IPO Report

2019 WilmerHale recognizesWilmerHale its corporate responsibility to environmental stewardship. 19_0197 KW 6/19 5000

Connect with us wilmerhale.com

Wilmer Cutler Pickering Hale and Dorr llp is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom office is operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK office. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2019 Wilmer Cutler Pickering Hale and Dorr llp Attorney Advertising 2019 IPO Report – What’s Inside 1

2 US Market Review and Outlook

6 Regional Market Review and Outlook – California – Mid-Atlantic – New England – Tri-State

8 IPO Market by the Numbers

9 JOBS Act Relief: An Update on EGC Elections

10 Special Issues for Special Issuers

14 Selected WilmerHale Public Offerings

16 Law Firm Rankings

18 SEC Policies and Practices Continue to Encourage Public Offerings

19 Confidential Treatment Process Gets Easier

20 Assembling Your IPO Team

22 Managing Cheap Stock Issues

24 Selling Stockholders: The Basics

26 Disclosure and Reporting Obligations—One Size Does Not Fit All

27 A Brief Lexicon of IPO Terminology

28 Initial Public Offerings: A Practical Guide to Going Public 2 US Market Review and Outlook

REVIEW US IPOs by Year – 1996 to 2018

# of IPOs Dollar volume (in $ billions) he IPO market produced 183 IPOs in 2018, an increase of 29% from the 142 T 845 IPOs in 2017. The year’s tally represented 108.1 the second-highest annual figure since 94.8 2007, trailing only the 244 IPOs in 2014. 603 74.4 527

Total gross proceeds for the year 59.0 445 were $43.75 billion—43% above the 47.1 322 43.3 43.8 39.8 41.0 41.3 37.8 36.3 $30.51 billion figure for 2017. 34.7 35.1 244 29.8 30.5 198 193 28.7 25.2 176 176 23.1 178 25.2 183 19.2 136 152 18.5 142 15.0 IPOs by emerging growth companies 88 97 102 98 71 70 54 (EGCs) accounted for 92% of the 27 year’s IPOs, compared to 87% in 20182017201620152014201320122011201020092008200720062005200420032002200120001999199819971996

2017—a figure that matched the Source: SEC filings overall market share for EGCs since enactment of the JOBS Act in 2012.

The median offering size for all 2018 IPOs was $108.0 million, a 10% decline from the $120.0 million median for 2017 but 10% US IPOs by Quarter – 2013 to 2018 higher than the $98.0 million median for # of IPOs Dollar volume (in $ billions) the five-year period from 2012 to 2016. 36.1

The median offering size for life sciences 72

IPOs in 2018 was $85.3 million, 8% 63 60 57 58 57 above the $79.1 million median in 2017 54 50 51 50 50 and 31% higher than the $65.0 million 45 18.7 median for the five-year period from 41 15.4 35 31 31 30 30 29 13.1 2012 to 2016. By contrast, the median 28 27 12.6 11.3 11.1 10.1 9.9 10.1 20 9.0 9.5 20 offering size for non–life sciences IPOs 8.1 8.6 6.9 6.8 7.0 5.6 4.8 5.4 5.6 in 2018 was $161.0 million—up 7% from 3.6 8 3.7 the $151.0 million median in 2017 and 0.7 23% above the $130.8 million median Q1 Q2 Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3 2013 2014 2015 2016 2017 2018 for the five-year period preceding 2017. Source: SEC filings In 2018, the median offering size for IPOs by EGCs was $101.3 million, a decrease of 5% from the $106.5 million median in 2017 but 18% above the $85.9 million median that prevailed from enactment of the JOBS Act through 2016. The median non-EGC offering size in 2018 was $731.5 million, a 55% increase from the $472.0 Median IPO Offering Size – 1996 to 2018 million median for 2017, representing $ millions the highest annual level since 2012. 140 135 The median annual revenue of all 125 121 120 119 120 IPO companies in 2018 was $68.2 111 105 108 107 108 98 94 96 94 million, almost one-third below the 89 92 $101.4 million figure for 2017 but 84 20% above the $57.0 million figure 62

that prevailed from 2014 to 2016. 40 30 32 In 2018, only 43% of life sciences IPO companies had revenue, up from 34% in 2017 but below the 64% of life sciences 20182017201620152014201320122011201020092008200720062005200420032002200120001999199819971996 IPO companies that had revenue during Source: SEC filings US Market Review and Outlook 33 the five-year period from 2012 to 2016. The Distribution of IPO Offering Size – 2015 to 2018 median non–life sciences IPO company in % 2015 % 2016 % 2017 % 2018 2018 had annual revenue of $201.6 million, 5% below the $212.8 million median for 2017 and 2% below the $205.8 million median for 2016, but 31% above the $154.0 million median that prevailed during the five-year period from 2011 to 2015. EGC IPO companies in 2018 had median annual revenue of $50.8 million, compared to $1.69 billion for non-EGC IPO companies. The median annual revenue for non–life sciences EGC IPO companies in 2018 was $167.3 million, an increase of 10% from the $152.1 million Source: SEC filings median for 2017 and 55% above the $108.2 median that prevailed from the enactment of the JOBS Act through 2016. The percentage of profitable IPO Average IPO First-Day and Year-End Gain by Year – 2000 to 2018 companies declined to 28% in 2018 % First-day gain % Year-end gain from 34% in 2017 and 36% in 2016. Only three life sciences IPO companies in 2018, or 4% of the year’s total, were profitable, compared to 10% over the five-year period from 2013 to 2017. In 2018, 44% of non–life sciences IPO companies were profitable, down from 52% for the preceding five-year period. In 2018, the average IPO produced a first-day gain of 16%, compared to 14% for the average IPO in 2017 and 12% in 2016. The average 2018 first-day gain was the second-highest annual figure since 2000, behind only the 21% first-day gain in 2013. The average life sciences IPO company gained 14% in first-day trading in 2018, compared to 18% for the year’s non– life sciences IPO companies. First-day trading results in 2018 were similar to 2017, when the average life sciences IPO company gained 13% in first-day trading, Median Annual Revenue of IPO Companies – 1998 to 2018 compared to 14% for non–life sciences $ millions IPO companies. In 2016, by contrast, the average life sciences company rose only 6% on its first trading day—less than half the 16% gain achieved by non–life sciences IPO companies. There were a pair of “moonshots” (IPOs that double in price on their opening day) in 2018, up from one each in 2016 and 2017 but down from an annual average of six moonshots between 2013 and 2015—a three-year period that stands out as an aberration when compared to Source: SEC filings and IPO Vital Signs 4 US Market Review and Outlook

the incidence of moonshots for all other Percentage of Profitable IPO Companies – 1998 to 2018 years following the dot-com boom. % In 2018, 24% of IPOs were “broken” (IPOs whose stock closes below the offering price on their first trading day), up from 20% in 2017 but equal to the percentage over the five-year period from 2012 to 2016. In 2018, 28% of life sciences company IPOs were broken, compared to 21% of non–life sciences company IPOs. Overall, the average 2018 IPO company ended the year 2% below its offering

price—only the third time in the last Source: SEC filings and IPO Vital Signs ten years that the average IPO has failed to produce a gain by year-end. The year’s best-performing IPO was Tilray (trading 315% above its offering price at year-end), followed by Allakos (up 190%), Inspire Medical Systems (up 164%) and Goosehead Insurance (up 163%). Median Time to IPO and Median Amount Raised Prior to IPO – 1996 to 2018 # of years Median amount raised prior to IPO (in $ millions) At the end of 2018, 61% of the year’s IPO companies were trading below their offering price—life sciences companies faring better than their non–life sciences counterparts, with 55% trading below their offering price compared to 64% for non–life sciences IPO companies. Individual components of the IPO market fared as follows in 2018: ––VC-Backed IPOs: The number of IPOs

by venture capital–backed US issuers Source: Dow Jones VentureSource and SEC filings increased by 52%, from 50 in 2017 to 76 in 2018. The percentage of all US- issuer IPOs accounted for by VC-backed IPOs. The average PE-backed IPO in 2018 2017 to 57 IPOs in 2018. The tech sector’s companies increased from 48% in 2017 ended the year 9% below its offering price. share of the US IPO market remained to 61% in 2018. The median offering steady between 2017 and 2018, at 31%, ––Life Sciences IPOs: There were 74 life size for US VC-backed IPOs increased up from recent lows of 27% in 2016 and sciences company IPOs in 2018, an by 5%, from $96.8 million in 2017 to 23% in 2015, but well below the 45% that increase of 68% from the 44 in 2017. The $101.3 million in 2018. The median deal prevailed over the three-year period portion of the IPO market accounted for size for non–VC-backed companies was from 2010 to 2012. The average tech IPO by life sciences companies increased from $142.8 million in 2018, down 8% from ended the year 1% above its offering price, 31% in 2017 to 40% in 2018. While the $156.0 million in 2017. The average 2018 compared to a 3% loss for non-tech IPOs. 2018 figure lags behind the sector’s 43% US-issuer VC-backed IPO gained 8% market share in the three-year period – Foreign-Issuer IPOs: The number of US from its offering price through year-end. – from 2014 to 2016, it is more than double IPOs by foreign issuers increased by 53%, ––PE-Backed IPOs: Private equity–backed the 17% that prevailed over the five-year from 38 in 2017 (27% of the market) to IPOs by US issuers declined by 23%, period preceding 2014. The average life 58 in 2018 (32% of the market). Among from 26 in 2017 to 20 in 2018. Overall, sciences IPO company in 2018 ended the foreign issuers, Chinese companies led PE-backed issuers accounted for 16% of year down 1% from its offering price, the year with 32 IPOs (the highest annual all US-issuer IPOs in 2018, compared to compared to a 3% year-end decline for number of IPOs from China since 2010), 25% in 2017. The median deal size for PE- non–life sciences IPO companies. followed by companies from the United backed IPOs in 2018 was $288.0 million, Kingdom (eight IPOs) and Brazil and ––Tech IPOs: Deal flow in the technology compared to $100.2 million for all other Israel (each with three IPOs). The average sector increased by 30%, from 44 IPOs in US Market Review and Outlook 55

foreign-issuer IPO company ended the Venture Capital–Backed IPOs – 1996 to 2018

year down 5% from its offering price. # of VC-backed IPOs Dollar volume (in $ billions) In 2018, 58 companies based in the eastern United States (east of the Mississippi River) completed IPOs, compared to 67 for western US–based issuers. California led the state rankings with 43 IPOs, followed by Massachusetts (20 IPOs), Texas (10 IPOs), New York (six IPOs), and Pennsylvania and Washington (four IPOs each).

OUTLOOK Source: Dow Jones VentureSource and SEC filings IPO market activity in the coming Based on US IPOs by VC-backed US issuers. year will depend on a number of factors, including the following: ––Economic Growth: US economic growth slowed over the course of 2018, with the fourth quarter posting a 2.2% increase, Private Equity–Backed IPOs – 1996 to 2018 down from 3.4% in the third quarter and 4.2% in the second quarter. Despite # of PE-backed IPOs Dollar volume (in $ billions) the slowdown, the GDP growth rate for the year was among the highest in over a decade, job growth has remained consistently strong and the unemployment rate is at its lowest level in nearly 50 years. The residual effect of the US corporate and individual income tax rates enacted in late 2017, coupled with the continuation of low interest rates, should continue to support economic growth in the coming year, although geopolitical concerns—including rising Source: Thomson Reuters and SEC filings Based on US IPOs by PE-backed US issuers. international trade tensions and the growing likelihood of a messy Brexit— could dampen economic growth in ––Venture Capital Pipeline: The pool ––Private Equity Impact: Although private the United States and overseas. of IPO candidates remains large and equity fundraising in 2018 declined by vibrant, including more than 300 one-quarter from the record-setting ––Capital Market Conditions: The major “unicorns” (private companies with level of 2017, PE firms are eager to put US stock market indices all posted solid valuations exceeding $1 billion). With their unspent capital to work in new gains through the first three quarters of 2018 yielding more than 175 venture acquisitions. At the same time, PE firms 2018, before heading sharply lower in financing rounds that raised at least $100 face pressure to exit investments—via the fourth quarter. In what ended up as million—an increase of almost two- IPOs or sales of portfolio companies— the worst year for stocks since 2008, the thirds from 2017—it is clear that many and return capital to investors. Dow Jones Industrial Average fell 5.6%, VC-backed companies continue to be The US government shutdown at the start the Nasdaq Composite Index declined able to raise private “IPO-sized” rounds of 2019 contributed to a tepid start for the 3.9% and the S&P 500 dropped 6.2%. This and delay their public debuts. However, 2019 IPO market, with only 18 IPOs in the bleak year-end 2018 performance was investor demand for cash returns, first quarter, but deal flow has since picked more than erased in the first quarter of coupled with the attractive valuations up, with 16 offerings in April. The long- 2019, as the Dow, Nasdaq and S&P 500 and comparatively favorable aftermarket awaited IPOs of Lyft, Pinterest, Uber and posted gains of 11.2%, 16.5% and 13.1%, performance of VC-backed IPOs in Zoom—and the likely arrival of additional respectively, but a return of this kind of 2018, should prompt additional VC- unicorn IPOs—should help build further volatility in the capital markets could backed companies to go public in 2019. < create headwinds for the IPO market. momentum as the year progresses. 6 Regional Market Review and Outlook

CALIFORNIA California IPOs – 1996 to 2018 # of IPOs Dollar volume (in $ billions) osting its second consecutive year Pof strong growth, the California IPO market produced 43 IPOs in 2018, an increase of 72% from the 25 in 2017 and the highest annual total since the 54 IPOs in 2014. Gross proceeds grew by 16%, from $6.22 billion in 2017 to $7.20 billion in 2018—the third- highest annual level since 2000.

The largest California IPO in 2018 came from Dropbox ($756 million), followed by offerings from DocuSign ($629 million) Source: SEC filings and Pivotal Software ($555 million).

The California IPO market continues to be dominated by technology and life sciences companies, which together accounted for all but three of the state’s offerings in 2018, or 93% of the year’s total (up from Mid-Atlantic IPOs – 1996 to 2018 the 86% that prevailed over the five-year period from 2013 to 2017), compared to an # of IPOs Dollar volume (in $ billions) average of 60% for the rest of the country.

The number of venture-backed California IPOs increased by 83%, from 18 in 2017 to 33 in 2018. California’s tally represents 43% of all US-issuer VC-backed IPOs in 2018, up from the 34% recorded over the prior two years but below the 47% that prevailed during the five-year period preceding 2016.

The average 2018 California IPO produced a first-day gain of 29%. The state’s top Source: SEC filings performers were Zscaler (up 106% in first-day trading), Elastic (up 94%) MID-ATLANTIC mid-Atlantic IPO of 2018 came from and Principia Biopharma (up 92%). Maryland-based Tenable Holdings ($251 The mid-Atlantic region of Virginia, million), followed by North Carolina– At year-end, 53% of the state’s 2018 Maryland, North Carolina, Delaware based Liquidia Technologies ($50 million). IPOs were trading above their offering and the District of Columbia produced price, with the average California four IPOs in 2018, down from six in 2017 The average 2018 mid-Atlantic IPO IPO up 17% from its offering price. and well below the annual double-digit produced a first-day gain of 9%, largely The best-performing California IPO of the count that prevailed from 2013 to 2015. due to the first-day gain of Tenable Holdings (up 32% in first-day trading). year was Allakos (up 190% at year-end), Maryland produced two of the region’s followed by Zscaler (up 145%), Elastic (up IPOs in 2018 (doubling its tally from At year-end, Liquidia Technologies 99%) and Guardant Health (up 98%). 2017). North Carolina contributed (up 97% from its offering) was the With the largest pool of venture capital– one (down from four in 2017), as did only mid-Atlantic IPO trading backed companies in the United States Virginia (matching its 2017 count). above its offering price. and a wealth of entrepreneurial talent, Gross proceeds in the mid-Atlantic region Despite 2018’s contraction in deal flow, California should remain a major were $364 million in 2018, down sharply the region should see some recovery source of attractive IPO candidates in from the $1.40 billion generated in 2017. in IPO activity in the coming year the coming year, particularly from the For only the second time since 2011, the if market conditions are conducive, technology and life sciences sectors. region did not produce an IPO with at with offerings from the life sciences, least $500 million in proceeds. The largest technology and financial services sectors. Regional Market Review and Outlook 7

NEW ENGLAND New England IPOs – 1996 to 2018

# of IPOs Dollar volume (in $ billions) The number of New England IPOs increased for the second consecutive year, from 17 in 2017 to 24 in 2018—the second-highest annual count since 2000, trailing only the 32 IPOs in 2014.

Massachusetts accounted for 20 of the region’s IPOs in 2018—the state’s tally was the second-highest state total in the country, behind California. Connecticut added three IPOs and New Hampshire produced the remaining one.

Source: SEC filings Gross proceeds in the region more than doubled, from $1.67 billion in 2017 to $3.43 billion in 2018.

The largest New England IPO in 2018 was by BJ’s Wholesale Club Holdings ($638 million), followed by Moderna ($604 million) and Rubius Tri-State IPOs – 1996 to 2018 Therapeutics ($241 million). # of IPOs Dollar volume (in $ billions) Life sciences companies accounted for 20 of the region’s IPOs in 2018 (or 83% of the total), representing one-third of all life sciences US-issuer IPOs in the country.

The number of venture-backed New England IPOs increased by 50%, from 14 in 2017 to 21 in 2018. The region accounted for 28% of all US-issuer VC-backed IPOs in 2018—the same percentage as in 2017 and the highest figure in at least 20 years.

The average 2018 New England IPO Source: SEC filings produced a first-day gain of 7%. The TRI-STATE The average 2018 tri-state IPO produced region’s top performer in first-day trading a first-day gain of 15%. The region’s was AVROBIO (up 64% from its offering The number of IPOs in the tri-state region top performers in first-day trading price), followed by The LoveSac Company of New York, New Jersey and Pennsylvania were Neuronetics (up 63% from its (up 50%) and Solid Biosciences (up 41%). declined from 18 in 2017 to 13 in 2018. offering price), Y-mAbs Therapeutics At year-end, only 29% of New England New York produced six of the region’s (up 50%) and Electrocore (up 32%). 2018 IPOs, with Pennsylvania IPOs were trading above their offering At year-end, only 23% of the region’s accounting for four and New Jersey price—led by Solid Biosciences (up IPOs were trading above their offering producing the remaining three. 68% at year-end) and Scholar Rock price, with the average tri-state IPO down Holding (up 64%)—and the region’s Gross proceeds from tri-state IPOs in 31%. The best-performing tri-state IPOs average IPO was down 22%. 2018 were $4.69 billion, just below the were from Y-mAbs Therapeutics and With the region’s world-renowned $4.72 billion figure for 2017, led by the Neuronetics, up 27% and 14%, respectively, universities and research institutions AXA Equitable Holdings offering, which from their offering price at year-end. generated $2.75 billion in proceeds— serving as incubators for emerging With the level of venture capital activity the nation’s largest IPO of the year. tech and life sciences companies, and in the tri-state region trailing only that of with strong levels of venture capital The next-largest tri-state IPOs of 2018 California, the coming year should see IPO investment, New England should came from Focus Financial Partners ($535 deal flow from both emerging life sciences continue to generate attractive IPO million), BrightView Holdings ($469 and technology companies and larger, candidates in the coming year. million) and Livent ($340 million). private equity–backed companies. < 8 IPO Market by the Numbers

PROFILE OF SUCCESSFUL HOW DO YOU COMPARE? IPO CANDIDATES Set forth below are selected metrics about the IPO market, based on combined data for all US IPOs in the three-year period from 2016 through 2018. What does it really take to go public? There is no single profile of a successful IPO Percentage of IPO companies qualifying as EGCs company, but in general the most attractive 88% under JOBS Act candidates have the following attributes: $107.2 million (17% below $50 million and ––Outstanding Management: An investment Median offering size truism is that investors invest in people, 10% above $500 million) and this is even truer for companies going $78.3 million (44% below $50 million and Median annual revenue of IPO companies public. Every company going public needs 19% above $500 million) experienced and talented management with high integrity, a vision for the future, Percentage of IPO companies that are profitable 32% lots of energy to withstand the rigors of Delaware—88% the IPO process and a proven ability to State of incorporation of IPO companies No other state over 2% execute. An IPO is not the best time for a fledgling CEO or CFO to cut his or her teeth. Percentage of IPOs including selling Percentage of IPOs—23% stockholders, and median percentage of offering Median percentage of offering—33% ––Market Differentiation: IPO candidates represented by those shares need a superior technology, product or Percentage of IPOs including directed share Percentage of IPOs—41% service in a large and growing market. programs, and median percentage of offering Median percentage of offering—5% Ideally, they are viewed as market leaders. represented by those shares Appropriate intellectual property protection Percentage of IPO companies disclosing is expected of technology companies, and 50% adoption of ESPP in some sectors patents are de rigueur. Percentage of IPO companies using a “Big 4” 73% ––Substantial Revenue: With some accounting firm exceptions, substantial revenue is expected—at least $50 million to $75 Stock exchange on which the company’s Nasdaq—71% million annually—in order to provide common stock is listed NYSE—29% a platform for attractive levels of profitability and market capitalization. Median underwriting discount 7% Median—19 Number of SEC comments contained in initial ––Revenue Growth: Consistent and strong 25th percentile—14 comment letter revenue growth—25% or more annually—is 75th percentile—28 usually needed, unless the company has Median number of Form S-1 amendments other compelling features. The company (excluding exhibits-only amendments) Five should be able to anticipate continued filed before effectiveness Median—84 calendar days and predictable expansion to avoid the Time elapsed from initial confidential submission 25th percentile—57 calendar days market punishment that accompanies to initial public filing of Form S-1 (EGCs only) 75th percentile—146 calendar days revenue and earnings surprises. Time elapsed from initial confidential submission Median—121 calendar days ––Profitability: Strong IPO candidates (if EGC) or initial public filing to effectiveness of 25th percentile—94 calendar days generally have track records of earnings the Form S-1 75th percentile—227 calendar days and a demonstrated ability to enhance Legal—$1,500,000 margins over time, although IPO investors Median offering expenses Accounting—$900,000 Total—$3,410,000 often appear to value growth more highly than near-term profitability. ––Market Capitalization: The company’s Other factors can vary based on a company’s Beyond these objective measures, IPO potential market capitalization should industry and size. For example, many life candidates need to be ready for public be at least $200 million to $250 million, sciences companies will have much smaller ownership in a range of other areas, in order to facilitate development of a revenue and not be profitable. More mature including accounting preparation; corporate liquid trading market. If a large portion of companies are likely to have greater revenue governance; financial and disclosure controls the company will be owned by insiders and market caps, but slower growth rates. and procedures; external communications; following the IPO, a larger market cap High-growth companies are likely to be smaller, legal and regulatory compliance; and a variety may be needed to provide ample float. and usually have a shorter history of profitability. of corporate housekeeping tasks. < JOBS Act Relief: An Update on EGC Elections 9

he cornerstone of the JOBS Act is the Life sciences companies, for which older EGCs are automatically exempt from any Tcreation of an “IPO on ramp” that financial information is often irrelevant, future mandatory audit firm rotation provides “emerging growth companies” have overwhelmingly embraced the requirement and any rules requiring (EGCs) with a phase-in period, which can option of providing only two years that auditors supplement their audit continue until the last day of the fiscal year of audited financial statements and reports with additional information following the fifth anniversary of an IPO, two years of selected financial data. about the audit or financial statements of to come into full compliance with certain Technology companies, which generally the company—such as the requirement disclosure and accounting requirements. have substantial revenue and often have to make disclosure about critical audit Although the overwhelming majority of all profitable operations, are more likely than matters (CAMs) under new auditing IPO candidates qualify as EGCs, different life sciences companies to provide three standard AS 3101. Any other new auditing items of EGC relief are being adopted years of audited financial statements and at standards will not apply to audits of EGCs at different rates, with some additional least three years of selected financial data, unless the SEC determines that application variation among types of IPO companies. although the percentage of technology of the new rules to audits of EGCs is companies doing so has declined necessary or appropriate in the public CONFIDENTIAL SUBMISSION significantly over the past three years. interest. To date, the SEC has applied all OF FORM S-1 new auditing standards to audits of EGCs. ACCOUNTING AND AUDITING RELIEF An EGC is able to submit a draft REDUCED EXECUTIVE Form S-1 registration statement to the EGCs may choose not to be subject to any COMPENSATION DISCLOSURE SEC for confidential review instead of accounting standards that are adopted filing it publicly on the SEC’s EDGAR or revised on or after April 5, 2012, until An EGC need not provide Compensation system. A Form S-1 that is confidentially these standards are required to be applied Discussion and Analysis (CD&A); submitted must be substantially complete, to nonpublic companies. Through 2016, compensation information is required including all required financial statements the vast majority of EGCs opted out of the only for three named executive officers and signed audit reports. The SEC review extended transition period, but a dramatic (including the CEO); and only three of process for a confidential submission shift has since occurred. The percentage the seven compensation tables otherwise is the same as for a public filing. A of EGCs adopting the extended transition required must be provided. The use of confidentially submitted Form S-1 must period jumped from 11% through 2016 these reduced compensation disclosures be filed publicly no later than 15 days to 42% in 2017 and 2018. Between these is almost universal practice among EGCs, before the road show commences. periods, the percentage of technology without apparent investor pushback. Confidential submission enables an EGC companies electing the extended transition SECTION 404(B) EXEMPTION to maintain its IPO plans in secrecy and period spiked from 12% to 58%, while among life sciences companies the delay disclosure of sensitive information EGCs are exempt from the requirement percentage increased from 10% to 35%. to competitors and employees until under Section 404(b) of the Sarbanes- The change in behavior appears to be much later in the process, although it Oxley Act that an independent registered motivated by the desire of many EGCs to also delays any perceived benefits of public accounting firm audit and report on delay the application of the new accounting public filing. Depending on the timing, the effectiveness of a company’s internal standards for revenue recognition (ASC confidential review also means that control over financial reporting (ICFR), 606) and lease accounting (ASC Topic the EGC can abandon its IPO plans beginning with the company’s second Form 842) or, at a minimum, to take more without any public disclosure at all if, 10-K. Most EGCs adopt this exemption at time to evaluate the effects of the new for example, the SEC raises disclosure the time it becomes applicable to them. < issues that the EGC does not want made standards before adopting them. public or market conditions preclude an offering. Confidential submission EGC ELECTIONS has been widely adopted by EGCs. Based on IPOs initiated after enactment of the JOBS Act and completed by EGCs through 2018, below are the rates of adoption with respect to several key items of EGC relief: REDUCED FINANCIAL DISCLOSURE LIFE SCIENCES TECH OTHER ITEM EGCs must provide only two years of COMPANIES COMPANIES COMPANIES audited financial statements (instead of three years), plus unaudited interim Confidential submission of Form S-1 97% 97% 91% financial statements, and need not present selected financial data for any period prior Two years of audited financial statements 90% 43% 67% to the earliest audited period (instead of five Deferred application of new or revised 18% 26% 21% years). Similarly, an EGC is only required accounting standards to include MD&A for the periods presented in the required financial statements. Omission of CD&A 100% 99% 96% 10 Special Issues for Special Issuers

or some companies, the IPO journey ordinarily not necessary for other may be willing to invest in a Ftakes a road less traveled. Although types of IPOs, such as a description of Form 10 IPO private placement; and non-traditional IPOs and alternative the transaction structure and its tax much of the time, cost and expense paths to capital and public trading and accounting consequences, and a –– associated with public company share many features with conventional summary of the agreements between preparations can be deferred until after IPOs, these transactions have special the parent and the subsidiary. the company has received the capital. requirements and attributes. Spin-off IPOs are a staple of the There are also several disadvantages to a market. Recent prominent examples SPIN-OFF IPOs Form 10 IPO, including the following: include SecureWorks (from Dell) The term “spin-off IPO” refers to the in 2016 and Elanco Animal Health ––it may be difficult for a smaller company sale of an ownership position in a (from Eli Lilly) in 2018. to comply with its public reporting subsidiary to the public, with the parent obligations under the Exchange Act, company selling some of its shares in FORM 10 IPOs which become applicable as soon as the subsidiary and/or the subsidiary the Form 10 becomes effective; In a “Form 10 IPO,” a private company issuing new shares. A spin-off IPO is sells securities in a private placement the company may encounter difficulty sometimes combined with the parent’s –– under Regulation D and, in connection in satisfying the public float and distribution of its remaining shares in the with the private placement, agrees to round-lot stockholder requirements subsidiary to the parent’s stockholders. file a Form 10 registration statement to for stock exchange listing; A spin-off IPO usually requires more become a reporting company under the elapsed time from the sale of extensive preparations than a conventional the Exchange Act and to file a Form S-1 –– the securities to trading on a stock IPO. In addition to customary planning registration statement registering for exchange—the ultimate goal in a for the subsidiary’s IPO and public resale the shares sold in the private Form 10 IPO—may be no shorter company life, a spin-off IPO involves placement. Typically, a Form 10 IPO than in a traditional IPO; a number of other elements: company will arrange to have its stock quoted on an over-the-counter market – if the company’s stock trades below ––Transaction Planning: A transaction – and later seek to have its shares listed on $5.00 per share and is not listed on structure must be developed to a national securities exchange once it a national securities exchange, the achieve the desired operating, satisfies the applicable listing standards. company will be subject to the SEC’s tax and financial objectives. “penny stock” rules, which could make The traditional IPO route can be difficult, it more difficult for broker-dealers ––Establishment of Subsidiary: The business especially for smaller companies without to execute trades in the stock; to be spun off must be segregated significant revenue in high-risk industries, into a separate subsidiary, holding such as life sciences. Given the length of the aggregate legal and accounting the correct assets, liabilities and –– time it takes to complete the overall IPO expenses incurred in connection employees, and the infrastructure of a process, there is significant risk that market with a Form 10 IPO will likely be separate company must be created. conditions will change between the time a as much, if not more, than those ––Parent-Subsidiary Relationship: The company begins the process and the time associated with a traditional IPO; parent and subsidiary need to determine it is ready to market and price the offering. the placement agent’s fees may be their post-IPO relationship, including the In response, the Form 10 IPO has emerged. –– based on a higher percentage of the terms of inter-company agreements and The principal advantage of a Form 10 financing proceeds than the percentage transition services agreements. The parent IPO is that it can provide a company underwriting discount in a conventional also may wish to implement mechanisms with significant capital more quickly IPO, and the company may also need to retain control of the subsidiary. than a conventional IPO. The following to issue warrants to the placement ––Controlled Company Rules: If the aspects of the Form 10 IPO process agent as additional compensation; parent holds a majority of the contribute to its advantages: research coverage may be more difficult, voting power for the election of the –– ––the price at which the company raises and perhaps impossible, to obtain; subsidiary’s directors, the subsidiary capital is negotiated up front with the will be a “controlled company” and investors in the private placement; ––major investment banks may be less entitled to exemptions from some likely to underwrite the company’s corporate governance requirements ––SEC review does not occur until follow-on offerings because they did under Nasdaq and NYSE rules. after the sale of the securities; not have the opportunity to become familiar with the company during ––Additional Disclosure: The Form S-1 ––institutional investors that ordinarily a conventional IPO process; requires various disclosures that are invest only in public companies Special Issues for Special Issuers 11

––the intangible benefits of enhanced ––the stock is priced with an ––Registration: In a direct listing, the prestige and credibility provided illiquidity discount; company files a Form 10 to register its by a conventional IPO will be common stock under the Exchange the investor pool is limited to “qualified delayed, or not present at all; and –– Act. The Form 10 requires disclosure institutional buyers” and purchasers in of substantially the same information aspects of the relief otherwise available offshore transactions under Regulation S; –– required in a Form S-1 for a traditional to an EGC under the JOBS Act are not it may be difficult to satisfy the public IPO, except for the omission of offering- available to an EGC filing a registration –– float and round-lot stockholder related items. Alternatively, the company statement on Form 10 (rather than requirements for stock exchange listing; may file a Form S-1 to register the resale a Form S-1), including the ability to of some or all of its outstanding shares. In provide reduced financial disclosure. ––unless the stock is exchange-listed, the the absence of a resale Form S-1, public offering does not create a market for To date, only about a dozen companies resales must be made in reliance on employee equity incentives or liquid have completed Form 10 IPOs. Interest Rule 144, which is not available for resales stock currency for acquisitions; in IPO alternatives, such as Form 10 by affiliates until 90 days after Exchange Act registration and in any event may not IPOs, tends to decline when the IPO ––research coverage may be more difficult, provide sufficient liquidity for an active market is receptive to companies lacking if not impossible, to obtain; and some of the attributes of traditional IPO trading market to develop. If the company candidates and to increase when market ––since a Rule 144A IPO is a “stealth” qualifies as an EGC, the use of Form S-1 conditions become less conducive to IPOs IPO, the intangible benefits of enhanced permits the company to take advantage by smaller, less seasoned companies. In prestige and credibility provided by a of the reduced financial statement and these circumstances, a Form 10 IPO should conventional IPO will not be present. MD&A disclosure requirements available remain a possibility for private companies to an EGC, which is not permitted with Moreover, the benefit of avoiding that seek public investor capital but are the use of Form 10. A Form S-1 is eligible public company obligations may be looking to avoid the market fluctuation for confidential staff review, while the temporary, since the company usually and pricing risks associated with raising similar nonpublic review process is agrees to register the Rule 144A money through a traditional IPO. available for a Form 10. Other aspects of securities for public resale or register EGC relief are available with respect to as a reporting company, typically the filing of either Form S-1 or Form 10. RULE 144A IPOs within one year after the placement. ––Resale Considerations: Apart from A “Rule 144A IPO” consists of a Rule Rule 144A IPOs have been reported liquidity and EGC considerations, the 144A placement by a private company, as far back as the early 1990s, but the rules of the exchange on which the coupled with an agreement to register market has not lived up to the promise company is listing its common stock the securities for public resale or a it showed between 2005 and 2007, when may require the company to file a resale commitment to register as a reporting approximately 40 transactions were Form S-1 in conjunction with the listing, company under the Exchange Act completed. Since then, only one Rule 144A or the SEC staff may require a resale following completion of the placement. IPO has been completed in the United Form S-1 if it views the transaction as States—by Oaktree Capital Group in 2012, The principal advantage of a Rule 144A constituting a distribution of securities following a Rule 144A placement in 2007. IPO is that it can provide the company for which the exemption for “ordinary with as much capital as a conventional trading” is not available. A Form S-1, IPO—but much more rapidly because DIRECT LISTINGS if filed, can be terminated 90 days after SEC review is bypassed. Other advantages effectiveness (at which point Rule 144 With the rise of very large, well-capitalized include greater flexibility in the disclosure becomes available for resales) in order to private companies boasting valuations and offering process and the company’s eliminate potential Section 11 liability well in excess of $1 billion, the concept of corporate governance arrangements, and for further sales under the Form S-1. a “direct listing” has emerged. In a direct the potential ability to delay compliance If a resale Form S-1 is filed, the company listing, the company files a registration with public company obligations. may register its common stock under statement to become a reporting company the Exchange Act by filing a Form 8-A Compared to a conventional IPO, a Rule under the Exchange Act and concurrently instead of a Form 10 (a Form 8-A is much 144A IPO has several disadvantages: lists its shares on a stock exchange, without shorter and simpler than a Form 10). underwriters and without a concurrent – the Rule 144A IPO market is concentrated – public offering of newly issued shares. ––SEC Review: The Form 10 or Form S-1 in a few sectors and limited to more undergoes the same type of staff review mature companies than the market for Key aspects of the direct listing as in a traditional IPO. The company is conventional IPOs, effectively excluding process include the following: permitted to submit a draft Form 10 or many prototypical IPO candidates; Form S-1 for confidential or nonpublic 12 Special Issues for Special Issuers

review but must publicly file the and other rules of the stock exchange an early-stage life sciences company Form 10 or Form S-1 (and amendments on which its common stock is listed. whose clinical research program fails thereto) at least 15 days before it becomes after completing an IPO is acquired in A direct listing offers the potential for a effective. A Form S-1 can be declared a reverse merger by a private company faster and less expensive path to public effective upon completion of staff review, seeking access to the target’s cash reserves trading than a traditional IPO. Despite while a Form 10 automatically becomes to finance the acquirer’s operations. the success of Spotify’s direct listing in effective 60 days after filing, unless April 2018, in which Spotify achieved The reverse-merger route to public withdrawn and refiled due to ongoing an initial market capitalization in excess ownership presents several special staff review. Upon effectiveness of the of $25 billion, the technique remains challenges, particularly when the Form 10 or Form S-1, stock exchange largely unproven. As a practical matter, public target is a shell company: listing can be completed and trading can a direct listing is a good fit for relatively commence. (Because underwriters are few private companies—those that ––Merger Agreement: The transaction not involved in a direct listing, FINRA do not require an immediate capital begins with a merger agreement review and clearance is not required.) infusion, and are of sufficient value and defining the terms and conditions of the transaction. Every issue present in ––Exchange Listing: Nasdaq and NYSE both investor interest to qualify for stock any business combination—ownership, permit the listing of eligible securities exchange listing and enjoy meaningful management and integration, to registered under the Exchange Act trading liquidity without the aftermarket list just a few—must be resolved. without a concurrent public offering of support provided by underwriters (or the newly issued shares, as long as applicable stabilizing influence of lockup agreements ––Due Diligence: The surviving company is listing requirements are satisfied. The for the first 180 days) in a traditional responsible for the liabilities incurred and overall listing process is similar to the IPO. The pending direct listing of Slack actions taken by the public target before listing process in a traditional IPO, Technologies would be the second direct the merger. The private company merging although aspects of the process are more listing on a national securities exchange. into the public target must carefully difficult in the absence of a concurrent examine the target’s corporate history public offering and require ongoing REVERSE-MERGER IPOs and pre-merger activities to make sure it dialogue and coordination with the is not inheriting unexpected liabilities. exchange. In a direct listing, the company A “reverse-merger IPO” is a mechanism – SEC Filing and Review: A reverse- does not engage investment banking for a private company to become a – merger transaction usually requires a firms to act as underwriters but may need public company. In a typical reverse merger proxy statement or a Form S-4 to retain investment bankers to provide merger, a private company with an registration statement. These filings assistance and advice with respect to operating business merges into a public typically are more complicated and time- the registration and listing process. shell company without an operating business, and the private company’s intensive to prepare than a Form S-1 for ––Investor Engagement: A direct listing stockholders receive a majority of the a conventional IPO. SEC review usually does not include a traditional road stock of the surviving company. takes longer than review of a Form S-1 for show, although the company may an IPO or a public-public merger proxy wish to undertake similar activities to Reverse mergers involving public shell statement because of the complexity familiarize investors with the company companies often result in a company of the reverse-merger transaction and, in conjunction with listing. For example, that bears the burdens and expense if the public target is a shell company, if the company qualifies as an EGC, it of being public but has unsatisfactory the scrutiny that its origins draws. may hold “test-the-waters” meetings trading liquidity, cannot list its stock on – Blue Sky Laws: If the public target’s with eligible institutional investors. a national securities exchange, does not – shares are not listed on a national An “investor day” or “non-deal” road have meaningful access to the public securities exchange (which typically show is also possible if conducted capital markets, has no research analyst is the case with a shell company), the in accordance with SEC rules. coverage or market maker support, cannot attract institutional investors, target’s issuance of shares in the merger ––Public Reporting: Following a direct is subject to the SEC’s penny stock transaction will not be exempt from listing, the company becomes subject trading rules, and has its deal-making state securities “blue sky” laws. As a to the normal public reporting and prospects tainted by its origins. result, the public target will be forced other requirements of the Exchange to comply with additional filing and Act. If eligible, the company can take More recently, a new breed of reverse disclosure requirements in all applicable advantage of the reduced disclosure mergers has emerged in the life sciences states, and to justify the substantive requirements and exemptions available sector, without the negative connotations fairness of the exchange in states that to EGCs following an IPO. The typically associated with reverse- impose “merit review” requirements. company must also comply with the merger transactions involving public In most cases, it is puzzling why a private corporate governance requirements shell companies. In these transactions, company that aspires to become a Special Issues for Special Issuers 13 substantial public company would pursue ––a tracking stock is immune from A post-bankruptcy IPO presents a reverse merger with a shell company. unsolicited acquisition bids and any several noteworthy issues: The transaction is often more difficult accompanying takeover premium. – Fresh-Start Accounting: Upon emerging and expensive than a traditional IPO, and – A tracking stock IPO is not as complex from bankruptcy, the company will adopt the results are usually less satisfactory. as a spin-off IPO, primarily because “fresh-start” accounting. Although both By contrast, reverse-merger transactions most of the separation arrangements pre- and post-bankruptcy results and involving public life sciences companies involved with a spin-off are not required. financial statements must be presented are likely to continue to grow in popularity The parent usually creates new equity in the Form S-1, these results will in light of the large number of IPOs in incentive plans for the management not be directly comparable, and the recent years by early-stage life sciences and employees of the tracked business, company may find it difficult to go public companies—a portion of which will but few other indicia of independent until it has several post-bankruptcy inevitably suffer failed clinical research operations. Perhaps the biggest challenge periods that can be compared. programs, making them attractive in a tracking stock IPO is to accurately reverse-merger candidates, particularly ––Bankruptcy Disclosures: The company describe and delimit the tracked business for acquirers who lack some of the will need to discuss its past financial in a manner that permits separate financial attributes of traditional IPO companies. difficulties and will be unable to focus statements for it to be prepared and exclusively on its “new” strategies, audited. The Form S-1 needs to describe TRACKING STOCK IPOs management, capital structure and the investors’ rights in the tracked business prospects. Disclosure will also be required In a “tracking stock IPO,” a parent and the potential conflicts of interest. if any director or executive officer of the company creates a new class of stock to Tracking stock IPOs have never company was a director or executive “track” the economic performance of represented a large segment of the market, officer of the company at the time of (or a specific subsidiary, division or other and have now all but disappeared in favor within two years before) the company’s business unit of the parent, and issues of structures that afford more transparency bankruptcy and the bankruptcy shares of the stock to the public. Investors and investor protections. The most occurred in the preceding ten years. in tracking stock do not actually receive recent firm-commitment underwritten Offering Limitations: A company an ownership position in the specific –– tracking stock IPO was in 2002, when that has been subject to a bankruptcy business being tracked, and that business Loews Corporation issued a new class of petition within the prior three years unit is not actually separated from the common stock to track the performance is not permitted to use an electronic parent. A tracking stock is intended to of its Lorillard subsidiary. In 2014–2015, road show, and its use of free writing function in a manner similar to a spin- Fantex completed six tracking stock prospectuses is limited to a description off, by allowing the tracked business to IPOs (underwritten on a “best-efforts” of the terms of the securities and the be separately highlighted and valued basis through the website of its broker- offering. Also, if a creditor who owns in the public market, while preserving dealer affiliate) tied to the economic at least 10% of the voting securities of ownership and control for the parent. performance of brand contracts between the company sells shares in the IPO, the From an investor’s perspective, Fantex and professional athletes. More SEC may request disclosure concerning there are several downsides to recently, in 2016, Liberty Media created the creditor’s underwriter status. a tracking stock structure: a tracking stock to reflect the separate economic performance of the Atlanta ––Exchange Listing: Although Nasdaq and ––the tracked business usually lacks Braves and its new baseball stadium. the NYSE do not preclude the listing the kind of corporate governance of companies that previously filed for bankruptcy, a past bankruptcy could arrangements that would be present POST-BANKRUPTCY IPOs in a freestanding company; affect an exchange’s subjective judgment Occasionally, a company that has of the merits of the application. – the investor has no direct voting rights – emerged from bankruptcy proceedings with respect to the tracked business; Some public companies inevitably fail, subsequently pursues an IPO. A company due to excessive debt or other factors. As ––potential conflicts exist between in these circumstances is likely to have the financial cycle plays out, some of these the interests of the parent and been a public company that deregistered companies eventually return to the public the tracked business; in conjunction with its bankruptcy market with IPOs. The most prominent proceedings. The subsequent IPO could – an investment in a tracked stock is post-bankruptcy IPO of recent years was – be prompted by registration rights subject to risks associated with all of the that of General Motors, whose 2010 IPO given to creditors or stockholders in parent’s businesses, assets and liabilities; consisted of a $15.8 billion common stock the bankruptcy, or could be desired offering by selling stockholders (former ––a tracking stock usually can be by the company for its own reasons. creditors) and a concurrent $4.35 billion redeemed by the parent; and preferred stock offering by GM. < 14 15

Counsel of Choice for Public Offerings Serving industry leaders in technology, life sciences, cleantech, financial services, communications and beyond

Initial Public Offering of Initial Public Offering of Initial Public Offering of Rule 144A Placement of Public Offering of Public Offering of Initial Public Offering of Initial Public Offering of Common Stock Common Stock Common Stock Convertible Senior Notes Common Stock Common Stock Common Stock American Depositary Shares $84,375,000 $123,207,750 $86,250,000 $1,150,000,000 $546,250,000 $126,500,000 $55,000,000 $85,058,750 Counsel to Issuer Counsel to Issuer Counsel to Underwriters Counsel to Issuer Counsel to Issuer Counsel to Underwriters Counsel to Issuer Counsel to Issuer July 2018 October 2018 February 2019 May 2018 January 2018 February 2019 May 2019 February 2019

Public Offering of Public Offering of Initial Public Offering of Public Offering of Public Offering of Public Offering of Initial Public Offering of Public Offering of Initial Public Offering of Common Stock Senior Notes Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock $105,167,500 €600,000,000 $126,286,750 $145,291,500 $324,000,000 $86,250,000 $75,000,000 $402,500,000 $172,960,000 Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Underwriters Counsel to Issuer Counsel to Underwriters January 2019 August 2018 July 2018 June 2018 February 2019 October 2018 September 2018 August 2017 October 2017

Rule 144A Placement of Public Offering of Rule 144A Placement Initial Public Offering of Public Offering of Public Offering of Public Offering of Public Offering of Convertible Senior Notes Ordinary Shares of Convertible Senior Notes Common Stock Common Stock Common Stock Senior Notes Common Stock $1,437,500,000 $82,800,000 $172,500,000 $60,000,000 $202,944,000 $71,156,250 €300,000,000 $1,151,324,500 Counsel to Issuer Counsel to Underwriters Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer February 2019 October 2018 October 2018 July 2018 January 2019 October 2018 April 2018 July 2018

Public Offerings of Common Stock Public Offering of $1,488,300,000 Public Offering of Common Stock, Preferred Stock Public Offering of Initial Public Offering of Initial Public Offering of Public Offering of and Public Offering of Public Offering of Common Stock and Warrants Ordinary Shares Common Stock Common Stock Common Stock Mandatory Convertible Preferred Stock Senior Notes Common Stock $117,300,000 $70,000,000 $50,000,000 $98,325,000 $300,000,000 $50,000,000 $1,650,000,000 $750,000,000 $183,750,000 Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Underwriters Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer Counsel to Issuer March 2019 April 2019 July 2018 June 2018 July 2017 April 2019 March 2019 March 2018 April 2018 16 Law Firm Rankings

Eastern US IPOs – 1996 to 2018

Counsel to the Issuer Counsel to the Underwriters

Wilmer Cutler Pickering Hale and Dorr LLP 130 98 228

Latham & Watkins LLP 55 148 203

Davis Polk & Wardwell LLP 22 145 167

Skadden, Arps, Slate, Meagher & Flom LLP 68 75 143

Goodwin Procter LLP 75 50 125

Simpson Thacher & Bartlett LLP 59 57 116

Cravath, Swaine & Moore LLP 18 95 113

Ropes & Gray LLP 31 82 113

Cooley LLP 47 40 87

Shearman & Sterling LLP 17 66 83

Morgan, Lewis & Bockius LLP 52 17 69

Sullivan & Cromwell LLP 11 53 64

Cahill Gordon & Reindel LLP 1 1 61 62

Kirkland & Ellis LLP 49 9 58

Sidley Austin LLP 11 44 55

Source: SEC filings

Company Counsel in Eastern US VC-Backed IPOs – 1996 to 2018

Wilmer Cutler Pickering Hale and Dorr LLP 99

Goodwin Procter LLP 58

Cooley LLP 38

Morgan, Lewis & Bockius LLP 35

Latham & Watkins LLP 21

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 17

DLA Piper LLP (US) 15

14

Hogan Lovells US LLP 13

Locke Lord LLP 13

Ropes & Gray LLP 13

Foley Hoag LLP 12

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 12

Skadden, Arps, Slate, Meagher & Flom LLP 11

Nixon Peabody LLP 8

Source: Dow Jones VentureSource and SEC filings The above charts are based on companies located east of the Mississipi River. Law Firm Rankings 17

Company Counsel in IPOs of Eastern US Technology Companies – 2000 to 2018

38

Source: SEC filings

Company Counsel in IPOs of Eastern US Life Sciences Companies – 2004 to 2018

Source: SEC filings The above charts are based on companies located east of the Mississipi River. 18 SEC Policies and Practices Continue to Encourage Public Offerings

he JOBS Act of 2012 was intended filing of the Form S-1. In February 2019, on the submission of an opinion from Tto spur job creation and economic the SEC proposed rule amendments to the Attorney General of New Jersey growth by improving access to the permit any company to engage in “test- that implementation of the proposal capital markets for startup and the-waters” communications with eligible would violate state law. In response, the emerging companies. Over the past institutional investors in connection proponent of the stockholder proposal filed two years, the SEC has taken additional with any registered securities offering. a lawsuit seeking to compel the company to steps—often through changes in staff include the proposal in its proxy statement. policies and practices rather than REGULATION A The permissibility of mandatory arbitration formal rules—to encourage IPOs and provisions remains uncertain and may Regulation A—historically available only follow-on offerings by all companies. ultimately be resolved in the courts. to private companies—permits securities offerings of up to $50 million with less STAFF REVIEW OF REGISTRATION NONPUBLIC REVIEW OF extensive disclosure than registered public STATEMENTS REGISTRATION STATEMENTS offerings. Effective January 31, 2019, the In July 2017, the staff changed its review SEC made Regulation A available for Reflecting the staff’s focus on the most procedures to allow any company, follow-on offerings by public companies. significant issues presented by a company’s regardless of its status as an EGC, to business and Form S-1 disclosures, the MANDATORY ARBITRATION PROVISIONS submit a draft registration statement typical number of comments in the first for “nonpublic review.” The nonpublic Public companies historically have not comment letter has dropped from 30–40 review process is similar to the sought to impose mandatory arbitration several years ago to 15–25 today. The staff confidential submission process for for stockholder claims, and an attempt typically does not review registration EGCs but is available for a wider range to do so in connection with a 2012 IPO statements for follow-on offerings, but of offerings and registration statements. was abandoned after it encountered a proposed follow-on offering generally significant opposition from the SEC cannot proceed until the staff confirms OMISSION OF CERTAIN staff and investor criticism. On several it will not review the registration FINANCIAL STATEMENTS subsequent occasions, the staff allowed statement. Staff “no-review” decisions public companies to exclude stockholder are now being communicated faster, In January 2016, the FAST Act amended proposals seeking to mandate the adoption sometimes within one day after filing. < the JOBS Act to permit an EGC to omit of mandatory arbitration bylaw provisions, from its Form S-1 financial information noting (but not explicitly concurring) ENCOURAGEMENT OF that relates to a historical period that that “there appears to be some basis for FURTHER RELIEF the company reasonably believes will [the] view that implementation of the not be required to be included in the proposal would cause the company to Rule 3-13 under Regulation S-X has long permitted Form S-1 at the time of the contemplated violate the federal securities laws.” companies to seek SEC relief to permit the omission offering, as long as the company adds of required financial statements or the substitution all required financial information to In public comments made in July 2017, of “appropriate statements of comparable character” the Form S-1 before distributing a one SEC commissioner expressed support if the relief is “consistent with the protection of investors.” Such requests can be bolstered by preliminary prospectus to investors. for permitting IPO companies to include mandatory arbitration provisions in demonstrating that satisfaction of the requirement A non-EGC is not eligible for this their corporate charters. Since then, SEC would involve “unreasonable effort or expense,” FAST Act relief. However, under a Chair Clayton has consistently stated the general standard contained in Rule 409 under staff policy announced in August 2017, that the question of whether public the Securities Act for relief from SEC disclosure requirements. a non-EGC may omit from its draft companies can require stockholders to registration statements submitted for arbitrate claims against them arising On numerous occasions over the past two years, nonpublic review annual and interim under the federal securities laws is not senior staff members have expressed an increased financial information that it reasonably appropriate for resolution at the staff willingness to consider requests for modifications. believes it will not be required to present level but rather should be addressed by In public commentary, SEC Chair Clayton acknowledged that in some circumstances the SEC’s separately at the time that it publicly the SEC in a measured and deliberative reporting rules may require disclosures that are files its registration statement. manner. However, he has remained non- burdensome to generate but may not be material committal on the questions of if, when and to the total mix of information available to investors. TESTING THE WATERS how the SEC might consider the issue. He encouraged companies to consider whether In February 2019, the staff permitted a modifications to their financial reporting requirements The JOBS Act permits EGCs to engage in public company incorporated in New in these situations may be helpful in connection with “test-the-waters” communications with capital-raising activities and indicated that the staff Jersey to omit from its proxy statement a eligible institutional investors to determine is placing a high priority on responding with timely stockholder proposal for the adoption of their investment interest in a contemplated guidance to such requests. a bylaw provision requiring mandatory IPO, either prior to or following the arbitration of stockholder claims, based Confidential Treatment Process Gets Easier 19

he requirement to file material standards were not met, there would be submitting a CTR. This new rule Tcontracts as exhibits to an IPO back-and-forth until the examiner and codifies existing SEC staff practice. registration statement often provokes the company reached a resolution. anxiety over the potential disclosure IMPLEMENTATION OF REVISED RULES of competitively sensitive information. REVISED RULES Fortunately, SEC rules have long permitted ––Scope of Redactions: While it remains to a company to redact confidential ––CTR Not Required for Material Contracts: be seen how much scrutiny the staff will information that is not material Companies are no longer required apply to the review of redacted exhibits, and that would cause the company to submit a CTR when they redact companies should continue to focus competitive harm if publicly disclosed. information from material contracts on redacting only the specific words or filed as exhibits under Item 601(b)(10) numbers necessary to be kept confidential Even better, rule changes approved by the of Regulation S-K, if the information in order to prevent competitive harm— SEC in March 2019 significantly simplify redacted is not material and would the “Swiss cheese” approach—and should the process for redacting confidential likely cause competitive harm to the continue to follow the relevant guidance information. Although the confidential company if publicly disclosed. A similar set forth in Staff Legal Bulletin No. 1. treatment process has been made easier, provision applies to plans of acquisition, As is currently the case, companies the substantive rules regarding when reorganization, arrangement, liquidation may not redact material information confidential information may be redacted or succession. In each case, the revised or information that is specifically have not changed and companies still rules require the company to: required by SEC disclosure rules. need to exercise judgment to determine what information may be redacted. • mark the exhibit index to ––Staff Review: If a redacted exhibit is indicate that portions of the going to be reviewed, the SEC staff will exhibit have been omitted; HISTORICAL PRACTICE send a letter to request a copy of the unredacted exhibit marked to highlight • include a prominent statement on In the past, in order to obtain the confidential information. Following the first page of the redacted exhibit confidential treatment, a company that certain identified information its review, the staff may or may not going public was required to file an has been excluded from the exhibit ask for an analysis of why the redacted application—often termed a confidential because it is not material and would information is not material and would treatment request or “CTR”—with likely cause competitive harm to the likely cause competitive harm if publicly the SEC and demonstrate that: company if publicly disclosed; and disclosed. If a company’s analysis does not support the redactions, the staff can the information sought to be protected –– • indicate with brackets where require the company to file a pre-effective falls within one of the permitted the information has been amendment that includes additional categories under the Freedom of omitted from the version of the information disclosed in the exhibit. Information Act (FOIA), most frequently exhibit that is publicly filed. exemption 4, which covers “trade secrets ––Impact on Timing: The SEC staff will and commercial or financial information” ––Omission of Schedules: Companies continue to ask companies to resolve any that is “privileged or confidential”; are allowed to omit entire schedules pending confidential treatment comments and similar attachments, provided the relating to redacted exhibits before public disclosure of the information –– omitted schedules and attachments submitting a request for acceleration of would likely cause competitive do not contain information material the effective date. As a result, companies harm to the company; and to an investment or voting decision may sometimes be forced, as is currently and the omitted information is not the information is not the case, to choose between abandoning –– otherwise disclosed. The filed exhibit material to investors. their efforts to redact certain information must identify the contents of any omitted and delaying the IPO during the time it The CTR was filed in paper form with schedules and attachments. Upon takes to resolve open SEC comments. the SEC and included the full text of request, the company must furnish the contract, including the portions for a supplemental copy of any omitted ––Scope of Revised Rules: The new relief which confidential treatment was sought, schedule or attachment to the SEC. from the requirement to file a CTR and a detailed analysis, citing relevant applies only to exhibits filed under – Omission of Personally Identifiable authority, of why confidential treatment – Items 601(b)(2) and 601(b)(10) of Information: Companies are allowed was appropriate under established FOIA Regulation S-K and not to the other to eliminate personally identifiable standards. The CTR would be reviewed exhibits required to be filed under information, such as bank account by the SEC staff, usually by the same S-K 601, although confidential numbers, social security numbers, home legal examiner reviewing the rest of treatment typically is not sought for addresses and similar information, the filing. If the examiner believed the other types of exhibits. The other rule from required exhibits without request was too broad or the applicable changes apply more broadly. < 20 Assembling Your IPO Team

s part of its IPO preparations, at least six to twelve months before the committee member qualifies as a Aevery company hoping to go public organizational meeting—in time to “non-employee director” for purposes must assemble the group of employees, become familiar with the company’s of Section 16 of the Exchange Act. board members, outside professionals business, contracts and corporate affairs, Public Company Experience: It and advisors who are needed for the and to participate with outside company –– may be necessary or desirable IPO journey and subsequent life as a counsel in public company preparations. to add board members with public company. The principal members Investor Relations Personnel: Most public company experience. of the IPO team are described below. –– private companies rely on the CEO Allocation of Committee Duties: or CFO to handle any stockholder –– MANAGEMENT AND EMPLOYEES Additional independent directors may be relations matters that come up. useful to share the burden of the board’s Following an IPO, additional resources The CEO and CFO are essential to three principal committees—generally, (internal or external) must be devoted the success of the company’s IPO. If at least five independent directors to investor relations. Before the IPO the incumbents do not possess the are needed to enable a reasonable is closed, the company should have combination of experience, knowledge, allocation of committee duties. communications skills, vision and integrity plans in place to fill this function. needed to lead the company through – Departure of VC and PE Directors: ––Stock Plan Administrator: An IPO – the IPO process, woo investors on the Directors appointed by venture capital company must hire a qualified transfer road show and tend to public company or private equity investors often depart agent to handle stock transfers and obligations after the closing—all while after the IPO lockup period ends record keeping. Most public companies managing the company’s operations—the and their funds’ shareholdings are also need an internal stock plan board will need to consider deferring distributed to their limited partners. administrator, who usually resides within the IPO or changing the company’s the human resources or finance group. Although phase-in rules apply to the leadership. For example, it is not unusual director independence standards and for a company going public to seek a more ––Internal Auditor: Although not there is no technical deadline for most seasoned CFO, even if the existing CFO has required by SEC rules, an internal audit of the other requirements summarized been perfectly adequate for the company’s function is required by NYSE listing above, the board should begin discussing needs while it was privately held. requirements, subject to a one-year potential changes in board composition transition period for IPO companies. Most companies add other capabilities six to twelve months before the IPO. Nasdaq does not currently require as part of their IPO preparations: its listed companies to establish and COMPANY COUNSEL ––Controller: An IPO company should maintain an internal audit function. have a controller on board before Company counsel is a central player completing the IPO, and preferably BOARD OF DIRECTORS in the IPO working group. In selecting six to twelve months before the a law firm to serve as IPO counsel, An IPO presents both a need and organizational meeting—particularly if a company should consider: an opportunity to reset a company’s the CFO has more of a finance than an board. As IPO planning progresses, the accounting background. The controller ––IPO and Public Company Experience: company should evaluate the post-IPO should be well grounded in accounting Experience in handling IPOs and composition of its board of directors and and public company reporting. advising public companies on their board committees, for several reasons: ongoing reporting obligations, ––Finance and Accounting Staff: Additional preferably for companies in the same ––Independence Requirements: The board finance and accounting employees will or a similar industry, is essential. will need to satisfy independence be needed to assist with various public standards under SEC and applicable company responsibilities, including ––Issuer and Underwriter Experience: Both stock exchange rules, including the preparation for Section 404 of the issuer and underwriter IPO experience enhanced standards for membership on Sarbanes-Oxley Act and public reporting is relevant, since an understanding the audit and compensation committees. matters. Generally, some new finance and of the priorities and expectations of underwriters will facilitate the offering accounting employees—such as a director ––Audit Committee Financial Expert: process on the company’s side. of external reporting—are hired during The audit committee should have at the IPO process and others are added as least one “audit committee financial ––Prior SEC Work Experience: Former the company’s needs develop over time. expert,” as defined by SEC rules. SEC staff members within a firm can often draw on prior working ––General Counsel: A general counsel ––Compensation Committee knowledge to expedite the resolution can make significant contributions to Considerations: There is a securities of issues or identify the appropriate the IPO process, particularly if hired law advantage if each compensation decision maker within the SEC. Assembling Your IPO Team 21

––Team Members: The company should statements may need to be re-audited. difficulty identifying those potential assess the experience and capabilities To avoid potential offering delays, a managing underwriters they consider to of the individual lawyers who will switch in auditors generally should be more (or less) prestigious than others. handle the IPO, including the more be made six to twelve months before – Economic Factors: If the company junior lawyers on the team—the “second beginning the IPO process. A change in – anticipates a large IPO and hopes chair” on the offering may well be the auditor during the company’s two most to negotiate a discount below the company’s principal point of contact recent fiscal years or any subsequent generally prevailing 7% rate, the topic for many parts of the IPO process. interim period must be disclosed in the should be discussed when banks are registration statement for the IPO. ––Firm Capabilities: The firm’s full-service competing for the engagement. capabilities should be considered, as MANAGING UNDERWRITERS – Financial Strength: An investment the company will inevitably have legal – banking firm’s financial resources will needs in a wide range of areas, both The selection of managing underwriters— determine the amount of capital it can during and after the IPO process. in particular, the lead managing commit to aftermarket trading support underwriters—is perhaps the single and will affect its potential ability to INDEPENDENT ACCOUNTANTS most important decision the company make credit available to the company for will make as part of the IPO process. Although an IPO company does not acquisitions or other corporate purposes. The following criteria are generally need to hire a “Big 4” or other national considered relevant in choosing from ––Other Capabilities: The company should accounting firm to go public, most do. among competing investment banks: assess each potential underwriter’s The Big 4 plus the next three largest strengths in the areas of the company’s audit firms account for more than 80% ––Track Record: An investment bank’s likely future needs, including follow-on of all US IPOs, for several reasons: prior experience and success is public offerings, M&A engagements, arguably the most germane factor, and SEC Experience: Every independent assistance in takeover defenses and –– has three dimensions: overall track registered public accounting firm will other capital markets matters. If record, IPO experience and familiarity be familiar with Regulation S-X, GAAP the company contemplates a “dual with the company’s industry. and PCAOB auditing standards, but track” process, it should also consider national accounting firms can tap into ––Team Members: The company should the underwriter’s M&A capabilities a wellspring of institutional experience evaluate each underwriter’s entire team, and track record for this process. concerning the SEC and IPOs. including the investment banking personnel, research analysts, and equity UNDERWRITERS’ COUNSEL ––Bench Strength: With large staffs in many capital markets and syndicate group. or most major metropolitan areas in The lead managing underwriters will the United States, national accounting ––Commitment to the Company: The select an outside law firm to serve as firms have the bandwidth to meet the company should be sure that the underwriters’ counsel. In addition to demanding schedule of an IPO and can managing underwriters it chooses experience with IPOs and the company’s service the audit needs of companies are committed to the company and industry, familiarity with the company with widely dispersed operations. that the deal teams have sufficient will make underwriters’ counsel more capacity to devote to the company. effective and contribute to a smooth ––Additional Services: National accounting offering process. Many law firms firms offer a variety of tax and advisory ––Distribution Capabilities: The managing underwriters collectively must have are qualified to act as underwriters’ services in addition to traditional audit counsel, and the underwriters will services, often enabling companies to sufficient distribution clout to sell the entire IPO and the ability to achieve often give considerable weight to the benefit from “one-stop shopping” (subject company’s views on the choice of firm. to limitations on non-audit services the target mix of institutional, retail, imposed by the Sarbanes-Oxley Act). domestic and international investors. OTHER ADVISORS AND VENDORS – Aftermarket Support: An IPO can – Brand Name: Underwriters and – – quickly sour if an active trading Companies going public regularly retain investors often draw comfort from the market does not develop or the stock additional consultants and advisors, such inclusion of a national accounting firm underperforms the market after closing, as a compensation consultant, investor audit opinion in an IPO prospectus. and securities litigation often follows relations firm and accounting consultant. IPO candidates that are not using a a sudden drop in the stock price. An IPO company also needs to line up national audit firm often switch to an several vendors as part of the IPO process, ––Prestige: Perceptions of underwriter audit firm with more IPO and public including a financial printer, transfer prestige are largely subjective and can company experience. If a new audit firm agent and virtual data room provider vary across industries, but few directors is engaged, previously audited financial (typically the financial printer).< or institutional investors would have 22 Managing Cheap Stock Issues

s part of its review of the Form S-1, 20% penalty tax and possibly interest and to obtain independent valuations of Athe SEC staff scrutinizes a company’s penalties. This tax treatment will continue their common stock for equity granting pre-IPO grants of options and other on an annual basis with respect to any purposes. These valuations vary in compensatory equity awards to assess post-vesting appreciation in the stock quality and price, based in part on the whether they were properly valued. If until the option is exercised or expires. size and nature of the valuation firm. The

the staff determines that the company company’s independent auditor cannot IRS regulations provide that the fair underestimated the fair market value perform the valuation without losing market value of private company stock of its common stock in accounting for its independence from the company. must be determined by the reasonable equity grants—commonly referred to application of a reasonable valuation Whenever the company obtains an as having issued “cheap stock”—the method that considers all relevant independent valuation of its common company will be required to recognize facts and circumstances and specifies stock, it should confirm in advance that the additional compensation expense. the factors that should be considered valuation will be Section 409A–compliant Accounting for compensatory equity in this process. The regulations also for tax purposes and consistent with ASC awards has long been a focus of staff contain two safe harbors that, if Topic 718 for accounting purposes. The review. Although the accounting followed, will be presumed to result in company should also confirm that the consequences of a cheap stock finding often a reasonable valuation. The first safe valuation firm and methodology will be are not as severe as in the days prior to the harbor is for a valuation performed acceptable to the company’s independent mandatory adoption of ASC Topic 718 (the by an independent third party. The auditor and then work with its auditor to accounting standard requiring companies second safe harbor, which is much less review the draft valuation report before to record compensation expense for commonly utilized, permits an internal issuance. Methodologies that include employee equity grants), the resultant valuation under limited circumstances. more than one valuation approach are changes to the company’s audited financial more likely to pass muster with the statements can trigger a restatement. ––AICPA Practice Aid: The SEC staff company’s auditor and the SEC staff. Perhaps more importantly, the time applies the recommendations contained The Section 409A regulations permit an required to achieve closure with the staff in an AICPA Practice Aid, Valuation of independent valuation to be used for up on cheap stock issues can delay an IPO, Privately-Held-Company Equity Securities to 12 months as long as its continued use particularly since the topic typically cannot Issued as Compensation, in assessing the is not grossly unreasonable. However, be resolved until the estimated price range basis on which a company has estimated it is advisable to obtain an updated for the offering becomes available shortly the fair market value of its stock. The valuation contemporaneously with each before commencing the road show. Practice Aid identifies three acceptable valuation methodologies—market-based, significant grant date and following income-based (such as discounted cash each significant company development COMMON STOCK VALUATION flow) and asset-based—and states that affecting valuation, such as closing a The starting point of proper accounting the preferred approach is a valuation new round of financing, substantially for compensatory equity awards—and a at the time of grant by an unrelated exceeding the company’s revenue plan, cheap stock analysis—is the fair market valuation specialist. Use of rules of achieving positive cash flow or profitability, value of the company’s common stock. thumb—such as informal discounts from commercially launching an important Valuation practices for common stock the anticipated IPO price range—is not new product, commencing discussions of pre-IPO companies have become permitted, and there is no predictable to be acquired, or beginning the IPO less subjective and more formal over pattern as to the timing and amount of process. Similarly, significant reversals the years, for several reasons. the discount from the IPO range that in the company’s fortunes may merit a the staff will find acceptable. The staff reduction in the common stock valuation. ––Section 409A: Under Section 409A of generally focuses on the application of the Internal Revenue Code, if a stock the Practice Aid to grants made in the STRATEGIES TO MINIMIZE option is granted with an exercise price 12-month period prior to the initial filing CHEAP STOCK ISSUES that is below the fair market value of or submission of the Form S-1, although the common stock on the date of grant it may examine earlier grants as well. The following strategies can be and does not otherwise comply with incorporated into pre-IPO planning and the provisions of Section 409A, the The confluence of the SEC’s emphasis equity granting practices to minimize recipient is required to pay—as the on the Practice Aid, the onerous Section the likelihood and severity of cheap option vests and regardless of whether it 409A tax consequences of granting stock issues during SEC review: is exercised—ordinary income tax based discounted stock options and the difficulty – Use of Independent Valuations: For the on the difference between the exercise of valuing private company stock—the – period of 12 to 18 months preceding the price and the fair market value in the “perfect storm” of cheap stock—has initial Form S-1 filing or submission, year of vesting, plus in each such year a driven almost all pre-IPO companies the company should price all options, Managing Cheap Stock Issues 23

and recognize compensation expense The staff will generally permit the Cheap stock submissions are no longer for all stock-based awards, based company to state that it obtained universally requested by the SEC staff, and on independent, contemporaneous third-party valuations (without naming practices vary across examiners. If a cheap valuations and should procure updated the valuation firm) as data points to stock submission is not requested by the valuations quarterly, or more frequently support the company’s determinations examiner, some companies voluntarily if warranted by significant company of fair market value and the associated make a submission to avoid the potential developments. Under the Practice accounting charges. The staff will ask offering delay that could result if the staff Aid, a contemporaneous valuation companies to explain the reasons for raises concerns when the price range considers conditions and expectations valuations that appear unusual (such is publicly disclosed shortly before the that exist at the valuation date and is as unusually steep increases in the fair road show is scheduled to begin, while not biased by hindsight. Independent, market value of the underlying shares other companies with unremarkable contemporaneous valuations that are leading up to the IPO) but has indicated patterns of valuation determinations compliant with the Practice Aid and that these comments are intended in the months approaching the IPO, Section 409A will not preclude the SEC to assist the staff in confirming the and with appropriate prospectus staff from raising cheap stock issues, appropriate accounting for the stock- disclosures regarding valuation but they will present strong evidence based compensation and are not for methodologies consistent with staff to counter any challenges by the staff. the purpose of requesting changes to guidance, conclude there is no need to the disclosure in the prospectus. make a cheap stock submission. < ––Grant Approval Process: All option grants beginning 12 to 18 months before the ––Cheap Stock Submission: Because the initial Form S-1 filing or submission SEC staff cannot assess the company’s should be made only at meetings of cheap stock situation until it knows EQUITY GRANTS DURING the board and not pursuant to written the estimated offering price range, IPO PROCESS consents. Options must have an exercise which ordinarily is not included in the Between Org Meeting and Initial Filing or price that is at least equal to the fair Form S-1 until the last amendment prior Submission: The company should consider forgoing market value of the common stock on the to printing preliminary prospectuses and all equity grants as the initial Form S-1 filing or date of grant, and board determinations commencing the road show, the company submission approaches, because the fair market of fair market value of private company should consider supplementally providing value of the common stock used to establish option stock cannot, as a practical matter, be to the SEC examiner—or may be asked by exercise prices or to determine the accounting made by written consent. Also, since a the examiner to provide—a preliminary treatment of other equity grants during this period— written consent is not legally effective estimate of the anticipated price range even when based on independent, contemporaneous until the last required signature is (often referred to as a “cheap stock valuations—will be the most vulnerable to second- guessing once the estimated offering range is known. obtained, any delay in obtaining all submission”). required signatures can lead to assertions If it is impracticable to stop making grants during this period, the company should ensure that the valuation that the fair market value of the common If provided, a cheap stock submission firm knows about the company’s IPO plans and uses stock has increased in the interim. If typically discusses the factors contributing to the difference between an appropriate valuation methodology in light of the the company had previously authorized company’s near-term liquidity. the CEO to make option grants to new the midpoint of the estimated price range After Initial Filing or Submission: After the initial employees, new-hire grants should now and the fair market value of the common filing or submission of the Form S-1, the fair market be made only at board meetings to avoid stock, determined as of the date of the company’s most recent equity grant (and value used to establish option exercise prices or to similar issues (the board can choose determine the accounting treatment of other equity sometimes other recent grants). In a to begin vesting with the date of hire, grants should continue to be based on independent, cheap stock submission, the company may instead of the grant date, so that the contemporaneous valuations. Ideally, the fair delay in grant has no effect on vesting). prefer or need to use a wider price range market value used for these purposes should be than the $2.00 spread that is customary in within the estimated offering range, and it may be Prospectus Disclosure: In the initial –– the preliminary prospectus—sometimes desirable to stop making grants as the road show Form S-1 filing or submission, the as large as $3.00 to $4.00 per share. draws near, to avoid raising new cheap stock issues. company should include stock A cheap stock submission typically An alternative approach is to use the IPO price as compensation disclosure in accordance is made one to two weeks before the the fair market value for equity grants after the with SEC staff guidance. In general, a road show is expected to commence. initial filing or submission and to make the grants description of a company’s historical Confidential treatment is usually sought, effective concurrently with the execution of the valuation methodology, and how that since the submission will otherwise IPO underwriting agreement, as long as the IPO occurs by a specified date. This strategy should be methodology will change post-IPO, is become publicly available following the immune from cheap stock challenges, but will leave now sufficient. Under prior staff guidance, completion of the staff’s review of the a recipient with nothing if the company is acquired much more extensive disclosure regarding Form S-1. pre-IPO stock-based compensation was instead of going public. required. 24 Selling Stockholders: The Basics

elling stockholders are pre-IPO employee participation significantly Sstockholders of a company who sell complicates the offering logistics. PREVALENCE OF SELLING some of their shares to the public as part STOCKHOLDERS The prevalence of selling stockholders in of the company’s IPO. Pre-IPO investors IPOs varies widely. Selling stockholders Among all US IPOs completed from 2016 often have contractual registration rights are less common in weak offerings, because through 2018: permitting them to include shares in the underwriters may be leery of introducing offering. Selling stockholders achieve ––23% included selling stockholders. any negative factor into the mix. In strong immediate liquidity for the shares sold but offerings, selling stockholders appear ––The selling stockholders consisted face several tradeoffs, as discussed below. solely of investors in 65% of these more frequently, sometimes including deals, solely of management in 12%, management as well as pre-IPO investors. BACKGROUND and of both in the remaining 23%.

Investors in private companies routinely ADVANTAGES AND DISADVANTAGES ––Of the IPOs with selling stockholders, negotiate two types of registration rights: 30% included the shares only as part For stockholders, the principal advantage of the firm-commitment portion of the ––“Demand” registration rights permitting of including shares in the IPO is the offering, 17% included the shares only investors to require the company to file opportunity to receive liquidity for the as part of the over-allotment option, and a registration statement with the SEC shares that are sold without waiting for 52% included the shares in both. and register their shares for public sale, the expiration of the lockup agreement, ––In the IPOs in which selling stockholders usually after passage of a minimum and the ability to sell at the IPO price participated in the firm-commitment portion period of time and subject to a minimum without the risk of a subsequent market of the offering, the median percentage of offering size. Such rights typically cannot decline. For large stockholders that are the firm-commitment portion represented be invoked to “demand” an IPO. considered “affiliates” of the company, by selling stockholder shares was 33%. selling in the IPO also avoids the Rule 144 ––“Piggyback” registration rights enabling volume limitations that would otherwise investors to include a portion of their constrain the rate at which pre-IPO representations and indemnification from shares in a public offering initiated by shares can be sold without registration selling stockholders who are members of the company (sometimes excluding the once the lockup agreement expires. management, and management selling IPO). Piggyback rights generally allow Disadvantages include the following: stockholders often are not parties to the managing underwriters to cut back, any agreement obligating the company or exclude entirely, selling stockholder – Loss of Upside: The flip side of receiving – to indemnify them for information shares if such a step is deemed the IPO price for their shares is that in the Form S-1. Nonetheless, in the necessary due to market conditions. selling stockholders forgo any subsequent absence of deliberate misbehavior, the market appreciation in the value of the practical risk of liability for management Registration rights agreements usually shares sold. This factor is difficult to selling stockholders should be small. contain detailed provisions to address, assess, since no one knows for certain among other topics, eligibility, notices, how any particular company’s stock – Uncertain Terms: Although assured of registration procedures, lockup – will perform following its IPO. receiving the IPO price for their shares, requirements, expenses, waivers selling stockholders usually must cede and indemnification obligations. – Potential Liability: Selling stockholders – authority to the company to negotiate the face potential liability to all IPO investors final offering price and the exact number for material misstatements or omissions NATURE AND PREVALENCE OF of their shares to be included in the in the Form S-1. In addition, under SELLING STOCKHOLDERS IPO. In theory, selling stockholders can the underwriting agreement, selling condition inclusion of their shares in the Most frequently, selling stockholders stockholders are required to indemnify IPO on receiving a specified minimum are pre-IPO investors with piggyback the underwriters against liabilities to IPO price or being allowed to sell a registration rights. Company management the extent attributable to information minimum number of shares, but such without registration rights may also supplied by the selling stockholders for conditions can greatly complicate IPO be permitted to sell shares in an IPO. inclusion in the Form S-1. For investors, pricing and thus are generally resisted Management sales in an IPO can create the these potential liabilities are usually by both companies and underwriters. perception that insiders lack confidence mitigated by the company’s obligation in the company, and are usually limited to indemnify the investors against ––Higher Sales Commission: Selling to a small percentage of their holdings liabilities resulting from misstatements stockholders must pay the same (typically 5% to 10%), if permitted at or omissions in the Form S-1, except to underwriting discount on the sale of all. Employees can also be allowed to the extent attributable to information their shares as paid by the company— sell shares in an IPO, but widespread supplied by the investors. The managing typically 7% in an IPO. If the shares underwriters often seek more extensive were sold in the open market following Selling Stockholders: The Basics 25

the IPO and the expiration of the company, to deliver the stock certificate other material relationship that the lockup agreement, the brokerage and stock power to the managing selling stockholder has had with the commission would be lower. underwriters at the closing of the IPO. company within the past three years, If the selling stockholder is exercising and disclose the stock ownership of the Other Expenses: Most registration rights –– an option or warrant and selling the selling stockholder prior to the IPO, agreements require the company to underlying common stock in the IPO, the the amount offered in the IPO, and the pay the reasonable fees and expenses applicable option or warrant agreement amount and percentage (if 1% or more) of one law firm to represent all selling and notice of exercise will be placed in to be owned after completion of the stockholders in the IPO (often with custody in lieu of stock certificates. offering. If a selling stockholder is not a fee cap). If selling stockholders a natural person, the prospectus must need to retain additional counsel Stock Power and Medallion Guarantee: –– also identify its controlling persons and to review the Form S-1 or to render The stock power is used to convey the provide similar information about them. legal opinions to the underwriters at shares to the underwriters at the closing. closing, the expense typically must be The selling stockholder’s signature on the Disclosure complications can arise if a borne by the selling stockholders. stock power will need to be guaranteed selling stockholder is not willing to sign a by an eligible financial institution, such customary power of attorney authorizing SELLING STOCKHOLDER DOCUMENTS as a bank or stockbroker, that participates the company to determine the IPO price in an approved signature guarantee and number of shares to be sold. Similarly, The principal documents to be provided “medallion program” under SEC rules. last-minute changes in the composition by each selling stockholder consist of: of the selling stockholders or the number IRS Form W-9: Each selling stockholder –– of shares being sold can precipitate ––Questionnaires and FinCEN Certifications: also needs to complete and submit to the need to update the prospectus. Each selling stockholder typically is the company an IRS Form W-9 (Form required to complete questionnaires W-8BEN for non-US persons) for FOREIGN SELLING STOCKHOLDERS to elicit the information required to be federal tax withholding purposes. disclosed in the Form S-1 and to obtain The inclusion of selling stockholders information required by FINRA rules. The purpose of these documents is to make who reside in foreign jurisdictions In addition, each selling stockholder the sale of the selling stockholder shares in a US IPO can present various that is a legal entity is required as turnkey as possible and to eliminate the procedural and administrative to provide a beneficial ownership need for selling stockholders to make any challenges, such as the following: certification form and identifying further decisions or sign any additional documentation in compliance with documents in order to complete their sales. ––The underwriters may need to impose the rules of the Financial Crimes Any deviation from this approach—such intrusive and time-consuming Enforcement Network (FinCEN) within as minimum price or share requirements— documentary requirements on foreign the US Department of the Treasury. can cause logistical complications. selling stockholders in order to comply with applicable anti–money laundering Power of Attorney: The power of attorney –– SEC FILING OBLIGATIONS and “know your client” obligations. irrevocably authorizes attorneys-in- fact—typically designated officers of Depending on the circumstances, ––Transfer agent requirements may be the company—to sign the underwriting selling stockholders may have SEC filing more burdensome for foreign selling agreement on behalf of the selling obligations in connection with the sale stockholders, particularly if they reside stockholder for the sale of the selling of shares in the IPO. For example, a in tax haven jurisdictions. In foreign stockholder’s shares and to take any Section 16 insider selling shares in the countries, for example, it generally is not other actions necessary to complete the IPO must file a Form 4 to report the possible to obtain a medallion guarantee, sale. If the selling stockholder is selling transaction by the end of the second so selling stockholders are required shares to be received upon exercise of an business day after the closing of the IPO. to make alternative arrangements option or warrant, the power of attorney Also, although typically inapplicable due for authentication of signatures. also authorizes the attorneys-in-fact to to the large share and dollar thresholds, Notarization of documents, if exercise the option or warrant prior to selling stockholders must consider their –– required, is more difficult and time- or simultaneously with the execution “large trader” filing obligations pursuant consuming in foreign countries of the underwriting agreement. to Rule 13h-1 under the Exchange Act. than in the United States. ––Custody Agreement: The custody DISCLOSURE OBLIGATIONS Depending on the jurisdictions of agreement, which is accompanied by a –– the selling stockholders, foreign tax stock certificate for the shares being sold In general, the IPO prospectus must concerns may need to be addressed. < in the IPO and an executed stock power, identify each selling stockholder, indicate authorizes a custodian, typically the the nature of any position, office or 26 Disclosure and Reporting Obligations—One Size Does Not Fit All

t one time, most US companies reporting category consisting of “smaller ––Staff Policies and Practices: Over the past Agoing public underwent the reporting companies” (SRCs) that satisfy two years, the SEC staff has modified same IPO process and were subject public float or revenue tests. SRCs can several policies and practices to facilitate to the same disclosure standards, take advantage of relaxed disclosure IPOs and follow-on offerings. auditing requirements and post-IPO standards in a Form S-1 and as a public • In 2017, the staff changed its review reporting obligations. Nowadays, company. In June 2018, the SEC amended procedures to allow any company, significant variations exist. the definition of an SRC to significantly regardless of EGC status, to submit expand the pool of eligible companies. a draft registration statement for ––Accelerated Filers and Large Accelerated Under the amended definition, an SRC nonpublic review and made that Filers: In 2003, the SEC introduced an must have a public float of less than process available for a wider range of “accelerated filer” reporting classification $250 million, or annual revenues of less offerings and registration statements. based on a company’s public float than $100 million in its most recent (at least $75 million) and tenure as a fiscal year and either no public float or a • Under a staff policy announced in 2017, public company (a company that has public float of less than $700 million. As any company is permitted to omit from been subject to the Exchange Act for a result of the amendments, some SRCs a draft registration statement annual at least 12 calendar months and has may also be categorized as accelerated and interim financial information filed at least one Form 10-K). In 2005, filers or large accelerated filers and thus that the company reasonably believes the SEC added a “large accelerated obligated to obtain Section 404(b) audit will not be required in the registration filer” classification for companies reports. In May 2019, the SEC proposed statement when it is publicly filed. with a larger public float (at least $700 to exclude from the accelerated and large million). Accelerated filers and large accelerated filer definitions any SRC that • The staff has encouraged companies accelerated filers are subject to earlier had annual revenues of less than $100 to request relief from SEC reporting filing deadlines for Form 10-Qs and million in its most recent fiscal year. rules requiring disclosures that are Form 10-Ks and must comply with several burdensome to generate but may disclosure obligations and auditing ––Emerging Growth Companies: In 2012, the not be material to the total mix of requirements from which non-accelerated JOBS Act created the “emerging growth information available to investors. filers are exempt—most notably, the company” (EGC) classification. An requirement under Section 404(b) of EGC is a company that had total annual Further regulatory and legislative the Sarbanes-Oxley Act to obtain an gross revenues of less than $1.07 billion efforts to streamline capital formation, annual independent audit report on the during its most recently completed fiscal encourage IPOs and reduce compliance effectiveness of the company’s internal year. EGCs enjoy substantial disclosure burdens on public companies, particularly control over financial reporting. and reporting relief and the ability to for the benefit of smaller companies, submit a draft Form S-1 for confidential can be expected. For example: ––Well-Known Seasoned Issuers: Also SEC review during the IPO process. in 2005, the SEC created another new ––In May 2019, the SEC proposed classification, consisting of large, mature ––Testing the Waters: The JOBS Act amendments to Regulation S-X public companies known as “well-known permits EGCs to engage in “test-the- to update and ease the financial seasoned issuers” (WKSIs) that are waters” communications with eligible disclosure requirements in eligible for substantial flexibility in the institutional investors to determine their connection with acquisitions and registration process for follow-on public investment interest in a contemplated dispositions of businesses. offerings. A WKSI is a US public company IPO, either prior to or following the filing ––Bills have been introduced in Congress that is Form S-3–eligible and has a public of the Form S-1. In February 2019, the that would, among other things: extend float of at least $700 million or has issued SEC proposed rule amendments to permit the period of time during which EGCs at least $1 billion of debt securities in any company to engage in “test-the- are exempt from the auditor attestation registered transactions in the preceding waters” communications in connection requirement under Section 404(b) of the three years. To be eligible for Form S-3, with any registered securities offering. Sarbanes-Oxley Act; reduce the minimum a company must have been subject to Expansion of Regulation A: Effective public float for WKSI status; permit more the Exchange Act for at least 12 calendar –– in January 2019, the SEC amended companies to use Form S-3; exempt all months and timely filed all reports on Regulation A—which provides an EGCs and other smaller companies from Form 10-K, Form 10-Q and Form 8-K exemption from registration for public the requirement to provide financial (with limited exceptions) required to offerings by private companies—to make statements in XBRL format in SEC filings; be filed during the 12 calendar months Regulation A available for follow-on pare back the requirement for say-on- and any portion of a month immediately offerings by public companies. Offerings pay votes and eliminate the requirement preceding the filing of the Form S-3. under Regulation A require less extensive for say-on-frequency votes; and repeal ––Smaller Reporting Companies: In 2008, disclosure than registered public offerings. the statutory authority for SEC rules on the SEC introduced another new hedging and pay ratio disclosure. < A Brief Lexicon of IPO Terminology 27

he IPO process has its own ESPP. Employee stock purchase plan, statements that is a principal focus of Form Tvocabulary, which is often new and pursuant to which employees may S-1 preparation and SEC staff review. confusing to IPO participants. Below purchase shares of the company’s Non-GAAP financial measure. are definitions of some key terms. common stock, typically at a small A numerical measure of financial discount from the market price, through Analyst Day. Event held for research performance, financial position or cash the use of payroll withholdings. analysts employed by the managing flows that excludes amounts included underwriters at which the company makes Evergreen. Provisions in a stock in the most comparable GAAP measure in-depth presentations and entertains incentive plan or ESPP pursuant to or that includes amounts excluded from questions about the company’s financial which the number of plan shares is the most comparable GAAP measure. model and internal projections. subject to automatic annual increases Org meeting. Organizational meeting for a stated number of years. Bookrunner. The lead managing generally attended by all members underwriter primarily responsible FINRA. Financial Industry Regulatory of the working group to formally for organizing and conducting the Authority, the principal self-regulatory commence the IPO process. road show, building the order “book” organization for securities firms doing PCAOB. Public Company Accounting and agreeing with the company on business in the United States. Oversight Board, a nonprofit corporation the price and size of the IPO. Many Form S-1. Registration statement established by Congress to oversee IPOs have joint bookrunners. filed with the SEC by a US issuer the audits of public companies. Box. The prospectus summary, which for an IPO in the United States. Primary/Secondary offering. The customarily is framed in a page border. Foreign issuers file a Form F-1. portion of an IPO consisting of shares CD&A. Compensation Discussion and FWP. Free writing prospectus, a written offered by the company for its own Analysis, a narrative overview of the communication that constitutes an offer of account (primary offering) or the company’s executive compensation securities but is not a statutory prospectus. portion of an IPO consisting of shares objectives and policies (which EGCs offered by existing stockholders of Green shoe. An option granted by the are not required to provide). a company (secondary offering). company and/or selling stockholders that Comfort letter. A letter from the permits the underwriters to purchase Quiet period. The period during which company’s auditor that confirms certain additional shares (up to 15% of the offering and publicity restrictions apply financial and other information relating offering) within 30 days after pricing. to a company in the process of going to the IPO and the auditor’s status. Formally called an “over-allotment option.” public. Generally begins when the company selects managing underwriters Comment letter. A letter from the SEC Gun-jumping. A public communication and lasts until 25 days after the IPO. staff containing legal and accounting that constitutes an impermissible “offer” comments on the Form S-1. of securities prior to the public filing of the Red herring. Version of the preliminary Form S-1, in violation of the quiet period. prospectus circulated to make written Confidential submission. Submission offers, which must include a bona fide by an EGC of draft Form S-1 for JOBS Act. Federal legislation, enacted estimate of the offering price range and confidential staff review. Under staff in 2012, intended to spur job creation the number of shares to be offered. policy, a non-EGC can submit a draft and economic growth by improving Form S-1 for similar “nonpublic review.” access to the capital markets for Road show. The series of meetings held by startup and emerging companies. company management with prospective Corp Fin. Division of Corporation investors to market shares in an IPO. Finance, the SEC division responsible for KPIs. Key performance indicators, a reviewing Form S-1 filings for IPOs. common term for the key metrics used by Selling stockholders. Company management to monitor and assess the stockholders that sell shares in an IPO. DSP. Directed share program, a portion company’s operations and performance. of an IPO (typically 5%) reserved for sale Staff. Employees of the SEC, including to persons designated by the company. Lockup. Agreement prohibiting a lawyers, accountants and financial analysts. stockholder from selling shares acquired EDGAR. The SEC’s system for Test-the-waters (“TTW”) prior to the IPO for a specified period of electronic submission of, and public communications. Oral or written time following the IPO (typically 180 days). access to, nearly all SEC filings. communications with eligible institutional MD&A. Management’s Discussion investors to determine their investment EGC. Emerging growth company, a and Analysis of Financial Condition interest in a contemplated IPO, either prior company that had total annual gross and Results of Operations, a narrative to or following the filing of a Form S-1. < revenues of less than $1.07 billion during discussion of the company’s financial its most recently completed fiscal year. We Wrote the Book on Going Public. You can write the next chapter.

“[This book] is quickly becoming the bible of the I.P.O. market.” — The New York Times (The Deal Professor, January 19, 2010)

“Comprehensive in scope, informative, incisive, and … an important reference and informational tool.” — Burton Award, Outstanding Authoritative Book by a Partner in a Law Firm, 2013

“CEOs should keep this book at their side from the moment they first seriously consider an IPO … and will soon find it dog-eared with sections that inspire clarity and confidence.” — Don Bulens, CEO of EqualLogic at the time it pursued a dual-track IPO

“A must-read for company executives, securities lawyers and capital markets professionals alike.” — John Tyree, Managing Director, Morgan Stanley

More information at IPOguidebook.com Book available from PLI.edu The Road to IPO: Legal and Regulatory Insights into Going Public

follow WilmerHale’s IPO blog on twitter and at www.wilmerhale.com/IPOBlog Want to know more about the venture capital and M&A markets?

Our 2019 Venture Capital Report offers an in-depth US venture capital market analysis and outlook, including industry and regional breakdowns. The report looks at the potential risks—to both private companies and employees— of Section 83(i) tax deferrals, examines the antitrust ramifications of cross-shareholding in companies in the same industry, and offers a roundup of trends in deal terms in VC-backed company M&A transactions and convertible note, SAFE and venture capital financings.

See our 2019 M&A Report for a global M&A market review and outlook. We offer an update on takeover defenses for public companies, look at recent federal court responses to the rising tide of M&A disclosure lawsuits, and analyze the effects on foreign investments in the United States resulting from changes to CFIUS. We also examine the impact of buy-side representation and warranty insurance on deal terms in private company sales, compare public and private company M&A deal terms, and review deal term trends in VC-backed company acquisitions.

To request a copy of any of the reports described above, or to obtain additional copies of the 2019 IPO Report, please contact the WilmerHale Client Development Department at [email protected] or call +1 617 526 5600.

An electronic copy of this report can be found at www.wilmerhale.com/2019IPOreport.

Data Sources: WilmerHale compiled all data in this report unless otherwise indicated. Offerings by REITs, bank conversions, closed-end investment trusts, special purpose acquisition companies, oil & gas limited partnerships and unit trusts are excluded from IPO data. Offering proceeds generally exclude proceeds from exercise of underwriters’ over-allotment options, if applicable. For law firm rankings, IPOs are included under the current name of each law firm. Venture capital data is sourced from SEC filings and Dow Jones VentureSource. Private equity–backed IPO data is sourced from SEC filings and Refinitiv. © 2019 Wilmer Cutler Pickering Hale and Dorr llp IPO Report

2019 WilmerHale recognizesWilmerHale its corporate responsibility to environmental stewardship. 19_0197 KW 6/19 5000

Connect with us wilmerhale.com

Wilmer Cutler Pickering Hale and Dorr llp is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom office is operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK office. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2019 Wilmer Cutler Pickering Hale and Dorr llp Attorney Advertising