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Strategies for going public Fifth Edition Contents

2 Chapter 1. Should you go public?

8 Chapter 2. Is the time right?

12 Chapter 3. Your team

16 Chapter 4. Pre-public planning

26 Chapter 5. The underwriters

32 Chapter 6. Registration

44 Chapter 7. Marketing the offering

50 Chapter 8. Closing the deal

54 Chapter 9. After you go public

62 Chapter 10. Foreign private issuers

67 Appendices 68 Appendix A: The US Securities and Exchange Commission 69 Appendix B: Registration exemptions 72 Appendix C: The securities exchanges 77 Appendix D: A timetable for going public 82 Appendix E: A sample checklist 84 Appendix F: Emerging growth

85 Glossary 91 About Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates

92 About 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Foreword

Welcome to the fifth edition of Strategies for Going Public!

An IPO is an important event in the life of an as it seeks to grow. Executing the IPO is the initial step in being a public . We hope that this publication takes away some of the mystery and surrounding the process and acts as a useful guide as your organization begins its IPO journey.

The for initial public offerings (IPOs) is complex and challenging. The legacy of the financial crisis and the economic that continues to impact the markets have made even more diligent in their scrutiny of IPOs.

Legislation passed in the aftermath of the financial crisis, including the Dodd-Frank Reform and Consumer Protection Act (Dodd-Frank Act), has added to the complexity of these transactions, although the Jumpstart Our Startups Act (JOBS Act) and the Fixing America’s Surface Transportation Act (FAST Act) have provided increased flexibility for companies, particularly for new entrants. Timing remains critical, and being able to take advantage of windows of opportunity is key to a successful IPO.

In light of these challenges, it is extremely important that any organization considering an IPO be well prepared. This fifth edition of Strategies for Going Public, created by Deloitte in collaboration with Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates aims to help effectively prepare for an IPO. It provides a straightforward explanation of the process, highlights the common technical terms and language encountered during an IPO, and outlines the new regulatory requirements and procedures that organizations will need to take into account as they seek to go public.

Good luck!

Michael Dziczkowski Partner, Deloitte & Touche LLP

As used in this document, “Deloitte” means Deloitte & Touche LLP, a of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public .

Strategies for going public 1 Chapter 1. Should you go public?

2 Strategies for going public 4 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Going public is a , involved process that represents a significant milestone for any company.

Exploring the opportunity to go public today incorporates these characteristics can presents many challenges due to market enable you to move quickly and take Introduction volatility, increased regulations, expanded advantage of market opportunities. scrutiny of , On the surface, the transformation and heightened legislative influence. The Chapter 3: Your team. Taking your from a private to a Sarbanes-Oxley Act of 2002 (SOX), Dodd- company public requires a team of seems fairly straightforward. A Frank Act, JOBS Act, and the FAST Act highly specialized professionals. This company typically goes public are examples of more recent legislation chapter identifies these professionals when it sells securities to the that changed the IPO landscape and the and offers a brief overview of their roles general public for the first time. requirements for becoming and remaining in the process. You should also give Generally, going public refers to the a public company. consideration to your company’s own sale of securities, although team. Additionally, this chapter discusses in some cases it may refer to the This publication provides information to the skill sets demanded in a public sale of securities. The term help you understand the requirements company’s finance function and beyond. “going public” in this publication of an offering in light of the changing IPO refers to those instances where a landscape, including the people you may Chapter 4: Pre-public planning. This company files a registration need to assist you, what your role will be, chapter deals with the steps that you likely statement with the Securities and certain regulations with which you must need to take to prepare your company Exchange Commission (SEC) for the comply, and what effect a for a public offering. It also provides you offer and sale of securities to the may have on you and your company. with insight into the roles that you can public for the first time. The Most importantly, it will help you prepare expect your , attorneys, and process is called the initial public for what to expect as you start the journey independent registered public accounting offering or “IPO.” toward going public. To assist you, we firm or “auditor,” and other advisers to play. have summarized the contents of each chapter below. The prospect of having Chapter 1: Should you go public? Public available to finance The , as ownership can provide significant benefits future growth can be amended (1933 Act) requires to a company and its , but it registration with the SEC prior to the also has drawbacks. This chapter offers you alluring. Yet careful and offer and sale of securities, unless an an overview of the process and touches on deliberate thought is exemption from registration exists. some of the pros, cons, and alternatives Additionally, the 1933 Act requires that should be considered before you prudent when deciding that investors receive financial and decide whether this is the right course to go public. other information concerning the for your company. company in connection with that The offer and sale. The Securities Chapter 2: Is the time right? It is Chapter 5: The underwriters. underwriters are critical to the immediate Exchange Act of 1934, as amended important to evaluate your company’s and long-term success of most public (1934 Act)—which created the appeal to investors and the state of the offerings. This chapter discusses criteria to SEC—regulates and controls market before you decide to go public. This use in selecting lead underwriters and, just securities markets and related chapter considers several of the factors as important, some of the market criteria practices and establishes the that may affect shareholders’ in underwriters use in deciding whether they ongoing periodic disclosure a company’s . It also want to take your company public. It also requirements for public companies. describes some of the key characteristics of a company considering whether to explains the factors that underwriters go public. Having a that typically consider when pricing your .

Strategies for going public 3 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Chapter 6: Registration. Everyone on with a handful of shareholders to a company to peer companies, and setting earnings your team will be involved in preparing with a large number of holders of its stock, expectations, all of which are highly and filing your registration statement and which easily can be bought or sold through publicized exercises. Such enhanced related documents with the SEC. Your a or the over-the-counter visibility and the publicity generated by company’s decision to go public is (OTC) market. an IPO may also create opportunities for contingent upon the SEC declaring the your company to expand into other global registration statement “effective.” This News about the dramatic wealth created markets in the future. chapter reviews the importance of the for company founders and members of due diligence process and the makeup of management that follows an IPO can be Less dilution. If your company is at the registration statement, as well as the captivating. The prospect of having capital the stage where it is ready to go public, clearances necessary for your registration available to finance future growth can be you may command a higher price for your statement to be declared effective. alluring. Yet careful and deliberate thought securities through an IPO than through a is necessary when deciding whether to go or other form of equity Chapter 7: Marketing the offering. The public. Opening your company to increased financing. This means that you give up actual selling efforts principally occur public scrutiny can change the way you do less of your company to receive the same during the weeks immediately preceding business, and the pressure to maintain amount of funding. the effective date of your registration growth patterns and meet the expectations statement. This chapter describes that of the investment community is typically real Enhanced ability to raise capital in process, the rules governing what you can and intense. It is advisable to weigh fully the the future. As your company continues and cannot do and say during the offering advantages and disadvantages, including to grow, you may need additional process, and what your involvement in the those listed in the section below, with a permanent financing in the future. If your selling effort should be. selected group of trusted advisers. stock performs well in the , you may be able to sell additional stock or Chapter 8: Closing the deal. Once your Common advantages debt on favorable terms. registration statement is effective and the Going public potentially provides both offering is priced, the remaining events tangible and intangible benefits, including Liquidity. Once your company goes in the process of going public occur very the following: public, a market will be established for quickly. This chapter outlines those events. your stock. A public market provides Increased capital. An IPO can provide liquidity for management, employees, and Chapter 9: After you go public. Even your company with additional funds to existing investors, subject to expiration of a before the offering is completed, you must meet needs, acquire customary lock-up period following an IPO. look ahead to your responsibilities and other , expand research and Subject to applicable laws and regulations, duties as executives and decision makers development efforts, invest in facilities and holders of your stock may generally sell it of a public company. This chapter explains equipment, or retire existing debt. Publicly whenever the need arises. However, there aftermarket trading, your relationship traded stock can also be used effectively are important restrictions to keep in mind with the financial community, reporting as transaction consideration in mergers that place certain limits on the timing and requirements, and certain of the federal and acquisitions. number of shares that can be sold by certain securities laws that may affect you. parties after the offering (see, for example, Improved financial . As an IPO the discussion of sales restrictions under Chapter 10: Foreign private issuers. is usually in the form of an equity-based Rule 144 of the 1933 Act in Chapter 9). Many foreign companies consider going , your company may experience an public in the . This chapter immediate improvement in its This publication is intended only as a general discusses some of the more important and debt-to-equity ratio. overview and is not intended to provide legal or differences between initial public offerings investment advice. It does not address all federal and by domestic issuers and foreign issuers. Increased visibility. Going public will state securities laws, rules of the Financial Regulatory Authority (FINRA), and standards and give your company increased and ongoing other requirements of the trading markets or other Advantages and disadvantages exposure through worldwide media laws, rules, and practices that may apply to an initial Going public can signify to the outside world coverage of the financial markets, which public offering, and we undertake no duty to update that a company has achieved a special level may enhance your company’s reputation the laws, rules, and practices that are described herein. Securities and corporate counsel should be involved, of success. Overnight, a company can be and its brand. Broker-dealers will now and you should refer to the actual laws, rules, and transformed from being a closely held entity be analyzing your company, comparing it regulations themselves when preparing to go public.

Strategies for going public 4 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Ease of market . After an IPO, Better ability to attract and retain by privately held companies concerning the increased liquidity in your company’s personnel. Stock options and other the company, officers, directors, and shares and the availability of your company’s incentive compensation plans enable certain shareholders will be available information will enable the market to easily personnel to participate in the company’s to competitors, customers, employees, ascertain your company’s . Further, the success without increasing and others. Also, information about your market valuation of a public company may compensation. The chance to acquire company’s sales and profits, and executive be higher than its private peers. stock in the company they work for may information such as compensation of your motivate employees to take a longer-term officers and directors, must be disclosed not Exit strategy. Some major shareholders, view of the company. Additionally, it only initially when you go public but also on such as and enhances the company’s ability to attract a continuing basis thereafter. firms, require liquidity in a company. and retain top talent. Such sponsors may manage funds with Management demands. Top management an expected life of less than 10 years. Personal wealth. Not insignificantly, an frequently needs to be available to At the end of that period, they typically IPO may enhance pre-IPO stockholder net shareholders, brokers, analysts, and the need to liquidate the fund. By going public, worth. Even if pre-IPO stockholders do press. Executives (e.g., the chief executive you provide the venture capitalists with not realize an immediate gain by selling a officer (CEO) and chief financial officer (CFO)) the ability to sell their holdings or portion of their existing stock in the IPO, also must be involved in preparing and distribute publicly tradable stock to they may be able to use publicly traded certifying written information about financial their fund participants. stock as to secure personal . results and other company matters that Shares of publicly traded stock are usually must be reported to the public and the SEC. Improved credibility with business more liquid and, as such, can facilitate This could result in management distraction, partners. The simple fact that you are personal financial and estate planning. which may prevent management from public provides business partners, such as devoting time to operating the business. suppliers, distributors, and customers, with Common disadvantages more information and can be an indication There are also some disadvantages of going There can be considerable internal and to them that your company is a business public that should be weighed against the external pressures to maintain the growth of substance. Prospective suppliers and many advantages: rate you have established. If your sales customers may feel more secure about or earnings deviate from established entering into a relationship with your Loss of confidentiality and increased trends or from analyst expectations, company. You may also be perceived as financial transparency. As a publicly held shareholders may become apprehensive a more attractive partner in a joint , your company’s operations and sell their stock, driving down its price. venture or other similar relationship as and financial situation are open to public While a reduced stock price does not have a public company. scrutiny. Information not ordinarily disclosed a direct financial effect on a company, it may affect company reputation, employee compensation (through reduced value if you have options outstanding), and the viability and value of a subsequent offering (causing more dilution to existing shareholders).

Ongoing reporting obligations. Public domestic companies report operating results on a quarterly basis to the SEC. In addition, you will need to disclose certain other events as they occur during the year. This means that parties can now evaluate your company throughout the year, which can intensify the pressure and may shorten your planning and operating horizons significantly.

Strategies for going public 5 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Less and more board of reforms designed to strengthen corporate Debt financing can be obtained from directors’ influence. The sale of shares governance and restore investor confidence. institutions such as , -based to the public will dilute your ownership SOX and the Dodd-Frank Act were two of the lenders, and equipment financing and may reduce your level of control of most comprehensive reforms to be passed companies. The advantages of debt the company. In addition, depending on since the 1933 Act and the 1934 Act. Both financings are that they may be relatively the requirements of your trading market, pieces of legislation required significant simple to arrange and will not dilute your you are likely to be required to have a changes to heighten corporate governance ownership. For many companies seeking (board) consisting of requirements for public companies. The alternative funding sources, private a majority of independent directors. The governance listing standards of the New placements or venture capital may also board is responsible for protecting your York Stock Exchange (NYSE) and the prove of . shareholders’ interests, and you will need to Stock Market (Nasdaq) increased take into account the board’s role in making significantly. In addition, many investors and However, exclusive reliance on debt decisions. In addition, as your ownership is advisers to investors, such as proxy advisory rather than equity may have unintended diluted, the possibility of losing control of firms, have their own expectations of best consequences. When you incur debt, your company increases. practices in corporate governance that they you subject your company to potentially may communicate to you, either directly significant financial obligations. A downturn Greater legal exposure. As a consequence or through use of their proxy power. These in your business or an increase in interest of selling your company’s shares to the investor demands can exceed even the rates could make it difficult to make your public, there is greater legal exposure for heightened regulatory requirements. payments or meet contractual covenants the company and its officers and directors. As a result, corporate governance has in debt financing agreements. Many Directors have a fiduciary duty to the become a priority for investors and companies have faltered in this way. company, meaning they owe it duties of companies and their boards. loyalty and care and so must act in good Another common alternative is to sell your faith and in its best interests. When there Change in culture and flexibility. Another business. The sale of a business will often is a decline in stock price, directors are consequence of selling your company’s provide quicker liquidity than an IPO. You increasingly subject to litigation alleging shares to the public is the possibility of also will not be subject to the of a breach of fiduciary duty. In addition, a change in your company’s culture. This decline in the market value of the company directors and officers are sometimes subject may be caused by the introduction of new after a sale. However, if you sell your to SEC enforcement actions in connection personnel, the loss of personnel, or the business for stock of the acquiring company, with alleged misreporting of financial results company’s heightened accountability to its you should understand the associated or other violations of law or regulations. shareholders after the IPO. with the stock and perform the appropriate The offering itself creates exposure under level of due diligence on the acquirer. Some the antifraud rules of the 1933 Act and . The cost of going public is companies follow a “dual-track” process, 1934 Act. All communications, written and substantial, both initially and on an ongoing meaning they begin the IPO process while oral, relating to the offering or included in basis. These initial expenses are discussed exploring the possibility of being acquired. periodic reports or other public disclosures, at greater length in Chapter 4. There are In both instances, you are marketing your can give rise to litigation for securities also significant ongoing expenses associated company, and many of the early steps in fraud if the communications were materially with periodic public reporting, SEC rule the IPO process can be helpful in an misleading. You will have to become much compliance, directors’ and officers’ (D&O) acquisition context. For example, more formal in your decision-making liability , independent director fees strengthening your internal control over process. Often, private companies operate in the form of cash payments, and option financial reporting (ICFR) framework would somewhat informally with respect to awards, as well as with other requirements. assist in the facilitation of your acquisition director involvement. That can no longer by a public entity. occur in a public company. The alternatives Companies typically make use of a variety The process Enhanced corporate governance. In of financing options before they even Here, in brief, is the typical general response to the corporate failures and loss consider going public. Generally speaking, sequence of events involved in taking a of investor confidence during the technology these options should be explored and, company public once an informed decision bubble in the late 1990s, the corporate where appropriate, fully considered before has been made: frauds and failures in the early millennium, a company decides on a public offering. and the economic crisis of the late , The most common way to raise additional . Once you have decided Congress implemented a variety of capital, of course, is to borrow. that pursuing an IPO is the appropriate

Strategies for going public 6 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

avenue for your company, you typically will step in the process of going public. When Typically, on the final day of the roadshow, invite several firms, the preparation process begins, an “all the company will ask the SEC to declare or underwriters, to discuss this possibility. hands” meeting is typically held to delegate the registration statement effective. Those who are interested meet with you and responsibility for preparing the various The underwriters and the company will your management team to investigate the sections of the registration statement and determine the price of the shares to be sold company’s operations and prospects. The to establish a timetable for its completion. and execute the underwriting agreement, underwriters submit proposals from which When completed, the initial registration and the underwriters will confirm sales you make your selection, and the formal statement is filed with (or confidentially of shares with investors. Trading will process begins. This is covered in greater submitted to) the SEC. The interval between commence the following morning. detail in Chapter 5. the initial filing of the registration statement and its effective date is called the “waiting Closing and sale. The closing usually period” or “quiet period,” during which you takes place two business days after the An IPO is most commonly thought will be responding to the SEC’s comments pricing, giving the underwriters time to of as the initial sale of equity and updating the registration statement. receive payment for the securities from securities to the public. However, There are restrictions on communications most of the customers in response to the there are also other situations in during the waiting period, which are confirmations of sales that have been sent. which a company can register debt discussed further in Chapter 7. Typically, the securities are delivered (though or equity securities with the SEC for not in physical form) to the underwriters the first time, such as by way of a Marketing. Typically, after the company and for distribution to or on behalf of their direct listing, by exchanging debt its advisers resolve all potentially significant customers, and the proceeds from the securities previously issued in a SEC comments but before effectiveness of sale of stock (net of underwriting discounts private transaction for registered the registration statement, a preliminary or commissions) are paid to the issuer. debt securities, distributing shares is printed to be used in The underwriters may exercise their over- in a spin-off transaction by a public the marketing efforts. The preliminary allotment option within 30 days post-closing, company, or registering currently prospectus must bear a legend stating which is described in more detail in outstanding equity securities. that a registration statement related to the Chapter 9. offering has been filed with the SEC but has not yet become effective and that the For a sample timetable of the IPO process, securities may not be sold, nor may offers please see Appendix D: A timetable for At this point, you will not have any binding to buy be accepted, before the effective going public. commitments with the underwriters. To date. Because this legend is printed in red help you decide whether to proceed, the ink, the preliminary prospectus is commonly Impact on the broader organization underwriters will provide you with an initial referred to as the “red herring.” While the above items generally discuss the valuation range for the company and the IPO process with respect to the filing and percentage of interest in the company that This is the stage, as a practical matter, effectiveness of the registration statement, they recommend be sold. There is usually a when the underwriters’ major marketing there are many other organizational facets series of valuation discussions. The ultimate efforts will move into full swing. By this of going public that your company may need price and size of the offering, however, point, the lead underwriter or underwriters to consider as part of the overall process are not finalized until immediately before the usually have formed a syndicate. As other and the impact on the broader organization. stock is ready to be sold. underwriters join the syndicate, their It is difficult to predict what changes will salespeople begin distributing the red occur in your corporate culture as a result Registration statement. In connection herring to clients and orally soliciting orders. of being a public entity. If you decide to with an IPO, the 1933 Act requires that a These orders are considered indications of proceed, it will be important to plan for the registration statement be filed with the SEC interest only and may be canceled by the organizational changes that will occur during before securities may be offered for sale and customers at any time prior to the sale of and after the offering. This publication that a registration statement be declared the shares. Also, the “roadshow” generally addresses these other potential changes effective by the SEC before securities are occurs during this period. This is a tour outside of the actual registration statement sold. Preparing the registration statement that enables the company’s executives to filing that should be considered as part of to comply with SEC requirements is a team meet the underwriters’ salespeople and the IPO process. effort by management, the underwriters, prospective investors. It, too, is designed counsel, and auditors, among others. to build for the offering and is This is usually the most time-consuming scheduled to end just before pricing occurs.

Strategies for going public 7 Chapter 2. Is the time right? 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Is the market ready for your company? Is your company ready for the market?

Product quality and industry potential. product-sourcing arrangements adequate Assessing the interest that your The quality and future of your products to meet the demands of growth? How do company is likely to generate in the in the context of your industry are key. your production capabilities compare with public market is the first step Questions include: What segment of the others in your industry? Are they adequate toward a successful IPO. While market are you targeting? What is the growth to meet the quality requirements of your there is no universal law to potential? Who are your competitors? What market? How efficient is your ? determine market interest, is the life span of your product? Will you What risks are inherent in your supply experience indicates that certain have to diversify or develop new products chain? Are your information systems features that are indicative of a to continue growing? Does your company adequate to support forecasting? company’s maturity and potential have command of its technology and its What are your contingency plans if there for future earnings are relevant to ? What products are is an interruption in the supply of key raw market appeal. currently in ? materials, shipping, or other key aspects of What is your product roadmap? Are you in product production? Are you in an industry a growth industry? How permanent is that is likely to be disrupted? A focused business plan is an important your industry? part of your IPO. It contains future Employees. A strong employee base operating projections, such as Management quality. This is a very is important to the success of most and forecasts, which are not contained in important factor for investors. Investors companies. Questions include: What is the registration statement but likely will be will typically only entrust their money your strategy? How do essential to you as you sell your story to to a team with strong leadership. The you attract and retain top talent? What the lead underwriters. Your management departure of a key executive just before are your compensation, stock option, and team should clearly articulate a compelling or after the IPO will potentially affect the employee benefit plans? How do they strategy to the underwriters and potential company’s market competitiveness and compare to others in your industry? Is there investors to help you realize a valuation raise concerns with potential investors. The an adequate labor supply to support your reflective of your company’s potential. underwriters (and investors) also will look growth plans? If some of your company’s at the composition and qualifications of employees are represented by labor unions, Any prospective investor in your company members of the board. Often, a company’s how are your relations with the unions, and will look at a number of factors when board needs to be altered as a part of the what is the status of your labor ? making a decision to buy your stock. As IPO process. Your advisers can assist you Are you dependent on only a few key the representatives of the purchasers, the in doing so as a part of the preplanning employees and, if so, how are you underwriters often need assurance on process. See Chapter 4 for additional protecting yourself from the risk of their these factors in order to sell your stock with information. Questions include: Do the top potential departures? confidence. They need to be enthusiastic managers have the necessary experience? about your company’s potential and about Do they work together as a team? Are they Financial position. Your current financial your industry, they need to be confident that of high integrity? Do they inspire confidence position is important in assessing both there are no significant negative factors (e.g., among the company’s employees? Are how much money you will need to raise heightened susceptibility to technological they committed to the company? Are they and the effectiveness of your financial change, increased ) that the effective in developing working relationships management. Questions include: How well company cannot handle, and they need with customers, suppliers, bankers, are you managing your ? How are you to have confidence in the people running auditors, and so on? Is there stability in financing your working capital needs? Are the company. As the underwriters also the leadership team? you providing any financial support to your have potential liability for the information customers? What financial contingencies in the registration statement, they must be Production or service capability. exist? How leveraged are you and what is comfortable with the disclosure. Following Your ability to execute operationally on your effective ? Do you have are some of the factors and questions that your business plan is also key. Questions audited financial statements? Are your are typically addressed. include: Are your production facilities or accounting policies well documented?

Strategies for going public 9 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Tax matters. How you are addressing cash? What is your growth potential? Is of related-party transactions has your your and your exposure to tax there a strong upward trend that is likely to company entered into? How committed is expenses are important determinations for continue? How do you compare (in earnings your company to social responsibility and investors. Questions include: What is and margins) with other companies in sustainability initiatives? the effective rate of tax on operations, your industry? Do you have detailed and how does it compare with others in historical and future information about Company categories your industry? What is the forecasted your operations, including sales and gross A company that offers the investment amount of cash tax payments to be made? analyses by product or product community a high-risk/high-reward Do you have unique or potentially difficult- line, sales channel mix, geographic sales opportunity likely will be held to evaluative to-manage tax positions? How would breakdown, and headcount trend reports? criteria that differ from those applied proposed tax law changes affect your to a company that is perceived to be a tax posture? Company reputation. Investors will long-term solid performer. Taking this into consider your reputation in making account, most companies typically fall into Earnings history and potential. investment decisions. Questions include: four general classifications: early-stage, Reported earnings and potential future How do suppliers, customers, experts, high-growth, long-term solid performers, earnings are often considered as important and others in your industry assess your and spin-offs. for public companies as is for performance? How does the public private companies. Questions include: perceive your company? What kind Early-stage companies What has your earnings history been? How of relationship do you have with your Some companies’ potential so captivates effectively does your business generate customers and your suppliers? What types the public’s focus that they easily can

Strategies for going public 10 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

attract funds. These companies receive does not rely on the talents of a If an offering is fortunate to catch a rising considerable attention when they go public single entrepreneur. Normally, the market, an IPO may produce a windfall of even though they may have yet to produce founder is surrounded by experienced capital. Finding the ideal offering window significant . Some of these executives with responsibilities for key can be tricky. You should rely on thorough companies are bolstered by the strengths management areas. preparation, the expertise of your IPO of a promising industry, such as clean team, and patience to guide your company technology, social media, biotechnology, or Long-term solid performers through the decision on timing. You should deep learning/artificial intelligence, while These midsize companies often have a be prepared to adjust your IPO timetable others rely on the past performances of long and continuous record of strong as required by changing market conditions. similar enterprises that have achieved sales and earnings. They may not be At the same time, consideration should be significant growth. More typically, however, nationally known, but they offer the public given to alternative financing, such as that early-stage companies have reached the a long-term investment at a reasonable provided by mezzanine venture capital point in their development where most price-earnings ratio (calculated by dividing investors, to protect the company in the of the technological, , and the price per share of event of an unanticipated “closing of the marketing risks have been substantially by ) and are likely to IPO window.” reduced, and their stock can command a pay . Despite their profitable higher price than venture capitalists are history, established companies may go What if the offering is terminated? willing to offer. The market appeal for this public for several reasons, such as to The market opportunity to successfully type of company is heavily influenced by fund acquisitions or provide liquidity to consummate an IPO can be quite , three factors: their owners. In many cases, they have and on occasion (due to a variety of • Market opportunity. An industry that revenues of several hundred million reasons) companies terminate their can support significant growth. dollars; a large and stable or growing proposed offerings before the securities • Potential industry leadership. An market; and a history equal to or are sold. A company may be ready to unproven company needs a product or better than the industry average. complete its IPO but may find that the service that indicates it is on the leading market is not supportive. This could be due edge in its field. Spin-offs to industry factors, economic factors such • An experienced management team. as market volatility, or other events outside Diversified companies, many of which may Management personnel demonstrate of the company’s control. already be public, may not be commanding the capability to deal with anticipated the market value that their components growth and maintain the company’s Terminating a public offering before it is may realize. A continuing is for leadership position. finished does not affect the ability to sell such companies to spin off business units securities in a private placement after a as a way of realizing value. High-growth companies short period of time or to sell the company. Companies across many industries have In both cases, much of the work performed High-growth companies also offer the spun off portions of their companies, taking in connection with the public offering can potential for significant future growth, and the spun-off company public, with existing be utilized in either the private placement they have typically matured beyond the shareholders receiving shares in the spun- or the sale transaction. Chapter 4 discusses “start-up phase” to attain certain levels of off entity, which then separately financial reporting considerations of revenues and profitability. The market most from the original company. readily accepts companies of this type that deferred offering costs when an IPO is terminated, and Appendix B: Registration have achieved the following: Is the market ready for your company? exemptions includes a summary of certain • Sales. With some exceptions, annual The market can be influenced by a variety registration exemptions. revenues of at least $100 million suggest of factors, including economic forecasts, an established company. domestic and international political • A growth track record. The investment events, global and local trends, interest community generally looks for an annual rates, and . A company that might growth rate of 25 percent or more with easily attract public funds in a bull market the ability to maintain that rate in the could run into considerable resistance in next few years. a bear market. When the market becomes • An experienced management team. depressed, declines in value are generally Generally, institutional investors greater for newer, less-established want evidence that the company companies and those in “riskier” industries.

Strategies for going public 11 Chapter 3. Your team

12 Strategies for going public 4 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Taking your company public requires the talents of a variety of highly specialized professionals.

Management Management is also the link between the In addition to having a qualified Throughout the IPO, management will IPO team and the company’s board. It is management team, taking your serve as the visible representatives of the important that the board is fully supportive company public requires the company. The importance of management’s of the IPO. Members of the board of expertise of other professionals, impression on the investment community directors will need to sign the registration including underwriters, counsel, should not be underestimated or minimized. statement, and they assume securities law and auditors. The array of Investors typically place enormous weight liability exposure as a part of the process of professional service providers, and on their perceptions of management’s going public. the time demands made on abilities. Thus, management’s qualifications, company management, will be ethics, and experience likely will be highly Board of directors costly. However, these costs are scrutinized. One way to address this is to SOX and subsequent legislation have simply part of the price of going make a concerted effort to retain executives placed significant emphasis on the role of a public. The success of the IPO and who are experienced in building a company public company’s board in overseeing the the future prosperity of the and taking it public and who have a strong activities of the company. The board and its company depend in part upon the reputation without prior ethical violations. structure—its skills and knowledge, process, talents of this team, so you should Executives with a successful history of behavior, and how it communicates—are resolve to engage the most corporate growth can substantially help to critically important. Regulatory requirements qualified team possible. steer the company through a successful IPO. mandate that public company boards comply with enhanced independence The usually standards, maintain specific committees, includes a CEO and a CFO. Additional and clearly articulate prescriptive executives that may be useful depending responsibilities in their charters, as well as on the industry are a chief risk officer, chief other requirements. Furthermore, as the information officer, chief technology officer, ownership base changes, companies and and (depending on the size of the company) boards may be subject to the governance a chief operations officer. Most public policies of institutional investors, proxy companies also have a general counsel, advisers, and governance rating agencies. head of human resources, and head of Corporate governance issues should be investor relations. addressed in the early planning stages of the IPO process, as these changes may take Management is essential in both the time to implement. Additional corporate preparation and marketing of the offering. governance matters are discussed at the During the pre-filing period, management’s end of Chapter 4. intimate knowledge of the company is important in ensuring the company’s story, Attorneys as told in the registration statement, is Going public is a highly technical legal accurate and complete. After the filing, the process, and you will work closely with centerpiece of the marketing effort is the your outside counsel as they assist in roadshow. This is a tour by top management your offering. Securities legal work is very In a company’s annual proxy with the lead underwriters to a number of complex and highly specialized, and the statement, it must disclose why the locations to allow management to meet company and its directors and officers who company has selected to either with potential investors to present strategic, sign the registration statement risk serious separate or combine the roles of the financial, and operational information financial penalties, as well as shareholder chairman of the board and the CEO. and answer questions. See Chapter 7 for lawsuits, if the registration statement additional information. omits material facts or contains material

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misstatements. It is extremely important relationship. Your external Underwriters that you have legal counsel with prior SEC auditor should be a qualified public Lead underwriters, or investment experience and knowledge of the intricacies accounting firm that has significant SEC bankers, lead the marketing of an IPO. of working with the SEC. Your counsel should experience and is registered with the Public These professionals are selective in their also have significant IPO-specific experience. Company Accounting Oversight Board acceptance of clients and likely will conduct (PCAOB). Many companies choose to engage in-depth research into your company’s Your counsel assists in the process of the services of an international professional management, products or services, preparing the nonfinancial sections of the services firm because of their industry , and business plan before accepting registration statement and responding specialization and extensive SEC experience. your company as a client. A key task for a to the SEC’s comments. Experienced lead underwriter, after accepting a client, securities counsel can also speed up the Throughout the IPO, is to determine the value of the company process significantly, which can reduce costs according to industry and market analysis. and allow for a more effective will serve as process. They also advise you in the pre- the visible representatives The lead underwriters will be joined by public planning stages. Your attorneys will several other underwriters selected by be able to understand your company’s of the company. Manage- the company to market and sell the current state and perform an assessment ment is also the link securities. If the stock falls below the IPO of the gap between where you are today price during its distribution, your lead and where you need to be in order to go between the IPO team underwriters may seek to stabilize the public. This represents a critical part of and the company’s board. stock’s performance. (The role of your the pre-public planning stage because lead underwriters is extensive and is the better the plan is from the start, the discussed in greater depth in Chapter 5.) In addition to completing the of smoother the IPO process will be for your In many cases, a successful IPO signals your financial statements and review of company. In addition, your attorneys can the beginning of a long-term relationship any interim financial statements for the assist you in other ways throughout the IPO between your company and the lead registration statement, your auditors will process, such as by making introductions to underwriters. Remember that even though also render significant assistance in the underwriters to ascertain their interest in you are the client of the underwriters, there registration process. They will read any your IPO and compiling data so that you may are some inherent conflicts of interest other financial data to be included within evaluate the compensation proposed by between you and the underwriters. the registration statement and, in doing the underwriters. so, may be able to highlight concerns the Most importantly, the underwriters have SEC may raise and help you address these In connection with the registration preexisting relationships with most of the in the filing. They will also assist in the statement, your attorneys will opine on the institutional customers who will be buying responses to the SEC’s accounting-related validity of the stock being issued and sold your stock (as well as the of other comments. All of this will reduce the in the IPO, and at the closing, they will issue companies that are being offered on an possibility of subsequent delays. Clearly, a legal opinion on a variety of subjects, and ongoing basis through the underwriters). your auditor’s role is a large one that would a negative assurance letter regarding the The lead underwriters will engage their own be best facilitated by establishing a good registration statement and prospectus, in counsel in connection with the offering. working relationship early in your company’s each case, addressed to the underwriters Underwriters’ counsel will be active in development. In this way, your auditor to assist in the due diligence process. After the IPO process in representing the can serve you better through their the IPO, your attorneys may assist you underwriters’ interests in the transaction. in-depth knowledge of your company’s in ongoing compliance governance and particular situation. financing matters. Accounting advisers Many companies elect to utilize separate Your auditor also will furnish comfort letters Auditors accounting advisers to assist in the (see Chapter 6) to the underwriters, which An important part of the pre-public planning preparation for an IPO, as the types of assist the underwriters in performing effort is to assess your company’s financial advice or services will not be restricted due their investigation of certain financial and “side of the house” to determine whether to independence requirements. In your pre- accounting data that is included in the it will satisfy strict SEC and underwriter public stage, your accounting advisers can registration statement. demands. One step is to consider your assist you by focusing on your business and

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providing the guidance and support that you certificates to reflect changes in the experienced firm. Another option for your will need to help you steer your company ownership of a company’s shares. In company to consider is to bring the investor through the IPO process and beyond. Many addition, transfer agents assist in processing relations function in-house. As the effective growing companies need advice on other stock transactions, complying with the date of your IPO registration statement key issues associated with growth, such requirements of the Internal draws closer, your company may want as the size and additional competencies Service, and coordinating shareholder to explore the option of establishing an necessary to staff an accounting, tax, correspondence and payments. investor relations resource whose primary external reporting, and finance function Transfer agents may also act as the responsibility is to facilitate communications in a public company; assistance with company’s proxy agent, exchange agent, between your company and the required disclosures; and general business or mailing agent. Registrars (usually part investment community. planning advice. of the same firm) keep track of the issued stock. Your attorneys or accounting advisers In addition to establishing a dedicated Tax advisers typically can recommend a reputable resource, your company should also Tax advisers can add value to IPO planning firm. During the IPO process, the same consider establishing a corporate by highlighting material income or firm also may act as the custodian and/or communications director who is transaction tax issues that could lessen paying agent in connection with the sale responsible for developing and the success of the IPO prior to the offering. of securities by any selling shareholders. implementing the communications strategy, Specifically, they can assist in determining You should engage transfer agents and as well as having oversight over all written the direct and indirect tax consequences of registrars early in the process so that the communications, including electronic the planned use of IPO proceeds and can sale of the securities can occur smoothly and printed communications with staff, compare and assess possible corporate upon closing. contributions to company publications, reorganization options for effective tax marketing materials, websites, and client/ rate planning. Tax advisers can also aid Others community engagement communications. in benchmarking the tax efficiency of the Hiring an investor relations firm can be enterprise compared to similar public worthwhile to consider prior to an IPO Building effective investor companies, and make determinations and as part of a company’s broader regarding the availability, , and communications strategy. An effective relations takes time, and timeliness of tax information used for campaign can serve as a means of you should consider financial reporting. increasing the public profile of your company. While you can maintain your cultivating a relationship Financial printers prior level of business communications with a reputable firm as The SEC maintains strict guidelines on (such as for product announcements), the format for documents that it will companies must be extremely careful about early as possible. accept. Documents are filed by electronic communications even before filing the submission to the SEC’s Electronic Data registration statement. (For a discussion of Gathering, Analysis, and Retrieval (EDGAR) the restrictions on communications during system. Financial printers remain abreast the IPO process, see Chapter 7.) of the filing-related SEC requirements and are accustomed to the time constraints and After the offering, the role of investor confidentiality issues involved in their work. relations is critical. These efforts can work to Typically, printers maintain facilities with retain existing shareholders while attracting conference rooms and other amenities that new investors, thereby maintaining or raising accommodate the unique conditions that the stock price. Often, when the marketing often surround the preparation and filing of effort stops, your public visibility is reduced. documents with the SEC. Building effective investor relations takes time, and you should consider cultivating a Transfer agents and registrars relationship with a reputable firm as early on Transfer agents and registrars maintain as possible. Your underwriters, attorneys, shareholder records and issue or cancel or auditors typically can recommend an

Strategies for going public 15 Chapter 4. Pre-public planning

Strategies for going public 4 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Once you decide that you want to take your company public, you are embarking on a journey.

formally seek to go public. This means the should evaluate the capabilities and staffing Going public is not something you following: of your accounting and finance departments do in one day or one month. It to make sure you have the personnel •• Maintain adequate records and takes long-term planning and necessary to understand and manage these internal controls many months, or sometimes even additional responsibilities. Furthermore, a year or more, to effect. This •• Produce monthly financial statements for you should consider hiring additional pre-public planning is necessary internal reporting purposes employees, other than management, both to prepare to sell stock and who have experience with SEC reporting. •• Generate reliable and meaningful monthly to demonstrate to the lead financial statements on a quarterly basis underwriters that you are ready Management should also begin designing, to be a public company. From the implementing, and documenting its Accounting and finance departments should start of the IPO process, the better internal control processes. Once the expect to have monthly and quarterly prepared you are, the faster you company is public, subject to certain closes that are as accurate as a year-end can respond to windows of transition periods, the SEC requires all close. This is crucial on a prospective basis opportunity in the capital markets. public companies to have disclosure when filing quarterly reports on Form Your IPO readiness can inspire controls and procedures in place. The 10-Q with the SEC. Private companies greater confidence from investors implementation and ongoing monitoring can generally prepare their financial and underwriters, which may of these controls should be an important statements on an annual basis without any increase the likelihood of a smooth focus of the entire organization from top accelerated timeline. In contrast, following IPO process. to bottom. In order for this to be effective, their IPOs, newly public companies are it will require significant involvement from often challenged to meet filing deadlines management, as well as oversight from your when preparing periodic reports, especially Increased formalization company’s . quarterly reports on Form 10-Q, because Running a private company for a handful of there are more tasks to complete in a investors is vastly different from operating Furthermore, the SEC requires the CEO and shorter amount of time. a public company for a large number of the CFO to certify that they are responsible shareholders. As a public company, your for establishing and maintaining disclosure Additional considerations impacting your actions will be much more visible, thereby controls and procedures to evaluate their IPO timeline and quarterly reporting requiring you to be more formal and effectiveness, and to report the results of thereafter should include the time required transparent in managing the business their evaluation. for: drafting the Management’s Discussion & and complying with all the requirements Analysis (MD&A) section of the prospectus imposed by federal securities laws and Ongoing financial analysis should be (and subsequent Form 10-Qs), calculating the exchange on which your stock trades. performed and reported to management. the quarterly tax provision, obtaining sub- You should be aware of the consequences Typical monthly reporting packages certifications from lower-level management well before you transform your business include, at a minimum, information that as to the accuracy of the financial reports, into a public company. (Some of the most will permit the analysis of sales volume and and establishing disclosure controls and significant post-IPO requirements are pricing trends by product or product line; procedures and audit committee review. discussed in Chapter 9.) sales by major customers, sales channels, In addition, you may be asked to present and geographic regions; and headcount historical quarterly information for inclusion We recommend you and your management trends. In addition, major balance sheet in your prospectus. team be appropriately staffed to accept items (e.g., accounts receivable and these added responsibilities. As a best inventory) should be supported with In light of the many accounting and financial practice, you should begin operating as appropriate analysis. reporting matters that must be addressed if your company were public well before you prior to becoming a public company, you

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In receiving timely financial information, undertake an IPO. Consult with counsel , use a reverse stock managers can discipline themselves to determine whether any pending split) to bring the number of shares and the to analyze operations and results more litigation could affect the company’s ability price of the stock to an acceptable level for frequently and accustom themselves to to go public. In addition, you may have the offering. While planning for these actions the pressure of quarterly performance arrangements, such as royalty agreements, should occur early in the process, often evaluations. This level of preparation that need to be revised before you are they are completed simultaneously with the is an important step in avoiding marketable as a public company. You, consummation of the IPO. financial “surprises.” together with counsel, should also examine whether you are generally in compliance Bring your stock ownership records up to with applicable regulations, including A public company is required to date. One of the more time-consuming compliance with the Foreign Corrupt disclose incentive-based aspects of preparing the registration Practices Act (FCPA), export controls, and compensation, as well as policies statement can be determining the current environmental regulations. that allow the company to recover ownership, both direct and beneficial, of the compensation in the event of a your stock and agreeing on the details Conduct business through a clear financial restatement. The scope of of stock information for the registration organizational structure. A company that the “” provision applies to statement and related financial statements. is going public should have an organizational any former or current officer for the This includes determining whether all structure suitable for public investment. three years prior to any restatement. the proper formalities were observed in Many closely held businesses are conducted Therefore, these incentive-based the issuance of the stock, from both a by a number of under common compensation arrangements should corporate and a securities law perspective, ownership or by combinations of business be considered in light of how they and identifying any existing registration or entities. They can be operated as limited will appear to the public. other rights that shareholders may have. It liability companies or as Subchapter S also means addressing any issues related corporations. Both provide for pass-through to employee stock options and other tax treatment that can be more tax efficient. stock-based compensation plans, including The company should carefully consider Review organization documents. The ascertaining all unexercised options that how its current business structure charter and bylaws of a private company have been granted and determining whether may affect the increased financial often contain provisions that are not these options have vested. If not addressed reporting requirements of a public entity. suitable for a public company. These may sufficiently in advance, these matters could Considerable tax, legal, and financial include preemptive rights to purchase equity lead to costly delays in the registration systems work may be required to reorganize securities; requirements of a supermajority process. The SEC often raises valuation the various entities by mergers, , approval to amend the charter, approve issues with respect to recent stock issuances and other . mergers, or change of control transactions; or the pricing of recent option grants if the unconventional quorum requirements; pricing is significantly below the likely initial Simplify the . Some and dual classes of common stock. It is public offering price (so-called cheap stock). companies planning to go public have easier to obtain shareholder approval to You should discuss these matters with your to make significant changes to their amend the charter prior to going public. legal and accounting advisers before you organizational or capital structure. Even Consider whether the state of start the IPO process. when the business has been operated as is most friendly to the company as well. If a a single corporation, the capital structure company is currently incorporated in a state Corporate housekeeping may need revision. You may need to simplify in which the laws are not flexible in terms Once you make the decision to go public, a complex capital structure by redeeming of corporate governance or do not insulate you will likely need to do a substantial dilutive securities, such as stock warrants officers and directors from liability, the amount of preliminary work not directly and , or converting them to company may want to reincorporate under related to the preparation of the registration common stock. You may need to amend more favorable laws. Also consider whether statement. Attorneys refer to this as your corporate charter to authorize the organizational documents should “corporate housekeeping.” the issuance of more shares to be sold include anti- provisions designed to in the IPO. If you currently have only a discourage unsolicited or hostile . Determine whether the company minimal number of shares authorized and Consider market views on staggered is legally positioned for an offering. outstanding, you may want to split the stock boards, stockholder rights plans, and other Counsel’s role in the offering will begin with (or in the case of a very large number of protective measures. advising you as to whether you even

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Review all related-party transactions process may necessitate revisions to your preparation and material contracts. Generally prospectus, additional filings with the SEC, General speaking, you will need to depersonalize or a new circulation of the preliminary Under current SEC rules, domestic your business before taking it public. The prospectus. To avoid any possible delay in companies (other than EGCs and smaller SEC requires full disclosure of significant registration, the impact on the offering of reporting companies) must include three related-party transactions. You must any major initiative should be evaluated. It years of audited annual financial statements disclose the names of highly compensated may be beneficial to complete (or abandon) in an initial registration statement. EGCs and individuals, the amount paid to them, major acquisitions and new royalty and smaller reporting companies may include and any special arrangements made with lease agreements, and to finalize the only two years of audited annual financial them. Shareholders’ agreements providing establishment of any new management statements. In addition, unaudited interim for rights of first refusal may have to be compensation program and changes in key financial statements may be required, which canceled; personal loans made by the personnel and directors before you start the would require certain review procedures company to directors or executive officers IPO process. on interim financial statements by the of the company are unlawful under SOX and company’s auditors. are required to be repaid; the fairness of the Review financial statements. The SEC terms of contracts (such as leases) between requires that your company’s finances There are certain situations where additional the company and insiders should be be sufficiently detailed and your financial sets of financial statements may be adequately documented and, if necessary, statements audited in preparation for required to be included in your company’s altered; and employment contracts, stock your IPO. You should engage an auditor registration statement. If your company has option plans, and stock purchase plans may or change auditors as early as possible to recently grown through significant merger have to be entered into, revised, or canceled. identify any unforeseen financial obstacles and acquisitions activity, or if an acquisition that may have detrimental consequences if is probable, financial statements of the You should review all material leases and uncovered later in the IPO process. businesses that were acquired or may be contracts, updating or amending them to acquired may also need to be presented. If reflect their current terms or to provide Determine if your company qualifies your company has a significant investment more flexibility. You should determine as an “emerging growth company” accounted for under the equity method of whether any require consent in connection (EGC). An EGC is defined as an issuer that accounting, a full set of financial statements with an IPO or in connection with a had total annual gross revenues of less of the investee may be required. Separate corporate prior to an IPO. You than $1.07 billion during its most recently financial statements of financial guarantors should also consider whether there are any completed fiscal year. EGCs are exempt may also be required. In the event that any provisions that must be kept confidential from, or subject to, reduced compliance with of these situations is present, the additional and not disclosed or filed. This can all lead to certain regulatory requirements for a limited sets of financial statements may need delays in the registration process. period of time. Determining if your company to be audited, which could require the qualifies as an EGC early in the process will coordination of the counterparty’s audit You should review your balance sheet and help you establish what information you will firm and your own. Companies also should off-balance sheet assets (such as intellectual need to include in the registration statement consider adoptions of new accounting property) to determine whether you can and assist in your planning for post-IPO standards, such as those relating to revenue verify the legal ownership and existence of requirements. (See Appendix F). recognition, loss methodology, all your assets. You should make certain that and lease accounting, which may require you have all the documentation regarding To prepare your company significant time and resources for companies your outstanding loans and notes and that to adopt and prepare required financials. there are no provisions that may cause you for an IPO, begin to think to be in as a result of the actions you about operating as if your As the SEC requirements are complex, intend to take in going public. you should check with your legal counsel, company were public well auditor and accounting advisers early in Anticipate major company initiatives. before you formally seek the process to be sure you understand During the registration process, you should the specific requirements. In some cases, consider the consequences of undertaking to go public. the underwriters may require you to have any significant company initiative. A major more periods of information audited than initiative in the middle of your registration are strictly required by the SEC to give

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potential investors more information. You should reach an understanding with your underwriters on any recommendations that go beyond SEC requirements early in the process. See Chapter 6 for additional information about the financial statements required in a registration statement.

Audits Due to the extensive audit requirements, many companies establish a relationship with an auditor very early in their development and have annual performed even if the shareholders or debt holders do not require them. Then, once and money and minimizing public company Further delays could result. A two- or the decision is made to go public, audited reputational risk. Furthermore, it may be three-year audit is time consuming and financial statements will be available. more difficult to have a two- or three-year could delay the registration process by Having a two- or three-year audit performed audit performed as part of the process of several months. A few months’ delay could in the process of going public can be time- going public for several reasons: mean missing the window that would be consuming. Consider performing annual most advantageous for you to go public. audits in the years leading up to your IPO, It may not be feasible. If you have as well as including the additional required significant , your auditors Despite the potential difficulties described disclosure in your financial statements. generally need to observe and test your above, the auditors can generate useful Further, you should keep adequate records annual physical inventory counts in order to suggestions to organize your accounting to be able to determine quarterly results, issue a “clean” opinion for each of the years records, internal controls, and processes. if necessary. under audit. This cannot be done after the For example, prior to the IPO process, it is fact, except possibly by a costly audit of a recommended that the company document If your company currently utilizes a “rollback” of a current physical inventory. its internal controls and processes. The smaller or regional accounting firm as your auditors can provide valuable insight into independent auditor, your underwriter You may be surprised by the audit documentation of best practices as you may suggest that you switch to a more results. Income results and trends move forward with these tasks. nationally recognized public accounting may not be as you had expected due firm prior to your IPO. Keep in mind, to material audit adjustments and may Tax considerations however, if your company decides to change lead you or the underwriters to cancel or An IPO also presents new challenges in tax independent auditors, the new auditor may delay the IPO. By this time, you will have and . Your company need to re-audit the financial statements incurred substantial costs. In addition, should consider the following: for all of the years that will be included in your previous financial statements may your company’s registration statement. not be sufficient for an IPO as prior audits Tax issues associated with the Another option would be to have the new would have been performed under transaction. Certain sections of the Internal auditor only audit the current year, while American Institute of Certified Public Revenue Code (IRC) may reduce the value of keeping the prior year(s) audited by the (AICPA) standards and for net operating losses and other tax attributes predecessor auditor. In this scenario, both the IPO, the audits need to meet PCAOB when an ownership change occurs as a your new auditor and prior auditor would standards. Some accounting guidance is result of equity issuances. As such, the be required to review separate portions effective for public companies before it is company’s ability to offset its future income of the registration statement. You should effective for nonpublic companies. You with net operating losses from prior years weigh the pros and cons of each option and may be required to retrospectively adopt can be limited. Similar provisions exist make a determination based on the timing an accounting policy because your within state statutes. Planning for this prior and associated costs. Issues highlighted at financial statements are prepared on to a public offering can help increase your an early stage in the process can be tackled a historical basis. company’s future utilization of net operating before the IPO, potentially saving both time loss and credit carryforwards.

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Compensation and benefits. There a sub-certification to support disclosure Begin an investor relations program. are several compensation and benefits controls. In addition to developing or Name recognition can be a very important tax implications. For example, the tax increasing tax internal controls, your factor in pricing your stock, but it cannot code may affect the timing of deferrals of company will need to monitor financial and be developed overnight. As discussed in elections in addition to setting limits on information technology operational changes Chapter 7, the type of publicity you can distribution. If your company has deferred for necessary updates to tax processes. As seek out is limited once you have made compensation plans, you will want to discussed in Chapter 9, public companies the decision to go public. Consequently, it consider whether existing or future plans have periodic reporting requirements is important that you develop your public will be in compliance. The tax code can also that will necessitate the need for timely image with the appropriate people at least have implications on transaction success and accurate tax accounting information. a year before you plan to go public. In these awards, existing severance and incentive Further, increased disclosure will be conversations, do not mention any possible plans, stock options, and appreciation required. Consideration may be given to offering. You may wish to consider engaging rights, among other plans. Deductions for using external resources, but, as discussed an investor relations firm that is experienced compensation in excess of $1 million paid in Chapter 9, independence standards are in working with the business media and by certain publicly held corporations to more restrictive for public companies. analysts. Many entrepreneurial companies top employees may be disallowed. Your publicize one or two key individuals, such company should consider and confirm Tax considerations in business growth. as the founder or a chief scientist or whether this may be relevant to any new Changes to the business through an technologist. Analysts and the business compensation arrangements. In addition, IPO will have direct and indirect tax media, however, like to probe more deeply a company considering an IPO should also consequences and may also create into the company. You should certainly confirm whether or not existing employment potential tax opportunities. You should continue to focus attention on your key agreements or documents have a payment consider and evaluate the tax efficiency individuals, but demonstrating your depth event upon an IPO that would qualify as of capital movement following an IPO and of management and operating talent can be excess parachute payments. Such payments the implications of any modifications to just as important. can be nondeductible and cause significant the current debt structure. Further, the excise to be levied on the recipient. usage of IPO proceeds may give rise to Make presentations at conferences You should consult with your tax adviser particular and incentives that and shows. Trade associations, and engage your underwriter in these should be explored. investment banking firms, venture capital planning discussions. firms, and business media organizations frequently have conferences at which Global tax rate. Your company should A positive image in the market companies can present themselves to the model its prospective global tax rate Just as your company goes to great media and analysts. If these exist in your and then benchmark it to similar public lengths to create a favorable public industry, arrange for a presentation of your companies. As the overall IPO structure is image for its customers, products, and company. In addition, analysts frequently being determined, it is the perfect time to services, it should try, to the extent legally attend major trade shows and technical consider a tax-efficient structure. permissible, to create a favorable image conferences to keep abreast of products in for the people who will buy your stock or their fields. The key analysts will likely attend You should evaluate repatriation strategies can influence that buying decision. These shows where you exhibit. Make a special and transfer-pricing policies, as well as people include analysts, brokers, the effort to demonstrate your products or review accounting methods. business media, and specialty publications services and introduce your key managers that follow your industry from a financial and engineers, but limit your discussions Tax operations. During the global review standpoint. In the 24/7 media world of to nonfinancial information or publicly for consistency of use, it is important to today, effectively utilizing blogs and other disclosed financial results as applicable consider tax resources, both internal and forms of social media and networking to your ownership status at that time (for external, required of a public company. sites can also help create a favorable reasons further discussed in Chapter 7). This includes assessing your capabilities public image of your company. with respect to financial reporting as a public company. Your tax resources will The following are some additional ways you be included in your financial reporting can start developing a positive image: framework and may be required to provide

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Update your company’s website, Effective pre-public and administrative work for each seller. In and effectively utilize social media planning can help limit secondary or partial secondary offerings, and networking sites. The way we some of the legal and other fees may be communicate is continuously evolving. Stay the number of unexpected borne by the selling shareholders. Those abreast of relevant blogs and social media issues that arise during shareholders and the company determine outlets to effectively market your product the allocation of those expenses. However, and brand. Know your target market and the IPO process and the company often bears many of the potential investors. By knowing these, you manage the costs of expenses (other than the underwriters’ can utilize the most effective means of discount attributable to the selling reaching your target audience and reinforce going public. shareholders’ shares). In most cases, you will a positive image of your company. also pay a fee to the underwriters’ counsel for work in connection with Blue Sky filings, Again, with any marketing activity, you must Out-of-pocket costs when required, and FINRA clearance. be mindful of “gun jumping,” as discussed Apart from the underwriters’ discount, in Chapter 7. You are strongly encouraged you will incur significant out-of-pocket Accounting and audit fees. Audit fees are to speak with your attorneys prior to costs, primarily for professional adviser incurred for the audit of the financial participating in any of the foregoing or other fees (accounting and legal), audit fees, statements, as well as the auditor’s communications-related activities if you are and printing. participation in the process associated contemplating embarking on an IPO. with the preparation of the registration Effective pre-public planning, as discussed statement and the comfort letters for the Costs of going public herein, can help limit the number of underwriters (explained in Chapter 6). The The costs associated with going public are unexpected issues that arise during the fees will increase significantly if separate significant, but there are opportunities to IPO process and manage the costs of financial statement audits of businesses control these costs. The main costs come going public. You can get a sense of the acquired or to be acquired, equity method under the following two categories: out-of-pocket expenses for other IPOs by investees, or financial guarantors are looking at the SEC’s website (www.sec.gov) required. Also, if interim financial statements Underwriters’ expense for registration statements filed by other are required, the audit fees will be higher, The underwriters’ discount, or commission, issuers in connection with their IPOs. Item as the auditors will need to review them, is typically the largest single cost of going 13 in Part II of the registration statement particularly in connection with the comfort public. It is negotiated between you and summarizes the offering expenses of the letters requested by the underwriters. As the lead underwriters. Factors that affect issuer. Keep in mind, however, that each noted above, situations could arise where the discount are the size of the offering, offering is unique and costs can vary a great there are multiple auditors involved in the type of underwriting (see Chapter deal. For example, if unusual problems the various financial statements that are 5), the going rate for offerings of similar or circumstances develop, such as an required to be included in the registration size and complexity, and the efforts unforeseen accounting surprise, the costs statement, which can further add to the perceived to be required to sell your could increase substantially. audit fees incurred. In addition, your stock. In smaller offerings, underwriters company may want your accounting may seek other compensation, such as Legal expense. Legal fees are incurred for the advisers to perform an assessment of your reimbursement for some of their expenses, preparation of the registration statement, company’s current level of compliance warrants to purchase stock, or some other negotiation of the underwriting agreement, in the areas of financial/SEC reporting, arrangements. All of the compensation paid offering structuring, corporate governance, corporate governance, process, systems to the underwriters (or related persons) is housekeeping, due diligence, and other and controls, and tax with any regulatory or subject to review by FINRA to ensure that matters that arise during the IPO process. If statutory requirements and best practices. it is not “unfair or unreasonable.” An IPO the housekeeping is extensive, for example, This assessment is valuable, in that it helps cannot proceed until FINRA has reviewed requiring a complex reorganization or the to formulate your IPO timeline and could the compensation paid and to be paid to the negotiation of significant agreements, the identify the presence of any issues that underwriters. This is discussed further in legal fees will be higher. The fees will also might otherwise fall through the cracks Chapter 6. increase if there are a large number of early on in the process. selling shareholders because of the legal

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Printer and printing costs. Your financial sheet rather than charged directly to the Additional costs will be incurred in printer will charge you for the preparation . For instance, certain establishing an independent board, an audit and filing of the registration statement and incremental costs incurred prior to the committee, and other board committees. the amendments thereto. You will also need effective date of an offering may be deferred The company will be required to file current to have the red herring and final prospectus and charged against the gross proceeds of and periodic reports with the SEC that printed by your financial printer. Printing the offering. Management salaries or other may involve legal, accounting, and printing costs vary depending on the length of the general and administrative expenses may costs. For example, companies incur costs prospectus, artwork, and the extent of the not be allocated as costs of the offering and associated with the printing and distribution revisions required. Significant savings may therefore cannot be charged against the of a glossy as well as soliciting be realized by preparing preliminary proceeds of the offering. proxies for annual shareholder meetings. drafts internally. An ongoing investor relations and corporate Deferred costs of an aborted offering communications program is also advisable. D&O liability insurance. D&O coverage relates may not be deferred and charged against Executives will likely need to spend a to liability arising from alleged wrongdoing of proceeds of a subsequent offering and significant amount of time on all of directors and officers while acting on behalf therefore must be written off. A short these matters. of their company or organization. The cost postponement (up to 90 days) does not of D&O liability insurance varies depending constitute an aborted offering. Therefore, Corporate governance upon market conditions and the amount should you decide to withdraw your offering, From a corporate governance perspective, of coverage sought, and is critical in that it you are required to write off the deferrable preparations for an IPO are not only allows a company’s directors and officers costs before any action to “start over” is necessary but may be used as a tool for to make strategic decisions, in good faith, initiated. However, if the offering is merely companies to focus on board structure without the fear of personal liability. Such postponed, not withdrawn, and restarted and practices prior to being required liabilities can result from lawsuits brought within 90 days, then the deferred costs can to comply with regulatory standards. against a company’s directors and officers be charged against the gross proceeds. Regulatory requirements and stock by shareholders, customers, regulators, and exchange listing standards mandate that even competitors. You should consult with Future expenses. The future costs attributable public company boards comply with a your company’s insurance agent to obtain to being a public company must also be host of governance enhancements. an accurate quote on the cost of a D&O taken into account. Making the transition insurance policy. to a public company will put a strain on Board of directors the resources that your company currently In the United States, every corporation Miscellaneous expenses. Other expenses has due to the additional responsibilities has a board of directors. For a private include the SEC filing fee, the Nasdaq or and requirements that are inherent for any company, the board typically is composed NYSE listing fee, any Blue Sky notice and/ public company. Additional executives may of company executives, shareholders, family or registration filing fees, and registrar need to be recruited to help the CEO and members, and, in some cases, independent and transfer agent fees. Each of these can the CFO run the company, and additional members. Conversely, the board of a public range from several hundred to thousands employees may need to be hired in the company typically is, and in most situations of dollars. You will also need to include the accounting, SEC reporting, and tax functions is required to be, composed of a majority of cost of the roadshow and investor relations’ to handle the reporting requirements of a independent directors, within 12 months of expenses in your . You may also public company. In addition, the CEO and the IPO. This is one of the many fundamental have fees of a compensation consultant the CFO will need to file certifications as to differences between a private and public or other consultant you may hire in the accuracy of the financial statements company board. connection with the IPO. In addition to these contained in the SEC filings. The company identifiable costs, significant executive and will need to maintain its ICFR, which may The NYSE and Nasdaq have specific administrative time will be spent putting the mean hiring additional employees or outside corporate governance listing standards. offering together. consultants. You may be required, on an These rules are important to consider as annual basis, to have the company’s auditor companies evaluate their organization’s From a financial statement perspective, perform an engagement to attest to the corporate governance leading up to an IPO. many of the costs associated with a effectiveness of the company’s ICFR. See Broadly, the governance listing standards successful offering can be offset against the Chapter 9 for additional information. of the exchanges address items such as proceeds from the offering on your balance the definition of independence, board

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structure, use of executive sessions, Compensation committee and the company’s best interests and aligned committee composition, committee charter nominating/corporate governance with its corporate mission, strategy, and requirements, and so on. While these committee risk profile. The nominating/corporate rules are prescriptive and you should As part of an IPO, there are many governance committee plays a critical role in consult with counsel to ensure compliance, compensation-related considerations, overseeing matters of corporate governance this is an opportunity to optimize board including: for the board, including formulating and structure, composition, and effectiveness recommending governance principles and 1. Understanding the impact on by considering corporate governance in the policies. As its name implies, this committee executive roles and benchmark levels early planning stages. is charged with enhancing the quality of of compensation. nominees to the board and ensuring the Well before the IPO, it may be beneficial to 2. Establishing a peer group of integrity of the nominating process. The take a critical look at your board. In light of similar companies and developing SEC requires disclosure of the presence the necessity to comply with public company a plan to bring compensation in of a compensation committee and a standards, composition will likely be one line with the market. separate nominating/corporate governance of the more significant areas requiring committee of the board. 3. Implementing an Annual Incentive Plan attention. Reviewing the existing skills and and a Long-Term Incentive Plan. knowledge of the board and how they The exchanges have listing standards align with the strategic objectives of the 4. Considering adoption of stock ownership relating to compensation committees. organization, as well as the gaps that may guidelines, which require executives to NYSE- and Nasdaq-listed companies are occur as a result of shifting composition, own a predetermined number of shares required to have a compensation committee may better position the board for day one of of company stock, or value of shares, composed only of independent directors. being a public company board. by a certain date (typically, five years) in order to align management’s and Exemptions for controlled companies Audit committee shareholders’ interests. The NYSE and Nasdaq provide exemptions Each public company is required to have to their listing standards for controlled an audit committee. The audit committee The two additional required board companies. A controlled company is is established by and among the board committees are the compensation defined by both exchanges to mean a listed of directors for the primary purpose of committee and the nominating/corporate company of which more than 50 percent assisting the full board with its oversight governance committee. For Nasdaq-listed of the voting power for the election of responsibilities pertaining to the company’s companies, the function of the nominating directors is held by an individual, a group, or financial statements; its compliance with committee may be performed by a another company. A controlled company is legal and regulatory requirements; and majority of the independent directors of exempt from various corporate governance the company’s independent auditor’s that company. The requirements for these requirements, including the requirements qualifications, independence, and committees are very similar in terms of relating to the independence of board performance, among other things. The presence and committee structure. members, the compensation committee, activities of the committee are required to and the nominating committee. While both be articulated in a publicly disclosed charter, The role of the compensation committee the NYSE and Nasdaq generally maintain the standards of which are defined by the is to set CEO compensation and approve similar exemptions, the specifics vary and applicable stock exchange. appropriate and supportable pay programs, should be considered in the context of principally for executive officers, that are in controlled companies.

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SEC corporate governance disclosures are combined or separate (and if there is a Policies and committee charters The SEC requires significant disclosure lead independent director). Also required Companies will also want to consider on corporate governance matters. are discussions of the board’s role with their corporate governance policies and Disclosures include information about respect to risk oversight for the company. committee charters during the pre-filing board meeting attendance, if the period. It is important for companies to board has a process to allow for direct The objective of the various disclosure engage in dialogue with counsel in order shareholder communications, risks requirements is to provide transparency to to ensure that these documents contain related to compensation structuring, and investors of the operations, structure, and all of the necessary and required duties the board’s consideration of diversity in policies of the board and its committees. and responsibilities for each committee. selecting board or committee members, For management and board members who Each of these documents will need to be among others. Companies are also have not previously been involved with a disclosed on the company’s website, so it is required to disclose the board leadership public company, these disclosures should be important that they are thoroughly vetted structure, which includes discussion of considered by the management team and by all applicable parties and accurately whether the roles of CEO and chairman board early in the IPO process. articulate the full scope of the board’s and committees’ responsibilities.

Strategies for going public 25 Chapter 5. The underwriters

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Your primary goal when your company goes public is a successful offering.

If you were to conduct your own offering, banker (or vice versa) at least a year or you would probably find it very difficult to two in advance. Some startup companies A successful offering not only find a sufficient number of buyers for your make this connection during early-stage brings a fair price for your stock stock, and you could encounter challenges private placements. In doing so, they avail but also leads to a stable or rising in determining the right price for your stock. themselves of the investment bankers’ price for the stock after the IPO. Key reasons for using underwriters are that advice on positioning their companies to While there is nothing to prevent they can market your shares to a broad go public. you from conducting your own base of institutional and investors with initial public offering, the use of whom they have relationships, help you craft Investment bankers may assist in arranging underwriters can help ensure that your company’s story, and guide you to the financing in those years, keeping you the offering is successful. appropriate valuation for your shares. informed of current and predicted general market conditions and the mood of the Underwriters are also familiar with market market with regard to your industry, and conditions; they can gauge the level of advising you on the appropriate time to go interest of institutional and individual public. Before selecting underwriters, the investors regarding new stock issuances company should evaluate the prospective and are familiar with the valuation of similar underwriter’s selling, distribution, and companies. They are typically in the best research capabilities. Do the underwriters position to advise you on what price to ask have a history of effectively selling IPOs? for your stock, as well as on when to sell it. Do they have a strong sales force and Their sponsorship usually continues well relationships with key investors in the past the IPO and may affect the way your company’s sector, as well as a strong retail stock performs in the aftermarket. network? In addition, you should meet the investment banks’ research analysts and Selecting underwriters be comfortable that they “get” your story. A group, or syndicate, of underwriters The research they write post-IPO will be an normally conducts IPOs. Your company first important determinant of market interest in needs to select the lead underwriter (or your stock. underwriters), which will lead this syndicate. If you do not already have investment Underwriters come with various banking relationships, there are many backgrounds and have differing preferences things to consider when establishing one. for the kinds of companies they want to It is important to keep in mind that your support. Some are national firms that seek relationship with your investment banking out companies with national reputations firm will likely not end when your IPO is and established growth records. Others completed. Because it may be an ongoing are regional firms that focus on companies relationship, you should make your choice from their geographic area or specialize in with all the care you exercise in selecting certain industries, such as health care or your auditor, accounting advisers, attorneys, financial institutions. and the other professionals with whom you regularly work. Ideally, you will have already developed a relationship with investment bankers Investment bankers, unlike other by the time you decide to go public. Most professionals, do not typically charge companies approach an investment hourly rates for their services. They are compensated through fees or commissions

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on any completed deals they underwrite or Some firms have access to many Market-making capability advise on for you. These commissions do institutional investors, while others Once the stock has been issued to the not usually vary significantly from firm to emphasize individual or “retail” investors. public, the lead underwriters generally firm, so pick from the best firms available Some have an international emphasis, while assume responsibility for continued and have an understanding of market rates others are domestically oriented. Evaluate sponsorship of your company in the financial for offerings of the size and nature you the quality of their investor relationships, community. This sponsorship includes are contemplating. whether they are long-term investors or “making a market” in the company’s stock speculators. companies tend and assisting the company in sustaining An effective way to consider which to be longer-term holders, while public interest in the stock, including investment bankers you may wish to funds are more varied with some “long organizing presentations to investor groups. approach is through a mutual contact (your only” funds considered to be good longer- Other members of the syndicate may directors, investors, accounting advisers, or term shareholders, whereas others may become market makers as well. The market attorneys may be able to assist you). be more likely to trade your stock for more makers of the stock trade in your stock, speculative gains. You should always ask offering firm prices to buy or sell shares. Be prepared to shop around and compare any proposed lead underwriters what the The lead underwriter often serves as the firms. If your company has promise and the aftermarket performances of their IPOs principal . In order to maintain investment bankers know you are talking have been in the recent past. a market, the lead underwriter may need to to other firms, they may show greater devote a sufficient amount of capital to take interest and be more competitive. Many Calendar positions (i.e., short or long) in your stock. companies ask a number of bankers to You should ask any prospective lead Without this support, large shareholders formally present or pitch their credentials underwriters what other offerings are on may not have sufficient liquidity, interest to them (sometimes referred to as a their “calendar” of transactions. These other may wane, and the market price of your “bake-off” or “beauty contest”). Here offerings may be competing with your IPO stock may suffer. When you consider the are some characteristics to look for in for attention from the people at the lead aftermarket performance of proposed lead investment bankers: underwriters responsible for the actual underwriters, you are often assessing its allocation and placement of your shares, willingness to place its capital at risk for its Reputation or the lead underwriters may try to company clients. In an IPO, the underwriters’ reputation sequence other offerings ahead of yours, is of great importance. Institutional and causing you to miss optimal execution Research analysts individual investors may have greater windows. It is extremely important that The financial community will look to the confidence in your stock if a highly regarded your offering receive sufficient attention lead underwriters as a primary source of investment banking firm is named in throughout the process and particularly information about your company. your prospectus as a lead underwriter. during the last week or two prior to the Reputation can also affect the ability pricing of your transaction when you are Therefore, the selected investment banking to organize a strong syndicate of other marketing your shares. firms should have experienced research underwriters to assist in selling and analysts who are respected by the financial distributing the stock. Experience community and closely follow the industry in The investment banking firms should which the company does business. Distribution capability typically have experience in underwriting You will want the underwriters to distribute issues of companies in the same or similar Certain conflict of interest rules between your stock to an investor base that is industries. This may influence their ability to research analysts and their investment sufficiently strong and varied to generate help you craft your equity story to appeal to banking firms were designed to promote ongoing market interest in the stock after investors and to price the issue accurately independence and objectivity of research the IPO. An investor base of committed, and may give them improved credibility reports. The rules restrict analyst long-term holders will help avoid excessive when explaining and selling the company participation in certain activities and also churn in your shares in the aftermarket. to the public. Experience of the investment prohibit certain communications by Investment banking firms have wide banking firms is key—while there are many analysts and between analysts and client bases. You should understand the investment banks with excellent reputations, investment bankers. composition of the client base and evaluate you should consider their experience with it in the context of your strategy. IPOs in your company’s industry and key There are provisions for EGCs that are investor markets before making a selection. designed to liberalize the communications

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and interactions of analysts in the IPO use more than one lead underwriter. outside the company, including customers, process and increase the flexibility regarding Most companies also choose to use other suppliers, competitors, and other people publication and dissemination of research underwriting firms to act as “passive” who are knowledgeable about your industry. reports about EGCs. or as co-managers of their offerings if they have a good relationship A detailed presentation of the company is Notably, brokers or dealers that are with more than one firm or if the company extremely helpful in providing information participating in the registered offering of an sees advantages to combining the client about your company to the underwriters. EGC may publish research reports about the bases, research capability, geographic EGC, and may publish or distribute research strengths, and other resources of the This presentation should include a realistic reports or make a public appearance with underwriting syndicate. It is important to portrayal of your company’s operations, respect to the securities of an EGC during keep in mind that there may be certain strengths, and risks and of the projected post-IPO quiet and lock-up periods. In conflicts of interest between you and application of an offering’s proceeds. A practice, however, most banks continue the underwriters, such as conflicts that well-done presentation also provides a to impose customary research blackouts may arise because of their long-standing great deal of information that will be useful on offerings by EGCs through the 25-day relationships with institutional customers when drafting the registration statement. prospectus delivery period following an IPO. or with some of your competitors. A detailed and thorough business Underwriters receive their commission presentation can reduce the time and Ability to provide financial advice if the transaction is completed, whether expenses incurred by attorneys and other During and after your IPO, you will look to successful or not in the aftermarket. professional advisers. your investment bankers for financial advice. You may need help in obtaining additional What underwriters look for Remember that even if the underwriters funding in the future, advice on potential Before any underwriters agree to proceed complete this initial investigation to , or insight into with your IPO, they will want to investigate their satisfaction, they will have no legal the investing public’s attitude toward your company to decide whether they commitment to take you public until the your company. want to take your company public. This completion of the marketing and pricing investigation constitutes a portion of their of the transaction, which is one of the last Other considerations due diligence. They will also do specific due steps in the IPO process. You should talk with the proposed diligence on the company and registration investment bankers’ other corporate clients statement disclosure later in the process. The underwriters will also evaluate factors to find out firsthand what their experience Assuming they decide to back your related to the offering itself in determining has been and how they feel about their company, the information they gather during whether to take you public. These include: relationship with the underwriter. You their investigation will also assist them in should ask both about working with the determining how to price the stock. The Use of proceeds. The underwriters will underwriter during the offering and how underwriters will closely investigate many of evaluate how much money you will need to supportive the underwriter has been after the items described in Chapter 2, including effectively operate and grow the company the offering. Read the prospectuses of other management quality, employees, product under your business plan. If you require IPOs in which the investment has acted quality and industry potential, strength more money than can realistically be as a lead underwriter. of customer and supplier relationships, raised in the public market at the time, it financial and tax positions, key performance may not be wise to try to go public now. If You should also take the time to be sure indicators, financial performance history and a large amount of the proceeds will go to you are comfortable not only with the projected growth, and company reputation. shareholders or if key employees are people with whom you will be initially selling stock, the underwriters may want directly involved but also with those who The underwriters’ investigation can take some assurance that these people are not will have ongoing responsibility for market several weeks or more depending on their selling because they have lost confidence in making, research, and sales sponsorship. familiarity with your company and your the company. The personal chemistry between your industry. They and their legal advisers will investment bankers and you, your review legal, accounting, finance, and tax Marketability. The underwriters will also management team, and your board is materials. They will also interview your key consider the state of the markets at the extremely important. Many companies executives, and they will talk to people time, both generally and for a company

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in your industry and at your stage of distribution of the offering. The type of If possible, it will be useful for you to development. These things can change underwriting that is offered to you will perform this analysis on other companies quickly, so you must be prepared to be depend on the underwriting firm that you prior to meeting with underwriters on price. flexible in this process. are using and the nature of your stock It is a good idea to develop a valuation offering. If one of the major firms agrees to model well in advance of the IPO (e.g., more Selecting a trading market underwrite you, it will almost always agree than one year in advance) and use this Working with your lead underwriters and to a firm commitment. The smaller firms that information to refine the legal counsel, you should consider on handle more speculative offerings may do so to maximize the long-term valuation. In what trading market you want your stock on a best-efforts basis. addition, this valuation model may be useful to trade after the IPO. The initial listing in pricing employee stock options. Many requirements of the NYSE and Nasdaq Pricing the stock companies also engage outside valuation are detailed in Appendix C: The securities As in most pricing situations, no set experts to prepare periodic valuation exchanges. In addition, both the NYSE formula exists for determining the proper reports for purposes of pricing their and Nasdaq have corporate governance price for a company’s stock. The pricing stock options. requirements for their listed companies. for an IPO is determined by a combination See “Corporate governance” in Chapter 4 of factors. Your investment bankers will There is usually a good deal of information for a general overview. examine the of companies available about companies similar to yours that operate in your field or have similar to help you develop a range for the price Types of underwriting business models and profiles, particularly of your stock. This analysis will help you There are generally two main types publicly traded peers. If none exist, the negotiate realistically with the underwriters. of underwriting: underwriters will then try to find other If your company is selling stock to the public companies in related areas or with related for the first time, pricing is different than A firm commitment. Under this arrangement, growth and other attributes. for a company that has its stock listed on the underwriters agree to buy all the an exchange already. Cautious buyers may stock being offered at a fixed price, usually They will typically select the most relevant want to wait and see how your company’s determined on the date the registration of these companies based on similarity of stock behaves before they purchase it, statement becomes effective. They then the companies’ business products, financial reducing demand in the offering, or they resell the stock to the public, consisting and growth profiles, scale, consumers may demand steep discounts to publicly largely of the investors the company will and end-markets, or other factors to form traded peers. have met with on the IPO roadshow. a comparable set (often referred to as “comps”). They will examine factors such It is also possible that, although your A best-efforts commitment. Essentially, the as price-earnings ratios, forward revenue or company is not well known in comparison underwriters agree to use their “best earnings before interest, taxes, , with others in your industry, your growth efforts” to sell the new issue on your behalf. and amortization (EBITDA) multiples, capital patterns and potential are so attractive If they do not sell the entire amount to the structure, debt-to-equity ratios, return that the public will accept a greater multiple public, they have no obligation to purchase on assets, and return on sales of these for your company’s stock than for others the balance. Thus, they are acting merely as companies. They will weigh carefully your that are more seasoned. The price for the your agent. These are rare in IPOs and are prospective revenues, earnings, and any offering will depend, in part, on the demand practically impossible to do in any offering potential dividends; the amount of stock for the stock during the marketing period, that will be listed on an exchange. that will be available; and the potential as evidenced in the bookbuilding process demand. Investors will often expect the that the lead underwriter has conducted. The firm commitment is generally the company to be valued at a discount to If demand has been particularly high from preferred—and by far the most common— these publicly traded, comparable attractive potential investors, it may be form of underwriting arrangement, as it companies; therefore, selection of the possible for the company to increase the ensures you that your company will receive right comp set is of paramount importance. size of the offering or the expected price, a certain sum of money by a certain date. Bankers will also often perform other or both. Alternatively, if the market has It also facilitates listing on an exchange valuation work as a “check” on their weakened or demand is not as high as because the lead underwriter makes a comparable company analysis, such expected, the expected price or size of the representation to the exchange as to the as a discounted cash-flow analysis. offering may have to be reduced.

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It is not necessarily advantageous for your Size of the offering Keep in mind that underwriters have some stock to be sold for the highest possible Determining the appropriate offering size flexibility on this matter at the time of the price that underwriters could achieve. If the is important, as it may affect the company’s offering, as they are generally allowed to IPO price is set too high in relation to the engagement of an investment bank and offer and sell up to 15 percent more shares company’s peers, given prevailing market the ability to attract high-quality investors. than set forth on the cover page of the conditions, the aftermarket may be weak. If the offering is not large enough, many prospectus for the offering. This option, Consequently, underwriters usually advise institutional investors will be hesitant to which is agreed upon in the underwriting you to sell slightly below (traditionally invest due to the potential lack of liquidity in agreement, is referred to as the over- between 10 and 15 percent) the anticipated the aftermarket. allotment option in an IPO, also known as a aftermarket price. “green shoe,” and is described in more detail Sometimes, a public company will decide in Chapter 9. Sometimes, a stock’s price will increase that it does not need that much money, sharply immediately after the IPO. This or any at all. A partial, or total, secondary does not necessarily mean that the stock offering, in which the existing shareholders was priced incorrectly. Underwriters try sell some of their shares, may be made to to establish a price under normal trading obtain the desired number of shares to conditions. Sometimes, though, surprises be sold. occur. There have been instances where the trading price has doubled or tripled in the In some cases, early-stage companies are first few days or weeks of trading. not encouraged to make secondary offerings of any significance. If these companies want Direct listing is an alternative that has been other people to invest in them, the existing utilized recently in select circumstances shareholders must show confidence in the for companies seeking to go public. Direct potential of the stock. Underwriters may listings do not rely on the bookbuilding become concerned if they see investors process described above to set a price or who may have held stock for only a short identify investors and may be appropriate time and already want to sell. Conversely, for private companies that are not seeking for later-stage companies, particularly those additional funding, but whose shareholders in which private equity sponsors have held want the flexibility to sell their shares on positions for a longer period, meaningful the open market. In a direct listing, pricing secondary sales are generally more is determined after the company provides acceptable. As for management and key information about itself to the general directors, sales are generally discouraged public and works with the applicable stock in IPOs, although in some cases, sales of exchange to set an opening price. less than 10 percent of any one individual’s stock may be acceptable. Of course, the Direct listings are generally less expensive underwriters may make exceptions if there than IPOs, since they need not involve an are valid reasons. underwriter or significant underwriter fees. However, because an underwriter does not The number of shares sold is a function of agree to buy all the shares offered or agree price and total valuation of the company. to provide any post-offer pricing support, Issuing too many or too few shares can the valuation of the stock may not be as unfavorably alter the and thus strong and the post-listing trading price may the total amount to be raised in the offering. be more subject to volatility.

Strategies for going public 31 Chapter 6. Registration

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The entire IPO process revolves around your company’s registration with the SEC.

During the preparation phase, one or a The interval between the initial filing or Registration is achieved through series of planning and review meetings submission of the registration statement the filing of a legal document are held, often referred to as “all hands” and its effective date is traditionally known referred to as the registration or “organizational” meeting(s). Meeting as the “quiet period” or “waiting period.” statement, and the contents of participants generally include company this document are governed by officials, counsel, underwriters and their Typically, after several rounds of comments, the securities laws and rules counsel, as well as the company’s external the “preliminary prospectus” is filed and thereunder. Preparing the auditors and other advisers. printed for use in the marketing efforts. registration statement can be a The preliminary prospectus must bear a lengthy process even if everything The purpose of the organizational meeting legend stating that a registration statement goes smoothly. It is not is to establish an initial timetable; assign related to the offering has been filed with uncommon for completion responsibilities; discuss the components the SEC but has not yet become effective, (including review and comment of the registration statement; present and that the securities may not be sold, nor period) of the registration business, financial, and legal information; may offers to buy be accepted before the statement to take three or four and assess other aspects of the offering. An effective date. Because this legend is printed months or even longer. The illustrative timetable is available in Appendix in red ink, the preliminary prospectus is company is strictly liable for the D: A timetable for going public. commonly referred to as the “red herring.” information in the registration The red herring is typically printed and statement, and great care must When an initial draft of the registration distributed to potential investors after be taken in its preparation. statement is complete, it may be the company and its advisers resolve all Because directors and officers confidentially submitted to, or publicly potentially significant SEC comments. The who sign the registration filed with, the SEC. Issuers must publicly red herring also includes the number of statement also may have liability file their registration statements at least shares to be offered and an estimated for misstatements or omissions in 15 days prior to commencement of the pricing range for the shares. the registration statement and IPO roadshow. The registration statement prospectus, they are responsible is then reviewed by the SEC in order to The merits of your offering may need for ensuring the accuracy of the determine if it complies with the applicable to be reviewed and approved by the information included in the disclosure and accounting requirements. states in which the stock is to be sold, registration statement. The SEC will then issue a comment letter and the underwriters’ compensation on the registration statement requesting must be reviewed by FINRA. Once these clarifications, modifications, and other requirements are addressed and marketing information approximately 30 days after efforts are completed, the registration submission or filing. The company formally statement can be declared effective, responds to the comments by letter, the pricing of the offering can occur, modifies the registration statement, and the securities may be sold, and a final files, or submits, an amended version. prospectus can be printed. There is also an This process continues until the SEC is accompanying registration of the class of satisfied with the disclosure. The SEC stock being sold under the 1934 Act. This staff has issued guides designed to assist concise registration document incorporates potential registrants, such as the Division portions of the 1933 Act registration of Corporation Finance’s Financial Reporting statement. See the discussion of the 1934 Manual, as well as “Staff Observations in the Act in Chapter 9. Review of Smaller Reporting Company IPOs,” which may be helpful when preparing the initial registration statement.

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If your financial as analyses of the company’s place in to advise you on the many issues that will statements have been its industry, details about its market, an arise throughout the process (such as tax, assessment of the competition, a complete corporate governance, and executive and audited on a regular basis description of its products or services, and share-based compensation plans, among in the years leading up to consideration of risks to the company’s many others). performance. Along with this, the company the filing of a registration should prepare a detailed financial model Auditors statement, ensuring that on which its advisers will perform due The company’s auditor must audit the diligence thoroughly, which will form the financial statements included within the the financial statements basis of projections that will ultimately registration statement and issue a report are SEC compliant may be be shared with the research analysts in on the audit regarding whether the financial the syndicate ahead of the IPO. Your CEO statements present fairly, in all material less difficult. and CFO must also be ready to certify respects, the financial position of the entity the accuracy of the historical financial as of the balance-sheet date and the results Who does what statements and disclosures as part of the of its operations and its cash flows for The better prepared the company and its annual reporting process. the period then ended, in conformity with executives are to complete the registration generally accepted accounting principles statement, the more efficient the external Company counsel (GAAP). If your financial statements have professionals can be. While each party As the registration statement is, in been audited under PCAOB standards on a has specific responsibilities, the entire large measure, a legal document, the regular basis in the years leading up to the group must be comfortable with the final attorneys generally take a leading role in filing of a registration statement, ensuring product. Everyone is associated with the drafting the majority of it. The company’s that the financial statements are in SEC- registration statement in some way, and it is management will gather information and required form may be less difficult. Your in everyone’s interest that the registration answer questions as needed. Based on auditors will also perform reviews of your statement is accurate and complete. Here the information gathered by management, quarterly financial statements, which may be are the basic expectations for each party: counsel will be able to assist you in deciding included in the registration statement. which particulars should be included in the Company management registration statement (i.e., what facts are Subsequent to registration, your auditor The most important team members are the material) and how they should be included. may be required to issue an opinion on the company’s management, typically led by the In addition, counsel will coordinate and company’s ICFR. See Chapter 9 for additional CEO and the CFO. Your management team assist in the drafting of responses to the information. In conjunction with preparation acts as a liaison between the working group SEC comments. The company’s counsel of the registration statement, your auditor and the company’s board and plays is also responsible for helping you with will also review drafts of the registration a critical role in all aspects of the IPO pre-IPO corporate housekeeping and statement for accuracy and consistency of process. The management team will make IPO preparations, coordination of the financial information. Your auditor may also structural and timing decisions relevant due diligence process, negotiation of the assist in the resolution of accounting and to the IPO with advice from underwriters underwriting agreement on behalf of financial reporting questions raised by the and counsel and, with assistance from the company, securities-related matters, SEC during the SEC review process and will the company’s advisers, will prepare the and issuance of a legal opinion on the issue “comfort letters” to the underwriters registration statement, respond to SEC validity of the securities being offered and and company’s board of directors as part of comments, and prepare and deliver the the accuracy of the disclosure, among their due diligence process. roadshow presentation. other things. Choosing the right counsel is imperative. Similar to your investment Advisory The best way for executives to expedite banking advisers, you will develop a An accounting adviser, not restricted by the the process is to have a detailed and close relationship with your counsel, independence standards of auditors, can up-to-date business plan and projections and establishing a relationship of is provide assistance to management with SEC ready for outside professionals to use as critical. Moreover, you will want to choose reporting requirements, updating financial a reference. The plan normally includes counsel with significant experience with reporting for SEC compliance, preparation the company’s future objectives, as well the IPO process and with a deep bench of MD&A and pro formas as necessary, and

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evaluation of new and revised accounting Pre-filing activities warrants and rights, transactions with the policies; review of the draft prospectus; Due diligence company, indemnification agreements, and responses to SEC comment letters. Due diligence is the process of ensuring and the number of shares owned of record The accounting adviser can also assist you that the information in the registration and beneficially (shares in which they, with post-IPO issues involving information statement is accurate in all material respects directly or indirectly, have or share voting systems, internal controls, SEC reporting, and that the registration statement does not or investment power). In some cases, the improvements, and contain any untrue statements of material individual directors and officers may be corporate governance. fact or omit material facts required to be interviewed by your advisers. stated in the registration statement or Underwriters that are necessary to prevent statements Financial statements The lead underwriter or underwriters in the registration statement from being The company’s audited financial statements will manage an underwriting syndicate to misleading. One component of due diligence will be included in the prospectus, with provide you with advice on the pricing, includes questioning key management reliance on the auditor’s report given on timing, and distribution of the issue. personnel about company activities, matters the authority of the auditors as experts In addition, the lead underwriters will disclosed in the prospectus, and matters in auditing and accounting. In order for a organize the roadshow to help promote not disclosed in the prospectus. It is also company to include the audit firm’s report in the securities and increase demand for common for underwriters to conduct third- the filing and to refer to the firm as experts, the offering. Underwriters are also active party background checks on the company’s the company must request and obtain participants in the drafting process, management team and its directors. the auditor’s consent to the inclusion of particularly with respect to the summary their report in the prospectus and to being section of the prospectus (otherwise known Under the 1933 Act, liability named as experts. Before these consents as the “box”), and the description of the may be incurred if a registration statement are given, the auditors must perform a company’s business and the industry in contains misstatements of material facts or reasonable investigation through the filing which the company operates, as well as in omissions of material facts. The company, dates, conducting a subsequent-events responding to SEC comments. Underwriters its directors, the officers who sign the investigation to determine whether the typically have a depth of experience both registration statement (the principal financial statements and their opinion in the issuer’s industry and in marketing executive, financial, and accounting officers), thereon are still appropriate. IPOs and other transactions and can help the underwriters, and any experts (such as the company craft an equity story that auditors) participating in the registration This investigation includes inquiries into resonates with investors. Your underwriters may all be potentially liable. The company any events that occurred or became known can also supply you with examples of itself is liable for any material deficiencies, after the date of the auditor’s last report, registration statements from similarly regardless of good faith or the exercise of which, had they been known at the time, situated companies, which can be extremely due diligence. This requires that a complete would have been disclosed or reflected in useful guides in drafting your registration due diligence process be performed, the financial statements. Your auditors will statement and creating a which greatly increases the length of the also review and discuss with management for the offering. preparation phase. any concerns they may have with any interim, unaudited financial statements Underwriters’ counsel Corporate documents and included in the prospectus. They will also One of the principal roles of underwriters’ related information read the entire registration statement for counsel is to confirm that the registration Your counsel and the underwriters’ counsel inconsistencies between the financial and statement is complete and not misleading. will review articles of incorporation, bylaws, nonfinancial portions and any material To do so, the underwriters’ counsel will minutes of board and committee meetings, matters that have not been disclosed. The participate in drafting the registration major contracts, employment agreements, auditors are also asked by the underwriters statement, conduct due diligence meetings, stock option plans and related valuation to “provide comfort” (as explained below) draft the underwriting agreement, request materials, and other significant company on certain financial information disclosed in comfort letters from your auditors, help documents to verify that the prospectus the registration statement (outside of the respond to comments from the SEC, and disclosures are complete and accurate. audited financial statements). be responsible for the offering Questionnaires are circulated to all directors with FINRA. and officers requesting certain information, Comfort letters including their names, prior experience, During the registration process, the direct and other remuneration, options, underwriters and their counsel will review

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the financial statements with your auditor Types of issuers You should consult with your legal counsel and reach an agreement regarding comfort Issuers may be domestic issuers or to determine if your company may qualify as letters. In requesting these comfort foreign private issuers (FPIs). Domestic a smaller reporting company, EGC, or FPI. letters from the auditor, the underwriters issuers (which are the primary focus of are seeking assistance in performing a this publication) are generally organized The registration statement “reasonable investigation” of financial and under the laws of a state of the United Most registration statements for IPOs of accounting data in the prospectus that is States of America. FPIs are incorporated domestic issuers are prepared on Form not covered by the auditor’s report. Two or organized outside the United States but S-1. As indicated, however, there are comfort letters are generally issued: one register securities to be sold in the United scaled disclosure requirements for smaller on the effective date of the registration States. The SEC offers certain financial reporting companies and EGCs. statement and one on the closing date, the statement and disclosure accommodations latter of which is often referred to as the for FPIs. Chapter 10 defines foreign private The registration statement consists of “bring down” comfort letter. The comfort issuers and summarizes some of the more two principal parts. Part I contains the letters list specific procedures performed important accommodations. prospectus, which is a legal offering at the request of the underwriters. The document that will be distributed to underwriters will request that your auditor The SEC also created a designation for prospective buyers. The prospectus also furnish a preliminary draft well in advance of “smaller reporting companies” to streamline serves as a marketing document for the IPO. the first due date so that the underwriters and simplify the disclosure for companies Part II contains other detailed information. may decide whether the procedures with smaller market capitalizations. The The following discussion focuses on the described in the letter are consistent with primary determining factor for eligibility as Form S-1 registration statement. You should what they requested. The procedures, a “smaller reporting company” is that the consult with your legal counsel regarding performed by the auditor, usually include company has less than $250 million in public the specific requirements of each part of the a comparison of financial data (contained float as of the last business day of its most registration form. throughout the prospectus) to accounting recently completed second fiscal quarter or records or financial statements. They also annual revenues of less than $100 million Part I: The prospectus include consideration of financial results and no , or a public float of less The registration forms contain a series available subsequent to the last audit or than $700 million. of detailed “items” and instructions, in interim financial information included in the response to which disclosures must be prospectus for purposes of determining Domestic issuers and FPIs may qualify as made. Because the prospectus is the selling whether there have been any declines in EGCs. An EGC is defined as a company document as well as the legal document, sales or income or other trends that are with total annual gross revenues of less it is usually written in narrative form and is not adequately disclosed in the document. than $1.07 billion during its most recently highly stylized. The SEC requires the use of It is important for the company to be completed fiscal year. An EGC will continue “plain English” for parts of the document involved in the procedures requested by to be an EGC until the earliest of: the last (the cover page, summary, and risk factors the underwriters early in the process, as day of the fiscal year during which it had sections) and encourages such for the management may be able to identify items total annual gross revenues of at least whole document. The plain English rules that can be resolved with the underwriters $1.07 billion; the last day of the fiscal year require the use of short sentences that in advance of the issuance date. The following the fifth anniversary of the IPO of avoid technical and legal jargon. The SEC company may choose to discuss these its equity; the date on which it has, during also emphasizes the necessity of carefully situations with the underwriter prior to the the previous three-year period, issued more organizing information in the prospectus issuance date of the comfort letter to avoid than $1 billion in nonconvertible debt; or in a logical sequence and presenting that surprises or potential delays in filing. For the date on which it is considered to be a information in an understandable and example, sales for the most recent month “large accelerated filer” under the 1934 Act. balanced manner. may have declined from sales for the same Appendix F outlines the benefits of EGC month a year ago, and this decline will be status, including reduced financial The prospectus serves two potentially noted in the comfort letter. statement requirements and delayed conflicting purposes. On the one hand, as implementation of certain regulatory the basic selling document, the underwriters and accounting requirements. and company want it to present the best possible image of the company. On the other

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hand, to protect the company, controlling bases). At the time of the red herring, the legislation; the company’s dependence persons, directors and officers, and cover page will include a range of per- on strategic relationships or alliances; underwriters from potential liability under share prices (e.g., “It is currently estimated integration of acquired businesses; the need the 1933 Act, it should not be written with that the initial public offering price will be to expand parts of the organization, such the flair and style of marketing literature. between $12 and $14 per share.”), and the as sales, support, or production; intellectual Its emphasis should be on complete and distribution table will be blank. The inside property risks; litigation and regulatory risks; accurate disclosure, and while the company front or outside back cover includes a table cybersecurity risks; and any relevant and will highlight the positive aspects of the of contents and information regarding the material technological issues. The issuer also company, negative aspects will also be distribution of the prospectus. Many issuers should highlight other risk factors relating addressed. Reading prospectuses of other include a glossy inside cover page or pages to the company and its operations. As other companies in your industry will help you depicting images of the company’s products portions of the prospectus are written, be be prepared for drafting your company’s or other graphical marketing displays. The alert for issues that should be highlighted in prospectus, especially with regard to the SEC will scrutinize this content to ensure this section. level of detail required when preparing consistency with the prospectus and a fair your company’s description of business and balanced presentation. Use of proceeds. This section explains how and MD&A, as well as identifying potential funds raised in the offering (assuming weaknesses and risks associated with your Prospectus summary. This section of the the offering includes a sale of primary company. Note that most investors are prospectus, typically referred to as the “box,” shares) will be spent, such as to reduce accustomed to reading prospectuses and highlights the prominent features of the debt, acquire a new business, or invest in understand that they are not exclusively offering and includes summary descriptions the growth of the business, and must be sales pitches. of the company’s business and industry, carefully drafted. It will specify that any the company’s strengths and strategies, the shares sold by selling shareholders will Reading prospectuses offering, the use of proceeds, and the risk not result in proceeds to the company factors. An introductory statement about and will explain who is responsible for of other companies in the company is generally given, explaining paying offering expenses and underwriting your industry will help what business it is in, its main products or discounts and commissions. services, when it was formed, and where it you prepare for drafting is located. The summary will also disclose . The company’s dividend your own company’s condensed financial and, if applicable, pro policy and any restrictions on future forma information. As it will often serve as dividends should be explained. Note that prospectus, especially the basis for a potential investor’s decision many companies have never paid dividends, with regard to the level to consider the stock further, the summary retaining all earnings to finance continuing may require considerable time to prepare. operations and expansion. Any intent to not of detail required. pay dividends in the near future must be Risk factors. The prospectus includes a disclosed as well. In practice, the information in the discussion of the most significant factors registration statement is generally that make the offering speculative or Capitalization. This section contains a table presented in the following order: risky. These may include such things as a exhibiting the capital structure (debt and lack of operating history, an accumulated equity) of the company before and after Prospectus cover page. The outside front deficit, operating losses in recent periods, giving effect to the offering (i.e., on a pro cover of the prospectus provides key an expectation of future losses, industry- forma basis). facts about the offering, including the related risk factors, uncertainty of market name of the registrant, the names of the acceptance of the product, exposure to Dilution. When substantial disparity exists underwriters, the date of the prospectus, macroeconomic factors, dependence on key among the effective IPO price, the book the title and number of shares to be sold, a personnel or certain customers or suppliers, value, and the price that was paid for distribution table (the price to the public, the competition, and history of material existing shares owned by officers, directors, underwriters’ discount, net proceeds to the weaknesses, among others. Other factors and major shareholders, the resulting company, and net proceeds to any selling include risks related to first-time offerings; dilution of the purchaser’s equity interest shareholders on per-share and aggregate the potential impact of current or proposed is shown. Tables will compare the price

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paid by new investors with that paid by Selected quarterly financial data.There is no as well as the proposed remedy or the fact existing investors, and the net tangible requirement to provide selected quarterly that the deficiency has not been remedied, of the stock with the price paid financial data within an IPO registration should be disclosed. Off-balance-sheet by new investors. statement. However, the underwriters may arrangements that have, or are reasonably ask for quarterly financial data to provide likely to have, a current or future effect on Selected financial data. This section includes more information to potential investors, various aspects of the business should certain selected financial data for each of such as highlighting quarterly or seasonal also be disclosed. Contractual obligations the last five fiscal years or from the date variations in the company’s business. You should be shown in a table showing of the company’s inception, if shorter, and should discuss this with your underwriters future payments for certain contractual any interim periods that are included in the early in the process, as the accumulation commitments, such as operating or capital financial statements. An EGC is allowed to of this data may be time-consuming. If lease obligations or debt obligations. reduce the number of periods presented in included, your auditors would be required to Given the amount and varied nature of selected financial data to a minimum of two perform a review of this information. After the information that is required to be years corresponding to the earliest period the initial registration statement is declared included in the MD&A, you should become of audited financial statements included in effective, the company must be prepared to familiar with the SEC’s guidance in this area the registration statement. The purpose include selected quarterly financial data in well in advance of the initial drafting, as is to highlight certain significant trends in subsequent filings with the SEC. accumulation of information for all periods the company’s financial condition and its presented may take some time. In addition operations. Consequently, the data generally MD&A. The purpose of the MD&A is to to the SEC’s rules for MD&A, the SEC staff includes revenues; expenses, income (loss) provide management’s view of current has issued interpretive guidance in this area from continuing operations, in total and performance and expectations of the future and expects companies to follow these per share (in practice, many companies and to enhance disclosure, quality, and interpretations. Before companies begin disclose most of the details contained variability of earnings and cash flows. drafting their MD&A sections, it would be in their statements of operations); total beneficial to consider available guidance in assets; long-term obligations (e.g., debt, Management should provide a balanced Item 303 of Regulation S-K, SEC Release Nos. capital leases) and redeemable preferred explanation of the company’s operations, 33-6835, 33-8350, and 33-9144 and other stock; shareholders’ equity; and cash historical results, and financial condition, SEC staff guidance. dividends declared per share. A company and highlight both positive and negative may also include additional items that it trends that may reasonably affect the . This section requires believes would enhance an understanding company’s future. Management should quantitative and qualitative information of and highlight other trends in its financial also disclose critical accounting policies about the market risks to which the condition and results of operations. This and significant estimates made; any trends, company is exposed, with a distinction may include non-GAAP items, such as commitments, or events that may affect being made between instruments entered EBITDA, adjusted EBITDA, adjusted net working capital and commitments for into for trading or speculative purposes income, or other metrics the company capital expenditures; and the source of and those entered into for hedging and uses to assess its business. These items funds for those expenditures. Significant other purposes. must be reconciled to their nearest GAAP changes from year to year in line items on equivalent, and the company must provide the income statement should be explained, Categories of market risk include interest an explanation as to why it considers these and significant related-party transactions rate risk, foreign currency measures important to investors. should be discussed. Anticipated , price risk, and other and capital resource issues should be relevant market rate or price risks. This There is no requirement for a smaller highlighted, including future material capital disclosure may be provided in a variety of reporting company to present selected expenditures, significant payments due formats. Although the underwriters may financial data, although the underwriters on obligations, discretionary payments, request it, there is no requirement for a may request this information to acquisitions requiring cash financing, and smaller reporting company to present be presented. other commitments. Any identified material market risk. deficiency in short- or long-term liquidity,

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Description of business. This section is Management and certain security holders; •• For non-EGCs, a compensation discussion intended to provide the reader with material . These sections and analysis section that describes the information essential to the evaluation of provide background information about material factors compensation the company’s products or services and management personnel and major awarded to, earned by, or paid to industry. Disclosure should include, but is shareholders and their financial relationship executive officers in order to give the not limited to: with the company. Specifically, the company investor the information needed to must provide: understand the compensation policies •• The company’s historical development and decisions made by management, •• The names and ages of the directors, •• Plans for the future including how the specific compensation executive officers, and significant elements are determined •• Principal products produced or employees; their business experience; services provided their remuneration (including stock •• Tabular schedules of compensation for options, prequisites, and other indirect the named executive officers, the most •• Principal company markets and methods amounts); and any employment or notable being the summary compensation of distribution severance agreements table, the grants of equity-based awards •• The status of any announced new outstanding at the end of the year, and the •• A description of the involvement in certain products under development options exercised and vested schedules types of legal proceedings by a director •• Sources and availability of raw materials or and nominees for director or executive •• Tabular schedule of director compensation other necessary supplies officer during the past 10 years

•• Customer service and support

•• , trademarks, licenses, franchises, and concessions or other intellectual property held

•• Extent to which the business is or may be seasonal

•• Working-capital practices (e.g., if you are required to carry significant amounts of inventory to meet rapid delivery requirements or if you provide extended payment terms to customers)

•• Dependence on one or a few customers

•• Dollar amount of firm backlog, if applicable

•• Government contracts

•• Competitive conditions in the business

•• Research and development expenditures during the last three years, including those funded by others

•• Environmental matters

•• Number of employees

•• Export sales

•• Facilities, both owned and leased

•• Pending legal proceedings

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•• A description of all stock option and other supermajority voting requirements. Any As discussed earlier, smaller reporting employee benefit plans that provide clear, outstanding warrants or registration companies and EGCs are required to concise, and understandable disclosure rights should also be disclosed. For provide audited balance sheets, statements of all plan and nonplan compensation companies with significant outstanding of operations, cash flows, and changes in awarded to, earned by, or paid to the debt, a discussion of its debt securities and shareholders’ equity as of and for the two named executive officers and directors obligations should also be included. most recent fiscal years, including related footnotes. Note that, with the enactment •• The stock holdings of officers, directors, Underwriting. This section should explain of the FAST Act in 2015, the SEC now permits and any shareholders who beneficially the plan of distribution for the offering. EGCs to omit from registration statements own more than 5 percent of any class The various underwriters in the syndicate certain financial statements for periods of stock must be disclosed, as well as the number of that the issuer reasonably believes securities to be purchased by each. would not be required at the time of the If your management team or company contemplated offering. founders have not previously been The underwriters’ obligations, associated with public companies, the indemnification by the company, and Currently, the financial statements included amount of sensitive information that any material relationships between any of in a registration statement on Form S-1 must be disclosed in this area may not be the underwriters and the company should must be prepared in accordance with or known. You should consider preparing also be disclosed. In addition, any lock-up reconciled to GAAP. FPIs are permitted this information early in the registration arrangement, whereby shareholders to use International Financial Reporting statement drafting process to allow for agree not to sell their shares for a period Standards (IFRS) as an alternative to adequate review by all parties. of time after the offering, is described US GAAP. For circumstances in which here. See additional discussion osn lock- an auditor of a nonissuer performs an Related-party transactions. This section ups at the end of this chapter. audit in accordance with both generally includes information on transactions accepted auditing standards (GAAS) and with persons or entities connected to the Financial statements. The last section of the the standards of the PCAOB, AICPA AU-C issuer, such as family members, directors, prospectus will normally be the financial 700.44 now requires auditors to use the and officers or certain security holders. It statements. Form S-1 requires the following: form of report required by the standards should include the names of related parties, of the PCAOB, amended to state that such related parties’ interest in the transaction, audit was also conducted in accordance dollar amount of transaction, and the dollar •• Audited balance sheets as of the end with GAAS. amount of each related party’s interest. If of the last two fiscal years and audited related-party transactions are significant statements of operations, cash flows, Refer to Chapter 10 for financial statement within a company, they could come under and changes in shareholders’ equity requirements for foreign private issuers. intense scrutiny during the IPO process. and comprehensive income for the last Such transactions include loans by the three fiscal years, including footnotes to Audited financial statements of a business company to officers or directors (which must those statements. acquired or likely to be acquired may be be repaid prior to the IPO) and transactions •• Unaudited interim financial statements required to be included in the registration with promoters, if the company has been in (covering three-, six-, or nine-month statement. If your company has acquired existence for less than five years. periods subsequent to the company’s a business within the last three years, or latest fiscal year), if the registration an acquisition is probable, calculations will Description of securities. This section gives statement will not be filed/declared need to be performed to determine if the the par or stated value of common and effective within 45 days subsequent to acquisition is large enough to the preferred stock, explanations of dividend the company’s most recent fiscal year financial statements of the business to rights and voting, , preemptive end. Note that interim balance sheets be included in the registration statement. rights, and the transferability of each class for the current year are compared to the The size of the acquisition will determine of stock. It also describes any provision prior fiscal year balance sheet, while the the number of periods for which financial of the company’s charter or bylaws that statements of operations are compared to statements are required. In addition to would have the effect of delaying, deferring, the prior year corresponding period. including audited financial statements of or preventing a change in control of the an acquired business in the registration company, such as a classified board or

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statement, the company may also be limited requirements for draft registration •• Carve-out financial statements. Historical required to present unaudited pro forma statements. In addition to the FAST operations of a registrant may consist of financial information reflecting the business Act discussed above, in August 2017, a subsidiary or line of business that was acquisition. Separate financial statements the staff of the SEC issued guidance to previously part of a larger entity (parent). of equity method investees and financial streamline the confidential submission In many cases, the parent may not have guarantors may also be required if certain process, effectively eliminating the historically accounted for the subsidiary criteria are met. In 2019, the SEC proposed circumstances under which an issuer will or business line separately, and the changes to these requirements. Consult need to include interim period financial registrant may have relied on the parent with your auditor and attorneys to ensure statements in its initial draft registration for certain functions. It is critical that that you are following the most recent statement and subsequent confidential carve-out financial statements identify the disclosure requirements for acquisitions amendments. Issuers may omit from such appropriate assets and operations of the and dispositions. confidential draft submissions financials registrant and capture all costs of doing (and related MD&A disclosure) that they business. Determining the composition Other. Other information in the reasonably believe will not be required to of the carve-out financial statements registration statement includes tax be presented separately at the time they can require significant judgment and consequences, shares eligible for future launch (for EGCs) their IPO or publicly depends greatly on the registrant’s sale, identification of the law firms file (for non-EGCs) their registration specific facts and circumstances. In providing legal opinions, the identification statement. The age of financial statements determining what to include in the carve- of experts, and the availability of additional generally refers to the specific annual out financial statements, registrants information. and interim periods for which financial may need to consider issues such as the statements are required. Regulation parent’s existing reporting structure (e.g., Financial statements in a S-X, Rule 3-12, provides guidance on segments and reporting units), the nature registration statement such periods and on when the financial and size of the operations being carved In addition to the number of periods statements become stale out compared with the operations being required, one of the most critical steps for a (i.e., must be updated). retained by the parent, and the legal company undergoing an IPO is to determine structure of the carve-out. Registrants •• Predecessor financial statements. the appropriate financial statements to should also consider the information in A designation of “predecessor” is include in its registration statement with the the “description of business” and MD&A required when “a registrant succeeds SEC. Common considerations in identifying sections of their registration statements to substantially all of the business (or a the appropriate registrant financial and whether such information, along separately identifiable line of business) of statements include: with the financial statements, provides a another entity (or group of entities) and consistent, full, and transparent picture •• Recently organized registrant. Sometimes the registrant’s own operations before the for investors. the legal entity registering securities in an succession appear insignificant relative IPO is a newly formed company that will to the operations assumed or acquired.” Part II: Information not required succeed to the operations of an existing Because a predecessor’s historical in prospectus business before the effective date of the financial information is considered Part II of Form S-1 requires disclosure of initial registration statement. In such important to an investing decision, the expenses of issuance and distribution cases, a balance sheet of the recently when a predecessor is identified, the (excluding underwriters’ commissions), organized registrant is often required in registration statement must also present indemnification of directors and officers, addition to the financial statements of the the predecessor’s financial information and sales by the company of unregistered existing business. and reflect such information as if it were securities within the past three years. It the registrant’s. In other words, financial •• Age of financial statements. Financial also requires the filing of various exhibits, statements for both the registrant and statements of a registrant must meet the including the underwriting agreement, its predecessor should be presented as “age of financial statements” requirements articles of incorporation and bylaws, stock of and for all periods that are required by when the registration statement is option plans, plans, and certain Regulation S-X. declared effective, although recent contracts that are material to the company legislation and policy developments have (e.g., employment agreements, leases and

Strategies for going public 41 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

mortgages, and key supply contracts). statement and response letter when filed As the comment letter process nears Companies may request confidential and provide another comment letter. completion, you will need to decide when treatment of the material terms and This process continues until all questions to print the red herring. If the red herring provisions of certain contracts (e.g., pricing are resolved and may involve a number is distributed before all substantive SEC terms, royalty rates, milestone payments). of rounds of comments and additional comments are resolved, there is a risk that If granted by the SEC, such terms and amendments. The timing of the SEC review the SEC will require additional changes provisions are redacted and only the on the amendments can vary based on the to the registration statement, and a redacted version of the is available significance of the changes and the SEC’s redistribution of the red herring or a filing to the public. Obtaining confidential workload at the time but is often within 10 of a writing prospectus may need to treatment from the SEC is not an automatic business days. occur. Due to the risk of potentially having process and may involve substantial to distribute a revised red herring and the discussion with the SEC, which can delay The comment letters from the SEC and the associated costs, most companies do not the offering process. Concerns about public company’s response letters ultimately will print their red herring until substantially all disclosure of market-sensitive terms of be available publicly on the SEC website of the SEC’s comments have been resolved. material contracts should be addressed with following the offering. However, companies The cautionary language on the red herring your counsel early in the IPO process. can request to have portions of their is as follows: responses remain confidential. Some Post-filing activities regular areas of focus for SEC comment The information in the preliminary prospectus is not complete and may be changed. These securities may SEC review. Once the registration statement letters with respect to financial disclosures not be sold until the registration statement filed with is completed and the initial form has are as follows: the Securities and Exchange Commission is effective. been publicly filed with or confidentially This prospectus is not an offer to sell these securities, •• Non-GAAP financial metrics or submitted to the SEC, it will be reviewed and it is not soliciting an offer to buy these securities in operating data any state where the offer or sale is not permitted. by the SEC’s Division of Corporation Finance (DCF) to monitor compliance with •• Executive compensation discussion the applicable disclosure and accounting and analysis The red herring prospectus may be requirements. You should anticipate that distributed to the general public. Since it is •• Share-based compensation your IPO registration statements will receive created before the pricing of the offering, a full cover-to-cover review by both a legal •• Significant business acquisitions and pro it does not contain the exact offering price. and accounting examiner. The DCF’s staff forma financial information However, the SEC requires that a bona fide commonly finds items that it questions or estimated price range be disclosed. If the •• Trends in the company’s results of believes require additional explanation. final pricing is outside the range set forth operations described in the MD&A on the red herring that was distributed, you The SEC typically responds to the initial •• will have to determine any necessary legal filing within 30 days by issuing a comment requirements, which require a thorough •• Complex equity instruments letter that requests clarification and/or and sometimes complex analysis and seeks changes in the registration statement •• Clarification of accounting policies may require an additional filing and other and prospectus. actions. If this change occurs, you should •• Clarification of related-party transactions consult with counsel and refer to the SEC The company, with the assistance of its guidelines on this topic. You will need to reach agreement with the advisers, prepares a written response SEC in response to all comments before to each comment. The accounting and the registration statement can become legal responses are typically submitted effective. From time to time, contentious to the SEC, along with an amendment to issues with the SEC may be discussed via the registration statement that includes telephone. You should discuss these issues any changes made as a result of the with your legal advisers and auditors prior to SEC comments and other changes to conversations with the SEC. update the registration statement. The SEC will review the amended registration

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Filing and Printing. Early drafts of the Keep everyone involved in reading the registration statement are typically managed early drafts and do as much in-house by the company’s attorneys. After the initial editing as possible in advance of drafts have been discussed and edited, forwarding your draft to the printer. Art the document is usually sent to a financial for the inside cover of the prospectus, printer. Only a limited number of firms illustrations and related legends, pie specialize in financial printing. These printers charts, and graphs should be prepared will be alert to, and aware of, changing and approved in advance. The artwork SEC rules and regulations regarding must be just as accurate as the rest of prospectus and registration statement your prospectus and must be submitted presentation and format. The printers will to the SEC for review. For example, in also be sensitive to your need for complete a company’s registration statement, accuracy, timeliness, and confidentiality. The a color illustration of the company’s registration statement, including all exhibits, various products was presented. The is required to be filed on the SEC’s EDGAR SEC questioned why one of the depicted system. Financial printers are set up to products was not described in the accommodate the EDGAR filing process. prospectus and found that the product The SEC’s EDGAR system can be accessed was no longer being manufactured. The online at www.sec.gov. result was the artwork had to be redone and reprinted. Printing costs vary with the number of proofs and revisions made and the extent The printing of the final prospectus will of the revisions required between the be done after the registration statement original filing and the final printing. Once is declared effective by the SEC and the drafts are in printed form, involved pricing occurs. parties invariably notice details that were overlooked. Authors’ alterations are very expensive, as revisions are usually requested from the printer on a quick turnaround basis, often resulting in overtime charges.

However, revisions cannot be avoided, as they are essential and often reflect updates, clarifications, and other changes. With careful planning and organization, you can minimize revisions to save time, money, and frustration.

Strategies for going public 43 Chapter 7. Marketing the offering 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Use the quiet period to make some noise for your IPO.

The time period between the initial filing at the public offering price less a selling demand in the . Because of your registration statement and the concession. These selling group members the underwriting agreement is not signed, time the registration statement is declared do not share all the potential liabilities under the lead underwriter(s) and the syndicate effective by the SEC is referred to as the the securities laws with the underwriters members know how strong the demand waiting period or quiet period. This is a and, as a result, receive less compensation. is for the stock before they are legally misnomer, however, as there is a flurry of committed to purchase shares from the extremely important activity during this Selling the shares is really a group effort. company. So, as a practical matter, their time, occupying both the underwriters and The lead underwriter(s) “build the book,” risks in selling the shares are limited. the company. It is during this period that the keeping track of the outstanding indications After pricing occurs and the underwriting marketing effort takes place. of interest. Some participating underwriters agreement is signed, the underwriters will may actually sell two or three times be required to purchase the full amount The marketing process their commitment, and others may sell of their commitment (except under very After the registration statement is filed with none. The company’s participation in the limited circumstances). the SEC, if the full underwriting syndicate roadshow is the single most important has not already been identified, the vehicle for building momentum for the As indicated previously, the underwriters company and its advisers, after considering offering. If momentum is strong, the lead have a good sense of how many shares input from the lead underwriter(s), will select underwriters’ “book” may reflect demand can be sold before they enter into the additional underwriters who will participate that significantly exceeds the size of the underwriting agreement. Although the in the offering. The syndicate is formed to offering. The additional demand builds preliminary prospectus indicates the obtain a broad distribution of the stock and pricing tension and provides for continuing anticipated number of shares to be sold and to provide a balance between institutional and retail investors. It is also formed based on the strength of the research platform of the underwriters added to the syndicate.

In a firm commitment underwriting, the syndicate members participate with the lead underwriter(s) in assuming the risk of selling the stock. The lead underwriter(s) usually purchase the largest portion of the shares offered and bring into the group enough members to purchase the remainder. Each member makes a commitment to purchase a certain number of shares. When the SEC review process has reached a point that the company and the lead underwriter are sufficiently comfortable to print the red herring, the salespeople for the firms in the syndicate begin letting their clients know about the offering and furnishing them with copies of the preliminary prospectus. The syndicate may also include selling group members who are dealers that agree to purchase a specific number of shares

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the expected price range, the underwriters of the registration statement. It is very Rules promulgated by the SEC under find out during the quiet period just how important that everyone in the company be the 1933 Act provide a “safe harbor” for acceptable that price and offering size are to aware of these guidelines. From the time continued communications at any time investors. Both factors may change before a that you begin to work on the IPO process, by or on behalf of a nonreporting issuer registration statement becomes effective. it is strongly recommended that all press of regularly released factual business releases and interview requests be cleared information by the same employees who If your underwriters have done a thorough with your legal counsel and your lead have historically been responsible for job, any changes during this period will underwriter(s). Your key executives should providing such information to persons other generally reflect only changes in market also meet with company counsel and the than investors or potential investors and in conditions. However, it can still be difficult lead underwriter(s) to review what may and the same manner and form as historically to anticipate demand and price sensitivity may not be said publicly about the company, provided (Rule 169). This safe harbor does by investors until the deal is actually as failure to comply can lead to a halt in the not permit the publication or dissemination launched. Throughout the registration IPO process until the interest that has been of forward-looking information by process, a series of pricing discussions are stimulated (or perceived) has cooled down. nonreporting issuers. In addition, the safe likely to occur between you and the lead harbor does not permit communications underwriter(s) to set the initial price range The practical period of time covered by containing information about a registered and size of the offering and to apprise you of the guidelines extends from 30 days prior offering or communications released as any needed revisions. to the filing of the registration statement part of offering activities. The company to 25 days after the effective date of the should particularly not disclose anything The 1933 Act generally prohibits any public registration statement, when broker- as to valuation or projections of future offers of a security, either orally or in writing, dealers are no longer required to deliver performance. In addition, a specific rule before the initial filing of the registration a prospectus to potential investors (or 90 (Rule 135) provides a safe harbor whereby statement. In this context, what constitutes days if, following the IPO, the company is certain limited announcements regarding an offer has been defined very broadly by not listed on a stock exchange or certain a proposed public offering are deemed not the SEC and the courts. Any publicity effort, OTC markets). During this period, any to constitute an offering. In particular, Rule if deemed to create a favorable attitude publicity release can raise questions about 135 provides that a notice of a proposed toward the securities to be offered and to whether the publicity is part of the selling offering (e.g., a press release or a written stimulate the market artificially, may lead effort, even if the release contains no communication directed toward employees) to what is called “gun jumping” and result offer or even a mention of the company’s will not be deemed to be an offer if it states in possible sanctions or fines by the SEC in effort to sell securities. Even before this that the offering will be made only by a addition to delaying the offering. period starts, there can be problems with prospectus and the notice contains no communications that make any reference more than the information specified by There is an important exception to this to the contemplated offering. In addition, if the rule, including the amount of securities general rule prohibiting gun jumping. An company executives give interviews where you propose to sell, the proposed timing of issuer or its authorized representative may the ultimate date of publication is uncertain, the offering, and a brief explanation of the “test the waters” before or after filing a problems can arise. In those cases, the manner and purpose of the offering. registration statement by engaging in oral company must take reasonable steps within or written communications with qualified its control to prevent further distribution of Companies should also pay particular institutional buyers (QIBs) or institutions that the information during the 30-day period attention to what information is on are accredited investors to assess interest prior to filing the registration statement. their company websites (including any in a contemplated offering. Communications There have been many recent examples of hyperlinked information). Specifically, the to “test the waters” will not have to be filed companies having difficulty with the quiet company should avoid establishing a new with the SEC as free writing prospectuses period restrictions. Most notably, companies website or expanding its existing website, (discussed below). have granted interviews that were published other than in a manner consistent with past during the quiet period. This can require practice; avoid discussing the possibility The SEC, through various releases and the company to delay its offering until the of any issuance or offering of securities; rules, has established guidelines for the increased publicity surrounding the offering have internal counsel or outside counsel publication of information other than the has dissipated, and it may require additional review all information before it is posted prospectus, both before and after the filing filings with the SEC. on the company’s website; review its

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website and remove any incorrect factual computer data compilation. However, it conflict with the information found in information as soon as possible; avoid does not include a communication that at the registration statement. The rules posting “hype” regarding its anticipated the time of the communication originates pertaining to the free writing prospectus are financial performance; and avoid posting live, in real time to a live audience, and does complicated, and you should work with your or hyperlinking to third-party websites or not originate in recorded form or otherwise legal counsel to ensure compliance. reports, if any exist. The SEC will typically as a graphic communication, although review the company website and anything transmitted through graphic means. These Also allowed are short press releases under included therein that contains information definitions become very important in Rule 134. The Rule 134 “safe harbor” permits inconsistent with information in the dealing with the roadshow (described below) written communications that include registration statement or information and information distributed through social information with respect to the securities that could relate to the offering that may networking media. As a part of the briefing being offered (the title, amount being generate questions and result in potential that counsel provides to officials in the offered, offering price, etc.); proposed stock legal issues. company, these rules and their application, exchange listing; the type of underwriting, including to social networking sites, should names of underwriters, names of selling Restrictions on offers be reviewed. security holders, and a brief description Once you have filed the registration of the intended use of proceeds of the statement and the quiet period begins, Free writing prospectus offering, if then included in the disclosure unless a “testing the waters” or other To provide companies more flexibility in the prospectus that is part of the filed exception applies, you are forbidden from during the offering, in light of modern registration statement; the anticipated making any written offers, such as through communication methods and the wide schedule for the offering and a description sales literature regarding the offering, except dispersion of information, companies of marketing events (including dates); and by means of the red herring prospectus and entering an IPO can use what are called a description of the procedures by which a free writing prospectus (described below). “free writing prospectuses” during the quiet the underwriters will conduct the offering. Oral selling efforts (conversations between period after the registration statement that The purpose of the press release is to the company or its underwriters and the contains a price range that has been filed announce the offering in the press and to prospective buyers relating to information with the SEC. Free writing prospectuses are tell interested parties where they can obtain in the prospectus) are allowed, but you any written communication that constitutes a copy of the prospectus. must be careful even in oral conversations. an offer to sell or solicitation of an offer to If oral communications are taped for buy securities that are or will be the subject The roadshow broadcast or placed on a website, they can of a registration statement, other than Common during the quiet period is a two- or be considered a written offer in violation of the statutory prospectus included in the three-week series of meetings between the SEC rules. In addition, oral offers must be registration statement, or a communication company’s top executives and investors, consistent with the information contained after the effective date of the registration often referred to as a roadshow. The in the registration statement to avoid any statement that is accompanied or preceded roadshow often covers up to ten cities with imbalance of information presented to some by a statutory prospectus. key financial centers where institutional parties and not others. With the continued investors have indicated interest. In expansion in use of the internet and social Free writing prospectuses must include offerings where some shares will be sold media, the SEC has adopted rules to set a prescribed legend and most must be internationally, the roadshow can include the boundaries between oral and written filed with the SEC. In addition, free writing international stops. communications. Written communication prospectuses must be accompanied or is defined to be any communication that preceded by a physical copy of the most The roadshow is usually organized by your is written, printed, a radio or television recent statutory prospectus, although lead underwriter(s). The filing requirements broadcast, or a graphic communication. this requirement will be satisfied, in of roadshows are covered by an SEC Graphic communication includes all forms the case of an electronic free writing rule (Rule 433 under the 1933 Act). Most of electronic media, including audio and prospectus, if the latter contains an active roadshows will not be deemed to be free video recordings, facsimiles, digital storage hyperlink to the statutory prospectus. writing prospectuses and, therefore, will not devices, email, internet websites, computers, The free writing prospectus may contain need to be filed. Most are live presentations computer networks, or other forms of additional information that is not found and will be deemed not to be written or in the registration statement, but cannot graphic communications, even if they are

Strategies for going public 47 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

simultaneously webcast or transmitted with purpose is to demonstrate not only the Companies (together with the lead the live presentation into other locations. growth potential of your company, but also underwriter) must file a request for The slides that are generally used in the executive capacity of your team. acceleration of effectiveness of the presentations are also not deemed to be registration statement. When the SEC grants written or graphic communications if they An investor relations advisory services your request for acceleration, it issues an are transmitted simultaneously with the firm may assist you with independent and order declaring your registration statement live presentation. In contrast, prerecorded objective counsel on prospective investors. effective. The exchange (wherever the stock electronic roadshows for an IPO will be The ranking of institutional investors based will trade upon completion of the offering) deemed free writing prospectuses and on investment criteria and quantitative will also submit its approval of the company will have to be filed, unless the company modeling will assist in prioritizing for listing. See further discussion of the makes at least one version of the electronic opportunity and time during the investor closing in Chapter 8. roadshow available without restriction to outreach process. This will allow an issuer to any person (for example, by posting it on the be selective and precise when dealing with As soon as you receive notification of the company’s website), which many companies the institutional investment community. effectiveness of the registration statement do to avoid the filing requirement. and pricing occurs, the transaction team will Roadshows (like all other publicity during the work to allocate shares and confirm orders The roadshow’s purpose is to make offering), even if they do not have to be filed that investors placed, as well as complete presentations to key potential investors, with the SEC, are still subject to the antifraud the final prospectus. This prospectus will portfolio managers, and analysts. provisions of the securities laws. You should have the final pricing information included be very careful about what is said in the and the red herring legend removed. These meetings allow people to ask roadshow, and the company’s legal counsel questions about the company and the should review the roadshow presentation. Blue Sky and FINRA clearance. Even though material contained in the prospectus. The underwriters, legal counsel, and you file a registration statement with the The information covered during the investor relations advisory services firm SEC, you may need to comply with the “Blue presentations and the questions from may provide coaching on what questions to Sky Laws” of the states where the stock is participants will be similar to the earnings expect, how to answer them, and what you offered and sold. Blue Sky is the general and analyst calls expected after you go can and cannot say during those meetings. term applied to the states’ securities laws public. They are meant to build enthusiasm A roadshow can be very grueling, but it is an and regulations. and momentum for the offering. important component of the IPO process. Before, after, and between presentations, The name is derived from a court decision You should view these meetings as including at meals, you may meet with on the constitutionality of Kansas securities opportunities to present the story of your individual analysts who specialize in your regulations, which were aimed at preventing company to those people who may buy industry and can help build relationships “speculative schemes which have no your stock or influence the people who and coverage of your offering. The roadshow more basis than so many feet of blue sky.” buy. The company needs to be extremely can educate the financial community about Many states have adopted the Uniform cautious prior to making forecasts to your company and help generate and Securities Act as the model for their state potential investors and should discuss sustain interest in your stock through the blue sky laws, which facilitates the state the advisability of this with counsel well in period of the offering. filing process; however, some states, like advance of the roadshow. California, Illinois, , and Texas, have The start of the roadshow is timed to their own securities regulatory statutes Many of these key investors, portfolio coincide with the distribution of the red and regulations, adding complications managers, and analysts will be participating herring. Since the red herring used during to the process. In order to facilitate an in future quarterly earnings announcement the roadshow contains a price range, pricing orderly national distribution of securities conference calls (after you go public) and will discussions with the underwriters will have in offerings where the securities will be otherwise follow the company’s progress. If occurred prior to filing the amendment traded on national markets (and in certain you are meeting them for the first time, you containing the red herring. Final pricing other cases), Congress enacted the National should take care to convince them that you discussions occur after the completion of Securities Markets Improvement Act and your associates are people of ability and the roadshow. See further discussion of the (NSMIA) in 1996, which preempts from state integrity who will provide solid leadership roadshow in Chapter 7. registration public offerings of securities to for your company in the years ahead. Your be traded on national markets.

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Where NSMIA does not apply, you will be without additional shares being sold into the Visuals. Given today’s sophisticated subject to each individual state’s . To make sure that this occurs, the presentation packages and easy-to-produce laws and regulations. Many states do underwriters will most likely require that the graphics, audiences expect some visual not permit you to circulate a preliminary officers, directors, significant shareholders, backup in the form of slides or visual prospectus until you have filed their state and other listed management enter presentations to support statements about application forms for registration or notice. into a lock-up agreement whereby such the company and its financial performance. Thus, these filings, which are generally shareholders agree not to sell or otherwise While the presentation should not be handled by underwriters’ counsel, should transfer their shares for a certain period of based entirely on such visuals, they can be be completed and filed with the applicable time. The duration of the lock-up agreement used judiciously to make the presentation states when the registration statement is is typically 180 days for an IPO. clear and interesting. Anticipate potential filed with the SEC. In contrast to the SEC, problems and have backup alternatives which focuses on disclosure only, some As you prepare for the registration immediately accessible. states do evaluate the “merits” of the process, you may want to consider offering and its suitability for investors your communication strategy with your Demonstration. A demonstration of your in their state. The lead underwriter will employees and management team about company’s product or service can save a generally advise you of the states in which these types of agreements. lot of explanation and will emphasize its the underwriters wish to sell the securities importance much more compellingly than and the amount of securities to be qualified Making the best presentation a verbal description. This is especially true in each state. When you and your top executives present if your product is technologically advanced. your company and appear before analysts If the product is too big or the service is too SEC regulations also call for clearance by and investors, your company will likely be complex for a demonstration, the use of FINRA of the amount of the underwriters’ judged in large measure on the strength videos or other visuals showing it being used compensation and other terms of the of your performance. How clear is the by customers may be effective. offering. FINRA reviews not only the presentation? How well organized is underwriting discount, but also other everyone? Can you take the heat of Preparation. Rehearse your presentation compensation that the underwriters tough questions? as much as possible. Each time, executives are deemed to receive in connection will discover a weakness or problem with the offering (such as options or While you can expect guidance and that should be corrected. Also practice warrants, finders’ fees, and reimbursement suggestions from your underwriters, answering potential questions; use team of expenses normally borne by the attorneys, and others on how to conduct members (counsel and underwriters) to underwriters) to determine whether the yourselves, you should be sure that you are ask tough questions and then rehearse underwriting arrangements are fair and comfortable with the presentation—both your answers. Videotaping the rehearsals reasonable. It is mandatory to file the what is in it and how it is presented. This will facilitate spotting the problem registration statement with FINRA within is your opportunity to tell your company’s areas. The management team’s formal one business day of filing with the SEC if the story, and you will have to execute presentation should not last longer offering is not exempt from filing with FINRA operationally to meet the expectations than about 30 minutes. You should also (IPOs are not exempt). This allows sufficient that you and your management team have allow for up to 30 minutes of questions time for FINRA clearance and possible set through these presentations and the following the presentation. changes in the underwriting agreement that disclosure in the prospectus. FINRA may require. Choreography. Each member of the executive Lock-up agreements. At the time of filing the team should have a specific role in the registration statement, the underwriters presentation. It could be that the CEO will want to make sure that highly visible provides a summary and an introduction employees and significant, existing to the company and his or her vision for its shareholders of the company do not sell future. Other members of the team would their shares for a period of time after the provide more detail on marketing, sales, IPO is completed. This is generally done to production, and finances. Typically, only allow an orderly trading market to develop two or three of the company’s executives (including the CEO and CFO) present during the roadshow.

Strategies for going public 49 Chapter 8. Closing the deal

50 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

You have come a long way—stay focused as the IPO rounds the corner.

final pricing, agree on the selling price to the adverse changes in market conditions occur public. The lead underwriter and the other or the registration process reveals serious The closing of a public offering is underwriters participating in the syndicate problems at the company of which the not a simple affair, as it is governed also legally agree to their participation in underwriters were previously unaware. The by both the underwriting industry’s the underwriting. lead underwriter has substantial motivation traditions and government for completing the offering because it has regulation through the SEC. It is The agreement among underwriters invested considerable time and expense in important that everything be done authorizes the lead underwriter to sign investigating the company’s business and properly, so as not to risk wasting the underwriting agreement, specifies the affairs, helped to prepare the registration the long and costly preparation terms on which the other underwriters will statement, and organized a selling work and damaging the public participate in the syndicate, and spells out syndicate. The public perception of a failed perception of your company. the responsibilities of the lead underwriter IPO is damaging to the reputations of both to manage the offering. the company and the lead underwriter.

Signing the underwriting agreement Immediately after the pricing of the offering, Should the market cool significantly You do not enter into a written underwriting the underwriting agreement is signed by during the waiting period, however, it is agreement generally until the end of the IPO the company, the lead underwriter, and the not unusual for an IPO to be postponed process, after the registration statement selling shareholders, if any. The agreement or canceled after the registration process is declared effective by the SEC and the includes the offering price of the stock; starts. If the market is not willing to offering price has been determined. commissions, discounts, and expense accept the originally anticipated price allowances; the method of underwriting; range or to absorb an offering as big as Until that time, you have only a draft representations and warranties; and an the one contemplated, the company may copy of the underwriting agreement indemnification agreement. It also sets a be faced with the choice of accepting an (which has been negotiated by your number of conditions to the underwriters’ offering of unsatisfactory size or price, attorneys and the underwriters’ counsel) obligation to complete the offering (for postponing the offering until the market and an oral understanding with the example, that there is no material adverse improves, or even abandoning the IPO underwriters. The oral understanding development impacting the company altogether and pursuing other financing with the underwriters is not a legal between pricing and closing, no material options. In addition, if the final size or commitment by either side to proceed adverse development in financial markets, pricing of the offering is outside the range with any predetermined transaction. and no suspension in trading of securities originally on the distributed red herring generally on exchanges in the United prospectus, it may be necessary to Timing becomes quite important as the States). Until the underwriting agreement recirculate a new red herring prospectus effective date of the registration statement is signed, the company has no legal right to with an updated price range. approaches. The end of the roadshow compel the underwriters to proceed with and the completion of the bookbuilding the IPO. Once the underwriting agreement Transfer agents and registrars process (resulting, it is hoped, in significant is signed, the company files a Rule 424 You will need to appoint a transfer agent public momentum for the offering) are final prospectus with the SEC, actual sales and registrar before the closing of your IPO. targeted to occur at about the same time commence, and the auditors give the Stock registration and transfer services as the SEC review process is completed. underwriters an initial comfort letter as of are provided by commercial banks and The registration statement is then declared the pricing date. trust companies. Companies often appoint effective by the SEC. On that day, the lead the same organization to provide both underwriter and the board (or the pricing As a practical matter, once preparation services. Furthermore, the same firm can committee of the company), which is of the registration statement reaches an assist during the IPO process by acting responsible for reviewing the underwriter’s advanced stage, underwriters rarely refuse as the custodian and/or paying agent in report of indications of interest and to complete the offering, unless significant connection with the sale of securities by allocation of shares, as well as agreeing on any selling shareholders.

Strategies for going public 51 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

For most companies undertaking an IPO, the eligibility requirements. The DRS enables will change hands daily. Not only is this question of transfer agents and registrars the registered shareholders to maintain an administrative burden, but transfers is one of both expediency and regulation. and transfer their shares on the books and must be handled with absolute accuracy, Both the NYSE and Nasdaq require that all records of the transfer agent in book-entry because any mistake can lead to claims listed securities be eligible to participate form instead of a physical . against the company and possible financial in the Direct Registration System (DRS) Participating in DRS can save costs involved liability. An independent transfer agent offered by the Depository with replacing stock certificates that are lost, and registrar can assume responsibility for (DTC). In order for any securities to become stolen, or destroyed. making sure that mistakes in stock transfers DRS-eligible, DTC requires that the issuer do not occur. Further, as a practical matter, appoint a transfer agent who is a participant A public company will usually have a your agreement with the underwriters may in DTC’s Fast Automated Securities Transfer large number of shareholders and, as require such independent agents. program, as well as meet certain other regular trading develops, shares likely

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The transfer agent’s primary underwriter and its counsel, the registrar underwriting agreement; a certificate responsibilities are to handle the transfer and transfer agent, and the auditors. from the secretary of the company, which, of shares from one person to another Among the actual exchanges that occur, the among other things, certifies resolutions and to maintain the stock books that underwriters wire the company immediately of the company; a bring-down of the are the official records of the names and available funds for the net proceeds of the auditors’ comfort letter; and legal opinions addresses of the company’s shareholders. offering, the registrar and transfer agent and negative assurance letters. After all Ancillary responsibilities assigned to record the stock, the stock sold is credited closing documents have been delivered, the transfer agents may include disbursing to the underwriters’ accounts through DTC, underwriters will wire funds to the company. cash dividends, mailing annual reports counsel provide their legal opinions, and Once receipt of the wire is confirmed, the and proxies, distributing stock dividends, the auditors give the underwriters a second company, the underwriters, their respective responding to shareholder inquiries comfort letter as of the closing date, referred counsel, and the transfer agent will relating to their shares, and keeping to as the bring-down comfort letter. participate in a brief closing call, after which custody of unissued stock certificates. the company typically issues a press release Preparing for the closing day announcing the closing. Registrars are responsible for making sure There are a few requirements that every that stock is not over-issued in excess of company would do well to prepare for in Countdown to losing EGC status the number of authorized shares. They order to ensure a smooth closing. The first If you qualified as an EGC, closing marks countersign all stock certificates to make is a call between the underwriters, the the beginning of a countdown toward the sure the number of shares issued is not company, and their respective counsel, date when you will lose EGC status. Under greater than the number surrendered for which is referred to as a bring-down due the JOBS Act, an issuer who qualifies as an cancellation, and they keep active records diligence call. This call is an opportunity for EGC will continue to be viewed as such until, of all the shares that are outstanding. the underwriters to ask the company a series among other things, the end of the fifth year Registrars also keep records of the of largely pre-distributed questions that are after the first sale of the issuer’s common certificates that have been canceled, lost, or aimed at determining whether any material equity securities (for example, an IPO). destroyed, as well as those that have been events have occurred since the most recent issued, so that at any given moment they diligence call (typically, the call immediately have an exact record of shares outstanding. prior to pricing) that might affect the IPO Part of their role is to cross-check the work or the company. Such events may include Other transactions could trigger the of the transfer agent. new litigation involving the company, a countdown to losing EGC status. For material development in the company’s instance, an offering of securities to See also Appendix D: A timetable for going business or expectations regarding its future your employees as part of an public, for steps taken by a transfer agent financial results, or a previously unforeseen employee stock plan that is and registrar in the illustrative IPO timeline. regulatory issue arising. registered on Form S-8 would likely qualify as a sale of common equity. The closing Assuming no new issues arise on the This is an important consideration Although the company shares will begin bring-down due diligence call, the morning for EGCs that become public by way trading the morning after pricing, the closing of the closing day is characterized by legal of a spin-off, rather than an IPO. marks the conclusion of the IPO. Unlike a formalities and the exchange of documents. firm commitment offering, in a best-efforts Your counsel will check the SEC’s website offering, the closing will occur after all the to confirm that no stop orders have been In practice, your counsel may schedule a shares have been sold, or the company and issued on your registration statement and pre-closing with the underwriters’ counsel underwriters agree that selling efforts can also work with the underwriters’ counsel to one day before the scheduled closing be concluded. confirm that both sides have received final date to ensure that all necessary steps copies of all closing documents. Such closing have been taken and all documents and The closing is a formal meeting to exchange documents typically include bring-down signatures are ready to be delivered. Often, executed documents, including certificates good-standing certificates; a certificate executed documents will be exchanged and legal opinions. The closing is usually from officers of the company confirming the the day before closing “in escrow” to help attended (in person or by phone) by continued accuracy of the representations ensure a smooth closing. the company and its counsel, the lead and warranties of the company in the

Strategies for going public 53 Chapter 9. After you go public 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

The transition from a private to a public company marks the entrance to a dramatically new compliance and regulatory environment.

Underwriters are also allowed to engage in research departments or groups of “over-allotment,” whereby more shares than analysts that continually study the progress After going public, you will want initially purchased by the underwriter under of public companies. In addition, several to maintain the financial the underwriting agreement are offered and independent analysts also follow specific community’s interest in your sold. This practice automatically creates a industries, as well as companies within company. It is critical that you “short” position, as the underwriters have those industries. The role of an analyst develop a strong relationship with then sold shares they do not own. The short is to assist investors in evaluating and the key members of the financial position may be subsequently covered by interpreting the financial performance of community (brokers, analysts, the stock resold by speculative buyers. In companies. You will likely run into analysts etc.), as they will play a significant addition, the underwriting agreement in a during your roadshow, so knowing who role in sustaining the market’s firm commitment offering often gives the they are may prove to be helpful. interest in your company. underwriters an option to purchase more shares from the company for the purpose Appearances before societies of analysts of covering over-allotments. This option is can also be an integral part of your investor Trading and aftermarket support referred to as a “” option, as it was relations program. Analysts are in a position As part of its aftermarket support for your first used in an offering by the Green Shoe to recommend to investors the purchase stock, your lead underwriter will typically Manufacturing Company. A typical over- or sale of your stock. Analysts that develop be the principal market maker. Your allotment provision enables the purchase of an interest in your company may conduct underwriter should stand ready to purchase an additional number of shares equal to up management interviews and visit your or sell your company’s stock in the inter- to 15 percent of the total shares offered in company to gather additional information. dealer market. Upon the initial sale of your the IPO. The over-allotment option provides You should welcome opportunities to stock, some buyers may purchase shares flexibility to the underwriters to fine-tune present to analysts, but always ensure the with the intention of getting in for the initial the distribution and to help create an content of your presentation is limited to price rise and then selling. These buyers will orderly aftermarket. public information. likely sell your stock the same day as the IPO or a few days after. This is typically referred Additionally, working with an investor As a public company, in general, you will to as “flipping.” Some flipping is good in relations advisory services firm can help timely disclose material information (both an IPO because it provides for additional you understand the subtle nuances of each positive and negative) to investors unless supply in the aftermarket. But if too much potential investor’s investment criteria. An you have a legitimate business reason occurs, flipping could adversely affect the analysis of trading in real-time will for keeping the information confidential. aftermarket and force a stock’s market price give you the most current shareholder data You should consult with legal counsel below its original IPO price. One of the key available. By understanding how the former, for guidance in this area, as the legal responsibilities of both the lead underwriter current, and potential investors view the requirements are complex and very fact- and the syndicate is to find the proper mix company and the management, you can specific. You may be required to file a Form of short-term and long-term investors. deal with the investment community more 8-K Current Report with the SEC to disclose efficiently and effectively, and cultivate this information. See further discussion To stabilize the market and prevent or long-term investment partners rather than on Form 8-K requirements in the 1934 Act delay a decline in the stock’s market price, short-term traders. discussion below. the lead underwriter, acting on behalf of the syndicate, may enter bids to buy the Your relationship with the Public disclosures are generally made stock from investors wishing to sell shortly financial community through SEC filings, press releases, and after the IPO. This process is referred to Investment banking firms and retail investor presentations. SEC Regulation as stabilization. Stabilization is a highly brokerage houses maintain investment FD (which stands for “Fair Disclosure”) is technical practice allowed by the SEC only when certain requirements are met.

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an investor relations officer who will be annual shareholder meeting is a process responsible for (1) responding to requests that can be filled with complexities of all for information from analysts, the financial kinds—from complying with regulatory press, and other interested parties; requirements to navigating industry and (2) reviewing all proposed content challenges to flawlessly executing the to be disseminated publicly, including mechanics. There are activities that require press releases, speeches, and interview coordination among your transfer agent, the material. Only certain employees should SEC, stock plan administrators, and other be authorized to speak with members of third parties. You should seek the advice of the financial community. Public companies your transfer agent, as many offer services generally have a disclosure committee. The to assist you with the annual meeting. committee’s purpose is to review public disclosures prior to their issuance. The Success at your first annual meeting committee will normally be composed of requires an understanding of those members of senior management (including investors who are eligible to vote. legal counsel) as well as employees from key Depending on the amount of time and areas of the organization. trading activity since your IPO, your voter base may have evolved. Comprehensive secondary market stock surveillance can help you separate institutional trading from Regulation FD applies to social retail trading, and gives you the ability to media channels in the same way that break out voting rights from investment it applies to company websites. the guidance that must be followed with rights and identify the current positions of Companies should be careful to respect to such disclosures. To make sure large investors, their investment styles, and advise their officers, directors, and that you have satisfied your obligations of portfolio turnover rates. employees that posting on social full disclosure under SEC Regulation FD, you media could implicate Regulation FD. should select the method that best provides Key sources of ownership information for broad and nonexclusionary distribution include (1) your transfer agent and equity of information to the public in light of your plan administrator(s); (2) public filings, Websites and social media channels particular distribution circumstances. You including SEC Form 13F and Schedules 13D may serve as appropriate channels to should never release material nonpublic and 13G; (3) voluntary disclosures via your disseminate public information if investors information to individuals who may rely investor relations dialogue; and (4) stock have been made aware that they can locate on the information to buy or sell stock. activity surveillance firms. the information on the respective channel. Nonpublic material information may However, issuer communications through include, among other things, new earnings You also should become familiar social media channels require a careful guidance, confirmation of previously with additional influencers, including Regulation FD analysis. Public companies issued earnings guidance, and changes in institutional proxy advisory and corporate with a social media presence must manage trends in the issuer’s business or industry, governance rating agencies. Also, many these channels and have clear guidelines for regulatory developments, and merger major institutional investors maintain corporate and personal accounts. and acquisition activity. If the company dedicated internal corporate governance or its representatives disclose material and proxy voting groups that may operate Your first annual shareholder meeting nonpublic data, SEC Regulation FD requires in coordination with the investment and proxy matters simultaneous or prompt public disclosure management side of their organization Your first annual shareholder meeting is via Form 8-K. (i.e., the portfolio managers and analysts a major event for both your company and who are the primary focus of your investor your shareholders. A successful annual To ensure appropriate, adequate, and timely relations dialogue). A proxy solicitation meeting will support key corporate goals, disclosure, you should consult with legal firm can help you to understand the whether that is obtaining approval for counsel to adopt written disclosure policies relationships between these various parties specific corporate actions, election of and procedures that are consistent with and influencers—how they impact your directors, or addressing issues relating Regulation FD. You may want to designate unique ownership base (as it continues to to executive compensation. Planning the

Strategies for going public 56 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

evolve over time)—and share with you best dividends, stock splits, or repurchases. A smaller reporting company, as defined practices for investor engagement, proxy Additionally, stock compensation plans by Item 10(f) of Regulation S-K, is subject and corporate governance messaging, for your employees may have complex to fewer disclosure and information and proxy solicitation. These firms also formulas and require continuous requirements. These scaled-down have capabilities in “projecting” the vote on monitoring to ensure compliance. requirements include a less detailed potential future voting issues, which many description of the company’s business, no companies consider to be an important Compliance with securities laws requirement to present selected financial element of their due diligence prior to Once you are a public company, you are data, a condensed management discussion committing to particular courses of action. subject to a number of federal securities and analysis, and no requirement for laws. You, your officers, and your directors qualitative and quantitative disclosure As a company matures, there is typically should meet with your legal counsel regarding market risk. In addition, under a shift in the representative ownership to determine your obligations and the JOBS Act, EGCs are subject to reduced profile. At the time of an IPO, the ownership responsibilities under these laws. This disclosure requirements for a limited period profile is typically composed of a majority of section briefly addresses some of the key of time, including no selected financial data founders and venture capitalists, shifting to obligations and responsibilities below. for any period prior to the earliest audited a majority ownership However, securities laws are extremely period presented in connection with an IPO. over time. Companies that retain majority complex. Therefore, your legal counsel See table 9-1 for the 10-K filing deadlines. As founder/insider control following the should be involved in ensuring that your of June 2018, a smaller reporting company initial IPO may be relatively immune from company complies with the applicable laws. may also qualify as an accelerated or large outside shareholder pressure in the early accelerated filer. stages. That said, with board independence The 1934 Act requirements and increased disclosure of As part of the IPO process, your stock is Form 10-Q. A domestic registrant must your corporate activities, you will want to listed on a stock exchange, and a Form file quarterly reports on Form 10-Q (other become familiar with shareholder influences 8-A must be filed with the SEC to register than with respect to the fourth quarter of and voting processes, and how they may the class of securities under the 1934 each year). These reports contain quarterly impact your activities. You should consult Act. Form 8-A is a short document that unaudited financial statements that must with your legal advisers and proxy advisers effectively incorporates portions of the 1933 be reviewed (but not audited) by an auditor about these matters. Act registration statement. The 1934 Act prior to the filing of the Form 10-Q and subjects your company to certain legal and management’s certifications regarding Voting results from your annual reporting requirements, some of which are the accuracy of the financial statements. shareholder meetings must be made described below. These reports also contain management’s public via an 8-K filing with the SEC discussion and analysis of financial condition (discussed later in this chapter) within four Periodic reporting requirements and the results of operations and narrative business days of the meeting. Form 10-K. A domestic registrant must disclosures in the event that specific file a Form 10-K report annually with the reportable events (e.g., legal proceedings, These are readily accessible to investors, the SEC. Form 10-K is designed to provide a material changes in previously disclosed media, and potential activists. Poor voting continuing update of the disclosures in your risk factors, changes in securities, and results may invite additional scrutiny of registration statement. Consequently, it will defaults on senior securities) have occurred your company and potentially subject it to contain information about the business, during the quarter. The Form 10-Q is additional activism at future meetings. For risk factors, management, the latest audited due at different dates depending on your these reasons, all voting matters must be financial statements, management’s accelerated filer status. See table 9-1 for the attended to carefully. certifications regarding the accuracy of the 10-Q filing deadlines. financial statements and the effectiveness of Other aftermarket activities the company’s ICFR, and MD&A of financial As a newly public company, you will condition and results of operations. The due be required to make sure your stock dates for the Form 10-K annual report vary records are in order. Keeping track of depending on your accelerated filer status. trades and issuances can be a tedious task. But it is a critical one, as ownership information on certain dates may affect corporate activities, such as

Strategies for going public 57 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Table 9-1. SEC filing deadlines •• Costs associated with exit or disposal activities SEC Form SEC Form SEC Form 8-K IPO Filer 10-K 10-Q considerations •• Material impairments

Large 60 days after 40 days after Generally Not considered a •• Notice of delisting or failure to satisfy accelerated filer end of fiscal end of fiscal four business large accelerated a continued listing rule or standard or year quarter days after filer for the first transfer of listing occurrence 10-K filing after of event, an IPO* •• Unregistered sales of equity securities with some •• Material modifications to rights of exceptions security holders

Accelerated 75 days after 40 days after Generally Not considered •• The submission of matters to a vote of filer (including end of fiscal end of fiscal four business an accelerated security holders emerging year quarter days after filer for the first growth occurrence 10-K filing after •• A change in the registrant’s auditor companies) of event, an IPO* •• The nonreliance on previously issued with some financial statements or a related audit exceptions report or completed interim review

All other filers 90 days after 45 days after Generally Filing deadlines •• Changes in control of the registrant (nonaccelerated end of fiscal end of fiscal four business remain the same filers, certain year quarter days after for first 10-K •• The departure of directors or smaller occurrence filing after an IPO principal officers reporting of event, •• Shareholder director nominations companies, with some emerging exceptions •• Director elections growth •• Principal officer appointments companies) •• Compensatory arrangements of

* An issuer will not be considered a “large accelerated filer” or an “accelerated filer” until it has been subject to certain officers the reporting requirements of Section 13(a) or 15(d) of the 1934 Act for at least 12 calendar months and has filed at least one annual report pursuant to Section 13(a) or 15(d) of the 1934 Act. •• Amendments to articles of incorporation or bylaws

Form 8-K. Form 8-K must be filed (or furnished, as applicable) within four business days of •• A fiscal year change a reportable event, subject to certain exceptions (as indicated below). If the event occurs on a Saturday, Sunday, or holiday on which the SEC is not open for business, then the •• A temporary suspension of trading under four-business-day period will begin to run on the first business day thereafter. Failure to file the registrant’s employee benefit plans certain Form 8-Ks will result in the issuer losing its eligibility to use the short form registration •• Amendments to the registrant’s code statement on Form S-3 for a period of 12 months. The reportable events include: of ethics

•• Entrance into, or termination of, a material definitive agreement •• Waiver of a provision of the code of ethics

•• or receivership •• Asset-backed securities triggering events

•• Mine safety reporting •• Regulation FD disclosure

•• Completion of a significant acquisition or disposition of assets •• Other material events •• Results of operations and financial condition Of the Form 8-K reportable events listed •• Creation of a direct financial obligation or an obligation under an off-balance- above, disclosure of significant acquisitions sheet arrangement or dispositions is one of the most •• Triggering events that accelerate or increase a direct financial obligation or an obligation cumbersome. Companies are required under an off-balance-sheet arrangement to initially report the consummation of a

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furnishing a report on this form under Item 7.01 (Regulation FD Disclosure) or electing to file a report on this form under Item 8.01 (Other Events) solely to satisfy its obligations under Regulation FD . . . must furnish such report or make such filing, as applicable, in accordance with the requirements of Rule 100(a) of Regulation FD.” However, if the Form 8-K is used to disclose material, nonpublic information in accordance with Regulation FD, then the Form 8-K must be filed “simultaneously” for an intentional disclosure and “promptly” for a nonintentional disclosure. Promptly is defined to mean “as soon as reasonably practicable” but no later than 24 hours after the disclosure is learned of.

Section 404 of SOX. Section 404 of SOX requires that management and the auditor attest to the effectiveness of the ICFR of the company and issue a report in accordance with the PCAOB standards. Item 308 of Regulation S-K provides that a company’s annual report on Form 10-K must contain a report of management on the company’s significant business acquisition within four retrospectively adjusted for a material internal control over financial reporting and business days. Financial statements of the change. Such material changes may an independent auditor’s attestation report acquired business and pro forma financial include those for the initial adoption of on management’s assessment. An EGC may information may be required to be filed certain accounting pronouncements, or elect to be exempt from SOX 404(b)—the depending on the level of significance of the classification of a component of your requirements for external audit attestation the acquisition. You may want to consult business as a discontinued operation. on internal controls over financial reporting. with your auditors or accounting advisers If you plan to file a new registration when acquisitions are possible to assess statement after you filed interim financial Item 308(c) requires that a company the need for financial statements of the statements for the period of such a change, disclose, on a quarterly basis in its acquired entity early in your due diligence you generally must file updated financial quarterly report on Form 10-Q (or annual process. Such financial statements and pro statements and other financial information report on Form 10-K in the case of the forma financial information may be filed (e.g., MD&A, selected financial data) to fourth quarter of the company’s fiscal by amendment to the Form 8-K up to 71 reflect the retrospective adjustments for year), any change in internal control days after the initial Form 8-K reporting the the periods before adoption of the change. over financial reporting that occurred acquisition was required to be filed. If this situation occurs, you would typically during the most recent fiscal quarter that file the updated financial statements and materially affected, or is reasonably likely additional information on Form 8-K. to materially affect, the company’s internal In addition, some material changes may control over financial reporting. occur after the filing of a Form 10-K Filings to satisfy Regulation FD. For Form and require the financial statements 8-K filings designed to satisfy Regulation in the previously filed Form 10-K to be FD, Form 8-K states, “[a] registrant either

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Table 9-2. Section 404 filing requirements

404(a) reporting 404(b) reporting Filer An EGC may comply with reduced requirements requirements executive compensation disclosure Large accelerated Yes Yes Both the 404(a) and and is not required to calculate and filer 404(b) reports are disclose the ratio of the CEO’s not required for the compensation to the median Accelerated filer Yes Yes first annual filing compensation of all employees. Nonaccelerated filer Yes No after an IPO, but they are required Smaller reporting Yes No for all annual Foreign Corrupt Practices Act (FCPA). company filings thereafter, if The FCPA applies to issuers of securities Emerging growth Yes No applicable. registered pursuant to the 1934 Act. The company FCPA deals with certain foreign payments and imposes a statutory requirement for such companies to: The section 404 reports are due at the same time as the related annual report (Form 10-K) in accordance with the schedule outlined in table 9-2. •• Maintain reasonably accurate detailed records of their transactions. XBRL requirements. All filers that use GAAP, including smaller reporting companies, and •• Maintain a system of internal accounting all foreign private issuers that prepare their financial statements in accordance with IFRS control that will be sufficient to reasonably as issued by the International Accounting Standards Board (IASB), are required to file assure that (1) transactions are executed an exhibit that contains their financial statements in an interactive data format, called in accordance with management’s eXtensible Business Reporting Language (XBRL). XBRL allows investors and others to authorization, (2) the transactions are pinpoint facts and figures by recognizing the information in the interactive data format recorded properly, (3) access to assets is through the use of searching software and analytical tools. New registrants will be required adequately safeguarded, and (4) there is to submit an interactive data file for their first periodic report on Form 10-Q or Form 10-K adequate accountability for the assets. or first annual report on Form 20-F or Form 40-F, if applicable. An XBRL exhibit is not required in an IPO filing. The FCPA was enacted after widespread publicity about “sensitive payments” by Proxy statements and annual reports . Before you hold a shareholders’ meeting or seek a companies to government officials, foreign written shareholder vote on a matter, you must send out an information statement or, companies and governments, suppliers, if you are soliciting proxies, a proxy statement. If it is an annual meeting and directors customers, and others. Even without the will be elected, you must also send an annual report (often a glossy report updating the existence of the FCPA, companies (both shareholders about the company and its activities and financial results for the past year). private and public) would want to maintain The SEC dictates the form of the proxy card and the content of the proxy statement (and adequate records and internal controls. any other proxy materials), which in some cases must be filed with the SEC 10 days before With the FCPA, companies and their they are sent or given to shareholders. The SEC also has rules governing the annual employees are subject to legal sanctions report. The Dodd-Frank Act contains provisions that affect proxy statements for public for noncompliance. companies. The current SEC rules require companies to include in proxy statements the nonbinding shareholder vote to approve compensation of executive officers and to In addition, the FCPA contains strict conduct a say-on-pay vote. prohibitions against bribery of foreign officials in order to obtain or retain An EGC is exempt from the requirement to hold nonbinding advisory shareholder votes business. Foreign officials can include on executive compensation arrangements for one to three years after it no longer certain individuals in state-owned qualifies as an EGC. commercial enterprises.

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Beneficial ownership reporting. Any person Some companies have “window periods” or entity that beneficially owns, directly during which they encourage insiders who or indirectly, more than 5 percent of the want to buy or sell stock to do so. Window outstanding shares of a class of stock must periods are considered to be periods of file with the SEC a statement containing time when all material information known certain information related to such person’s by employees is public. They are typically or entity’s ownership of such shares. This defined as the period shortly after a public can be done, depending on the filer’s status announcement of material events, such as and intentions, on a Schedule 13D or 13G. earnings releases. There are advantages and disadvantages to using window periods; you Trading activities by insiders. Certain insiders, should discuss them with your legal counsel consisting of shareholders beneficially before finalizing your policy. holding more than 10 percent of the stock and all directors and certain officers Regulation BTR (Blackout Trading Restriction) (defined in Rule 16a-1(f) of the 1934 Act), of the SEC, adopted pursuant to section must file with the SEC reports regarding 306(a) of SOX, generally prohibits directors their stock holdings. An initial report must and executive officers from trading company be filed by the time the company’s 1934 Act stock acquired in connection with service registration becomes effective. Any person or employment as a director or executive who subsequently becomes subject to officer when participants in company this requirement must file an initial report stock and plans are temporarily within 10 days of acquiring that status. prohibited from trading. Regulation BTR was disclosing these forward-looking statements Once the initial report is filed, any changes enacted to address the perceived abuses due to legal actions asserting companies in beneficial holdings (such as through a from the case, where employees were failed to meet these projections. The purchase, sale, gift, exercise of options) prohibited from selling company stock in Reform Act provides a safe harbor for these must be reported before the end of the their company stock plans, but executives statements. The Reform Act safe harbor second business day following the change. were not. does not apply in connection with certain The related filing requirements are complex, transactions, such as IPOs. as are the definitions of beneficial ownership Trading on inside information of shares under section 16 of the 1934 Act. No person in possession of material Disposition of restricted securities and securities As a result, informing all people subject to nonpublic information about the company, held by affiliates. Once an IPO is completed, these rules is critical. including those who are merely aware of the the shares sold as a part of the IPO are information, should trade the company’s freely tradable under the 1933 Act. All such reporting persons (except as noted securities before the information is made below) are also subject to the short-swing public. This applies to officers, directors, If there was outstanding stock previously profit provisions of section 16 of the 1934 and employees. It also applies to people issued in private placements, the stock Act. If these individuals realize any profits outside the company who gain access to is considered “restricted” for purposes from the purchase and sale or sale and this information, including family members of the 1933 Act and may be subject to purchase of the company’s stock within a of officers, directors, and employees of the resale restrictions. six-month period, they may have to turn company. If an insider tips another person, over such profits to the company. This can both parties may be liable for damages , and any stock owned apply whether or not the trading was based under federal securities laws. by persons who are considered affiliates on insider information. of the issuer, generally cannot be resold Private Securities Litigation Reform Act of 1995. in the public market unless the stock is Reporting persons are also not permitted The Private Securities Litigation Reform included in a registration statement or is to sell securities that they do not own at the Act of 1995 (Reform Act) provides a safe sold in compliance with Rule 144 under the time (sell “short”) or, if they do own them, harbor for companies to include forward- 1933 Act. that they do not deliver within 20 days after looking information within 1934 Act reports. the sale (sell “short against the box”). Companies had historically held back from

Strategies for going public 61 Chapter 10. Foreign private issuers 01 02 03 04 05 06 07 08 09 10 Appendices Glossary

Foreign companies going public in the United States use essentially the same process, but there are some special rules that apply.

A foreign private issuer may also voluntarily distributed to ADR holders in US dollars. elect to use the registration and reporting The SEC considers ADRs to be separate This chapter highlights some forms that domestic issuers use. However, securities from the issuer’s underlying special rules for foreign companies if the issuer elects to do so, it must comply equity securities; therefore, a Form F-6 is considering whether to go public in with all the requirements of the domestic required to be filed by the depositary bank the United States. There are many company forms. with the SEC. advantages to trading in the US capital markets for foreign The marketing process for the US IPO of Set forth below are short summaries of companies, including higher stock a foreign private issuer is generally very some key differences in the IPO process for valuations and improved visibility similar to that described for a domestic foreign private issuers. The summaries do for consumer marketing and issuer in Chapter 7. Both the team members not describe all the differences in disclosure corporate recruiting. and the pre-public planning process are and the application of the securities laws the same, and there are also SEC filings. between foreign and domestic issuers. You These processes, however, may be more should consult with your advisers before time-consuming because of a lack of moving forward on the IPO process. Some foreign companies that conduct IPOs familiarity with US disclosure requirements in the United States are called “foreign and the integration of those requirements 1933 Act filing and disclosure private issuers” under the federal securities with requirements of the company’s home differences laws. A foreign private issuer is defined as jurisdiction. This may be especially true for Form F-1 (and not Form S-1) is used an issuer that is incorporated or organized the accounting and due diligence portion by foreign private issuers to register under the laws of a foreign country, except of the work. In addition, the same SEC rules with the SEC. Form F-1 takes most of if: (1) more than 50 percent of the issuer’s govern public communications before, its disclosure requirements from those outstanding voting securities are directly during, and after the IPO. Some foreign found in Form 20-F. or indirectly held by residents of the United private issuers that publicly offer securities States; and (2) any of the following: (a) in the United States do so using American Form F-1 provides certain financial the majority of the executive officers or Depositary Receipts (ADRs). ADRs are issued statement and disclosure accommodations directors are US citizens or residents, (b) by a depositary institution in the United different from those found in Form more than 50 percent of the assets of the States (which has contracted with the S-1. While the SEC provides these issuer are located in the United States, or (c) foreign private issuer to provide this service) accommodations, often the underwriters the business of the issuer is administered and represent a specified number of equity will try to make most parts of the principally in the United States. This test is securities of the foreign private issuer. To go prospectus (other than the compensation required to be performed annually as of public in the United States, equity shares of disclosure) for a foreign private issuer look the last business day of the issuer’s most a foreign private issuer are deposited with similar (substantively) to a prospectus for a recently completed second fiscal quarter, the depositary. The depositary then issues domestic issuer. except in the case of the filing of an initial ADRs to investors securities registration statement, in which case the in the IPO. ADRs are meant to mirror the Certain accommodations determination may be made up to 30 days underlying equity securities (though there prior to the filing. can be important differences, which should are available for a foreign be discussed with legal counsel). ADRs can private issuer in the IPO A foreign issuer (other than a foreign be appealing to investors, as they can help government) that does not meet (or no mitigate some risks related to securities process. longer meets) the definition of an FPI must held in other countries. For instance, ADRs use the same registration and reporting are priced in US dollars and dividends paid forms as a domestic issuer. on the underlying securities are generally

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•• Income (loss) from continuing operations of the issuer that may affect the import or per share export of capital, including the availability While the JOBS Act (as of cash for use by the parent company or •• Diluted net income per share complemented by the FAST Act) is the remittance of dividends, interest, or arguably of less significance to •• Total assets other payments to nonresident security foreign private issuers because of holders. Any tax consequences that can •• Net assets the accommodations otherwise affect nonresident security holders must available to them, foreign private •• Capital stock (excluding long-term debt also be disclosed. issuers that qualify as EGCs are and redeemable preferred stock) eligible for some additional Audit requirements •• Number of shares as adjusted to reflect accommodations. For example, A foreign private issuer is generally required changes in capital only when filing as an EGC can a to include audited balance sheets as of foreign private issuer omit certain •• Dividends declared per share the end of the two most recent fiscal years historical financial information (unless the audited balance sheet for a from the confidential submission Selected Financial Data should be third fiscal year is required by an applicable prior to the distribution of the presented in the same currency as the jurisdiction outside the United States) preliminary prospectus. Further, financial statements. and audited statements of operations, foreign private issuers that are cash flows, and changes in shareholders’ EGCs can benefit from the reduced A foreign private issuer must include equity and comprehensive income for financial statement disclosure a statement of capitalization and the three most recent fiscal years. Such requirements and relaxed audit indebtedness in its Form F-1. While the form financial statements may be presented in attestation requirements for EGCs. requires that this be dated no earlier than accordance with either US GAAP, IFRS (as 60 days before the date of the prospectus, issued by the IASB), or local accounting Section 6270 of the Division of Corporate principles reconciled to US GAAP. Eligible Finance’s Financial Reporting Manual allows foreign private issuers reporting under US Certain accommodations are available for companies to use data as of the same date GAAP that meet certain criteria may be a foreign private issuer in the Selected as the most recent balance sheet. eligible to present only two years of audited Financial Data section of the registration statements of operations, cash flows, statement. For example, if the foreign The equivalent of the MD&A in a Form S-1 and changes in shareholders’ equity and private issuer is unable to provide can be titled the “Operating and Financial comprehensive income, instead of three. information for the earliest two years of Review and Prospects” in a Form F-1; the five-year period without unreasonable however, substantively, it is very similar to This accommodation also applies to issuers effort or expense, those periods may be the MD&A in domestic issuer offerings and reporting under IFRS (as issued by the omitted. However, issuers are required is often titled the same. IASB) in their year of transition to IFRS, to disclose the omission and the reason which are permitted to include only one for the omission within the document. Differences between a domestic issuer and year of comparative financial statements. Also, the information may be requested a foreign private issuer in compensation Per International Accounting Standard by the underwriters. In Selected Financial disclosures are perhaps the area of most (IAS) 1, however, the financial statements Data, a foreign private issuer is required to interest to executives. Foreign private should include a third balance sheet as of disclose items generally corresponding to issuers are permitted to provide only the beginning of the comparative period. the following: aggregate data (if that is what is provided in If the foreign private issuer presents its the issuer’s home country) and much less financial statements in accordance with local •• Net sales or operating revenues information concerning individual executive accounting principles, it must quantify and •• Income (loss) from operations compensation. This was done in part to reconcile material differences to US GAAP accommodate similar disclosures to that of and provide all other information required •• Income (loss) from continuing operations the home market. by US GAAP and Regulation S-X. However, •• Net income (loss) first-time foreign private issuer registrants Foreign private issuers must also disclose that present their financial statements in •• Net income (loss) from operations the effect of any laws, decrees, regulations, accordance with local accounting principles per share or other legislation of the home country are only required to provide reconciliations

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of the financial statements and selected However, foreign private issuers are not exempt from the requirement to make financial data to US GAAP for only the not required to include XBRL financial a public announcement if its audit report two most recently completed fiscal years statements in their initial registration contains a “” qualification; and any interim period required in the statement on Form F-1. and (3) must notify it in the event of any registration statement. While reconciliations material noncompliance with Nasdaq to US GAAP initially are required for only two Corporate governance differences corporate governance rules. In each case, years, the registrant’s financial statements The requirements governing the the foreign private issuer must also disclose still need to be presented in the registration composition of the board and the audit differences between home country and statement for all of the periods noted above. committee can be different for foreign NYSE and Nasdaq corporate governance private issuers. Foreign private issuers rules, as applicable. Foreign private issuers that file as EGCs are exempt from certain of the audit are also eligible to take advantage of committee independence rules and After the IPO – 1934 Act filings all accommodations in terms of audit can have certain members of the audit Periodic filings. A foreign private issuer requirements granted to EGCs. committee who are not independent, is required to file a Form 20-F annual such as a nonmanagement employee report with the SEC within four months Foreign private issuers may use any representative, a nonmanagement affiliated after the fiscal year end. A Form 20-F is reporting currency they deem appropriate. person who only has observer status, similar to a Form 10-K and extends certain The reporting currency must be or a nonmanagement governmental accommodations to FPIs. However, similar to prominently disclosed on the face of the representative. In addition, the foreign domestic issuers, annual reports on Form financial statements. private issuer is exempt from the audit 20-F must contain the officer certifications committee independence rules if the foreign required by SOX. Audited financial statements must be no private issuer has a board of statutory older than 12 months at the date of filing auditors (or similar body) or has statutory An FPI is exempt from the Form 10-Q of the IPO registration statement. This auditors, established and selected pursuant quarterly reporting and Form 8-K current requirement is waived if the company is to home country legal or listing provisions reporting requirements. Rather, an FPI is able to represent adequately to the SEC requiring or permitting such a board or required to furnish promptly on Form 6-K that it is not required to “comply with body, and that board or body comports material information that the issuer (1) files this requirement in any other jurisdiction with additional SEC standards that are or is required to file with a stock exchange outside the US and that complying with the meant to assure that board or body or on which its securities are traded, if made requirement is impracticable or involves statutory auditors are independent of public by that exchange; (2) makes or is undue hardship.” In that case, the . The SEC also has a provision required to make public by its domestic statements should be no older than 15 under its independence rules recognizing laws; or (3) distributes or is required to months at the date of filing. that whereas in some foreign countries, distribute to its securities holders. Also, companies have two-tiered boards, the the foreign private issuer must provide Unaudited interim financial statements “board of directors” means the supervisory either a full English translation or an English covering at least the first six months of or nonmanagement board. summary of its documents that are written the fiscal year, as well as the comparable in a foreign language, in accordance with period in the prior year, will be required Both the NYSE and Nasdaq also permit 1934 Act Rule 12b-12(d). when the Form F-1 registration statement foreign private issuers generally to follow is dated more than nine months after home country rules rather than their rules. Corporate governance. Foreign private the end of the last audited financial However, both specify certain exceptions to issuers with securities listed on a national year. If the issuer has published interim these accommodations. The NYSE requires securities exchange are required to provide financial information for a more current that all foreign private issuers (1) meet the a concise summary in their annual reports period, the most current interim financial SEC requirements for audit committees; (2) of any significant ways in which its corporate statements must be included. In practice, notify the exchange of noncompliance with governance practices differ from those however, the underwriters may require a exchange corporate governance rules; and followed by domestic companies under the foreign private issuer to include interim (3) provide an annual written affirmation listing standards of that exchange. financial information consistent with the to the NYSE. Nasdaq specifies that foreign domestic requirements. private issuers (1) must meet the SEC Proxy rules. Section 14 of the 1934 Act requirements for audit committees; (2) are requires public companies to comply with

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certain rules regarding proxies. The 1934 Act Foreign Corrupt Practices Act. Foreign private Impact of Dodd-Frank Act on foreign makes it unlawful for companies to solicit issuers are subject to both the books and private issuers proxies and to provide untrue statements records provisions and the anti-bribery Certain provisions of the Dodd-Frank Act with respect to tender offers, and also provisions of the FCPA, just as are domestic are applicable directly to foreign private requires companies to provide equivalent companies. This can be a surprise to foreign issuers. The Dodd-Frank Act increases information to holders, prior to any companies and a number have been the SEC’s ability to pursue enforcement meetings, that would have been compulsory prosecuted under the FCPA. actions against foreign companies, including if a solicitation had been made. Rule 3a12- increased extraterritorial jurisdiction for 3(b) of the 1934 Act, however, exempts SOX. Foreign private issuers that are enforcement action, increased liability foreign private issuers from the proxy rules reporting companies under the 1934 Act imposed on secondary actors, increased included within sections 14(a), 14(b), 14(c), are subject to the provisions of SOX, though resources for the SEC to administer and 14(f). there are some limited accommodations these actions, and increased bounties made for foreign private issuers. These for . Under sections 14(d) and 14(e), foreign accommodations include the following: private issuers are prohibited from making certain aspects of the audit committee As certain sections of the Dodd-Frank tender offers that would allow the issuer to independence rules (see above), periods in Act are still within the SEC’s rule-making beneficially own more than 5 percent of the which trading is prohibited under company process, there is uncertainty as to their class of securities (subject to complying with stock and retirement plans (Regulation applicability to foreign private issuers. certain conditions) or that include untrue BTR), and the use of non-GAAP financial statements of material fact. measures (Regulation G). Issuers, both foreign and domestic, conducting an IPO Reporting of trading activities by insiders. FPIs are not required to immediately comply with and their officers and directors are exempt the independent auditor attestation of the from the insider reporting and short-swing effectiveness of the ICFR under section 404 trading provisions of section 16 of the 1934 of SOX. See table 9-2 in Chapter 9 on this Act (as discussed in Chapter 9). subject for the implementation schedule of such attestations. Because of the time Regulation FD. As discussed in Chapter and effort to implement SOX requirements, 9, Regulation FD requires companies to FPIs should pay particular attention to the make public any material data or relevant requirements of SOX before they decide to information that may affect investment proceed with an IPO in the United States. decisions that were disclosed to certain However, FPIs that qualify as EGCs should enumerated persons. also consider the impact of the JOBS Act on the auditor attestation requirements. Regulation FD, however, specifically exempts foreign private issuers from its provisions. However, many foreign private issuers still comply with the regulation, in part because they can still be liable for selective disclosures under other theories of liability.

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Appendix A: The US Securities and Exchange Commission

In the chaotic securities markets of the Division of Corporation Finance Division of 1920s, companies often sold stocks and Corporation Finance has overall Investment Management ensures compliance bonds on the basis of promises of fantastic responsibility to oversee public disclosure with regulations regarding the registration, profits without disclosing any meaningful of information important for investment financial responsibility, sales practices, and information to investors. These conditions decisions. Its work includes reviewing advertising of investment companies and contributed to the disastrous stock market registration statements and periodic reports of investment advisers. In carrying out its crash of 1929. In response, the US Congress (e.g., Form 10-Ks, 10-Qs, 8-Ks, and 20-Fs) of responsibilities, Investment Management enacted the federal securities laws and, domestic issuers and foreign private issuers, also reviews new product filings and other through the 1934 Act, created the Securities as well as documents concerning tender offering registration statements, proxy and Exchange Commission (SEC) to offers, proxy solicitations, and mergers statements, and periodic reports. administer them. and acquisitions. Corporation Finance also assists issuers with interpreting the SEC’s Division of Risk Strategy and The SEC is an independent regulatory agency rules and regulations. Financial with responsibility for administering the Created in September 2009, the Division federal securities laws. The purpose of these Division of Trading and Markets of Risk Strategy and laws is to protect investors by (1) promoting Trading and Markets assists the SEC in assists the SEC in protecting investors by securities markets that operate fairly, and maintaining standards for fair, orderly, identifying new and developing risks and (2) ensuring that investors have access to and efficient markets. This includes the trends in the financial markets and making all material information concerning publicly registration and regulation of broker- recommendations with respect to how these traded securities. The SEC also regulates dealers and the oversight of the stock risks and trends affect the SEC’s regulatory firms engaged in investing, reinvesting, or exchanges, the Municipal Securities activities. Risk Strategy and Financial trading of securities (including mutual funds); Rulemaking Board, self-regulatory Innovation was formed by combining the people who provide investment advice; and organizations, and other participants Office of Economic Analysis, the Office of Risk investment companies. (such as transfer agents and credit Assessment, and other functions. rating agencies). Trading and Markets The SEC consists of five presidentially also oversees the Securities Investor Division of Enforcement appointed commissioners, with one Protection Corporation (SIPC), a private, As its name indicates, the Division of designated as chairman by the president nonprofit corporation that either acts as Enforcement is responsible for ensuring of the United States and no more than a trustee or works with an independent issuers’ compliance with federal securities three from one political party. The SEC’s court-appointed trustee to recover funds laws. Enforcement’s responsibilities include functional responsibilities are organized into in cases of missing assets. Essentially, investigating possible violations and five divisions and 11 regional offices, each of the SIPC insures the securities and cash recommending appropriate action and which is headquartered in Washington, DC. in the customer accounts of member remedies for consideration by the SEC. The SEC’s staff is located in Washington, DC, brokerage firms. and in 11 regional offices throughout the Office of the Chief country. The divisions of the commission are: As its name indicates, the Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy to enhance transparency of financial reporting.

For more information about the SEC, its responsibilities, and its organizational structure, visit www.sec.gov.

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Appendix B: Registration exemptions

The registration requirements of the 1933 To qualify for this exemption, the purchasers •• An employee benefit plan (within the Act apply to offerings of securities of both of the securities must: meaning of the Employee Retirement US and foreign companies or governments Income Security Act of 1974) if a bank, •• Have enough knowledge and experience in in the United States. An offering of securities insurance company, or registered finance and business matters to evaluate may qualify for one or more exemptions investment adviser makes the investment the risks and merits of the investment (the or safe harbors from such registration decisions or if the plan has total assets in “sophisticated investor”) or be able to bear requirements. The following exemptions and excess of $5 million or, if a self-directed the investment’s economic risk safe harbors under the federal securities plan, with investment decisions made solely laws are the ones most commonly relied •• Have access to the type of information by persons that are accredited investors upon. You must also comply with all normally provided in a prospectus •• A charitable organization, corporation, applicable state securities law registration •• Agree to buy the securities for their or with assets exceeding requirements or qualify for an exemption own account without a view to resell or $5 million under state law. distribute to others immediately •• A director, executive officer, or It is also important to note that, whether or general partner of the company The precise limits of this private offering not securities are registered, the antifraud selling the securities exemption are uncertain and have provisions under the federal and applicable generally been created pursuant to SEC •• A business in which all the equity owners state securities laws apply to all sales of interpretations and fact-specific court are accredited investors securities. The following descriptions of the decisions. As the number of purchasers exemptions and safe harbors are summaries •• A natural person with an individual increases and their relationship to the only, and an issuer should consult with net worth, or joint net worth with that company and its management becomes its legal counsel prior to attempting any person’s spouse, of at least $1 million more remote, it is increasingly difficult to issuance of securities. (excluding as an asset, the value of the show that the transaction qualifies for primary residence, and as a liability, the the exemption. If securities are offered to Private offering exemption debt secured by the primary residence even one person who does not meet the Section 4(a)(2) of the 1933 Act exempts up to the estimated fair market value of necessary conditions, the exemption may be from registration “transactions by an the residence) unavailable. issuer not involving any public offering.” •• A natural person with individual income Whether a transaction involves a Regulation D of the 1933 Act exceeding $200,000 in each of the two public or private offering is essentially a Regulation D establishes three exemptions most recent years or joint income with question of fact, and you should consider from 1933 Act registration, each with its own a spouse exceeding $300,000 for those all surrounding circumstances, including offeree qualifications and limitations. years and a reasonable expectation of the factors such as the relationship between same income level in the current year the offerees and the issuer, as well as the Definitions of Regulation D terms nature, scope, size, type, and manner •• A trust with assets of at least $5 million, not A sophisticated person is defined as of the offering. General solicitation and formed to acquire the securities offered, someone with sufficient knowledge and advertising in connection with this type and whose purchases are directed by a experience in financial and business matters of offering is prohibited. (See discussion sophisticated person to make the person capable of evaluating of JOBS Act impact on general solicitation the merits and risks of the prospective and advertising discussed under Rule investment. 506 below.) An is currently defined as:

•• A bank, insurance company, registered investment company, company, private business development company, or small business investment company

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Rule 504 required disclosures to nonaccredited •• Securities may be sold only to types of Exemption for limited offerings and sales of investors and certain other requirements. entities that may be characterized as securities not exceeding $1 million. qualified institutional buyers or “QIBs,” Rule 506 as defined in Rule 144A(a)(1). Generally, Rule 504 provides an exemption for the Exemption for limited offers and sales a QIB is a large institutional investor offer and sale by certain private companies without regard to dollar amount of offering, deemed to have a certain level of financial of securities with an aggregate offering Rule 506 is a nonexclusive “safe harbor” sophistication. price not to exceed $1 million in a 12-month under section 4(a)(2) and provides guidance •• If the seller takes steps to ensure that period. Some of the most important on the availability of section 4(a)(2). securities are resold only to persons that it characteristics of a Rule 504 offering are: reasonably believes to be QIBs, securities Issuers often try to comply with Rule •• You can sell securities to an unlimited may be offered to persons other than QIBs, 506 when conducting section 4(a)(2) number of persons. including by means of general solicitation private placements. or general advertising. •• You may make a general solicitation or advertise to market the securities under Under Rule 506: •• The seller must take reasonable steps certain circumstances. to ensure that the purchaser is aware •• Any issuer may raise an unlimited amount that the seller may rely on the Rule •• Purchasers receive securities that of capital. 144A safe harbor. are “restricted” except under limited •• You can sell securities to an unlimited circumstances. This means that they •• The securities must not, at the time of number of accredited investors (defined generally may not resell their securities issuance, be of the same class of securities above) and up to 35 other purchasers. without registration or qualifying for an listed on a national securities exchange Unlike Rule 505, all nonaccredited exemption from registration. or quoted on a US automated inter-dealer investors (either alone or with a purchaser quotation system. representative) must be sophisticated Rule 504 permits general solicitation or (defined above). •• When the securities sold are of an issuer advertising in certain circumstances where that is neither a 1934 Act reporting state securities laws provide for investor •• It is up to you to decide what information company nor a company exempt from protections or where only accredited you give to accredited investors (defined reporting pursuant to Rule 12g3-2(b) investors (as defined above) purchase the above), so long as it does not violate the related to foreign filers, the holder of securities. Rule 504 does not require issuers antifraud prohibitions. Nonaccredited the securities and any prospective to give disclosure documents to investors. investors must be given disclosure purchaser have the right to obtain documents that generally are the same as certain specified, reasonably current Nonetheless, sufficient information should those used in registered offerings. information from the issuer. be provided to investors to avoid violating the •• If all purchasers are accredited investors, antifraud provisions of the securities laws. and the issuer took reasonable steps to Rule 144A does not apply to sales by the verify their status as accredited investors, issuer of the securities (the company). Rule 505 there is no prohibition on general However, because sales pursuant to Rule Exemption for limited offers and sales of solicitation and advertising in connection 144A are deemed not to be a distribution of securities not exceeding $5 million. with Rule 506 private offerings. securities, it allows issuers to make private placements of securities either directly or Rule 505 provides an exemption for offers •• You must be available to answer questions through investment banks acting as initial and sales of securities with an aggregate by prospective purchasers. purchasers to QIBs, who can then resell such offering price not to exceed $5 million in •• Purchasers receive “restricted” securities. securities under Rule 144A. Such securities any 12-month period by an issuer that is Consequently, purchasers may not freely are “restricted securities” and many not an investment company. Under this trade the securities in the secondary holders may not freely offer or sell them exemption, you may sell to an unlimited market after the offering. to the public. While a large market for Rule number of “accredited investors” (defined 144A securities exists among institutional above) and up to 35 other persons (who Rule 144A of the 1933 Act investors, this market is less liquid than do not need to satisfy the sophistication Rule 144A provides a “safe harbor” from equity markets. or wealth standards associated with registration for sales by persons other than other exemptions). The issued securities issuers who sell securities in compliance with are “restricted.” General solicitation and four conditions: advertising are not allowed. There are also

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Regulation S of the 1933 Act Regulation S clarifies that the registration requirements of section 5 of the 1933 Act do not apply to offers and sales outside the United States. Regulation S provides two nonexclusive safe harbors, which deem an offer or sale to have occurred outside the United States: (1) a safe harbor for issuers, distributors, their affiliates, and persons acting on their behalf (which distinguishes among three types of offerings and provides increasing levels of conditions for each such category to claim the safe harbor); and (2) a resale safe harbor for other persons. Offers and sales of securities by the issuer must be made in an “offshore transaction” and no “directed selling efforts” may be made in the United States.

Rule 701 Exemption for sales of securities through employee benefit plans.

The SEC’s Rule 701 provides a safe harbor exemption from registration for offers and sales of securities if made to compensate employees. This exemption is available only to companies that are not subject to 1934 Act reporting requirements.

Under Rule 701: You can sell at most, over a 12-month period, the greater of $1 million, 15 percent of the total assets of the company, or 15 percent of the outstanding amount of the class of securities being offered and sold under Rule 701.

•• If you sell more than $10 million in securities in a 12-month period, you need to provide limited disclosure documents to your employees.

•• Employees receive “restricted securities” in these transactions and may not freely offer or sell them to the public.

The offers and sales under this exemption are part of a single, discrete offering and are not subject to integration with any other offers or sales.

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Appendix C: The securities exchanges

Securities are bought and sold in a number of different markets. The best known are the NYSE and Nasdaq. In addition, six regional exchanges are located in cities throughout the country. Corporate securities may be traded on an exchange only after the issuing company has applied and met the exchange’s listing standards. Such standards may include requirements as to the company’s assets, number of shares publicly held, and the number of shareholders. All the markets apply different standards to initial listings than they do for continued listings. Listing standards are updated frequently, and you can obtain the current parameters for inclusion and more details at the following websites: www. nyse.com and www.nasdaq.com.

Nasdaq initial listing requirements Companies must meet all of the criteria under at least one of the three standards below.

Requirements Standard 1 Standard 2 Standard 3

Stockholders’ equity $5 million $4 million $4 million

Market value of publicly held shares $15 million $15 million $5 million

Operating history 2 years N/A N/A

Market value of listed securities1 N/A $50 million N/A

Net income from continuing operations (in the latest fiscal N/A N/A $750,000 year or in two of the last three fiscal years)

Publicly held shares2 1 million 1 million 1 million

Bid price/Closing price $4/$3 $4/$3 $4/$3

Shareholders (round lot holders)3 300 300 300

Market makers4 3 3 3

Corporate governance5 Yes Yes Yes

1 The term “listed securities” is defined as “securities listed on Nasdaq or another National Securities Exchange.” 2 “Publicly held shares” is defined as the total shares outstanding less any shares held directly or indirectly by officers, directors, or any other person who is the beneficial owner of more than 10 percent of the total shares outstanding of the company. In the case of ADRs, at least 400,000 shall be issued. 3 Round lot holders are considered holders of 100 shares or more. The number of beneficial holders is considered in addition to holders of record. 4 An electronic communications network (ECN) is not considered a market maker for the purpose of these rules. 5 In addition to the above quantitative requirements, companies must comply with all corporate governance requirements as set forth in the Rule 5600 Series.

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Nasdaq Global Select Market initial listing requirements Companies must meet all of the criteria under at least one of the four standards below.

Requirements Standard 1 Standard 2 Standard 3 Standard 4

Pretax earnings1 Aggregate in prior three fiscal (income from continuing years ≥ $11 million, and each of operations before income the two most recent fiscal years taxes) ≥ $2.2 million, and each of the prior three fiscal years > $0

Cash flows2 N/A Aggregate in prior three fiscal N/A N/A years ≥ $27.5 million and each of the prior three fiscal years ≥ $0

Market makers3 3 or 4 3 or 4 3 or 4 3 or 4

Revenue N/A Previous fiscal year ≥ $110 million Previous fiscal N/A year ≥ $90 million

Market capitalization4 N/A Average ≥ $550 million over prior Average ≥ $160 million 12 months $850 million over prior 12 months

Bid price5 $4 $4 $4 $4

Round lot shareholders 450 450 450 450

or or or or or

Total shareholders 2,200 2,200 2,200 2,200

Total assets N/A N/A N/A $80 million

Stockholders’ equity N/A N/A N/A $55 million

Publicly held shares6 1,250,000 1,250,000 1,250,000 1,250,000

Market value of publicly $45 million $45 million $45 million $45 million held shares

Corporate governance7 Yes Yes Yes Yes

1 In calculating income from continuing operations, Nasdaq will rely on a company’s annual financial information as filed with the SEC in the company’s most recent periodic report and/or registration statement. If a company does not have three years of publicly reported financial data, it may qualify under Rule 5315(f)(3)(A) if it has (i) reported aggregate income from continuing operations before income taxes of at least $11 million; and (ii) positive income from continuing operations before income taxes in each of the reported fiscal years. A period of less than three months shall not be considered a fiscal year even if reported as a period in the company’s publicly reported financial statements. 2 In calculating cash flows, Nasdaq will rely on the net cash provided by operating activities reported in the statements of cash flows, as filed with the SEC in the company’s most recent periodic report and/or registration statement, excluding changes in working capital or in operating assets and liabilities. A period of less than three months shall not be considered a fiscal year even if reported as a stub period in the company’s publicly reported financial statements. 3 A company that also satisfies the requirements of an electronic communications network (ECN) is not considered a market maker for the purpose of these rules. A company that meets the requirements of the Nasdaq Global Market (NGM) Income Standard (Rule 5405(b)(1)) or the NGM Equity Standard (Rule 5405(b)(2)) is required to have at least three registered and active market makers. Otherwise, the company is required to have at least four registered and active market makers. 4 In the case of a company listing in connection with its initial public offering, compliance with the requirements of Rules 5315(f)(3)(B) and 5315(f)(3)(C) will be based on the company’s market capitalization at the time of listing. 5 The bid price requirement is not applicable to a company listed on the Nasdaq Global Market that transfers its listing to the Nasdaq Global Select Market. 6 Publicly held shares is defined as total shares outstanding, less any shares held directly or indirectly by officers, directors, or any person who is the beneficial owner of more than 10 percent of the total shares outstanding of the company. 7 See “Corporate governance” in Chapter 4.

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Nasdaq Global Market initial listing requirements Companies must meet all of the criteria under at least one of the four standards below.

Requirements Standard 1 Standard 2 Standard 3 Standard 4

Stockholders’ equity $15 million $30 million N/A N/A

Market value of listed securities1 N/A N/A $75 million N/A

Total assets and Total revenue (in latest fiscal N/A N/A N/A $75 million and year or two of last three fiscal years) $75 million

Income from continuing operations before income taxes (in latest fiscal year or two of last $1 million N/A N/A N/A three fiscal years)

Publicly held shares2 1.1 million 1.1 million 1.1 million 1.1 million

Operating history N/A 2 years N/A N/A

Market value of publicly held shares3 $8 million $18 million $20 million $20 million

Bid price $4 $4 $44 $4

Shareholders (round lot holders)5 400 400 400 400

Market makers6 3 3 4 4

Corporate governance7 Yes Yes Yes Yes

1 The term “listed securities” is defined as “securities listed on Nasdaq or another National Securities Exchange.” 2 “Publicly held shares” is defined as the total shares outstanding, less any shares held directly or indirectly by any officers, directors, or any other person who is the beneficial owner of more than 10 percent of the total shares outstanding of the company. 3 Companies must meet the bid price, publicly held shares, and round lot holders’ requirements as set forth in Rule 5405(a) and at least one of the Standards in Rule 5405(b). 4 Seasoned companies (those companies already listed or quoted on another marketplace) qualifying only under the Market Value Standard must meet the market value of listed securities and the bid price requirements for 90 consecutive trading days prior to applying for listing. 5 Round lot holders are shareholders of 100 shares or more. The number of beneficial holders is considered in addition to holders of record. 6 An electronic communications network (ECN) is not considered a market maker for the purpose of these rules. 7 In addition to the above quantitative requirements, companies must comply with all corporate governance requirements as set forth in the Rule 5600 Series.

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NYSE Initial listing requirements US companies must meet the minimum distribution criteria and one of the four financial criteria—earnings, cash flow, pure valuation, or assets and equity—under the US standards.

For non-US companies, the NYSE offers two sets of standards—domestic and worldwide—under which companies may qualify for listing. A company must satisfy both the distribution criteria and financial criteria (earnings and either cash flow or pure valuation) within that particular standard.

Non-US standards Distribution and size criteria US standards Domestic Worldwide

Round lot holders or 400 400 (US) 5000

Total shareholders ... together with N/A 2,200 N/A

Average monthly trading volume (for the most recent six months) or N/A 100,000 shares N/A

Total shareholders ... together with N/A 500 N/A

Average monthly trading volume (for the most recent 12 months) N/A 1,000,000 shares N/A

Public shares outstanding1 1,100,000 1,100,000 2,500,000

Market value of public shares: IPOs, spin-offs, carve-outs, and affiliated $40 million $40 million $100 million companies1

Market value of public shares: All other listings $100 million $100 million N/A

Stock price criteria

Stock price $4 $4 $4

Financial criteria4 – Must meet one of the following standards:

Earnings

Aggregate pretax earnings for the last three years, and $10 million $10 million $100 million

Minimum in each of the two recent preceding years pretax or $2 million2 $2 million3 $25 million

Aggregate pretax income for the last three years, and $12 million $12 million N/A

Minimum in the most recent year, and $5 million $5 million N/A

Minimum in the next most recent year $2 million $2 million N/A

Valuation with cash flow

Global market capitalization1 $500 million $500 million $500 million

Revenues in the most recent 12-month period $100 million $100 million $100 million

Aggregate cash flow for the last three years $25 million3 $25 million3 $100 million

Minimum cash flow in each of two preceding years N/A N/A $25 million

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Pure valuation with revenues

Global market capitalization1 and $750 million $750 million $750 million

Revenues for the most recent fiscal year $75 million $75 million $75 million

Asset and equity

Global market capitalization1 $150 million N/A N/A

Total assets $75 million N/A N/A

Shareholders’ equity $50 million N/A N/A

REIT US standards

Stockholders’ equity $60 million

Funds and BDCs US standards

Net assets $60 million

1 In connection with IPOs, the NYSE will accept assurance from the company’s underwriter that the offering will meet or exceed the exchange standards. 2 Third year must be positive. 3 All three years must be positive. 4 For new entities with a parent or affiliated company listed on the NYSE, the global market capitalization requirement is $500 million if the affiliated company has at least 12 months of operating history, the affiliated listing company is in good standing, and the affiliated listed company retains control of the entity.

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Appendix D: A timetable for going public

A projected timetable for an IPO is offered below. In this example:

•• The company’s fiscal year end is December 31.

•• Audited financial statements are available for each year that the company has been in existence, and the auditors are in the process of completing the current year’s audit.

•• It should be noted that this is only an example of an IPO timetable. There are many variables that can either cause the timing to be accelerated or delayed. As an example, the expected period for the SEC to respond with its initial comments on the company’s first registration statement is approximately 30 days. While this is the time period that the SEC aspires to, the time period to receive comments may be longer.

•• The timeline begins with an organizational meeting and due diligence. There may be additional activities, which could occur prior to this organizational meeting (as discussed throughout this document), that are not reflected in the example.

The many documents and procedures listed in the timetable are explained in Chapters 6 through 8. Abbreviations are as follows: ABC = company, CC = company counsel, A = auditors, T = transfer agent/registrar, U = underwriters, and UC = underwriters’ counsel.

ABC Company: Schedule of events and responsibilities

Summary of key dates Dates Days

Organizational meeting and due diligence December 15 1

First draft of Form S-1 distributed without financial statements December 27 13

Due diligence/first drafting session January 6 23

Second drafting session January 14 31

Third drafting session January 21–22 45

Final drafting session at printers February 4–5 52–53

Target confidential submission date with audited financial statements where other parts of February 5 53 prospectus are prepared well in advance

Expected receipt of first round of SEC comments March 7–8 83–84

Drafting session March 9–10 85–86

Roadshow April 1–16 108–119

Public offering effective April 16 124

Closing April 20 127

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Detailed schedule

Date Activity Responsibilities

Prior to December 1 Board meeting(s) to discuss IPO and ultimately to authorize preparation of registration ABC, CC statement and engagement of legal counsel and the lead underwriter

December 15 Initial organization meeting and due diligence: All Review timetable Discuss underwriters’ fees, compensation, and other underwriter issues Discuss proposed lock-up arrangements Identify accounting, legal, tax, and other issues Provide customer contacts Select printer Review financial forecasts Management due diligence presentations Discuss transfer agent and registrar Prepare list of parties involved (phone numbers, addresses, secretaries, etc.) referred to as the working group list

December 27 First draft of registration statement distributed ABC, CC

January 6 First drafting session and due diligence: All Complete business/due diligence presentations Review draft of registration statement Discuss obstacles

January 6–10 Revise registration statement; underwriters’ counsel to draft and distribute All underwriting agreement

January 11 Distribution of second draft of registration statement ABC, CC

January 14–15 Second drafting session to review registration statement All

January 15–31 Questionnaires and lock-ups completed by officers, directors, and 10 percent ABC, CC shareholders, and returned to company and underwriters’ counsel for review

January 18 Distribution of third draft of registration statement ABC, CC

January 18 Distribution of draft of management’s discussion and analysis of financial position and ABC, CC, A results of operations

January 21–22 Third drafting session to review registration statement All

January 23 Company counsel and underwriters’ counsel discuss underwriting documents CC, UC

January 28 Board meeting to review registration statement and take other actions related to the ABC, CC, U offering, including to authorize filing of the registration statement, appointment of transfer agent and registrar, and listing on an exchange and any other matters Authorize any Blue Sky filing, if applicable Discuss items to include in auditor comfort letter and auditing procedures Appoint pricing committee, authorize other actions necessary to complete offering, and authorize corporate housekeeping matters

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Detailed schedule

Date Activity Responsibilities

February 3 Year ended December 31 audited financial statements available and provided to ABC, A printer

February 4–5 All hands meetings: All Discuss any discrepancies between text of registration statement and financial statements Review and confidentially submit draft registration statement

QUIET PERIOD BEGINS

February 5 File underwriting agreement with FINRA UC

File listing application with exchange; make any required Blue Sky filing ABC, CC

February 6 Begin roadshow presentation preparation and rehearsal ABC, U

March 7–8 SEC comments received; responses prepared All

March 9–10 Make changes in registration statement or otherwise address SEC comments; All miscellaneous discussions with SEC staff regarding comments

All hands meeting to review first amendment to registration statements, discuss other issues, review underwriting agreement, etc.

March 12 Confidentially submit draft amended registration statement with responses to first ABC, CC, UC round of SEC comments

Continue roadshow preparation and rehearsal ABC, U

March 22 SEC comments on amendment received; responses prepared All

March 23 Confidentially submit amended draft registration statement with responses to second ABC, CC round of SEC comments

March 23–30 Receive and respond to second/third round of SEC comments All

File third/fourth amendment to Form S-1 ABC, CC, UC

Publicly file registration statement and confidential submissions at least 15 days ABC, CC prior to when roadshow presentations with investors begin (on or before March 27 on this timeline)

Finalize roadshow presentation ABC, U

Set price range ABC, U

Custody agreement and powers of attorney drafted if there are selling shareholders ABC, U (selling shareholder counsel is also involved in this activity)

March 30 Board approves such matters as deemed necessary in connection with the offering ABC, CC (including any pre-IPO transactions, such as stock splits or reorganizations)

March 31 Distribute red herring ABC, U

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Detailed schedule

Date Activity Responsibilities

April 1–5 Roadshow presentations to underwriters ABC, U

Complete selling holder documents ABC, T

Complete company information form ABC, T

April 10–18 Roadshow ABC, U

April 12-17 Finalize FINRA review and receive “No Objection Letter” from FINRA UC

Draft original issuance instructions ABC, T

April 17 File acceleration requests with SEC ABC, CC, U, UC

April 17 File Form 8-A with the SEC ABC, CC

File Form 3 for officers and directors

April 18 Registration statement declared effective by SEC

Pricing agreed upon and approved by ABC Pricing committee; Underwriting ABC, U agreement signed

Comfort letter delivered A

Sales activities commence U

QUIET PERIOD ENDS

POST–EFFECTIVE PERIOD

April 19 Funds schedule and full wire instructions prepared ABC, U, T

Closing documents for review at least two days prior to closing ABC, U, T

April 22 Final review of closing documents (evening before or morning of closing) ABS, U, T

Closing All

POST-CLOSING FILINGS

Due within 40 or File Form 10-Q ABC, A, CC 45 days (depending on filer category) of the end of each of the first three fiscal quarters*

Due within 60, 75, or File Form 10-K ABC, A, CC 90 days (depending on filer category) from end of fiscal year ending after effectiveness of IPO*

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Detailed schedule

Date Activity Responsibilities

Typically due within File Form 8-K (to provide information on certain specified current material events) ABC, CC four business days of the triggering event but varies based on nature of triggering event

Timing dependent on File Form S-8 if applicable (to register securities that will be offered via benefit plans) ABC, CC Form S-8 applicability

*IPO issuers are nonaccelerated filers during the first year following their IPO irrespective of their publicly floated equity. Accordingly, the first report on Form 10-K will be due 90 days after fiscal year end. Thereafter, the company must determine filing deadlines based on its SEC- designated filer status (larger accelerated filer, accelerated filer, or smaller reporting company) determined by the worldwide public float as of the last business day of its most recently completed fiscal quarter. Filing deadlines referenced above will vary depending on the category of filer. See table 9-1 in Chapter 9 for filing deadlines.

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Appendix E: A sample due diligence checklist

I. Financial information 3. Summary of all debt instruments/bank B. Product warranties and liability issues lines with key terms and conditions 1. A description of all product warranties A. Annual and quarterly financial 4. Off-balance-sheet liabilities relating to any products developed or information for the past three years 5. Schedule of number of shares held sold by the company or any subsidiary 1. Income statements, balance sheets, in treasury 2. Explanation of any product recalls in cash flows, and footnotes last five years 2. Planned versus actual results D. Other financial information 3. Management financial reports 1. Taxes III. Customer information 4. Breakdown of sales and gross a. Summary of current federal, profit by: state, and foreign tax positions, A. List of significant customers for the past 5. Product type including net operating loss two fiscal years and current year to date 6. Channel carryforwards by application (contact name, address, 7. Geography b. Federal, state, local, and foreign phone number, product(s) owned, and 8. Current backlog by customer (if any) tax returns for last five fiscal years timing of purchase(s)) 9. Accounts receivable aging schedule c. A description of all audits by any B. List of strategic relationships (contact 10. Inventory valuation, including federal, state, local, or foreign name, phone number, revenue turnover statistics and taxing authorities, including the contribution, and marketing agreements) obsolescence analyses date and a summary of each audit d. All tax elections filed by the C. Revenue by customer (name, contact B. Financial projections company or any subsidiary name, phone number for any customers 1. Quarterly financial projections for e. All legal or accounting tax accounting for 5 percent or more of the next three fiscal years opinions received by the revenue) 2. Revenue by product type, company or any subsidiary during customers, and channel the last five calendar years from D. Brief description of any significant 3. Full income statements, balance outside advisers that relate to any relationships severed within the last sheets, and cash flow statements tax reporting matters two years 4. Major growth drivers and prospects f. Legal entity and product or 5. Predictability of business service structures in place E. List of top 10 suppliers for the past two 6. Business plan, if available g. Transfer pricing and other fiscal years and current year to date with 7. Risks attendant to foreign intercompany agreements contact information operations (e.g., exchange rate 2. General accounting policies fluctuation, government instability) (revenue recognition, etc.) IV. Competition 8. Industry and company pricing policies 3. Schedule of financing history for equity, A. Description of the competitive landscape 9. Economic assumptions underlying warrants, and debt (date, investors, within each market segment, including: projections (different scenarios based dollar investment, percentage 1. Market position and related on price and market fluctuations) ownership, implied valuation, and strengths and weaknesses as 10. Explanation of projected capital current basis for each round) expenditures, depreciation, and perceived in the marketplace 2. Basis of competition (e.g., price, working capital requirements II. Products 11. arrangement service, technology, and distribution) assumption A. Description of each product (including 12. Budgets product literature) V. Marketing, sales, and distribution 1. Major customers and applications A. Strategy and implementation C. Capital structure 2. Historical and projected growth rates 1. Discussion of domestic and 1. Current shares outstanding 3. Market share international distribution channels, 2. Schedule of all options, warrants, 4. Speed and nature of technological including any value added resellers or rights, and any other potentially change original equipment manufacturers dilutive securities with exercise 5. Timing of new products, product prices and vesting provisions enhancements 6. Cost structure and profitability

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2. Positioning of the company and C. Summary biographies of senior H. Organization and standing its products management, including employment 1. Articles of incorporation, 3. Marketing opportunities/ history, age, service with the company, including amendments marketing risks years in current position 2. Current bylaws 4. Description of marketing programs 3. Board committee charters and examples of recent marketing/ D. List of board members, biographies, and 4. Corporate minute books product/investor relations/media compensation arrangements 5. A list of all jurisdictions in which the information on the company company or any subsidiary owns or E. Compensation arrangements leases assets (including real property), 1. Copies of key employment agreements B. Major customers has employees, or is qualified to do 2. Benefit plans 1. Status and trends of relationships business as a foreign corporation 2. Prospects for future growth F. Discussion of incentive stock plans 6. A list of all current and former and development of the company 3. Pipeline analysis G. Significant employee relations problems, 7. Internet domain names, website past or present; labor contracts linking, affiliate, cobranding, content C. Principal avenues for generating provider, and other e-commerce new business H. Personnel turnover agreements 1. Data for the last two years D. Sales force productivity model 8. Noncompetition, exclusivity, on- 2. Key unfilled vacancies 1. Compensation solicitation and indemnification, 2. Quota average I. Completed directors’ and and license agreements in favor 3. Sales cycle officers’ questionnaires of the company or by which the 4. Plan for new hires company is bound IX. Legal and other matters 9. Patents, trademarks, copyrights, and E. Ability to implement marketing plan with other evidence of intangible property current and projected budgets A. Pending lawsuits against the company, 10. A schedule of significant fixed assets, detail on claimant, claimed damages, brief owned or used by the company, VI. Research and development (R&D) history, status, anticipated outcome, and including the person holding title to name of the company’s counsel such assets and any material liens or A. Description of R&D organization restrictions on such assets 1. Strategy B. Pending lawsuits initiated by the 2. Key personnel company—detail on defendant, X. Other company information 3. Major activities claimed damages, brief history, status, anticipated outcome, and the name of A. List of all shareholders with share- B. New product pipeline company’s counsel holdings, options, warrants, or notes 1. Status and timing 2. Cost of development C. Description of environmental and B. Schedule of officers, directors, and 3. Critical technology necessary for employee safety issues and liabilities committees of the board implementation 1. Safety precautions 4. Risks 2. New regulations and their C. Press releases relating to the company, its consequences management, or its products and services VII. Operations D. List of material patents, copyrights, D. Shareholder agreements, proxies, and A. List of properties licenses, and trademarks—issued voting trusts and pending B. Summary of supply chain, risks, and E. Schedule of ownership by officers, contingency plans E. Summary of insurance coverage/any employees, and directors material exposures 1. Any analyst reports covering the C. History of any business interruptions company or industry generally F. Summary of material contracts VIII. Management and personnel G. History of SEC or other regulatory agency A. Organization chart problem, if any, and all correspondence with regulatory agencies B. Historical and projected headcount by function and location

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Appendix F: Emerging growth companies

Definition An issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year.

EGC duration An issuer that is an EGC continues to maintain its EGC status until the earliest of:

•• The last day of the fiscal year during which it had total annual gross revenues of at least $1.07 billion;

•• The last day of the fiscal year following the fifth anniversary of the initial public offering of its equity (IPO);

•• The date on which it has, during the previous three-year period, issued more than $1 billion in nonconvertible debt; or

•• The date on which it is considered to be a “large accelerated filer” under the Exchange Act (meaning the issuer has been reporting for at least one year, has filed at least one annual report, and the value of its common equity held by nonaffiliates is at least US $700 million, calculated on the last business day of its most recently completed fiscal quarter).

Status During the IPO process, an issuer should test its status as an EGC at the time of the first public filing of its IPO determination registration statement with the SEC. An issuer that qualified as an EGC at the time it confidentially submitted its draft registration statement (or, alternatively, publicly filed its registration statement) but loses its status during the IPO process, can retain its EGC status through the earlier of:

•• the date of the consummation of the IPO, or

•• the end of a one-year period beginning on the date the issuer lost its EGC status.

EGC benefits •• Reduced financial information in SEC filings include –– An EGC is permitted to present only two years of audited financial statements in its registration statement, as compared to the three years required for non-EGCs. An EGC also may limit the number of years of selected financial data to two years.

•• Delayed compliance with auditor attestation on internal controls required by Section 404 of Sarbanes-Oxley

•• Deferred compliance with new or revised accounting standards

•• Reduced executive compensation disclosure

–– An EGC may (1) omit the detailed Compensation Discussion and Analysis; (2) provide compensation disclosure covering the top three (including the CEO), rather than the top five, executive officers; and (3) omit four of the six executive compensation tables required for larger companies.

•• Exempt from say-on-pay shareholder votes

•• Publication and distribution of research reports

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Acceleration. Procedure in which the SEC Best efforts. An underwriting agreement Closing. A meeting at the conclusion of an declares a registration statement effective, in which the underwriters agree to use their offering, held for the purpose of completing waiving the statutory 20-day waiting period. “best” efforts to sell the issue (without any the issuance and sale of the stock. It up-front financial commitment), acting only includes delivery of funds for the net Accelerated filer. An issuer after it first as agents of the issuer. proceeds of the offering, as well as a number meets the following conditions at the end of of documents, including certifications, legal its fiscal year: (1) public float of $75 million Bid and asked. The quoted prices for opinions, and a bring-down comfort letter. or more but less than $700 million at trading in the OTC market. The bid is the the end of its most recently completed highest price someone is willing to pay; the Comfort letter. A letter provided by the second fiscal quarter; subject to the filing asked is the lowest price at which someone auditors to the underwriters, indicating requirements of the 1934 Act for at least will sell. the results of agreed-upon procedures 12 months; and at least one annual report performed on financial data included in filed under the 1934 Act. As of June 2018, a Blue Sky Laws. A popular name for the registration statement (other than the smaller reporting company may also qualify the various states’ securities laws and audited financial statements), as requested as an accelerated filer. regulations that have been enacted to by the underwriters. regulate the offering and sales of securities Accredited investor. The SEC designation in that particular state, as well as the Confidential Submission. Process for an individual or entity meeting certain registration and reporting requirements whereby an issuer can privately submit, strict criteria specified in Regulation D. for broker-dealers and investment advisers as opposed to publicly file, its registration Certain restricted offerings are open only to in the states. The National Securities statement and successive amendments accredited investors. Markets Improvement Act (NSMIA) created to the SEC. Should an issuer decide to go categories of securities, which preempts public, these documents must be publicly Aftermarket. Trading activity in a security many IPOs from the state securities filed at least 15 days before the start of immediately following its IPO. registration requirements of the Blue any roadshow. Sky Laws. Agreement among underwriters. An Confidential treatment. The method agreement signed by the members of the Bring-down comfort letter. The update to whereby a company can request that underwriting syndicate empowering the the comfort letter issued by the company’s certain sensitive or confidential information lead underwriter to sign an underwriting auditors as a condition of closing an offering. contained in exhibits to filings made with the agreement with the company selling The bring-down letter reaffirms the detailed SEC be redacted from the documents and the stock (issuer). This is now generally comfort letter issued when the registration not made available to the public. accomplished electronically through a statement becomes effective. standardized document. Dealers. Individuals or firms in the Broker. An individual or firm that acts as an securities business who buy securities for All hands meeting. A meeting of all the intermediary between a buyer and a seller, their own account and sell to customers parties involved in preparing the registration usually charging a commission. from inventory. statement (normally company management, company counsel, underwriters, Broker-dealer. An individual or firm in the Depository Trust Company (DTC). underwriters’ counsel, and auditors). business of buying and selling securities for A securities depository that provides itself and others. When acting as a broker, clearing and services to American depositary receipts (ADRs). a broker-dealer executes orders on behalf securities brokers and dealers, banks, trust Securities issued by a US bank that of its clients. When acting as a dealer, a companies, clearing companies, and other represent foreign shares held in custody by broker-dealer executes trades for its firm’s DTC participants to hold their securities that bank, thereby facilitating the trading of own account, for which such securities may and to facilitate transfers of such securities foreign shares in US markets. be sold to clients or other firms or become a through electronic book-entry changes. part of the firm’s holdings. (Book-entry means the company’s transfer Analyst. An individual who studies the agent maintains your shares on your development of individual companies or Capitalization. The total amount of the behalf without the need for physical share industries for the purpose of advising various securities issued by a company. certificates. Shares held in uncertificated investors; also called or For registration-statement purposes, book-entry form have the same rights and securities analyst. capitalization includes all short- and long- privileges as shares held in certificate form.) term debt and shareholders’ equity.

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Dilution. The reduction of one’s relative Electronic Data Gathering, Analysis, issuer are located in the United States; or (c) equity interest; the sale of additional and Retrieval (EDGAR). An electronic the business of the issuer is administered shares dilutes the percentage of one’s system developed by the SEC that allows principally in the United States. ownership. Also, a disclosure in the companies to file electronically SEC registration statement comparing the documents. The site can be visited via the Form 8-K. Current report required to offering price to the tangible book value SEC’s website at www.sec.gov. be filed with the SEC by most domestic per share of the company’s stock before companies when specific material events or and after the offering. Emerging growth company (EGC). An corporate changes occur. issuer with total annual gross revenues of Directors’ and officers’ questionnaires. less than $1 billion during its most recently Form F-1. Basic registration form used to Questionnaires circulated by the company’s completed fiscal year. register securities by FPIs. counsel and underwriters’ counsel before registration. The questionnaires verify Financial printer. A printer that Form S-1. The most commonly used SEC information about the directors and officers specializes in the printing of financial form for registering securities in an IPO. that is to be disclosed in the registration documents, including prospectuses and statement. registration statements. Form 6-K. Current report required to be furnished by foreign private issuers with the Direct Registration System (DRS). A The Financial Industry Regulatory SEC for reporting material information that service offered by the depository trust Authority (FINRA). The largest self- is either (1) distributed to shareholders or company, which enables the registered regulatory organization for the securities filed with a foreign stock exchange, if made shareholders to maintain and transfer their industry in the United States, FINRA public by that exchange; or (2) required to be shares on the books and records of the provides oversight of brokerage firms. It made public by its domestic laws. transfer agent in book-entry form instead of also performs market regulation under a physical stock certificate. contract for, among others, Nasdaq. FINRA’s Form 8-A. The registration form to register Department reviews a class of securities under the 1934 Act to Dodd-Frank Wall Street Reform and underwriters’ compensation to determine allow trading to occur. Consumer Protection Act. Signed into whether underwriting agreements are fair law on July 21, 2010, the Dodd-Frank Act and reasonable. Form 10-K. Annual report required to be was a response to the 2007–2010 financial filed with the SEC by domestic companies in crisis. The act was passed to promote the Firm commitment. An underwriting compliance with the 1934 Act. financial stability of the United States and agreement in which the underwriters agree prevent another significant financial crisis by to buy the entire issue and then resell it. Form 10-Q. Quarterly report, containing creating new financial regulatory agencies primarily unaudited quarterly financial and processes that enforce transparency Foreign Corrupt Practices Act (FCPA). A information, which must be filed by and accountability while implementing rules federal law, which includes provisions within domestic companies with the SEC in for consumer protection. the 1934 Act, that requires companies to compliance with the 1934 Act. maintain adequate records and systems Domestic issuer. An issuer other than a of internal control with regard to certain Form 20-F. Unlike other SEC forms, this FPI. foreign payments. It also prohibits bribery form is both a registration statement and an of foreign governmental officials in order to annual report form used by foreign private Due diligence. An investigation conducted obtain or retain business. issuers under the 1934 Act. by the parties involved in preparing a registration statement to form a reasonable Foreign private issuer (FPI). A company Free writing prospectus. Written basis for believing that the statements that is incorporated or organized under communications that constitute offers contained therein are true and that no the laws of a foreign country, except an to sell or a solicitation of an offer to buy material facts are omitted. issuer meeting the following conditions: the issuer’s securities after the filing of (1) more than 50 percent of the issuer’s a registration statement other than the Effective date. The date on which outstanding voting securities are directly statutory prospectus or certain post- the registration statement is declared or indirectly held by residents of the United effective communications. effective by the SEC and the sale of States, and (2) any of the following: (a) securities pursuant to the registration the majority of the executive officers and statement can commence. directors are US citizens or residents; (b) more than 50 percent of the assets of the

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Gun jumping. Communications in advance $700 million or more as of the last business Nasdaq. Nasdaq is the world’s largest of the filing of a registration statement day of its most recently completed second computer-based stock market; it designed to prepare or “condition” the fiscal quarter; (2) subject to the filing includes the Nasdaq Global Select market for the offering in violation of the requirements of the 1934 Act for at least 12 Market, Nasdaq Global Market, and the 1933 Act. months; and (3) at least one annual report Nasdaq Capital Market. filed under the 1934 Act. As of June 2018, a International Financial Reporting smaller reporting company may also qualify Nonaccelerated filer. An issuer that does Standards (IFRS). A set of accounting as a large accelerated filer. not meet the definition of an accelerated standards developed by the International filer or a large accelerated filer. Accounting Standards Board (IASB) used Lock-up agreement. An agreement with in many countries. The SEC currently underwriters whereby the issuer and certain NYSE. Founded in 1792, New York Stock allows FPIs to file reports using IFRS as an shareholders agree not to sell their shares Exchange is the largest organized securities alternative to US GAAP. in the company for a period of time after the market in the United States. effective date of a registration statement Independent director. A member of the (usually lasting 180 days). Over-allotment. An option in a firm company’s board who is not an employee commitment underwriting agreement of the company or any subsidiary and Making a market. Efforts by a dealer to allowing the underwriters to purchase who does not have a relationship which, in maintain trading activity in a particular additional shares than what is required compliance with the requirements of the stock by offering firm bid and asked prices under the underwriting agreement. Also listing exchange independence rules and in in that stock. known as a “greenshoe.” FINRA rules limit the opinion of the company’s board, would the over-allotment option to no more than interfere with the exercise of independent Management’s discussion and analysis 15 percent of the total offering. judgment in carrying out the responsibilities (MD&A). A report from management of a director. to shareholders that accompanies the Over-the-counter (OTC) market. A company’s financial statements in the securities market made up of dealers who Insider. Officer, director, or a 10 percent annual report. It explains the period’s buy and sell securities not listed on an shareholder of a public company. financial results and enables management to exchange. The dealers in the OTC market are discuss topics that may not be apparent in linked by telephones and computer screens. Institutional investor. A bank, mutual the financial statements. For foreign issuers fund, , or other corporate using Form 20-F/F-1, the MD&A is commonly Partial secondary offering. An offering in entity that trades securities in large volumes. known as the operating and financial review which securities are offered for sale by both or OFR. the company and existing shareholders. Investment banker. The intermediary between the company issuing new Market maker. A dealer who maintains Price-earnings ratio. A measurement of securities and the investing public. Also firm bid and offering prices by standing stock value calculated by dividing the price known as an underwriter. ready to buy or sell at publicly quoted prices per share of common stock by earnings in a particular security. per share. IPO. Initial public offering. An issuer’s first public distribution of a security. Material information. Refers to Private placement. An offering of information that a reasonably prudent securities exempt from registration, which is Jumpstart Our Business Startups investor would find of importance in making limited in distribution. Act (JOBS Act). Signed into law on April an investment decision. 5, 2012, the law consists of a package of Private Securities Litigation Reform bills intended to make it easier for smaller Medallion signature guarantee. A stamp Act of 1995 (PSLRA). Legislation passed companies to raise capital in the US provided by an eligible guarantor institution by Congress in 1995 to stem the filing financial markets. (financial institutions, such as a bank, of frivolous or unwarranted securities broker, , or savings association) lawsuits. The PSLRA increased the amount Large accelerated filer. An issuer after to guarantee the genuineness of the of evidence plaintiffs were required to have it first meets the following conditions as of shareholder’s signature in connection with before filing a securities fraud case with the end of its fiscal year: (1) public float of the transfer of securities. the federal courts. It also changed the way

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securities class action lawsuits were handled Quiet period. Generally, the period Regulation S-K. The primary integrated by giving judges the authority to determine between the time the registration statement disclosure rules for preparing the portions plaintiffs and to take other actions to reduce is filed and the effective date, so called (other than the financial statements) of legal system abuses. because of the restrictions on publicity. forms filed under the 1933 and 1934 Acts. There are also restrictions on publicity Prospectus. The official document included both before and after the quiet period, Regulation S-X. The primary rules in the registration statement filed with the also known as the waiting period. Certain governing the preparation of the financial SEC, used as the selling document in an excepted communications, such as “testing statements in forms filed under the 1933 offering that discloses pertinent information the waters” communications, are permitted and 1934 Acts. regarding the issuer and the securities being during the quiet period. sold. It must be given (or deemed given) to Restricted stock. Securities, usually issued original purchasers of the security no later Red herring. The preliminary prospectus, in a private placement, that have limited than the confirmation of their purchase. circulated during the waiting period, which transferability. Also called legended stock or bears a legend in red ink stating that letter stock. Proxy solicitation. The request to be the registration statement has not yet authorized to vote on someone else’s behalf. become effective. Roadshow. A series of presentations by A proxy statement must be furnished to company executives during the waiting shareholders before soliciting their proxies. Registrar. An agency that issues certificates period, for the purpose of introducing the to new shareholders and verifies the company and its management to potential Proxy statement. A document that the transfers of stock to make sure that the investors, analysts, and underwriters. SEC requires a company to send to its number of new shares issued is the same as shareholders, which provides material the number of shares canceled. Rule 144. An exemption provided in facts concerning matters on which the the 1933 Act that allows, under certain shareholders will vote. Registration. The administrative procedure conditions, the resale of restricted stock by for filing information required under the any person and other stock by controlling Public Company Accounting Oversight 1933 Act. persons in the public market without Board (PCAOB). A private sector, registration of that stock. nonprofit corporation, created by SOX, to Registration statement. A document oversee the auditors of public companies filed with the SEC to register securities Rule 144A. An exemption provision of the in order to protect the interests of under the 1933 Act. The registration 1933 Act that provides a “safe harbor,” under investors and further the public interest statement (e.g., Form S-1) comprises the certain conditions, for resales of securities in the preparation of informative, fair, and prospectus and other information not to certain qualified institutional buyers, as independent audit reports. required in the prospectus. defined in Rule 144A.

Public float. The aggregate worldwide Regulation D. Provisions of the 1933 Act Sarbanes-Oxley Act of 2002 (SOX). market value of the issuer’s outstanding that contain rules governing certain private- Congress-enacted reforms aimed at voting and nonvoting common equity held placement offerings. restoring investor confidence, which hold by nonaffiliates. public companies to a higher standard of Regulation fair disclosure (FD). The rule corporate governance than in the past. Qualified institutional buyer (QIB). governing selective disclosure by issuers of A purchaser of securities that is deemed material nonpublic information, requiring SEC. The Securities and Exchange financially sophisticated and is legally that when an issuer or person acting on Commission is a federal agency created recognized by security market regulators to its behalf discloses material nonpublic by the 1934 Act to administer federal need less protection from issuers than most information to certain enumerated securities laws. public investors. QIB primarily refers to an persons, it must disclose that information institution that manages at least $100 million simultaneously for intentional disclosures or Secondary offering. An offering in which in securities from issuers not affiliated with promptly for nonintentional disclosures by a securities of previously unregistered stock the institution. Also included are registered method or methods reasonably designed to are offered for sale by existing shareholders. broker-dealers owning and investing, on a effect broad, nonexclusionary distribution of discretionary basis, $10 million in securities the information to the public. of nonaffiliates.

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Securities Act of 1933, as amended Stabilization. Attempts by the Underwriters’ discount. A percentage (1933 Act). Sets forth the disclosure and underwriters to stabilize prices during the of the gross proceeds of an IPO that antifraud requirements for securities distribution of a new issue, specifically constitutes the compensation paid to the offered and sold in interstate commerce and through the purchase of securities for their underwriters for marketing and selling through the mail. own account when the market price is at a the offering. dip below the public offering price. Securities Exchange Act of 1934, as Underwriting agreement. An agreement amended (1934 Act). Regulates and Syndicate. A group of investment bankers between a company and its underwriters controls the securities markets and that, together, underwrite and distribute an setting forth the terms of the offering, related practices and matters. Includes offering of securities. including method of underwriting, the ongoing disclosure requirements and offering price, and commissions. antifraud provisions. . A formal offer to purchase shares of stock from existing shareholders, Waiting period. The period between Smaller reporting company. A company usually in connection with an attempt to the date the registration statement is that meets all the following criteria: (1) is not gain control of the company. initially filed with the SEC and the date it is an investment company, an asset-backed declared effective. issuer, or the majority-owned subsidiary Tombstone ad. An advertisement with of a parent that is not a smaller reporting limited information announcing an offering Warrants. Certificates giving the holder company; and (2) had a public float of less of securities and indicating where a copy of the right to purchase securities at a than $250 million as of the last business the prospectus can be obtained. stipulated price within a specified time day of its most recently completed second limit or perpetually. fiscal quarter or in the case of an IPO, as of Transfer agent. An agency that keeps the date within 30 days of the date of the the official records of the names and XBRL. A language for the electronic filing of the registration statement, and in addresses of a company’s shareholders communication of business and financial the case of an issuer whose public float and handles the transfer of shares from data. SEC filers are required to add a “tag” was zero; or (3) had annual revenues of less one person to another. to every numeric amount in the financial than $100 million and no public float, or a statements and to every numeric amount public float of less than $700 million during Underwriter. See investment banker. in the notes to the financial statements (but its most recently completed fiscal year for excluding MD&A or other disclosures). which audited financial statements are available on the date of filing.

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About Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates

Serving clients in every major international financial center, Skadden process to assist our clients with planning and preparing for post-IPO is one of the leading law firms in the world, with 22 offices and public company disclosure and governance requirements. approximately 1,700 attorneys. We consistently have been named one of the leading firms globally in The Capital Markets Group at Skadden has advised on some of the capital markets by Chambers Global, Chambers USA, Chambers Latin largest and most complex initial public offerings worldwide. We America, Law360, Legal 500, IFLR1000, and U.S. News – Best Lawyers— also regularly represent companies of all sizes and underwriters in with many of our attorneys individually identified as leaders in the connection with smaller and midsized IPOs, including those of many area of capital markets. Skadden has been named the top US firm in emerging companies. We integrate members of our securities regulation Corporate Board Member magazine’s annual survey of “America’s Best and corporate governance practice in the early stages of the IPO Firms” more than any other firm.

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About Deloitte

Deloitte offers a dedicated group reports; an ongoing webcast series Rod Gauer of professionals with extensive IPO called Dbriefs for Financial Executives; Partner experience across all industries. We offer and the highly acclaimed Technical Deloitte & Touche LLP fully integrated, customized solutions and Library, the Deloitte +1 213 688 6993 provide accounting, financial reporting, tool. Our experienced professionals [email protected] and technology short-term deliverables are distinguished in the accounting and long-term solutions. We can call on our profession—many have held positions Heath Poindexter deep and diverse experience to tailor an with organizations such as the SEC and Partner approach to help you address your specific the Standards Board. Deloitte & Touche LLP needs in preparing for your IPO—no matter +1 214 840 1368 what your company’s level of readiness. Links to relevant sites [email protected] In addition to this publication, Deloitte Our access to the resources of the member has a range of publications to assist with Previn Waas firms of Deloitte Touche Tohmatsu Limited IPO-related matters, legislative changes to Partner enables us to deliver quality services the IPO process, and accounting standards Deloitte & Touche LLP on a global scale, including accounting, related to IPO filings. These publications can +1 408 704 4083 financial reporting, tax, and technology, be found at the websites listed below. [email protected] through a network of professionals located in business centers around the world. For more information on Controllership, Christine M. Murphy Deloitte’s Controllership practice offers click here. Managing Director vast experience and a strong track record Deloitte & Touche LLP with US GAAP, IFRS, and regulatory filings For more information on the Center for + 1 313 396 3325 (SEC and other regulatory agencies). This Board Effectiveness, click here. [email protected] enables us to assist with a broad set of issues wherever you operate in the world, For more information on Accounting Sandy Pfeffer as well as help you explore options to list on Standards & Communications, click here. Managing Director both domestic and foreign exchanges. . Deloitte & Touche LLP Additional Resources +1 215 405 7846 The Deloitte Center for Board Effectiveness A roadmap to initial public offerings (2018) [email protected] (the Center) assists executives, boards of directors, and others active in governance Deloitte’s entire roadmap series by providing them with resources pertaining to current boardroom issues Contact the specialists: and governance trends. The Center’s Jeff Bergner activities demonstrate its focus to Partner encourage dialogue, knowledge sharing, Deloitte & Touche LLP and collaboration among corporations, +1 312 486 3377 board members, the accounting profession, [email protected] academia, and government. Michael Dziczkowski Deloitte’s Accounting Standards Partner & Communications practice helps Deloitte & Touche LLP organizations stay informed on +1 212 436 2813 the latest developments within the [email protected] accounting profession, offering a variety of information resources on accounting standards, financial reporting, regulatory updates, and technical trends. Resources include timely newsletters; special

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