United States

Equity Capital Markets 2006/07 Country Q&A United States

United States

Stephen Giove, Danielle Carbone and Ferdinand Erker, Shearman & Sterling LLP

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EQUITY CAPITAL MARKETS: GENERAL Requirements for registration

1. Please give a brief overview of the equity market in your ju- Public offerings of securities must be registered under the risdiction. Has it been active? What were the large deals over Securities Act of 1933 (Securities Act). Registration is the past year? accomplished by publicly filing a registration statement with the SEC and the SEC declaring the registration statement effective. A registration statement contains two parts: Overall activity in the US equity markets has increased significantly over the last several years. Although there were fewer ■ A prospectus, which is the main marketing document for the than 90 initial public offerings (IPOs) in 2003, there were offering (see Questions 8 to 12). more than 200 in each of 2004 and 2005. The aggregate value of IPOs has also increased significantly, from over ■ Other technical information that is made public but is not US$17 billion (about EUR13.5 billion) in 2003 to more than distributed to investors, including undertakings by the com- US$36 billion (about EUR28.5 billion) in 2005, although pany and exhibits. 2005 was down from more than US$46 billion (about EUR36.4 billion) offered in 2004. The results for the first half If the offered securities will be listed on an exchange, a separate of 2006 − over 100 completed IPOs with an aggregate value registration statement must be filed with the SEC under the of over US$20 billion (about EUR15.87 billion) − are slightly Securities Exchange Act of 1934 (Exchange Act). An Exchange better than those for the comparable periods in 2004 and Act registration statement filed in connection with a concurrent 2005. offering generally may incorporate most required disclosure by referring to the prospectus contained in the Securities Act Some of the largest IPOs (based on offering amount) in 2005 and registration statement. Country Q&A the first half of 2006 were: Often, to gain a secondary listing on a US exchange (see ■ MasterCard Incorporated. Question 24), a non-US company may only list its shares with the exchange and register them under the Exchange Act ■ Huntsman Corporation. without issuing any additional shares in a public offering or filing a Securities Act registration statement. In such a case, ■ PanAmSat Holding Corporation. the Exchange Act registration statement is significantly longer, as it must include all the information that otherwise ■ Lazard Ltd. might be incorporated by reference to a Securities Act registration statement. ■ KKR Financial Corp. Once the registration statements become effective, which in the case of a concurrent public offering usually occurs on the 2. Is there a distinction between admission to listing and ad- same day that the price for the offered securities is mission to trading? determined, the issuer becomes subject to the public reporting requirements of the Exchange Act and must comply, on an ongoing basis, with the SEC's rules and the exchange on To trade on a US exchange, a security must be registered with which the shares are listed. the Securities and Exchange Commission (SEC) and listed with the exchange (see box, The regulatory authorities for listing Requirements for listing and admission to trading). As a result, there is no practical distinction between admission to listing and admission to The US equity capital markets each have specific listing criteria trading. that a company and the listed securities must satisfy for an initial listing, as well as for continued listing (see Questions 3 and 25).

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3. Please describe the main equity capital market(s) and sum- ❑ Earnings test. Pre-tax earnings from continuing opera- marise the following in relation to each market: tions and after minority interest, amortisation and equity in the earnings or losses of investees must total at least ■ The regulator. US$10 million (about EUR7.9 million) for the last three fiscal years, with a minimum of US$2 million (about ■ Any limits on the size of company. EUR1.6 million) in each of the two most recent fiscal years, and positive amounts in all three fiscal years; ■ Any minimum trading record required. ❑ Valuation/revenue with cash flow test. All of the follow- ■ Any working capital requirements. ing criteria must be met:

■ Number of companies traded. - global market capitalisation is at least US$500 million (about EUR396 million); ■ Annual cost of being listed. - revenue during the most recent 12-month period is at least US$100 million (about EUR79 million); and The main equity capital markets are the New York Stock Exchange (NYSE) and the National Association of Securities - cash flow for the last three fiscal years is at least Dealers Automatic Quotation System (NASDAQ) (see box, The US$25 million (about EUR19.8 million) in total with regulatory authorities for listing and admission to trading). positive amounts in all three fiscal years.

Regulator ❑ Pure valuation/revenue test. Both of the following criteria must be met: The SEC, an independent agency of the US government, is the main US securities regulator and administers the federal securi- - global market capitalisation is at least US$750 mil- ties laws, including the Securities Act and the Exchange Act. The lion (about EUR594 million); and SEC has rulemaking and enforcement authority. - revenue during the most recent fiscal year is at least The NYSE and the National Association of Securities Dealers US$75 million (about EUR59.4 million). (NASD), which currently regulates NASDAQ, are self-regulatory organisations (SROs). They administer their own rules and ❑ Affiliated company test. All of the following criteria must policies, and regulate the activities of their members. The rules be met: of the NYSE and NASDAQ are subject to SEC review and approval. - global market capitalisation is at least US$500 million; Size limits, trading record and working capital - the company has an operating history of at least 12 NYSE quantitative listing requirements. The NYSE has domestic months; listing standards for US companies and alternate listing standards for non-US companies. A non-US company can list - the listing company's parent or affiliated company is Country Q&A under either set of standards. Although the financial criteria an NYSE-listed company; and under the domestic listing standards are less stringent, the share distribution criteria are based on shareholdings in the US only - the listing company's parent or affiliated company re- and do not take into account shareholdings outside the US. The tains control of, or is under common control with, the alternate listing standards take into account the worldwide distri- listing company. bution of a company's shares, and consequently many non-US companies choose to qualify under those standards. Under the alternate listing standards, an issuer must satisfy the following criteria: Under the domestic listing standards, an issuer must satisfy the following criteria: ■ Share distribution. A minimum of 5,000 shareholders worldwide must each hold at least 100 shares and at least 2.5 ■ Share distribution. A minimum of 2,000 shareholders in the million shares must be publicly held worldwide. US must each hold at least 100 shares and at least 1.1 million shares must be publicly held in the US. ■ Market capitalisation. Publicly-held shares worldwide must have a market value of US$100 million (or US$60 million ■ Market capitalisation. Publicly-held shares in the US must (about EUR48 million) for companies qualifying under the have a market value of US$60 million (about EUR48 mil- affiliated company test (see above)). lion) at the time of the IPO. ■ Financial tests. One of the following tests must be satisfied: ■ Financial tests. One of the following tests must be satisfied:

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❑ Earnings test. Pre-tax earnings from continuing opera- ❑ at least 1.1 million shares with a market value of at least tions and after minority interest, amortisation and equity US$18 million (about EUR14.3 million) are publicly in the earnings or losses of investees must total at least held; US$100 million for the last three fiscal years, with a minimum of US$25 million in each of the most recent ❑ shareholders' equity is at least US$30 million (about two fiscal years. EUR23.8 million); and

❑ Valuation/revenue with cash flow test. All of the follow- ❑ there are at least three registered and active market ing criteria must be met: makers.

- global market capitalisation is at least US$500 mil- ■ Entry Standard 3. All of the following criteria must be met: lion (about EUR396 million); ❑ either a market value of listed securities of US$75 mil- - revenue during the most recent 12-month period is at lion (about EUR59.4 million) or total assets and revenue least US$100 million; and of US$75 million each for either the most recently completed fiscal year or for two of the last three most - cash flow for the last three fiscal years is at least recently completed fiscal years; US$100 million in total with a minimum of US$25 million in each of the most recent two fiscal years. ❑ there are at least 1.1 million publicly-held shares with a market value of at least US$20 million (about EUR15.8 ❑ Pure valuation/revenue test. This is the same as the million); and domestic listing standards (see above). ❑ there are at least four registered and active market mak- ❑ Affiliated company test. This is the same as domestic ers. listing standards (see above). (See Question 25 for NYSE and NASDAQ continued listing NYSE qualitative listing requirements. The qualitative require- requirements.) ments relate to corporate governance standards, including maintaining an audit committee that complies with the Exchange NASDAQ National Market's qualitative listing requirements. The Act, and distributing annual and interim reports and other news qualitative requirements relate to corporate governance alerts. standards, including maintaining an audit committee that complies with the Exchange Act, and distributing annual and NASDAQ National Market's quantitative listing requirements. interim reports. These requirements are the same for US and non-US companies Country Q&A and are considerably less stringent than the NYSE's criteria. Number of companies traded Under the NASDAQ National Market's criteria, the listed shares must have at least 400 holders each holding at least 100 shares There were 2,672 NYSE-listed companies and 3,176 NASDAQ and must have a bid price of at least US$5 (about EUR4) per Composite Index members as at 31 December 2005. share, and the company must satisfy one of the following standards: Annual cost

■ Entry Standard 1. All of the following criteria must be met: NYSE. The initial listing fee for a class of common equity securities on the NYSE is between US$150,000 (about EUR118,815) ❑ income from continuing operations before income taxes and US$250,000 (about EUR198,025), including a one-time is at least US$1 million (about EUR792,098) in the charge of US$37,500 (about EUR29,704). The annual fee for most recently completed fiscal year or in two of the last the first listed class of equity securities is the greater of a three most recently completed fiscal years; minimum fee of US$38,000 (about EUR30,100) or a fee calculated on a per-share basis. There are additional fees for ❑ there are at least 1.1 million publicly-held shares with a additional listed classes. The total fees payable by a listed market value of at least US$8 million (about EUR6.3 company in any calendar year are capped at US$500,000 (about million); EUR396,049).

❑ shareholders' equity is at least US$15 million (about NASDAQ National Market. The initial listing fee for the NASDAQ EUR11.9 million); and National Market consists of a US$5,000 (about EUR3,960) application fee plus an additional amount of between ❑ there are at least three registered and active market US$100,000 (about EUR79,210) and US$150,000. The makers. annual fee for common or ordinary shares is based on total shares outstanding in the US for all listed classes and ranges from a ■ Entry Standard 2. All of the following criteria must be met: minimum of US$24,500 (about EUR19,406) to a maximum of US$75,000 (about EUR59,407). For American Depositary ❑ the company has a two-year operating history; Shares (ADSs), which represent an indirect interest in the

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issuer's common or ordinary shares, the annual fee ranges from a 7. Briefly outline the role of advisers commonly used for an minimum of US$21,225 (about EUR16,812) to a maximum of IPO. US$30,000 (about EUR23,763). There is no separate cap similar to the one used by the NYSE, but there is an effective cap because the maximum fee for equity securities is US$75,000 for The main advisers involved in an IPO are the investment banks shares, plus US$30,000 for ADSs. The fees cannot be higher, that act as underwriters, the issuer's and underwriters' lawyers, regardless of how the classes are listed. and the issuer's public accounting firm.

Underwriters INITIAL PUBLIC OFFERINGS (IPOs) ON THE MAIN EQUITY CAPITAL MARKET(S) The lead underwriters give financial advice to the issuer, including advice on the valuation of the company, and manage 4. What are the main ways of issuing shares in an IPO? the marketing of the securities to prospective investors (see Question 13). A broader syndicate of underwriters usually joins in the marketing efforts. The main ways of issuing shares in an IPO are: Lawyers ■ Primary offering. The issuer offers and sells newly issued shares in an underwritten offering. The issuer's lawyers are responsible for drafting the registration statement and managing the legal aspects of the offering. ■ Secondary offering. Shareholders of the issuer offer and sell already outstanding shares in an underwritten offering; how- The underwriter's lawyers also participate in drafting the registra- ever, this is often not done in an IPO because there can be a tion statement and lead the due diligence process. For negative market perception when insiders sell in an IPO. companies in highly-regulated industries or with operations in non-US jurisdictions, the issuer and underwriters may also retain In either case, the offer and sale must be registered with the SEC lawyers that specialise in those matters. because the IPO involves a public offering (see Question 2). Public accounting firm Exchange listings of shares without concurrent offerings (see Question 2) are also possible. See Question 6.

5. Is a sponsor or other listing agent required and if so, what is 8. Please summarise the requirements for a prospectus (or oth- its role? er main offering document).

Neither a sponsor nor other listing agent is required to list securi- The prospectus is the primary disclosure document used in an ties on an exchange or to register them with the SEC. The issuer offering. The contents of a prospectus are mandated by the and its lawyers deal directly with the exchange and the SEC. requirements of the applicable registration statement form, and the disclosure must include all "material" information, that is, Country Q&A matters that a reasonable investor would likely deem important in 6. Is a reporting accountant required and if so, what is its role? determining whether to purchase the security (see Question 10).

The issuer's financial statements included in a registration 9. Are there any exemptions from the requirements for a pro- statement must be audited by an independent public accounting spectus (or other main offering document)? firm registered with the Public Company Accounting Oversight Board. The public accounting firm: In a registered public offering, a written prospectus meeting the ■ Must consent to the use of its audit opinion in the registra- requirements of the Securities Act must be delivered. tion statement.

■ Reviews any unaudited interim financial statements 10. Please outline the contents of the prospectus (or other main included in the registration statement. offering document).

■ Issues a comfort letter to the underwriters and the issuer's board of directors relating to the financial information that is The contents of a prospectus depend on the requirements of the not covered by the audit opinion. registration statement form that the issuer is eligible to use. In an IPO, the issuer typically uses:

■ Form S-1 if it is a US company.

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■ Form F-1 if it qualifies as a foreign private issuer. ■ Related-party transactions. This describes certain transactions between the company and its directors, executive offic- Once the issuer has been a public company for at least 12 ers and significant shareholders. months and has filed its periodic reports on a timely basis, it may be eligible to use Form S-3 (or Form F-3 for a foreign private ■ Principal shareholders. This shows the share ownership of issuer), which is a short form registration statement that allows directors, executive officers and holders of more than 5% of the issuer to incorporate by reference information from its the issuer's equity before and after the offering. periodic reports into the prospectus. ■ Description of capital stock. This is a brief description of the A typical IPO prospectus must contain the following information: main terms in the issuer's certificate of incorporation, bye- laws or other organisational documents and the security ■ Summary. This summarises the information in the prospec- being offered, including voting rights and dividends. tus and includes an overview of the business, financial information and the key terms of the offering. ■ Underwriting. This describes how the issuer plans to distribute the securities and the factors considered in determining ■ Risk factors. This describes the most significant factors that the initial public offering price. make an investment in the issuer speculative or risky. ■ Legal matters. This identifies the law firms representing the ■ Use of proceeds. This is a statement of the main purposes issuer and the underwriter. for which the issuer intends to use the net proceeds and the approximate amount intended to be used for each purpose. ■ Experts. This identifies the independent public accounting firm and any other experts that may be required to give an ■ Dividend policy. This describes the issuer's dividend policy. opinion on the prospectus.

■ Capitalisation. This shows the capitalisation of the issuer at ■ Financial statements. This provides three years of audited the date of the most recent interim balance sheet and on a financial statements and unaudited financial statements for pro forma basis setting out the application of the proceeds any required interim periods. from the offering. This information is not required but is usually provided. If the issuer is a foreign private issuer, certain additional information must be included in the prospectus, for example, informa- ■ Dilution. This shows a comparison of the public contribution tion on the enforcement of judgments against the issuer and on under the public offering and the effective cash contribution exchange controls and taxation of shareholders in the issuer's of insiders (officers, directors, promoters or affiliates) where home country. there is a disparity between the public offering price and the Country Q&A effective cash cost to insiders of their common equity securities. 11. How is the prospectus (or other main offering document) prepared and verified? ■ Selected financial data. This shows five years (and any interim periods) of financial data. The issuer and its lawyers prepare the prospectus with input from ■ Management's discussion and analysis of financial condition the underwriters and their lawyers, and the issuer's public and results of operations. This discusses business trends accounting firm. The underwriters and their lawyers conduct due and key drivers of the issuer's performance that manage- diligence on the issuer and in relation to the information in the ment believes to be important to an investor's understanding prospectus, which primarily includes: of the issuer's financial statements. It contains a year-to-year comparative discussion of the results of operations for the ■ A review of corporate documents, material contracts, litiga- three most recent fiscal years and any interim periods, as tion and intellectual property and other legal and business well as a discussion of liquidity and capital resources, off- matters material to the issuer. balance sheet arrangements, contractual obligations and critical accounting policies. ■ Detailed discussions with management about the contents of the prospectus. ■ Business. This describes the material aspects of the issuer's business, including information on its main products and ■ Interviews with the issuer's auditors, main customers and services, raw materials, intellectual property, customer con- suppliers. centration, competition, and research and development activities. Market and industry data is taken from publicly-available information or reports prepared by experts who consent to ■ Management. This describes the five-year employment his- including the data in the prospectus. tory of directors and executive officers, compensation and option grants, employee benefit plans and employment contracts.

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12. Who is responsible for the content of the prospectus (or other Exchange Act): main offering document) and any liability arising from its contents? ■ Employ any fraudulent scheme.

■ Make any untrue statement of a material fact or omit to state The issuer of the securities is strictly liable for the content of the a material fact necessary to make the statements made, in prospectus. Liability arises primarily under sections 11, 12 and light of the circumstances under which they were made, not 15 of the Securities Act and Rule 10b-5 under the Exchange Act. misleading.

Section 11 liability ■ Engage in any conduct that would operate as fraud or deceit on any person. Any purchaser of security under a registration statement can sue the issuer and the following persons if that registration statement An important distinction between Rule 10b-5 and sections 11 contains an untrue statement of a material fact, or omits to state and 12 is that to succeed in a claim under Rule 10b-5, the a material fact required to be stated in it or that is necessary to claimant must show that the person selling the security had an make the statements in it not misleading (section 11, Securities intent to deceive or a reckless disregard of the truth. Act): Defences ■ Anyone who signed the registration statement (which includes the issuer's chief executive, financial and account- A person other than the issuer (such as an underwriter) against ing officers, and at least a majority of the issuer's directors). whom a claim is made has a due diligence defence.

■ Anyone who was a director of the issuer (or who consented to For section 11 offences (see above, Section 11 liability), defend- be named as a director) at the time the registration state- ants must show that, after a reasonable investigation, they had ment was filed. reasonable grounds to believe, and did in fact believe, that at the time the registration statement became effective the statements ■ Every accountant, engineer, appraiser or other expert who it contained were true and that there was no material omission. consented to being named as having prepared or certified any part of the registration statement or any report or valua- For section 12 offences (see above, Section 12 liability), defend- tion used in the registration statement (but liability is lim- ants must show that they did not know, and in the exercise of ited to that information). reasonable care could not have known, of the untruth or omission. ■ Every underwriter. For section 15 offences (see above, Section 15 liability), a Section 12 liability defence is if the controlling person had no knowledge of, or reasonable grounds to believe in, the existence of the facts that Any purchaser of a security can sue any person who (section 12, resulted in the alleged liability. Securities Act): Although Rule 10b-5 does not expressly afford a defendant an ■ Offered or sold the security to that purchaser in violation of affirmative due diligence defence, an adequate due diligence Country Q&A section 5 of the Securities Act. investigation can negate the required showing of an intent to deceive or a reckless disregard of the truth. ■ Offered or sold the security to that purchaser by means of a prospectus or oral communication that included an untrue statement of material fact or omitted to state a material fact 13. Briefly explain the ways used to market an IPO. necessary in order to make a statement, in light of the circumstances under which it was made, not misleading. Road shows are used to market an IPO. A road show lasts about Section 15 liability one to three weeks during which the underwriters, accompanied by the issuer's management, make presentations to prospective Every person who controls (through share ownership, agreement investors and market the securities using a preliminary or otherwise) any other person that is liable under section 11 or prospectus that specifies the amount of securities being offered 12 is also jointly and severally liable with the person, unless the and a price range for the securities. During the road show, the controlling person had no knowledge of, or reasonable grounds to underwriters obtain indications of interest from prospective believe in, the existence of the facts that resulted in the alleged investors and build a book of demand for the securities being liability (section 15, Securities Act). offered based on the number of securities that potential investors indicate they would be willing to purchase at particular price Rule 10b-5 liability points.

It is also unlawful for any person, in connection with the purchase At the end of the road show, the underwriters and the issuer or sale of any security, to do any of the following (Rule 10b-5, review the demand for the securities at various price points and

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establish the size and price of the offering. At that time, the securities on the settlement date, which is usually three business issuer and the underwriters enter into an underwriting days later. In most offerings, the issuer grants the underwriters agreement, which requires the underwriters, subject to the an option to purchase up to an additional 15% of the number of satisfaction of specified closing conditions, to purchase the securities initially offered to cover over-allotments. securities from the issuer (see Question 17). A final prospectus will then be prepared which, along with written confirmations of Representations and warranties sale, is provided to investors purchasing securities. The issuer represents to the completeness and accuracy of the prospectus and a variety of other matters related to its operations. 14. Describe any potential liability from publishing research reports by connected brokers and ways used to avoid such lia- Lock-up agreement bility. The underwriting agreement usually specifies a lock-up period (typically 180 days for IPOs) during which the issuer and its Underwriters participating in a registered public offering may not directors, officers and most shareholders agree not to sell securi- issue research reports unless one of the "safe harbours" for ties of the same class as the offered securities, subject to certain companies that are already public reporting companies in the US negotiated exceptions. is available. The issuing of the research report by a distribution participant can result in a violation of section 5 of the Securities Closing conditions Act, which may allow the purchaser of the security to rescind the purchase. Also, the issuer and the underwriters may be liable for The underwriters' obligation to purchase and pay for the securi- the information contained in the research report. ties is subject to the satisfaction of specified closing conditions, including the: The SROs prohibit the publication of research by managers and co-managers of an offering for: ■ Continued effectiveness of the registration statement.

■ 40 days after the offering in the case of an IPO. ■ Receipt of a bring-down comfort letter and legal opinions from the issuer's and underwriters' lawyers on the closing ■ Ten days after the offering in the case of a follow-on offering. date.

In an IPO, participating underwriters or dealers (other than In addition, a standard underwriting agreement limits the obliga- managers and co-managers) cannot publish research during a tion of the underwriters to purchase the securities in the event 25-day period after the offering. that there is a material adverse change in the issuer's business after the underwriting agreement is signed, but before the Country Q&A offering closes. 15. Is the bookbuilding procedure used and if so, in what circumstances? Indemnification

The issuer agrees to indemnify the underwriters if they incur any The bookbuilding process is typically used (see Question 13). loss or liability as a result of an untrue statement of a material fact or a material omission in the registration statement or prospectus. 16. Where bookbuilding is used, how is any related retail offer dealt with? Termination

The underwriters can terminate the underwriting agreement if a Most IPOs include retail investors, with about 20% of the shares significant external event occurs, such as suspension of trading usually being marketed to retail investors during the marketing on the relevant exchange. period (see Question 13). Often issuers include investment banks with significant retail accounts as co-managers or syndicate members to assist with sales to retail investors. 18. Please provide a summary of the timetable for a typical IPO.

17. What are the typical terms of the underwriting agreement? An IPO can take between three and six months to complete and the actual timing depends mainly on the lead time to prepare the registration statement, which is a process typically driven by: Purchase and sale ■ The time needed to prepare three years of SEC-compliant The underwriters commit to purchase the securities from the financial statements that are either prepared in accordance issuer on the pricing date and, subject to the satisfaction of the with US Generally Accepted Accounting Principles (GAAP) closing conditions (see below, Closing conditions), to pay for the or reconciled to US GAAP.

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■ The extent of the SEC's comments. 20. What is the approximate cost of an IPO?

■ Market conditions. The cost of an IPO depends mainly on the complexity of the The SEC registration process is divided into three periods: issuer's business and can be between about US$1 million (about EUR792,098) and US$5 million (about EUR4 million). The ■ Pre-filing period. During this period, the registration state- main costs (excluding underwriting discounts and commissions) ment and prospectus are prepared and due diligence is con- include: ducted. No offers, whether oral or written, are permitted. ■ Professionals' fees. ■ Period between filing the registration statement and effectiveness. This is known as the "waiting period" during which ■ Regulatory filing fees. the SEC provides comments on the registration statement, generally within 30 days of filing, and the road show and ■ Costs for printing the prospectus. other marketing efforts are undertaken. Oral offers are permitted, but written offers may not be made (other than pur- ■ Road show expenses. suant to a statutory prospectus) until the registration statement is declared effective. In addition, the underwriters receive a discount or commission in connection with the offering, which is a percentage of the gross ■ Period after effectiveness. During this period the securities offering proceeds. are priced, sales are confirmed and the securities are delivered to investors, typically within three business days of the Ongoing costs of a public company include the costs of additional first trade. auditing staff to comply with periodic reporting requirements and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), especially section 404 (relating to internal controls), investor relations 19. Are there rules on price stabilisation in the period after trad- matters and directors' and officers' liability insurance. ing starts?

EQUITY FINANCE It is unlawful for any person to stabilise, effect any syndicate covering transaction or impose a penalty bid in connection with 21. How common are secondary share issues as a way of raising the offering of a security unless certain conditions are satisfied equity finance? (Rule 104, Regulation M, Exchange Act). Stabilising activities are permitted before and after the pricing of an offered security, but only to prevent or slow a decline in the market price of the Secondary (follow-on) offerings are a very common way for public security. companies to raise additional financing. In 2005, more than two- thirds of the common share offerings completed in the US were The key conditions for stabilisation under Rule 104 relate to follow-on offerings. notice and price, as well as priority for independent bids, as follows: Country Q&A 22. What are the main ways of raising equity finance? ■ The party making the stabilising bid must disclose to its counterparty at the time the bid is made that the bid is being made for stabilisation purposes. The main ways of raising equity finance are through:

■ The price at which a stabilising bid may be made depends ■ SEC-registered public offerings. This includes an IPO (see on whether the main market for the issuer's equity securities Question 4). is open or closed and whether the bid is made before or after the pricing of the security that is the subject of the offering. ■ Private placement. This is an offering that does not involve a public offering and is typically made to accredited investors ■ Stabilising bid levels cannot exceed the lower of the offering (institutions or high net-worth individuals) without a general price of the security being offered, or the stabilising bid in solicitation or advertising by the issuer. Securities sold in a the main market if it is open (or, if it is not open, the stabil- private placement cannot be resold without registration or an ising bid in the main market at its previous close). exemption from registration.

■ Priority must be granted to independent bids that are made ■ Rule 144A offerings. This is a private placement of securi- at the same price as the stabilising bid, regardless of the ties to an intermediary that resells immediately to qualified size of the independent bid at the time it was placed. institutional buyers, commonly referred to as QIBs (institutions that own or manage at least US$100 million (about Rule 104 identifies a number of additional criteria that must be EUR79 million) in securities). Rule 144A offerings often satisfied when stabilising. form the US market component of global offerings by foreign

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issuers. Securities cannot be offered under Rule 144A if ■ Compliance with the Sarbanes-Oxley Act and the continued they are of the same class as, or fungible with, securities listing requirements of the relevant exchange, most impor- listed on a US exchange. tantly the corporate governance requirements.

■ Private investment in public equity. This is a transaction that In addition, listed companies may be required to comply with involves a private placement of equity securities of a public additional rules when undertaking certain transactions, for company and an obligation to file a registration statement example, compliance with the proxy rules in connection with a within a short period of time from closing so that the pri- stock tender offer. vately-placed restricted securities can be resold into the public market. Domestic and foreign companies

Periodic reporting. The reporting requirements imposed by the 23. Do existing shareholders have first refusal (pre-emption Exchange Act are similar for US companies and non-US rights) over issues of new shares? If so, please outline the re- companies, although they are less onerous for non-US companies quirements and whether they can be excluded. that qualify as foreign private issuers.

A US company must file with the SEC: It is unusual for US public company shareholders to have pre- emption rights. Whether or not shareholders have pre-emption ■ An annual report on Form 10-K after the end of each fiscal rights is a matter of corporate law of the jurisdiction in which the year. company is incorporated. Although most states allow a company to grant special rights to shareholders in the company's certifi- ■ Quarterly reports on form 10-Q after the end of its first three cate of incorporation, including pre-emption rights, pre-emption fiscal quarters. rights are not statutorily required in most states. ■ Current reports on Form 8-K when certain specified events occur. 24. Is it common for a company to seek a secondary listing in your jurisdiction? If so, please briefly outline the regulatory A foreign private issuer must: requirements. ■ File an annual report on Form 20-F within six months after the end of its fiscal year, but is not required to file quarterly It is fairly common for non-US companies that have securities reports on Form 10-Q or current reports on Form 8-K. listed on exchanges outside the US to seek an additional listing on a US exchange. Depending on the issuer's functional currency ■ Furnish on Form 6-K any material information that it makes Country Q&A and local laws, a secondary listing in the US can be made directly public under its home jurisdiction's laws or stock exchange (through a listing of the issuer's common or ordinary shares) or requirements, or is required to distribute to its shareholders, indirectly (through the listing of ADSs that represent an indirect such as bi-annual or quarterly reports. interest in the issuer's common or ordinary shares). The regulatory requirements for a secondary listing generally are no The Sarbanes-Oxley Act and the Exchange Act rules different than those for a primary listing, although a listing on a implementing the Sarbanes-Oxley Act impose numerous US exchange may be made without a concurrent offering of additional requirements on listed issuers, including: securities in the US. ■ The certification of SEC filings.

CONTINUING OBLIGATIONS ■ The submission of reports on internal controls over financial reporting. 25. Please outline any continuing obligations to which listed companies are subject, in particular: Each annual and, in the case of a US issuer, quarterly report filed with the SEC must be accompanied by certifications signed by ■ The key areas covered by the obligations. the company's principal executive and financial officers. The certifications must cover, among other things: ■ Whether the same rules apply to domestic and foreign companies. ■ The completeness and accuracy of the disclosure in the report. ■ How these obligations are regulated and any penalties for breach. ■ The fairness of the presentation in the company's financial statements.

Key areas ■ The effectiveness of the company's disclosure controls and procedures and internal control over financial reporting. The key areas of continuing obligations for listed companies are: In addition, each annual report must include a management ■ Periodic reporting under the Exchange Act. report and auditor's report on the company's internal control over

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financial reporting as required by section 404 of the Sarbanes- ❑ 750,000 shares are publicly held; Oxley Act. The reports and certifications can be particularly onerous and are currently subject to phase-in periods that allow ❑ shareholders' equity is at least US$10 million (about newly-public companies to delay compliance. Foreign private EUR7.9 million); and issuers that are not subject to Exchange Act reporting must provide the reports and certifications required by section 404 of ❑ there are at least two registered and active market mak- the Sarbanes-Oxley Act beginning with their annual reports for ers. fiscal years ending on or after 15 July 2007. In May 2006, the SEC announced that it expects to take a series of actions ■ Maintenance Standard 2. All of the following must be satis- intended to improve the implementation of section 404, fied: including issuing further guidance and a short postponement for small companies. ❑ the market value of publicly-held shares is US$15 million (about EUR11.9 million); NYSE continued listing requirements. The NYSE's quantitative continued listing requirements allow the exchange to de-list or ❑ 1.1 million shares are publicly held; suspend trading of a security if any of the following apply: ❑ the market value of listed securities is US$50 million ■ The number of shareholders falls below 400. (about EUR39.6 million) or the total assets and total revenue is US$50 million each for the most recently ■ The number of shareholders falls below 1,200 and the aver- completed fiscal year or two of the last three most age monthly trading volume is less than 100,000 shares for recently completed fiscal years; and most recent 12 months. ❑ there are at least four registered and active market mak- ■ The number of publicly held shares is less than 600,000. ers.

■ The global market capitalisation of the company falls below In addition, NASDAQ can suspend or terminate a listing in a certain levels. number of other circumstances, including if the listed company initiates insolvency proceedings or if it fails to maintain ■ The average closing price of the security is less than US$1 an audit committee in compliance with the Exchange Act. (about EUR0.79) over a consecutive 30 trading-day period. Regulation and penalties In addition, the NYSE can take discretionary enforcement action against a listed company under a number of circumstances, A failure to file the reports required by the Exchange Act can including if: result in the SEC bringing an enforcement action against the issuer seeking injunctive relief. In addition, any officer of the ■ The company's assets are substantially reduced. company who knowingly made a false certification in connection with an Exchange Act report can potentially be subject to both: ■ The company has discontinued its business. ■ Monetary fines and criminal sanctions for violating section ■ Insolvency proceedings have been initiated. 13(a) or 15(d) of the Exchange Act. Country Q&A

■ The listed security is without value. ■ SEC and private actions for violating section 10(b) of the Exchange Act and Rule 10b-5. ■ The security's Exchange Act registration becomes ineffec- tive. Failure to comply with an exchange's continued listing requirements can result in a suspension of trading or de-listing. ■ The company violates any of its listing or other agreements with the NYSE, including failing to maintain an audit committee in compliance with the Exchange Act. FINANCIAL PROMOTION

NASDAQ National Market's continued listing requirements. For 26. Are there restrictions on the communication of financial pro- continued listing on The NASDAQ National Market, listed shares motions? If so, please give details and penalties for breach. must have at least 400 holders each holding at least 100 shares and a bid price of at least US$1 (about EUR0.79) per share, and one of following standards must be met: The SEC imposes restrictions on communications by an issuer and other offering participants before, during and for a period of ■ Maintenance Standard 1. All of the following must be satis- time after, an offering. In December 2005, the SEC substantially fied: modernised communications during the offering process through various new and revised SEC rules referred to as the Securities ❑ the market value of publicly-held shares is US$5 million Offering Reform (SOR) (see Question 29). (about EUR4 million);

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©This article was first published in the PLC Cross-border Equity Capital Markets Handbook 2006/07 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact [email protected], or visit www.practicallaw.com/equitieshandbook Equity Capital Markets 2006/07 Country Q&A United States

THE REGULATORY AUTHORITIES FOR LISTING AND ADMISSION TO TRADING

US Securities and Exchange Commission (SEC) F +1 212 656 2126 E [email protected] Head. Christopher Cox (Chairman) W www.nyse.com

Contact details. Division of Corporation Finance Main responsibilities. NYSE Group is a leading provider of Office of International Corporate Finance securities listing, trading and market data products and 100 F Street, N.E. services, and it operates the New York Stock Exchange. NYSE Washington, DC 20549 Regulation, a subsidiary of NYSE Group, has primary responsi- United States bility for the regulatory oversight of NYSE Group and its T +1 202 551 3450 exchange subsidiaries. F +1 202 772 9207 E [email protected] NASDAQ W www.sec.gov Head. Robert Greifeld (President and Chief Executive Officer) Main responsibilities. The SEC is an independent agency of the US government and the main US securities regulator. The Contact details. Listing Qualifications stated mission of the SEC is to protect investors, maintain fair, 9600 Blackwell Road orderly and efficient markets, and facilitate capital formation. Rockville, MD 20850 United States NYSE Group T +1 877 536 2737 F +1 301 978 8069 Head. John Thain (Chief Executive Officer) E [email protected] W www.nasdaq.com Contact details. International Client Services Gregg Krowitz Main responsibilities. NASDAQ is the largest US electronic 20 Broad Street, 10th Floor stock market. The NASD currently regulates NASDAQ; however, New York, NY 10005 the SEC has authorised NASDAQ's planned separation from the United States NASD and the establishment of NASDAQ's own independent T +1 212 656 5746 SRO with rules regarding trading, listing, membership and

Before filing a registration statement, any communication, ■ Communications containing only limited factual business Country Q&A whether oral or written, that may be viewed as an offer of the information about the issuer. securities being registered is prohibited. The term "offer" is defined very broadly, and statements that do not explicitly refer Foreign private issuers have the benefit of an additional safe to an offering can be deemed to be offers. After a registration harbour for offerings of securities made in the US, so that giving statement is filed but before its effectiveness, oral offers are journalists access to certain press conferences, meetings and permitted and written offers (defined to include offers made by materials outside the US will not be deemed to be offers of the radio, television, e-mail and the internet) can be made only by a securities if: preliminary prospectus that complies with the SEC's rules or by a free writing prospectus, which is a separate written offering- ■ The offering itself will also be made offshore. related communication filed with the SEC. After the SEC declares the registration statement effective, additional written ■ Access is provided to both US and non-US journalists. offering materials can be provided to investors, provided that the materials are accompanied or preceded by a final prospectus. ■ Any press-related materials that are provided meet certain The SEC refers to violations of these restrictions as "gun requirements. jumping". The SEC may impose a number of penalties for a violation of the There are a number of safe harbours that provide issuers and gun-jumping prohibition. If the violation occurs before the SEC other offering participants with protection for communications declares the registration statement effective, the SEC cannot made around the time of an offering. In the SOR, the SEC declare the registration statement effective until after a cooling- expanded the categories of written offering-related communica- off period, so that the effects of any improper market tions that may be made apart from a prospectus. The SEC also conditioning can dissipate. In addition, if an illegal offer was created new categories of written communications that would not made to investors who ultimately purchased securities in the be deemed offers, including: offering, the investors may have the right to cause the issuer to repurchase the securities from them at the IPO price or, if the ■ Communications made 30 days before the registration state- investors have already resold the securities, to require the issuer ment is filed, provided that they do not refer to the offering. to pay damages in the amount of any losses from the IPO price at the time of resale.

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MARKET ABUSE AND INSIDER DEALING REFORM

27. Is there an offence for market abuse? If so, please provide 29. Please summarise any proposals for reform and whether they details of the offence and penalties. are likely to come into force and, if so, when.

It is unlawful for the issuer, any selling shareholders or any other In December 2005, the SOR took effect, modernising the distribution participants (including the underwriters and their communications regulatory scheme applicable to registered affiliates) to bid for, purchase or attempt to induce another securities offerings and streamlining the registration and offering person to bid for or purchase, a security offered during certain process. The SOR affected four aspects of the offering process: specified restricted periods (Rules 101 and 102, Regulation M, Exchange Act). There are exceptions for certain types of transac- ■ Written communications other than the preliminary and final tions and securities, most of which are inapplicable in the statutory prospectuses. context of an IPO. Regulation M also prohibits certain stabilisation activities (see Question 19). ■ Procedural aspects of the registration process for shelf offerings (registered offerings made on a delayed or continuous In addition, Rule 10b-5 prohibits fraudulent conduct and basis). misleading statements in connection with the purchase or sale of any security (see Question 12). ■ Prospectus delivery.

Violations of these rules can result in civil penalties. In addition, ■ Liability for information conveyed in an offering. a private right of action may also be available under Rule 10b-5. The SOR did not address offerings exempt from registration under the Securities Act, such as private placements. 28. Is there an offence for insider dealing? If so, please provide details of the offence and penalties. In light of the substantial changes brought about by the Sarbanes-Oxley Act and more recently by the SOR, further comprehensive amendments to the rules governing listed It is unlawful for an insider who has a duty of trust or confidence companies and public offerings seem unlikely in the near future. to an issuer or its shareholders to trade securities on the basis of The SEC, however, has proposed reforms that address more material, non-public information (Rule 10b-5, Exchange Act). limited aspects of the offering process and reporting obligations, This prohibition also applies to non-insiders who obtain material, including: non-public information from an insider as a result of the insider's breach of a duty of trust or confidence. ■ Amendments to the disclosure requirements for executive and director remuneration, related-party transactions, direc- The SEC can bring a suit for violations of Rule 10b-5, which can tor independence and other corporate governance matters result in both civil and criminal penalties. In addition, a private and security ownership of officers and directors. right of action may also be available under certain circumstances. ■ Amendments that would make it easier for a foreign private issuer to terminate the registration of a class of equity secu- Country Q&A rities under the Exchange Act (and therefore stop filing reports required as a result of registration).

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