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Frequently Asked Questions About Initial Public Offerings

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Frequently Asked Questions About Initial Public Offerings FREQUENTLY ASKED QUESTIONS ABOUT INITIAL PUBLIC OFFERINGS Initial public offerings (“IPOs”) are complex, time-consuming and implicate many different areas of the law and market practices. The following FAQs address important issues but are not likely to answer all of your questions. • Public companies have greater visibility. The media understanding IPOS has greater economic incentive to cover a public company than a private company because of the number of investors seeking information about their What is an IPO? investment. An “IPO” is the initial public offering by a company • Going public allows a company’s employees to of its securities, most often its common stock. In the share in its growth and success through stock united States, these offerings are generally registered options and other equity-based compensation under the Securities Act of 1933, as amended (the structures that benefit from a more liquid stock with “Securities Act”), and the shares are often but not an independently determined fair market value. A always listed on a national securities exchange such public company may also use its equity to attract as the new York Stock exchange (the “nYSe”), the and retain management and key personnel. nYSe American LLC or one of the nasdaq markets (“nasdaq” and, collectively, the “exchanges”). The What are disadvantages of going public? process of “going public” is complex and expensive. • The IPO process is expensive. The legal, accounting upon the completion of an IPO, a company becomes and printing costs are significant and these costs a “public company,” subject to all of the regulations will have to be paid regardless of whether an IPO is applicable to public companies, including those of successful. the Securities exchange Act of 1934, as amended (the “exchange Act”). • Once an IPO is completed, a company will incur higher costs as a public company, including What are advantages of going public? the significant compliance requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and • The most obvious reason to go public is to raise the Dodd-Frank Wall Street Reform and Consumer capital. unlike a private offering, there are no Protection Act of 2010 (“Dodd-Frank”). restrictions imposed on a company with respect to offerees or how many securities it may sell. The • Ther e is much more public scrutiny of a funds received from the securities sold in an IPO company after an IPO. Once a company is public, may be used for common company purposes, such certain information must be disclosed, such as as working capital, research and development, compensation, financial information and material retiring existing indebtedness and acquiring other agreements. companies or businesses. How does the JOBS Act change the IPO process? • Going public creates a public market for a company’s securities. Liquidity is important for existing and Since at least the dotcom bust of the early 2000s and future investors, and provides an exit strategy for accelerating after the passages of Sarbanes-Oxley and venture and hedge fund investors. Dodd-Frank, business leaders and commentators have observed that the regulatory requirements to be met • Following an IPO, a company should have greater in order to finance companies in the united States access to capital in the future. Once a public market have become overly burdensome and discourage is created, a company may be able to use its equity entrepreneurship. In the aftermath of the financial in lieu of cash or more costly debt financings. crisis of 2008, national attention shifted to job creation Later-stage R&D companies and companies with near- and the backlash against over-regulation brought term milestones may also decide to access the public about by Dodd-Frank. In April 2012, the Jumpstart Our markets through an IPO. Business Startups Act (the “JOBS Act”) was enacted, There are a number of kinds of companies that which reflects many of the legislative initiatives that do not yet have an operating history but may seek had been discussed for several years. The JOBS Act to go public in order to pursue their strategic plans, adopted the following provisions that affect capital including: formation: • Real estate investment trusts (“REITs”), including • An “IPO on-ramp” for a new category of issuer, mortgage ReITs, are formed to take advantage of “emerging growth companies,” that offers a number opportunities to purchase distressed or undervalued of benefits, including confidentiale S C Staff review of mortgage-related securities and equity ReITs that draft IPO registration statements, scaled disclosure seek to acquire specific kinds of real estate. requirements, no restrictions on “test-the-waters” communications with qualified institutional buyers • Special purpose acquisition vehicles (“SPACs”), a (“QIBs”) and institutional accredited investors more recent type of blind pool offering, are shell before and after filing a registration statement, and or blank-check companies that have no operations fewer restrictions on research (including research but go public with the intention of merging with or by participating underwriters) around the time of acquiring a company with the proceeds of the IPO, an offering (all of which will be discussed in greater subject to shareholder approval. detail below). • Business development companies (“BDCs”) are entities • An amendment to the Securities Act (informally that go public to fill the perceived need for capital referred to as Regulation A+) permitting for smaller businesses. companies to conduct offerings to raise up to $50 million in any 12-month period through a “mini- What is an “emerging growth company” or “EGC”? registration” process similar to that provided for The JOBS Act establishes a new process and disclosures under Regulation A. for IPOs by a new class of companies referred to as • Higher securityholder triggering thresholds for “emerging growth companies” or “eGCs.” An eGC reporting obligations under the exchange Act. is an issuer (including a foreign private issuer) with total annual gross revenues of less than $1.07 billion • Removal of the prohibition against general (adjusted from $1 billion in March 2017, and subject to solicitation and general advertising in certain inflationary adjustment by the SeC every five years) private placements. during its most recently completed fiscal year.1 The • A new exemption under the Securities Act for SeC Staff has stated in its General Applicability FAQs crowdfunding offerings. that asset-backed issuers and registered investment The JOBS Act offers an issuer new possibilities for companies do not qualify as eGCs; however, BDCs can structuring its capital raise. qualify as eGCs. 1 In its Frequently Asked Questions of General Applicability What types of companies go public? on Title I of the JOBS Act (issued on April 16, 2012, updated on May 3, 2012 and September 28, 2012, and collectively Any company seeking greater access to capital may referred to herein as the “General Applicability FAQs”), decide to go public. Companies with revenues and the SeC Staff specified that the phrase “total annual profits or a shorter path to profitability are more gross revenues” means total revenues of the issuer (or a likely to have successful IPOs than companies predecessor of the issuer, if the predecessor’s financial without revenues or that are in a development stage, statements are presented in the registration statement for the most recent fiscal year), as presented on the income particularly in difficult economic environments. A statement in accordance with u.S. generally accepted company seeking increased visibility and liquidity accounting principles (“GAAP”). If a foreign private may also decide to go public. Depending on its size issuer is using International Financial Reporting Standards and business, a public company may have from two to (“IFRS”) as issued by the International Accounting 20 analysts covering its stock. Standards Board as its basis for presentation, then the IFRS revenue number is used for this test. Because an Research and development-based companies, issuer must determine its eGC status based on revenues including pharmaceutical and technology companies, as expressed in u.S. dollars, the SeC Staff indicates that a with strong valuations but little current revenue may foreign private issuer’s conversion of revenues should be based on the exchange rate as of the last day of the fiscal decide to go public to fund long-term, costly R&D. year. 78 2 Morrison & Foerster LLP Capital Markets How long can an issuer maintain EGC status? ceases to be an eGC to continue to be treated as an eGC Status as an eGC is maintained until the earliest of: through the earlier of: the date on which the issuer consummates its IPO pursuant to that registration • the last day of the fiscal year in which the issuer’s statement, or the end of the one-year period beginning total annual gross revenues are $1.07 billion or more; on the date the company ceases to be an eGC. • the last day of the issuer’s fiscal year following the fifth anniversary of the date of the first sale of When should a company go public? common equity securities of the issuer pursuant There is no right answer or right time. It depends on to an effective registration statement under the a company’s need for cash or liquidity to pursue its Securities Act (for a debt-only issuer that never strategic plans. There is a market consensus that there sells common equity pursuant to a Securities Act is a “window” when companies, often particular types registration statement, this five-year period will not of companies, can effect IPOs. Whether the window run); is open or closed depends on overall economic • any date on which the issuer has, during the prior conditions and investor appetite for risk. For example, three-year period, issued more than $1 billion in in the dotcom boom of the late 1990s, many technology non-convertible debt; or companies had ideas but no revenues and certainly no • the date on which the issuer becomes a “Large profits.
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