering, whether before or after the first public filing of any registration statement, subject to the requirement that no binding orders can be solicited or accepted at that time. Though the “testing-the-waters” process is currently available only to EGCs and their authorized representatives, the SEC staff has stated that it is considering allowing all issuers and their authorized representatives to take advantage of this more flexible marketing process.

There are no form or content restrictions on these communications, but any information provided must be consistent with that in the registration statement. No written materials should be provided to the potential investors, and the company and the underwriters should review and agree on any scripts, slides, and other presentation materials before they are used. Before any communications are made, the underwriters will typically require the company to sign a letter outlining the permitted process and stating that the information presented in the testing-the-waters materials is limited to the information included in the registration statement, and that no written materials will be distributed to the prospective investors. The underwriters may also limit the number of institutions contacted.

4 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

The underwriters will typically request that the company agree in the underwriting agreement to indemnify them against liability for any material misstatements in or omissions from the testing-the-waters materials. The SEC typically requests to see any written testing-the-waters materials and may require the company to amend the registration statement to reflect any information in the materials that is missing from, or inconsistent with, the registration statement.

For more information about testing-the-waters by EGCs, see Emerging Growth Company Practice Guide and Top 10 Practice Tips: Emerging Growth Companies.

If the company is relatively unknown to the market and does not yet have an underwriter for its IPO, can the company prepare a “teaser” summary about the company and send it via a blast email to family, friends, former colleagues, and potential underwriters? Counsel should review the teaser closely to assess whether it would qualify for the Rule 163A safe harbor discussed above. Accordingly, the teaser should not mention the IPO and should be emailed more than 30 days before the initial public filing of the registration statement. Additionally, the company should take reasonable steps to prevent further distribution or publication of the communication during the 30 days immediately preceding the initial public filing, and the company may not be (and during the last three years was not) a blank check company, a shell company, an issuer offering penny stocks, a registered investment company, or a business development company.

A company that is preparing for an IPO would like to identify an underwriter, appoint a director, or hire an officer. May the company email its draft registration statement to potential candidates before the initial filing or confidential submission? In general, this is permitted. The company should inform the recipient, however, that the recipient is receiving the document only as a potential underwriter/director/officer, and that the information should be kept confidential.

May a company communicate with its shareholders before the registration statement is publicly filed? A company may generally communicate with its shareholders at any time. An IPO company may need to communicate with its shareholders for a variety of reasons, both before and after the registration statement is filed, including when selling shareholders are participating in the IPO, the company needs to obtain lock-up agreements from shareholders, or the company requires shareholder approval to proceed with the IPO.

Before the registration statement is publicly filed any such communications should be limited to only the information reasonably necessary to accomplish the purpose for which the communication is made and should provide that the information must remain confidential. For example, if shareholder approval for the IPO is required, the company would have to provide sufficient information about the proposed offering to allow for a reasonably informed shareholder vote.

Should individuals and entities named in the registration statement be notified by the company? Generally, yes. All persons named in the registration statement should be given the opportunity to review, revise, and consent to the disclosure about them included in the registration statement (subject to the SEC’s disclosure requirements, which may mandate disclosure that a party would prefer to exclude). In addition to considering

5 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers whether to submit a confidential treatment request for any sensitive business information, market practice involves doing the following before the registration statement is publicly filed on EDGAR:

●● Directors, director nominees, and executive officers should review and approve the biographical information about them, as well as their shareholdings, and each director nominee should sign the consent to be named in the registration statement required to be filed pursuant to SecuritiesAct Rule 438 (17 CFR 230.438). ●● Experts (e.g., the issuer’s independent public accounting firm) should confirm they are referenced properly in the registration statement and sign any consents required to be filed pursuant to SecuritiesAct Rule 436 (17 CFR 230.436). ●● Parties to agreements containing confidentiality provisions should waive the provisions to the extent necessary to prevent the company from breaching those agreements. ●● Any other third parties named in the registration statement should consent in writing to the disclosure to avoid any potential negative commercial impact to the company. For example, a company should consider whether to obtain consents from its celebrity clients before disclosing their names in the prospectus. ●● Principal and selling shareholders should confirm their addresses, beneficial ownership details, and any other information included in the prospectus describing their relationship to the company. ●● Any lenders or other counterparties should provide any waivers required to allow the IPO to proceed (e.g., change of control covenants waivers) and the prospectus should disclose whether the offering is still subject to their consent. ●● Any nonpublic provider (such as a subscription service) of information included in the registration statement should review and consent in writing to the disclosure that references the provider.

It is generally not necessary to obtain consents for referencing or reprinting information from publicly available sources or from parties to agreements that are required to be described in, or filed as exhibits to, the registration statement (and who, such as the parties to a loan agreement, are unlikely to object), but there are exceptions that may still make consents in such cases appropriate, such as with respect to commercially sensitive disclosure.

If a third party refuses to provide a consent, the company may need to redraft the disclosure, subject to the registration statement form disclosure requirements. The company could also request confidential treatment of the sensitive information from the SEC. However, the lack of a third-party consent does not permit the company to omit any required information from the registration statement.

A company publicly files its registration statement for the first time, and a friend of an officer of the company asks via email for details about the IPO. May this officer reply with a link to the publicly filed registration statement? No, because the prospectus included in the registration statement is not likely to constitute a Section 10 prospectus, which, for an IPO, requires stating a price range. As a result, sending the link would be an impermissible written offer. The price range is usually included later in the IPO process, at which time the prospectus may be emailed (or a link to it forwarded) to members of the public, although it would be preferable for the underwriters to handle all such communications.

To help address these situations, a company can publicly identify its investor relations contact immediately prior to the first public filing, and all inquiries about the offering received by company personnel should be forwarded to

6 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers that person for consistent replies. In this case, the investor relations contact could provide an oral or email reply stating that a registration statement has been filed with the SEC, without linking the filing.

Additionally, some companies issue a press release concurrently with making their first public filing, which typically states that a registration statement has been publicly filed with the SEC but is not yet effective (without including a link to the filing on EDGAR), and including other information about the company and the offering permitted by Securities Act Rule 134 (17 CFR 230.134). For the information permitted in a communication complying with Rule 134, see Contents of a Communication Permitted Under Rule 134 Checklist.

May a company’s CEO give an interview to the press immediately after the company publicly files its registration statement for the first time? It depends, but it is rare for a CEO to intentionally give an interview to the press immediately after the first public filing of the registration statement. The public filing of the registration statement begins the waiting period, during which oral offers and certain written offers are permitted but binding agreements to sell securities are prohibited.

For an interview with the press to not constitute an unlawful written offer, it would have to qualify for the safe harbor protection of either Securities Act Rule 134 or Rule 169, which, because of the limited information allowed under the conditions of the safe harbors, is not likely to be the case. Alternatively, the interview may possibly not constitute a written offer, but given the very broad definition of a “written communication” in Securities Act Rule 405 (17 CFR 230.405), which includes any publication or rebroadcast of an interview, and the difficulty in controlling whether an interview is recorded, transcribed, etc., a high level of caution is warranted.

The interview may qualify as media free writing prospectus under Rule 433(f), and thus would be permissible. Rule 433(f), unlike other subsections of Rule 433 (17 CFR 230.433), does not require the registration statement to include a price range. However, all the following criteria must be satisfied:

●● The company or any other IPO participant or their representatives, provided, authorized, or approved the information in the communication. ●● A Section 10 prospectus has been publicly filed (with or without a price range). ●● The interview was prepared and published or disseminated by a person: ○○ Unaffiliated with the company or other IPO participant –and– ○○ In the business of publishing, radio, or television broadcasting or otherwise disseminating written communications ●● If the company or one of its affiliates is itself the media company that wrote the relevant article: ○○ It must be a bona fide newspaper, magazine, or business or financial publication of general and regular circulation, or bona fide broadcaster of news, including business and financial news. ○○ It must have established policies and procedures for the independence of its publications or broadcasts from the offering activities of the issuer. ○○ It must have written or published the article in the ordinary course. ●● No payment was made or consideration given by or on behalf of the company or other IPO participant for the written communication or its dissemination. ●● The company or other IPO participant in question files the written communication with the SEC with the required legend within four business days after its publication, broadcast, or dissemination.

7 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

A company will be subject to liability under Section 12(a)(2) of the Securities Act (15 U.S.C. § 77l) for the information included in a media free writing prospectus, although it may correct the information in the free writing prospectus when making the filing. In addition, a CEO who says something in an interview that is inconsistent with, or not included in, the information in the registration statement, could expose the company to liability under the federal securities laws for misrepresentations or omissions in the registration statement or prospectus. Consequently, Rule 433(f) media free writing prospectuses are not often used in connection with IPOs.

For more information about the use of free writing prospectuses in IPOs, see Free Writing Prospectuses in IPOs.

A reporter writing an article on the IPO calls management to ask them to confirm/deny certain statements. How should management handle it? A “no comment,” that is, neither confirming nor denying statements in an upcoming article, is the recommended approach. If management confirms a statement—even an obvious truth—the reporter could write “as confirmed by the company,” which could create the appearance that the company participated in the preparation of the article and that the article may be viewed as an attempt to unlawfully condition the market.

May the company send an email to its employees with information about a directed share program? Yes, but sharing information and asking about participation in the program must be undertaken at different stages of the IPO process. A company may, pursuant to Rule 134, share information about a directed share program any time after a Section 10 prospectus has been publicly filed, even if it does not include a price range. However, Rule 134(d) requires that any request that employees indicate their interest in participating in the directed share program must be accompanied or preceded by a Section 10 prospectus that includes a price range.

For information about directed share programs, see Directed Share Programs.

May a company concurrently pursue an IPO and a private placement? Yes, provided that prospective private placement purchasers are not identified or solicited because of the IPO or through use of the registration statement, that is, they must become interested in or aware of the private placement through some other means, for example, having a substantive, preexisting relationship with the company or the underwriters. In that case, the private placement will not be integrated with the IPO because the registration statement would not constitute prohibited general solicitation for the private placement (which would cause the loss of the exemption). See Securities Act Sections Compliance and Disclosure Interpretation Question 139.25 [Nov. 26, 2008] and Securities Act Release No. 33-8828, available at https://www.sec.gov/rules/ proposed/2007/33-8828.pdf. General solicitation should not be used for a private placement that is conducted concurrently with an IPO, even if the exemption relied on for the offering permits general solicitation (such as Securities Act Rule 506(c) (17 CFR 230.506)).

For information about integration of private and public offerings, see Securities Offerings Integration, Integration Issues for Private Offerings, and Top 10 Practice Tips: Private Placements.

May a company concurrently pursue an unregistered offshore offering and an IPO? Yes, provided that the offering is conducted in compliance with the requirements of Rule 903 of Regulation S (17 CFR 230.903), including the requirement that the company and persons acting on its behalf not engage in any directed selling efforts in the United States regarding the offshore offering.

8 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

For information about offshore offerings by U.S. companies, see Offshore Offerings by U.S. Issuers and Regulation S Transactions.

May a company simultaneously pursue an IPO and an M&A transaction? And if so, can it share information with a potential M&A buyer? Yes. Dual-track processes are quite common. Sharing information confidentially with potential M&A buyers is permitted, even while the issuer is working on an IPO, for a possible sale of the company rather than to solicit interest in the IPO. A potential issue in any dual-track approach, however, is that if the company proceeds with the IPO rather than the sale, any potential buyers that received material nonpublic information from the company might not be able to buy or sell the company’s securities until the information is publicly disclosed or has become stale, or the company releases the buyers from any contractual prohibition on trading in its securities.

For more information about conducting a dual track process, see Dual-Track IPO and Sale Process.

Should the CEO conduct an interview the day after the IPO closing? The best practice would be to not conduct this interview because the CEO might say something material that is not disclosed in the prospectus. If that happens during the 25-day (or 90-day) period following the date the securities were first offered to the public, the company would have to amend the registration statement to include the information or prepare and file the interview as a free writing prospectus. See Section 4(a)(3) of the Securities Act (15 U.S.C. § 77d) and Securities Act Rule 174 (17 CFR 230.174). Whether an amendment or a free writing prospectus is used typically depends on which format more clearly communicates the changes. However, for certain changes, an amendment would be required, such as if the company cannot use a free writing prospectus because it is an ineligible issuer or an excluded issuer, as set forth in Securities Act Rule 164 (17 CFR 230.164).

What happens once the IPO prospectus includes a price range? Typically, this is when the full marketing effort for the IPO begins, because written offers accompanied or preceded by the company’s Section 10 prospectus setting forth the price range are now permitted. There is also some additional leeway regarding the use of media free writing prospectuses (pursuant to Rule 433(f)). Because the registration statement has not yet been deemed effective by the SEC, however, binding agreements to purchase the securities are still prohibited.

A company will typically file the Section 10 prospectus with the price range (often called the “red herring”) shortly before beginning its road show.

Publicity Guidelines for Follow-On Offerings A company conducting an offering following its IPO is subject to many of the same publicity and communications guidelines as it was for the IPO, but there are some differences.

How are publicity guidelines different for companies that are already public but are contemplating a registered offering? When an SEC reporting company conducts a follow-on offering (i.e., a registered public offering following its IPO), it must still carefully monitor its communications, especially any communication that might be deemed to constitute an offer of its securities.

A reporting company that has established a pattern of communicating factual business information and forward- looking information to the public may rely on Securities Act Rule 168 (17 CFR 230.168) to continue to do so while

9 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers engaged in an offering. IPO companies may rely only on Rule 169, which permits disclosure of factual business information but not forward-looking information.

Seasoned issuers (generally, issuers that meet the eligibility requirements to conduct a primary offering on registration statement Form S-3 or F-3) may use free writing prospectuses after a registration statement is filed, and well-known seasoned issuers (WKSIs) may use free writing prospectuses at any time, pursuant to Rules 433 and 164 (17 CFR 230.164), but may need to file them with the SEC. WKSIs may make oral and written offers before and after filing a registration statement with the SEC pursuant to Rule 163 (17 CFR 230.163) (although a written offer would need to include a legend, and may need to be filed with the SEC as a free writing prospectus), and WKSIs have some additional flexibility to issue media free writing prospectuses pursuant to Rule 433(f). (For a discussion of the media free writing prospectus requirements, see “May a company’s CEO give an interview to the press immediately after the company publicly files its registration statement for the first time?”) EGCs may continue to test the waters in connection with follow-on offerings.

For additional information about communications by WKSIs and seasoned issuers, see WKSIs and Seasoned Issuers.

Road Shows and Non-deal Road Shows A road show is the principal way to market most IPOs and follow-on offerings, and securities lawyers should be aware of the SEC’s rules and concerns with the conduct of road shows.

What is a road show? Rule 433(h)(4) defines a road show as an offer (other than a statutory prospectus or a portion of a statutory prospectus filed as part of a registration statement) that contains a presentation regarding an offering by one or more members of the company’s management and includes discussion of one or more of the issuer, its management, and the securities being offered. A road show is a concentrated marketing effort that typically begins shortly after a company’s preliminary, or red herring, prospectus is filed with the SEC. A road show for an IPO usually lasts from one to two weeks and comprises a series of live meetings between management and prospective investors at which management discusses the company’s business and financial performance, and the offering and planned use of proceeds. Management prepares its presentation, which usually includes a slide show, in advance and typically answers questions from the audience. Underwriters customarily manage the schedule for, and invitees to, the road show meetings. A live road show presentation, even if it includes visual aids, is typically not considered to be a written communication, as defined in Rule 405 (discussed below), and is thus not a free writing prospectus required to be filed with the SEC.

Companies often prerecord one or more versions of the road show for presentation to different investor groups. A video road show would be a “written communication,” as defined in Rule 405, and thus required to be filed with the SEC as a free writing prospectus unless the company makes at least one bona fide electronic road show readily available to an unrestricted audience electronically (i.e., a so-called retail road show). See Rule 433(d)(8)(ii). Rule 433(h)(5) defines a “bona fide electronic road show” as a written communication transmitted by graphic means that contains a presentation by one or more officers of a company or other persons of the company’s management and, if more than one road show that is a written communication is being used, includes a discussion of the same general areas of information regarding the issuer, management, and the securities being offered, as such other issuer road show or shows for the same offering that are written communications.

Under Rule 405, a written communication is any communication that is “written, printed, a radio or television broadcast, or a graphic communication.” A graphic communication includes “all forms of electronic media,

10 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks, and other forms of computer data compilation.”

A company should not allow any slides used in a road show to be retained by attendees. If attendees download the slides or take printouts with them after the meeting, the slides could be deemed a written communication that is neither a road show nor a bona fide electronic road show, and thus could constitute a free writing prospectus that likely would have to be filed with the SEC.

For reporting companies, especially those eligible to file shelf registration statements on Form S-3 (or Form F-3), road shows are generally much shorter, and often consist of prerecorded videos available only to prospective investors. The road show may only be available for viewing for a very limited time, and the launch, marketing, and pricing of the offering may occur in a compressed timeframe. Most follow-on offerings are now marketed either on an accelerated basis, usually over two to three days, or are marketed on a confidential, or wall-crossed, basis without a formal road show.

For more information about conducting road shows for offerings, see Preparing for a Road Show.

What is a non-deal road show? A non-deal road show is a live or video presentation by a company’s management to investors that does not mention any specific offering but rather provides information about the company and its financial performance. Non-deal road shows are commonly conducted to establish and strengthen relationships with existing and prospective investors and to establish a track record of communicating regularly with them.

May a company start a deal road show the day after a non-deal road show? A deal road show may follow a non-deal road show, but it may be prudent to allow some time to elapse between the two. The SEC has cautioned that Rule 168 (the safe harbor for releasing factual business information and forward-looking statements by reporting companies) is not available for offering-related activities.The market has evolved over the years, however, and market participants have become more comfortable with a shorter time between a non-deal road show and a road show, as well as between the completion of a non-deal road show and the launch of a follow-on offering.

Most underwriters have a process for handling these situations, including a script for the format of the communication, the types of individuals who may be invited to non-deal meetings, and whether any meeting requires “wall-crossing” procedures (in which the persons contacted agree to keep confidential the information shared with them).

For information about the wall-crossing process, see Investor Wall-Crossing Script and Email Confirmations.

May a deal road show be immediately followed by the CEO speaking at a business conference? Generally, yes. The attendees at business conferences are typically participants in the business or industry that is the subject of the conference, or related persons such as suppliers and customers, who are not necessarily attending as investors or potential investors. A company that regularly presents at business conferences could do so at any time pursuant to Rule 168 or Rule 169 safe harbor, even immediately prior to commencing a deal road show. A company should limit its communications at business conferences to those it customarily makes about its

11 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers business and should not refer to an offering. If a company does not regularly present at business conferences, the CEO’s presentation at such a meeting around the time of a road show may raise gun-jumping concerns.

What type of information is included in road show slides? Deal road show slides are subject to liability under the federal securities laws. Non-deal road show slides could also be subject to the anti-fraud provisions of the securities laws.

For IPOs, information included in (and, for follow-on offerings, also incorporated by reference into) the prospectus can be included in the road show slides. The grey area for information included in the road show slides commonly falls into the following categories:

●● The information is derived from information included in the prospectus through simple calculations or, in some cases, is derived from a combination of the prospectus and management’s presentation. Example. The prospectus includes the company’s profits over the last five years, and the road show includes the company’s cumulative annual growth rate (CAGR) over that five-year period. This may be permissible in the road show because anyone with access to the prospectus could calculate the CAGR. ●● The information is publicly available or may obtained by anyone. Example. A bar graph of the company’s revenue is overlaid with a red line that shows the average revenue for the company’s industry (with the source footnoted). Including the industry revenue in the road show may be permissible even though it is not in the prospectus if the prospectus includes disclosure that is generally consistent with the information in the slide and the information is publicly available. ●● The information is otherwise not material. Example. The prospectus may include five years of net income data, but a road show slide may show eight years of net income data. If the older data did not reflect any significant material trend, including that additional information should not be problematic.

The road show should not include any forward-looking information (e.g., projections about future events) that was not included in the prospectus. All the information in the road show should be substantiated through the typical diligence process.

A question that sometimes arises is whether a reporting company should reaffirm its annual earnings guidance during a road show. Doing so may be considered issuing new guidance, which would be material information to investors. In that event, the company would need to include the guidance in the prospectus and disclose it in a Form 8-K (or Form 6-K, for a foreign private issuer) submitted under the Exchange Act.

The road show slides include various disclaimers, legends, and required information. These should be tailored to the presentation, but typically include disclaimers relating to forward-looking statements (to allow the company to avail itself of either the statutory safe harbor for such statements or the judicially created “bespeaks caution” defense), a notice that a registration statement has been filed, and any non-GAAP financial measure reconciliations required by SEC rules. Any non-GAAP (or non-IFRS) financial measures included in the presentation must comply with the requirements of SEC Regulation G and the requirements of Item 10(e) of Regulation S-K (17 CFR 229.10) if the road show is filed with or furnished to the SEC, including the mandated reconciliation to GAAP (or IFRS) financial measures.

12 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

For information about forward-looking statements, see Safe Harbors for Forward-Looking Statements. For guidance on preparing forward-looking statements, see Forward-Looking Statement: Drafting a Compliant Statement. For information about the SEC’s regulation of non-GAAP financial measures, see SEC Regulation of Non-GAAP Financial Measures.

The underwriting agreement for an IPO or follow-on offering will customarily provide that the company will indemnify the underwriters against any losses incurred in connection with material misstatements in or omissions from road show slides and will not market the IPO using materials other than those that have been agreed upon with the underwriters.

Should companies be concerned about Regulation FD when preparing and conducting a road show? Road shows used in primary registered offerings are exempt from Regulation FD pursuant to Rule 100(b)(2)(iii) (F) (17 CFR 243.100). See also Regulation FD Compliance and Disclosure Interpretation Question 101.07 [Aug. 14, 2009]. But road shows used in exempt offerings and solely secondary offerings and road shows conducted by WKSIs before the filing of a registration statement in reliance on Rule 163, are subject to Regulation FD. Generally, reporting companies should keep a current investor presentation available on the investor relations section of their websites and, for Regulation FD purposes, should announce their participation in industry conferences and make such presentations publicly available.

For more information about Regulation FD, see Regulation FD.

What can management say in the road show presentation and when answering the audience questions? Management should follow the script prepared for the road show. During a Q&A session following the presentation, the executives may provide any information that is in the prospectus or is otherwise publicly available. Determining what information to provide may be difficult in a live presentation, so companies, underwriters, and their counsel should prepare as thoroughly as possible for anticipated questions. If any material information not included in the prospectus is inadvertently disclosed, company counsel and the underwriters should determine whether any remedial steps are required, including amending the prospectus or filing a FWP.

Earnings Guidance Issued Close to a Registered Offering Issuing earnings guidance around the time of a registered offering presents several issues. For information about issuing earnings guidance generally, see Earnings Guidance and Earnings Releases: Regulatory Framework and Disclosure Process.

May a reporting company revise its earnings guidance downwards just before launching an offering? Yes, this should be fine and could mitigate the company’s potential liability. Updating guidance to moderate the market’s expectations ordinarily would not be considered an offer under the Securities Act.

May a reporting company revise its earnings guidance upwards just before launching an offering? Yes. Rule 168 allows for forward-looking information, including earnings guidance, to be released only in the ordinary course of business in a manner that is consistent with past practice. Concerns may be raised, however,

13 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers regarding the timing of such an announcement and whether the announcement may be viewed as unlawfully conditioning the market.

If a reporting company revises its earning guidance upwards, how long should it wait before launching an offering? If the company earnings release falls within the Rule 168 safe harbor (i.e., the company regularly releases similar information at the same time(s) each year), a cooling off period may not be required. If Rule 168 is not available, however, then a cooling-off period would be recommended, the length of which will depend on the company’s circumstances, such as the risk that the new guidance will be subject to further changes. A company should be careful to avoid forward-looking statements from being included in marketing materials for an offering unless a forward-looking statements safe harbor is available.

14 IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

Anna Pinedo Partner, Mayer Brown LLP Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd- Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters. Vanessa K. Browder Associate, Mayer Brown LLP Vanessa K. Browder is an attorney at Mayer Brown LLP in New York. She focuses on securities law in the context of registered and unregistered domestic and cross-border transactions. Ms. Browder received an A.B. in philosophy from Harvard University and a J.D. from Boston College Law School. She also studied philosophy at the University of Chicago and violin with James Buswell (of New England Conservatory).

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LexisNexis, Lexis Practice Advisor and the Knowledge Burst logo are registered trademarks of RELX Inc. 15 Other products or services may be trademarks or registered trademarks of their respective companies. © 2018 LexisNexis Lexis Practice Advisor®

Market Trends 2018/19: Lock-Up Agreements

A Lexis Practice Advisor® Practice Note by Anna T. Pinedo, Mayer Brown LLP

Length of Lock-Up Period

In the case of an initial public offerings, the underwriters will seek to obtain lock-up agreements from all, or substantially all, the existing securityholders for a period of 180 days, Anna T. Pinedo subject to some limited carve-outs. In the case of a follow-on Mayer Brown LLP offerings (i.e., an offering following an issuer’s IPO), the lock- up period may vary from 30 days to 90 days depending on a This market trends article discusses lock-up agreements, number of factors, including the company’s maturity and the which are usually negotiated between the underwriters or liquidity of its stock. placement agents and the issuer and its directors, officers, and control persons in connection with offerings of securities. In almost all recent IPOs other than those involving special Pursuant to the terms of the lock-up agreement, the issuer purpose acquisition companies (SPACs), the lock-up period agrees that it will refrain from issuing for the agreed lock-up has been 180 days. To the extent that any IPO in recent years period securities of the same class as the offered securities has not had a 180-day lock-up period, the lock-up period has and securities convertible or exchangeable into the same been tiered with different parties subject to different lock- class as the offered securities. The issuer also will agree to up periods. For example, insiders may have been subject to a refrain from filing any registration statement relating to the somewhat shorter lock-up period than option holders. offer of securities, subject to certain exceptions as discussed further below. During 2019, even the most high-profile IPO issuers agreed to 180-day lock-up periods; however, there was some Similarly, the issuer’s directors, officers, and control persons speculation in the press that short-selling trading schemes will enter into lock-up agreements. The lock-up agreements were implemented that allowed stockholders to circumvent provide the underwriters or placement agents some the lock-up restrictions in at least one or two instances. assurance that new securities will not be sold immediately Looking back at variations to the 180-day lock-up period, following the proposed offering which might disrupt the the lock-up for Snap, Inc. and the lock-up for Dropbox trading market for the securities that have been offered. are deviations that may be useful to consider in terms of precedent. For additional information on lock-up agreements, see Top 10 Practice Tips: Lock-Up Agreements and IPO Key Agreements. In Snap, Inc., the company, its directors and officers, and For a form of a lock-up agreement, see Lock-Up Agreement holders of substantially all of the company’s outstanding (IPO). securities agreed that without the prior written consent of either of the representatives acting on the underwriters’ behalf, they would not engage in sales or transfers for a Act of 1933, as amended (the Securities Act), and the 150-day period. The lock-up period was understood to Securities Exchange Act of 1934, as amended (the Exchange end 10 business days prior to the scheduled closure of the Act), for the lock-up period, or (2) exercise or seek to exercise company’s trading window for the first full fiscal quarter or effectuate in any manner any rights of any nature that completed following the prospectus if (1) the lock-up the lock-up party has or may have to require the company period ended during or within 10 business days prior to the to register the lock-up party’s sale, transfer, or other scheduled closure of the trading window and (2) the lock-up disposition of any of the lock-up shares or other securities period would end at least 120 days after the pricing of the of the company held by the lock-up party, or to otherwise company’s IPO. participate as a selling securityholder in any manner in any registration effected by the company under the Securities In Dropbox, the company’s executive officers, directors, and Act. other holders agreed to a lock-up of 180 days provided that if (1) at least 120 days have elapsed since the IPO pricing, The lock-up party also agrees not to engage in any hedging, (2) the company publicly released its earnings results for the collar (whether or not for consideration), or other transaction quarterly period during which the IPO occurred, and (3) the that is designed to or reasonably expected to lead or to lock-up period is scheduled to end during or within 5 trading result in a disposition of lock-up shares during the lock-up days prior to a blackout period, the lock-up period would end period, even if such lock-up shares would be disposed of by 10 trading days prior to the commencement of such blackout someone other than the holder. The prohibited hedging or period. other similar transactions would include any short sale or any purchase, sale, or grant of any right (including any put or call Lock-Up Parties option or reversal or cancellation thereof) with respect to any lock-up shares or with respect to any security (other than a In almost all IPOs, the prospectus will disclose either that broad-based market basket or index) that includes, relates to, substantially all the pre-IPO shares have been locked up or or derives any significant part of its value from the lock-up will specify the percentage of the pre-IPO shares that have shares. been locked up. An IPO lock-up also will apply to shares The underwriters generally will agree to exceptions for the acquired through a directed share program. following: In follow-on offerings, which often are undertaken in an 1. Transfers of shares as a bona fide gift, including gifts to abbreviated time period, lock-up agreements usually only charitable organizations will be obtained from the issuer, the directors, and the officers. Other significant stockholders will not be advised 2. Transfers of shares to a trust for the direct or indirect about the potential offering since the fact that the issuer benefit of the lock-up party or such party’s immediate is contemplating a potential offering may itself constitute family material nonpublic information. Existing stockholders 3. Transfers by will or intestacy to legal representatives, generally would not want to receive material nonpublic heirs, or legatees information since the receipt of that information would 4. Transfers pursuant to a domestic order, divorce restrict their ability to trade in the issuer’s securities. settlement, or other court order Lock-Up Agreements and 5. Transfers of shares of common stock or any security convertible into or exercisable for common stock to the Carve-outs company pursuant to any company right of repurchase or right of first refusal over such securities, or transfers The customary lock-up will contain an acknowledgment of shares of common stock to the company for the net and agreement that the lock-up party will not (1) offer, sell, exercise of options, settlement of RSUs or warrants, or contract to sell, pledge, or grant any option to purchase or to cover tax withholding otherwise dispose of (collectively, a disposition) any company 6. Distributions of shares to members, limited partners, or securities or any securities convertible into or exercisable stockholders of the lock-up party or exchangeable for, or any rights to purchase or otherwise acquire, any company securities held by or acquired by the 7. Transfers to affiliates or to any investment fund or other lock-up party, or that may be deemed to be beneficially entity controlled by or managed by the lock-up party owned by the lock-up party (the lock-up shares) pursuant to 8. Transfers of shares to the company as forfeitures to the rules and regulations promulgated under the Securities satisfy tax withholding and remittance obligations of the lock-up party in connection with the vesting or exercise transaction that in each case is made to all of the holders of of equity awards granted pursuant to the company’s the company’s common stock involving a change of control; equity incentive plans or pursuant to a net exercise or however, if the strategic transaction is not consummated, the cashless exercise by the stockholder of outstanding shares remain subject to the lock-up agreement. equity awards pursuant to the company’s equity incentive plan Less frequently, the underwriters may allow a carve-out for holders to enter into a trading plan established pursuant to To the extent that the transactions identified in (1), (2), (3), Rule 10b5-1 under the Exchange Act provided that sales (4), (5), (6), and (7) do not involve a disposition or transfer for under the plan do not occur during the lock-up period and value; do not require a filing with the Securities and Exchange the entry into the plan is not required to be disclosed in any Commission; and any donee, distributee, or transferee public filing. does not otherwise voluntarily effect any public filing or report regarding the transfer, each donee, distributee, and transferee agrees to be bound by a similar lock-up Lock-Up Termination agreement. In the case of a transaction identified in (8), any Usually, the lock-up agreement will have a termination date filing made pursuant to Section 16 of the Exchange Act shall such that if the underwriting agreement is terminated, the state in the footnotes thereto that the filing relates to the company elects not to pursue the offering, or a certain drop- circumstances described in (8) and the lock-up party shall not dead date has passed, the parties will be released from their voluntarily effect any other public filings or reports regarding lock-up agreement. any such exercises during the lock-up period.

Often, the lock-up will apply to pre-IPO shares and will not The Issuer’s Lock-Up apply to shares purchased by the lock-up party in the open market in the offering or following the offering (provided that Agreement such sales are not required to be reported in any public filing, The issuer also will be subject to a lock-up agreement. The and the lock-up party does not otherwise voluntarily make issuer may negotiate limited carve-outs from its lock-up any public filing regarding the sales). agreement. Usually, the underwriters will accept carve-outs The lock-up will not restrict any grant or exercise of options for the following: pursuant to the company’s stock option plans or the exercise • The sale of the securities to the underwriters by the lock-up party of any warrant to acquire shares provided that such shares are not transferred during the • The ability to issue shares under executive compensation lock-up period. plans, which, may, from time to time, be subject to a share limit Other Lock-Up Carve-outs • The ability to file any registration statement on Form S-8 relating to securities granted or to be granted pursuant to From time to time, the underwriters may agree to other lock- any executive compensation plan in effect as of the date of up carve-outs to address special situations. the underwriting agreement or any assumed benefit plan pursuant to an acquisition or strategic transaction For example, if the lock-up party is a financial institution, which is engaged in broker-dealer, investment advisory, and • The issuance of shares (or a specified number of shares other services, the lock-up is not intended to prevent the or a percentage of the pre-transaction total shares lock-up party or its affiliates from engaging in ordinary course outstanding) in connection with acquisitions or joint lending or capital markets activities, such as brokerage, asset ventures management, derivatives transactions, and other securities • In the case of life science companies, the issuance of activities. shares (or a specified number of shares) in connection with licensing arrangements Also, the underwriters may agree to exclude from the lock- up transfers pursuant to an order of a court or a regulatory • The issuance of shares pursuant to pre-existing agreements agency. In recent offerings, underwriters also have been Generally, the issuer’s lock-up agreement in the case of permitting a carve-out for transfers pursuant to a bona fide SPAC IPOs will not contain carve-outs for stock-based third-party tender offer, merger, consolidation, or similar compensation. shares held by such holder. This early release provision for Lock-Up Releases significant holders would not be triggered in certain instances Generally, the lead book runner will have the right to release where the underwriters released the lock-up agreement of a parties from the lock-up. In recent deals, there are many holder as a result of an emergency or hardship affecting only instances in which there are joint book runners. Often, the such holder. book runners will make a point of negotiating that the release In some IPOs, the lock-up agreement may contain a release must be granted jointly by the two (or more) co-book or that is automatic and staggered pursuant to which a specified joint book runners. It is less common for a lock-up release percentage of the locked-up shares will be released from the to require the consent of all of the underwriters. The right lock-up in the event that the issuer’s stock is performing well. to release the lock-up is important, especially in the context This is not considered typical and may be limited to IPOs of an IPO since releasing the lock-up may enable the co- involving larger companies. book runners to secure a role for themselves as the lead underwriters in a follow-on offering by the issuer. Pre-IPO Private Placements Under applicable Financial Industry Regulatory Authority (FINRA) rules, the release of a lock-up in the context of an More and more often, companies are undertaking private IPO requires that public disclosure through a major news placements in close proximity to their IPOs. Investors in service be made at least two business days prior to the these pre-IPO private placements, especially cross-over fund effective date of the release. The FINRA rules do not require investors (i.e., those that invest in both public and private an announcement for a waiver relating to a transfer not made equity), will address IPO lock-up provisions in the investors’ for consideration to a transferee that has agreed to be bound rights agreement. Generally, a cross-over fund investor will by the lock-up provisions. want to ensure that the IPO lock-up will be no more than 180 days in length and that it will cover only pre-IPO shares From time to time, the lock-up parties will negotiate for the and not affect shares purchased by such fund in the open right to be released from their agreement to the extent any market. Cross-over investors also will want to be certain record or beneficial owner of any lock-up shares is granted that all company directors, officers, and 1% shareholders an early release. The release provisions may stipulate that will be subject to a substantially similar lock-up agreement. if the maximum number of lock-up shares that could be Correspondingly, cross-over fund investors will want a “most- released pursuant to such waiver in the aggregate is at favored-nations” type of lock-up release provision, such least 1% of such owner’s total lock-up shares, then certain as the one described above, which will provide that if any significant holders of the company’s securities also will be stockholder gets released from its lock-up agreement, then granted an early release from their lock-up obligations on a the cross-over funds will be released from their agreements pro rata basis based on the maximum percentage of lock-up to the same extent and in the same proportion.

Anna T. Pinedo, Partner, Mayer Brown LLP

Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd-Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters. This document from Lexis Practice Advisor®, a comprehensive practical guidance resource providing insight from leading practitioners, is reproduced with the permission of LexisNexis®. Lexis Practice Advisor includes coverage of the topics critical to practicing attorneys. For more information or to sign up for a free trial, visit lexisnexis.com/practice-advisor. Reproduction of this material, in any form, is specifically prohibited without written consent from LexisNexis.

LexisNexis.com/Lexis Practice-Advisor LexisNexis, Lexis Practice Advisor and the Knowledge Burst logo are registered trademarks of RELX Inc. Other products or services may be trademarks or registered trademarks of their respective companies. © 2019 LexisNexis IPO Accommodations for EGCs, FPIs, and Non-EGCs

Available An EGC An EGC FPI A Non-EGC A Non-EGC FPI Accommodations CONFIDENTIAL Yes, an EGC may submit its IPO New policy allows a Certain FPIs, even registration statement to the SEC for non-EGC to submit non-EGCs, are permitted SUBMISSION? confidential review as a result of JOBS Act its registration to submit their IPO provisions. statement to the registration statements SEC for confidential for confidential review. Confidentiality is established by statute. review. The new SEC policy Securities Act Section 6(e)(2). extends this to FPIs A non-EGC must beyond those indented in request confidential 2011/2012.1 treatment for its submission under A non-EGC FPI other Rule 83. than those addressed in SEC guidance would have to request confidential treatment for its submission under Rule 83. WHEN MUST 15 days prior to commencement of a traditional roadshow. If relying on new SEC policy, 15 days prior to REGISTRATION BE commencement of a FILED PUBLICLY? traditional roadshow.

Other FPIs do not have a deadline for public filing.1 TEST-THE-WATERS? Yes.

DISCLOSURE Yes. Yes. Certain No. Yes. Certain accommodations accommodations ACCOMODATIONS? available to FPIs. available to FPIs. FINANCIAL Confidential submissions may omit annual In reliance on new guidance, confidential and interim financial statements that will submissions may omit annual and interim financial INFORMATION THAT not be required to be presented at the statements that will not be required to be presented MAY BE OMITTED? time of the offering. at the time of the first public filing.

GOVERNANCE & Yes. An EGC FPI No. An FPI will benefit from benefits from the the accommodations OTHER SOX-RELATED accommodations available to FPIs under ACCOMMODATIONS? available to EGCs the securities rules and and those available the regulations of the under the securities national securities rules and the exchanges. regulations of the national securities exchanges for FPIs.

1 See Non-Public Submissions from Foreign Private Issuers, December 8, 2011, amended May 30, 2012, at: https://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm

© 2020 Mayer Brown. All rights reserved. JOBS Act IPO On-Ramp Accommodations

The following chart summarizes the accommodations made available to emerging growth companies (EGCs) as a result of the JOBS Act.

PRIOR TO JOBS ACT UNDER THE JOBS ACT

FINANCIAL • 3 years of audited financial statements • 2 years of audited financial statements INFORMATION IN SEC FILINGS • 2 years of audited financial statements for smaller reporting • Not required to present selected financial data for any period presented in companies connection with an IPO • Within 1 year of IPO, EGC would report 3 years of audited financial statements

CONFIDENTIAL • Confidential submissions now available to all issuers as a • EGCs (including FPIs that are EGCs) may submit a draft IPO registration statement SUBMISSIONS OF result of SEC staff policy, but confidential submission is not for confidential review prior to public filing, provided that such submission and DRAFT IPO incorporated into legislation or regulations any amendments are publicly filed with the SEC not later than 15 days before the REGISTRATION EGC conducts a “road show” STATEMENT

COMMUNICATIONS • Limited ability to “test-the-waters” • All issuers1, including EGCs, either prior to or after filing a registration statement, BEFORE AND may “test-the-waters” by engaging in oral or written communications with QIBs DURING THE and institutional accredited investors to determine interest in an offering OFFERING PROCESS

AUDITOR • Auditor attestation on effectiveness of internal controls over • Transition period for compliance of up to 5 years ATTESTATION ON financial reporting required in second annual report after IPO INTERNAL CONTROLS • Non-accelerated filers not required to comply

ACCOUNTING • Must comply with applicable new or revised financial • Not required to comply with any new or revised financial accounting standard STANDARDS accounting standards until such standard applies to companies that are not subject to Exchange Act public company reporting • EGCs may choose to comply with non-EGC accounting standards but may not selectively comply

EXECUTIVE • Must comply with executive compensation disclosure • May comply with executive compensation disclosure requirements by complying COMPENSATION requirements, unless a smaller reporting company (which is with the reduced disclosure requirements generally available to smaller reporting DISCLOSURE subject to reduced disclosure requirements) companies • Required to calculate and disclose the median compensation • Exempt from requirement to calculate and disclose the median compensation of of all employees compared to the CEO all employees compared to the CEO • FPIs entitled to rely on other executive compensation disclosure accommodations

SAY ON PAY • Must hold non-binding advisory stockholder votes on • Exempt from requirement to hold non-binding advisory stockholder votes on executive compensation arrangements executive compensation arrangements for 1 to 3 years after no longer an EGC • Smaller reporting companies are currently exempt from say on pay

1 On September 26, 2019, the SEC extended the ability to test-the-waters to all issuers by adopting new Rule 163B under the Securities Act of 1933, as amended. The new rule became effective on December 3, 2019.

Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) (collectively the “Mayer Brown Practices”) and non-legal service providers, which provide consultancy services (the “Mayer Brown Consultancies”). The Mayer Brown Practices and Mayer Brown Consultancies are established in various jurisdictions and may be a legal person or a partnership. Details of the individual Mayer Brown Practices and Mayer Brown Consultancies can be found in the Legal Notices section of our website. COMPARING THE REGISTRATION, REPORTING AND GOVERNANCE REQUIREMENTS FOR DOMESTIC (U.S.) COMPANIES AND FOREIGN PRIVATE ISSUERS The chart below summarizes briefly some of the benefits available to, and the accommodations made for, foreign private issuers that elect to register a class of securities with a U.S. securities exchange and offer securities publicly in the United States.

FILING OBLIGATIONS TERMINATION OF REGISTRATION / 1. Annual reports 2. Quarterly reports 3. Current reports 4. Proxy statements 5. Section 16 filings 6. Schedule 13D DEREGISTRATION and 13G filings

Required (Form 10-K), Required Required Required Required (Forms Required for Under Exchange Act Section 12(g) between 60 and 90 days (Form 10-Q) (Form 8-K) (Schedules 14A 3, 4 and 5) for 5% holders (4), termination of registration is following the end of the fiscal and 14C) for insiders only permitted if the number of year covered by the annual annual and spe- record holders falls below 300; or DOMESTIC report, depending on public cial meetings of (ii) the number of record holders ISSUER float and other factors shareholders falls below 500 and the issuer’s assets have been no more than $10 million at the end of each of its last three fiscal years

Required (Form 20-F), within Not required, Not required, Not required Not required Required for Under Exchange Act Rule 12g3- four months after the fiscal unless NYSE- unless 5% holders 2(b), an FPI may terminate its year covered by the annual listed (in which disclosure registration if certain conditions report case must file made in the are satisfied, regardless of number quarterly report home country of US holders under Form 6-K) or required Other related benefits for by the home FPIs: country exchange (in FOREIGN Can present financial which case PRIVATE statements in IFRS (as issued must file the ISSUER (FPI) by the IASB) without US GAAP disclosure on reconciliation Form 6-K) Only annual internal control reporting required (rather than quarterly) More onerous executive compensation disclosure requirements not applicable

COMPARING THE REGISTRATION, REPORTING AND GOVERNANCE REQUIREMENTS FOR DOMESTIC (U.S.) COMPANIES AND FOREIGN PRIVATE ISSUERS The chart below summarizes briefly some of the benefits available to, and the accommodations made for, foreign private issuers that elect to register a class of securities with a U.S. securities exchange and offer securities publicly in the United States.

CORPORATE GOVERNANCE REQUIREMENTS 20% REQUIREMENTS FOR CONFIDENTIAL 1. SEC and NYSE 2. NYSE / 3. NYSE/ 4. Dodd-Frank governance SHAREHOLDER FINANCIAL STATEMENTS IN SUBMISSIONS FOR / Nasdaq rules Nasdaq rules Nasdaq rules and disclosure provisions APPROVAL RULE CONNECTION WITH OFFERING REGISTRATION STATEMENTS regarding regarding regarding (Nasdaq audit compensation nominating AND NYSE) committees committees committees Financial statements cannot be more Permitted Must comply with Must comply with Must comply with Applicable provisions: Applicable than 135 days old SEC and NYSE/ SEC and NYSE/ SEC and NYSE/ - Sec. 951 (Say on Pay) Nasdaq rules Nasdaq rules Nasdaq rules - Sec. 952 (Compensation Committee Independence) - Sec. 953 (Pay vs. Performance DOMESTIC & Pay Disparity) ISSUER - Sec. 954 (Compensation Clawbacks) - Sec. 955 (Employee and Director Hedging Disclosure) - Sec. 972 (Disclosure of CEO and Chairman Separation) Financial statements go stale more Permitted Not required, Not required Not required Not applicable to FPIs: May comply with slowly. An FPI may omit interim unless disclosure home country - Sec. 951 (Say on Pay) unaudited financial statements if made in home practices and a registration statement becomes country or - Sec. 952 (Compensation requirements of effective less than nine months after required by home Committee Independence), home country the end of the last audited fiscal year country exchange if FPI complies with home exchange FOREIGN (unless the FPI has already published (in which case country practices and PRIVATE more current interim financial must file the requirements of home ISSUER (FPI) information). After that time, an FPI disclosure on country exchange must provide interim unaudited Form 6-K) financial statements (which may be - CEO pay ratio disclosure unaudited) covering at least the first six under Sec. 953 (Pay vs. months of the fiscal year, together with Performance & Pay Disparity) comparative financial statements for the same period in the prior year

MayMayer Brown is a global legal services provider advising many of the world’s largest companies, including a significant portion of Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. Our legal services include banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; US SuprSupreme Court and appellate matters; employment and benefits; environmental; financial services regulatory and enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and private clients, trusts and estates. Please visit wPlease www.mayerbrown.com for comprehensive contact information for all Mayer Brown offices. MayMayer Brown is a global services provider comprising legal practices that are separate entities, including Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated (collectively the “Mayer Brown Practices”), and affiliated non-legal service providers, which provide consultancy services (the “Mayer Brown Consultancies”). The Mayer Brown Practices and Mayer BrBrown Consultancies are established in various jurisdictions and may be a legal person or a partnership. Details of the individual Mayer Brown Practices and Mayer Brown Consultancies can be found in the Legal Notices section of our website. “Mayer Brown” and the Mayer Brown logo are the trademarks of Mayer Brown.

© 2020 Mayer Brown. All rights reserved. 2

Initial Public Offerings

At A Glance

Median Deal Size in 2019 IPOs Completed Preliminary Companies Down from IPO $ $ $ that Withdrew 2019 160 $45.8 billion $108 Registrations their IPOs Filed 2018 18 8 $46.7 billion million 15 5 $35.0 billion $107 in 2018 2017 million 2019: 208 2019: 46 2018: 217 2018: 33 Median Market Cap 2017: 188 2017: 28 Venture Capital-Backed IPOs at Time of IPO in 2019 2019 73 $21.3 billion 75 $10.5 billion $ $ $ Up from 49 2018 $580 Foreign private 2017 5 2 $9.1 billion million issuers completed an $612 in 2018 IPO in the US in 2019. million

Companies listed their stock on 37 the New York Stock Exchange Proceeds Raised in Private Equity-Backed IPOs Largest IPO of 2019 Companies listed their stock on 108 the Nasdaq Global Market 2019 18 $7.6 billion $8.1 billion 2018 31 $11.7 billion Completed by Companies listed their stock on 2017 43 $12.7 billion Uber Technologies, Inc. 15 the Nasdaq Capital Market

Top Five Sectors for IPOs in 2019 (By Number of Deals)

www. 32.5% 12.5% 11.9% 9.4% 8.1% 25.6% Computer Biotech/Pharma Medical & Healthcare Financial Services Internet of Things Other Sectors Software/Services

Source: IPO Vital Signs (Excludes IPOs by SPACs, closed-end funds, best efforts IPOs, self-underwritten IPOs, and direct offerings.)

For more information about initial public offerings, please visitmayerbrown.com © 2020 Mayer Brown

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