Fourth Edition

Fall 2012
Strategies for Going Public:
The changing landscape for IPOs
Welcome to the fourth edition of Strategies for Going Public!
The market for Initial Public Offerings (IPOs) has never been more complex or challenging
than it is today. The legacy of the nancial crisis, and the economic volatility that continues
to impact the markets, have made investors even more diligent in their scrutiny of IPOs.
In addition, new legislation introduced since the crisis has only added to the complexity
of these transactions. In particular, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) and the Jumpstart Our Business Startups Act (JOBS Act)
have added many new requirements and considerations to the IPO process. Finally, timing
is critical and essential, 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 fourth edition of Strategies for Going Public, created by Deloitte
in collaboration with American Stock Transfer & Trust Company, LLC and Skadden, Arps,
Slate, Meagher & Flom LLP & Afliates aims to help organizations 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 that organizations will need to take into account as they seek to go public.
An IPO is an important event in the life of an organization as they seek to grow. Executing
the IPO is the initial step in being a public company. We hope that this publication takes
away some of the mystery and uncertainty surrounding the process and acts as a useful
guide as your organization begins its IPO journey.
Good luck!

Tom Omberg
Partner, Deloitte & Touche LLP
As used in this document, Deloitte means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description
of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of
public accounting.
Forward
Contents
This publication is for educational and informational purposes only and is not intended and should not be
construed as accounting, business, nancial, investment, legal, tax, or other professional advice or services.
This publication is not a substitute for such professional advice or services, nor should it be used as a basis for
any decision or action that may affect your business. Before making any decision or taking any action that
may affect your business, you should consult a qualied professional advisor. This publication is considered
attorney advertising under applicable state laws.
Deloitte, its afliates, and related entities, American Stock Transfer & Trust Company, LLC, and Skadden, Arps,
Slate, Meagher & Flom LLP & Afliates shall not be responsible for any actions taken or loss sustained by any
person who relies on this publication.
1 Chapter 1 Should you go public?

9 Chapter 2. Is the time right?

13 Chapter 3. Your team

19 Chapter 4. Pre-public planning

31 Chapter 5. The underwriters

39 Chapter 6. Registration

53 Chapter 7. Marketing the offering

59 Chapter 8. Closing the deal

63 Chapter 9. After you go public

71 Chapter 10: Foreign private issuers

77 Chapter 11: Dodd-Frank Wall Street Reform and Consumer Protection Act

83 Chapter 12: Jumpstart Our Business Startups Act

Appendices
i. Appendix A: The U.S. Securities and Exchange Commission
ii. Appendix B: Registration exemptions
v. Appendix C: The securities exchanges
ix. Appendix D: A timetable for going public
xii. Appendix E: A sample due diligence checklist
xiv. Glossary
1
Chapter 1. Should you go public?
Going public is a long, involved process that represents a
signicant milestone for any company.
Strategies for Going Public 2
Exploring the opportunity to go public today presents many
challenges due to market volatility, increased regulations,
expanded investor scrutiny of corporate governance, and
heightened legislative inuence. The Dodd-Frank Act and
the JOBS Act are examples of recent legislation contributing
to this changing IPO landscape. (Chapter 11 and Chapter
12 further elaborate on both pieces of legislation.)
This publication will give you information to help you
understand the requirements of an offering in light of the
changing IPO landscape, including the people you may need
to assist you, what your role will be, certain regulations with
which you must comply, and what effect a public offering
may have on you and your company. Most importantly,
it will help you prepare for what to expect as you start
the journey toward going public. To assist you, we have
summarized the contents of each chapter below.
Chapter 1: Should you go public? Public ownership
can provide signicant benets to a company and its
shareholders, but it also has many disadvantages. This
chapter offers you an overview of the process and touches
on some of the pros, cons, and alternatives that should
be considered before you decide whether this is the right
course for your company.
This publication is intended only as a general overview and is not intended to provide legal or investment advice. It does not address all federal and state securities laws, rules of the Financial
Industry Regulatory Authority (FINRA), and listing standards and other requirements of the trading markets or other laws, rules, and practices that may apply to an initial public offering, and
we undertake no duty to update the laws, rules and practices that are described herein. Securities and corporate counsel should be involved and you should refer to the actual laws, rules, and
regulations themselves when preparing to go public.
Chapter 2: Is the time right? It is important to evaluate
your companys appeal to investors and the state of
the market before you decide to go public. This chapter
describes several of the issues the market considers
during an initial public offering, as well as some of the
key characteristics of a company considering whether to
go public. Having a business plan that incorporates these
characteristics can enable you to move quickly and take
advantage of market opportunities.
Chapter 3: Your team. Taking your company public requires
the talents of a variety of highly specialized professionals.
This chapter identies these professionals and offers a brief
overview of their roles in the process. You should also give
consideration to your companys own team. Additionally,
this chapter discusses skill sets demanded in a public
companys nance function and beyond.
Chapter 4: Pre-public planning. This chapter deals with
the steps that you likely need to take to prepare your
company for a public offering. It also provides you with an
insight into the roles that you can expect your management,
attorneys, independent registered public accounting rm or
auditor, and accounting advisors
to play.
The 1933 Act requires the registration of securities
with the SEC prior to their sale to the public, unless
an exemption from registration exists. Additionally,
the 1933 Act requires that investors receive nancial
and other material information concerning the
company. The Securities Exchange Act of 1934, as
amended (1934 Act), created the SEC, regulates and
controls the securities markets and related practices,
and establishes the ongoing periodic disclosure
requirements.
Introduction
On the surface, the transformation from a private to a public company seems
fairly straightforward. A company typically goes public when it sells securities
to the general public for the rst time. Generally, going public refers to the
sale of equity securities, although in some cases it may refer to the sale of debt
securities. The term going public in this publication refers to those instances
where a company les a registration statement with the Securities and Exchange
Commission (SEC) in accordance with the Securities Act of 1933, as amended
(1933 Act), for the offer and sale of securities to the public for the rst time. The
process is often called the initial public offering or IPO.
3
the registration statement effective. This chapter
reviews the importance of the due diligence process,
the makeup of the registration statement, as well as the
clearances necessary for your registration statement to
be declared effective.
Chapter 7: Marketing the offering. The actual selling
efforts principally occur during the weeks immediately
preceding the effective date of your registration
statement. This chapter describes that process, the rules
governing what you can and cannot do and say during
the offering process, and what your involvement in the
selling effort should be.

Chapter 8: Closing the deal. Once your registration
statement is effective and the offering is priced, the
remaining events in the process of going public occur
very quickly. This chapter outlines those events.
Chapter 9: After you go public. Even before the
offering is completed, you must look ahead to your
responsibilities and duties as executives and decision
makers of a public company. This chapter explains
aftermarket trading, your relationship with the nancial
community, reporting requirements, and some of the
federal securities laws that may affect you.
Chapter 10: Foreign private issuers (FPIs). Many
foreign companies consider going public in the U.S.
This chapter discusses some of the more important
differences between initial public offerings for domestic
issuers and foreign issuers.
Chapter 11: Dodd-Frank Wall Street Reform and
Consumer Protection Act. Signed into law on July
21, 2010, the law requires various agencies to make
rules, conduct studies, and create regulations as part of
nancial regulatory reform. This chapter provides a high-
level overview of those provisions in the Dodd-Frank Act
that may affect the IPO process.

Chapter 12: Jumpstart Our Business Startups Act.
Signed into law on April 5, 2012, the law consists of a
package of bills intended to make it easier for smaller
companies to raise public and private capital in the
U.S. nancial markets. This chapter provides a high-level
overview of the effects of the JOBS Act on the
IPO process.
The prospect of having capital
available to fnance future growth can
be alluring. Yet careful and deliberate
thought is prudent when deciding to
go public.
Chapter 5: The underwriters. One or more lead
underwriters are critical to the immediate and long-term
success of your public offering. This chapter discusses criteria
to use in selecting lead underwriters and, just as important,
some of the market criteria underwriters use in deciding
whether they want to take your company public. It also
explains the factors that underwriters typically consider when
pricing your stock.
Chapter 6: Registration. Everyone on your team will be
involved in preparing and ling your registration statement
and other documents with the SEC. Your companys
decision to go public is contingent upon the SEC declaring
Strategies for Going Public 4
Advantages and disadvantages
Going public can signify to the outside world that a company has achieved a special kind of success. Overnight, the
company can be transformed from being a closely held entity with a handful of shareholders to a company with a
large number of holders of its stock, which can be easily bought or sold through a stock exchange or the over-the-
counter (OTC) market.
News about the dramatic wealth created for company founders and members of management that often follow an
IPO can be captivating. The prospect of having capital available to nance future growth can be alluring. Yet careful
and deliberate thought is prudent when deciding to go public. Opening your company to increased public scrutiny
can change the way you do business, and the pressures to maintain growth patterns and meet the expectations of the
investment community are typically real and intense. It is advisable to weigh fully the advantages and disadvantages,
including those listed in the section below, with a group of trusted advisors.
The advantages
Going public potentially provides both tangible and
intangible benets, including the following:
Increased capital. When growth can no longer be
nanced internally from private equity investors or
borrowings, an IPO can provide your company with
additional funds to meet working capital needs, acquire
other businesses, expand research and development
efforts, invest in facilities and equipment, or retire
existing debt. Publicly traded stock can also be used
effectively in mergers and acquisitions.
Improved nancial position. As an IPO is usually in
the form of an equity-based security, your company will
experience an immediate improvement in its balance
sheet and debt-to-equity ratio.
Increased visibility. Going public will give your
company ongoing exposure through worldwide media
coverage of the nancial markets. Broker-dealers will
now be analyzing your company, comparing it to peer
companies, and setting earnings expectations, all of
which are highly publicized exercises. Such enhanced
visibility may also create opportunities for your company
to expand into other global markets in the future.
Less dilution. If your company is at the stage where it
is ready to go public, you may command a higher price
for your securities through an IPO than through a private
placement or other form of equity nancing. This means
that you give up less of your company to receive the
same amount of funding.
Enhanced ability to raise capital in the future. As your
company continues to grow, you may need additional
permanent nancing in the future. If your stock performs
well in the stock market, you may be able to sell
additional stock or debt on favorable terms.
Liquidity. Once your company goes public, a market will
be established for your stock. A public market provides
liquidity for management, employees, and existing
investors. Subject to applicable laws and regulations (see,
for example, the discussion of sales restrictions under
Rule 144 of the 1933 Act in Chapter 9), holders of your
stock may generally sell it whenever the need arises.
There are important restrictions to keep in mind that
place certain limits on the timing and number of shares
that can be sold by many parties after the offering.
continued on next page
5
Exit strategy. Some major shareholders, such as
venture capital rms, require liquidity in a company.
Venture capital rms generally organize funds with an
expected life of less than 10 years. At the end of that
period, they typically need to liquidate the fund. By
going public, you provide the venture capitalists with
the ability to sell their holdings or distribute publicly
tradable stock to their fund participants.
Improved credibility with business partners.
The simple fact that you are public provides
business partners, such as suppliers, distributors, and
customers, with more information and can be an
indication to them that your company is a business of
substance. Prospective suppliers and customers may
feel more secure about entering into a relationship
with your company. You may also be perceived as
a more attractive partner in a joint venture or other
similar relationships as a public company.
Better ability to attract and retain personnel. Stock
options and other incentive compensation plans
enable personnel to participate in the companys
success without increasing cash compensation. The
chance to acquire stock in the company they work
for may motivate employees to take a longer-term
view of the company. Additionally, it enhances the
companys ability to attract and retain top talent.
Personal wealth. Not insignicantly, an IPO may
enhance your net worth. Even if you do not realize
immediate gain by selling a portion of your existing
stock in the IPO, you may be able to use publicly
traded stock as collateral to secure borrowings of
a personal nature. Shares of publicly traded stock
are usually more liquid and, as such, can facilitate
personal nancial and estate planning.
The disadvantages
There are also some very signicant disadvantages
of going public that should be weighed against the
many advantages:
Loss of condentiality and increased nancial
transparency. As a publicly held corporation, your
companys operations and nancial situation are open
to public scrutiny. Information concerning the company,
ofcers, directors, and certain shareholders, not ordinarily
disclosed by privately held companies, will be suddenly
available to competitors, customers, employees, and others.
Also, information about your companys sales, prots, and
executive information such as compensation of your ofcers
and directors must be disclosed not only initially, when you
go public, but also on a continuing basis thereafter.
Management demands. Top management frequently
needs to be available to shareholders, brokers, analysts, and
the press. Executives (e.g., the CEO and CFO) must also
be involved in preparing and certifying written information
about nancial results and other company matters that must
be reported to the public and the SEC.
Pressure to maintain growth pattern. There can be
considerable internal and external pressure to maintain the
growth rate you have established. If your sales or earnings
deviate from established trends or from analyst expectations,
shareholders may become apprehensive and sell their stock,
driving down its price. While a reduced stock price does not
have a direct nancial effect on a company, it may affect
company reputation, employee compensation (through
reduced option 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
will have to begin reporting operating results on a quarterly
basis with the SEC. Additionally, you will need to disclose
material items that arise 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 signicantly.
Less control and more board of directors inuence.
The sale of shares to the public will dilute your ownership
and may reduce your level of control of the company. In
addition, depending on the requirements of your trading
market, you are likely to be required to have a Board of
Directors (board) consisting of a majority of independent
Strategies for Going Public 6
directors. The board is responsible for protecting
the shareholders interests and you will need to take
into account the boards role in making decisions.
Additionally, as your ownership is diluted, the
possibility for a hostile takeover increases.
Greater legal exposure. As a consequence of selling
your companys shares to the public, there is greater
legal exposure for the company and its ofcers
and directors. Directors are increasingly subject to
litigation asserting breach of duciary duty resulting
in a decline in stock price. In addition, directors and
ofcers are sometimes subject to SEC enforcement
actions in connection with an alleged misreporting
of nancial results or other violations of law or
regulations. The offering itself creates exposure
under the antifraud rules of the 1933 Act and 1934
Act. All communications, written and oral, relating
to the offering or included in periodic reports or
other public disclosures, can give rise to litigation
for securities fraud if the communications were
materially misleading. You will have to become much
more formal in your decision making. Often, private
companies operate somewhat informally with respect
to director involvement. That can no longer occur
with a public company.
Enhanced corporate governance. In response
to the corporate failures and loss of investor
condence during the technology bubble in the
late 1990s, the corporate frauds and failures in the
early millennium, and the economic crisis of the late
2000s, Congress implemented a variety of reforms
designed to strengthen corporate governance and
restore investor condence. The Sarbanes-Oxley Act
of 2002 (SOX) and the Dodd-Frank Act were two
of the most comprehensive reforms to be passed
since the 1933 Act and the 1934 Act. Both pieces
of legislation mandated changes that hold public
companies to a much higher standard of corporate
governance than in the past. The governance listing
standards of the New York Stock Exchange (NYSE)
and The NASDAQ Stock Market (NASDAQ) have also
increased signicantly. In addition, many investors
have their own expectations of best practices in
corporate governance that they may communicate
to you, either directly or through use of their proxy
power. These investor demands can exceed even
the heightened regulatory requirements. As a result,
corporate governance has become a priority for
investors, companies, and their boards.
Expense. The cost of going public is substantial, both
initially and on an ongoing basis. As for the initial
costs, the underwriters discount or commission
typically runs between six to seven percent of the
total offering proceeds. In addition, you will incur
signicant out-of-pocket expenses for even a small
IPO. These initial expenses are discussed at greater
length in Chapter 4. There are also signicant
ongoing expenses associated with periodic public
reporting, SEC rule compliance, directors and
ofcers (D&O) liability insurance, independent
director fees in the form of cash payments and
option awards, as well as with other requirements.
7
The alternatives
Companies typically make use of a variety of nancing
options before they even consider going public. Generally
speaking, these debt and investment options should be
explored and, where appropriate, fully considered before a
company decides on a public offering. The most common
way to raise additional capital, of course, is to borrow.
Debt nancing can be obtained from institutions such
as banks, asset-based lenders, and equipment nancing
companies. The advantages of debt nancings are that they
may be relatively simple to arrange and will not dilute your
ownership. For many companies seeking alternative funding
sources, private placements or venture capital may also
prove of interest.
Exclusive reliance on debt rather than equity may have
unintended consequences. When you incur debt, you
subject your company to potentially signicant nancial
obligations. A downturn in your business or an increase in
interest rates could make it difcult to meet your payments.
Many companies have faltered in this way.
Another common alternative is to sell your business. The
sale of a business will often provide quicker liquidity than
an IPO. You will also not be subject to the risk of a decline
in the market value of the company after a sale. However,
if you sell your business for stock of the acquiring company,
you should understand the risks associated with their stock
and perform the appropriate level of due diligence on the
acquirer. Some companies actually follow a dual-track
process, meaning they begin the IPO process while exploring
the possibility of being acquired. In both instances, you are
marketing your company and many of the early steps in the
IPO process can be helpful in an acquisition context. For
example, strengthening your internal control over nancial
reporting (ICFR) framework would assist in the facilitation of
your acquisition by a public entity.
The process
Here, in brief, is the typical general sequence of events
involved in taking a company public once an informed
decision has been made:
Underwriting. Once you have decided that pursuing
an IPO is the appropriate avenue for your company, you
would typically invite several investment banking rms,
or underwriters, to discuss this possibility. Those who are
interested meet with you and your management team to
investigate the companys operations and prospects. The
underwriters submit proposals, you select one rm (or
more), and the formal process begins. This is covered in
greater detail in Chapter 5.
At this point, you will not have any binding commitments
with the underwriters. To help you decide whether to
proceed, the underwriters can be expected to provide you
with a range of values for the company and the percentage
interest in the company that they recommend be sold. There
is usually a series of valuation discussions. However, the
ultimate share price and size of the offering are not nally
determined until immediately before the stock is ready to be
sold.
Registration statement. In connection with an IPO, the
1933 Act requires that a registration statement be led
with the SEC before securities may be offered for sale
and that a registration statement be declared effective
by the SEC before securities are sold. Preparing the
registration statement to comply with SEC requirements
is a team effort of management, auditors, and legal,
tax, and accounting professional advisors. This is usually
the most time-consuming step in the process of going
public. When the preparation process begins, an all
An IPO is most commonly thought of as the initial
sale of equity securities to the public, typically
occurring on a registration statement on Form S-1.
However, there are also other situations in which a
company can register debt or equity securities with
the SEC for the rst time, such as by exchanging
debt securities previously issued in a private
transaction for registered debt securities (typically
on a Form S-4), distributing shares in a spin-off
transaction by a public company (typically on a
Form 10), or registering currently outstanding equity
securities (typically also on a Form 10).
Perhaps the most
notable change
resulting from the JOBS
Act is the creation of
the emerging growth
company (EGC), a
new type of issuer
whose less stringent
regulatory and
reporting requirements
are intended to
encourage public
offerings by small and
developing companies.
See Chapter 12 for
additional information
on the JOBS Act.
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Strategies for Going Public 8
hands meeting is typically held to delegate responsibility
for preparing the various sections of the registration
statement and to establish a timetable for its completion.
When completed, the initial registration statement is led
with the SEC. The interval between the initial ling of
the registration statement and its effective date is called
the waiting period or quiet period during which you
will be responding to the SECs comments and updating
the registration statement. There are restrictions on
communications during the waiting period, which are
discussed further in Chapter 7.
Marketing. Typically, after the company and its advisors
resolve all potentially signicant SEC comments, but before
effectiveness of the registration statement, a preliminary
prospectus is printed to be used in the marketing efforts.
The preliminary prospectus must bear a legend stating that
a registration statement related to the offering has been
led with the SEC, but has not yet become effective and
that the securities may not be sold, nor may offers to buy
be accepted, before the effective date. Because this legend
is printed in red ink, the preliminary prospectus is commonly
referred to as the red herring.
This is the stage, as a practical matter, when the
underwriters major marketing efforts will move into full
swing. By this point, the lead underwriter has usually
formed a syndicate of underwriters. As rms join the
syndicate, their salespeople begin distributing the red
herring to clients and orally soliciting orders. These orders
are considered as indications of interest only and may be
canceled by the customers. Also, the roadshow generally
occurs during this period. This is a tour that enables the
companys executives to meet the underwriters salespeople
and prospective investors. It, too, is designed to build
momentum for the offering and is scheduled to end just
before pricing occurs.
Typically, on the nal day of the roadshow, the company will
ask the SEC to declare the registration statement effective.
The underwriters and the company will determine the
price of the shares to be sold and execute the underwriting
agreement, and the underwriters will conrm sales of shares
with investors.
Closing and sale. The closing usually takes place three
business days after the pricing, giving the underwriters
time to receive payment for the securities from most of the
customers in response to the conrmations of sales that have
been sent. Typically, the securities are delivered (though
not in physical form) to the underwriters for distribution to
or on behalf of their customers, and the proceeds from the
sale of stock (net of underwriting discounts or commissions)
are paid to the issuer. The underwriters may exercise their
over-allotment option within 30 days post-closing, which is
described in more detail in Chapter 9.
For a sample timetable of the IPO process, please see
Appendix D: A timetable for going public.
Impact on the broader organization
While the above items generally discuss the process with
respect to the ling and effectiveness of a registration
statement, there are many other organizational facets of
going public that your company will need to consider as
part of the overall process and its impact on the broader
organization. It is difcult to predict what changes will
occur in your corporate culture as a result of being a public
entity. If you decide to proceed, it will be important to
plan for the organizational changes that will occur during
and after the offering. This publication addresses these
other potential changes outside of the actual registration
statement ling that should be considered as part of the
process to go public.
9
Chapter 2. Is the time right?
Is the market ready for your company? Is your company ready
for the market?
Strategies for Going Public 10
The JOBS Act directed
that previously
existing legislation be
amended to increase
the shareholder
threshold that
triggers the
requirement for
companies to
register with the SEC
from 500 to 2,000
shareholders of
record. See Chapter
12 for additional
information on the
JOBS Act.
A focused business plan is an important part of your
IPO. It contains future operating projections, such as
budgets and forecasts, that are not contained in the
registration statement, but that will likely be essential
to you as you sell your story to the lead underwriters.
Your management team will need to clearly articulate
a compelling strategy to the underwriters and potential
investors to help you realize a valuation reective of your
companys potential.
Any prospective investor in your company will look at
a number of factors in making a decision to buy your
stock. As the representatives of the purchasers, the
underwriters often need assurance on these factors in
order to sell your stock with condence. They need to
be enthusiastic about your companys potential and
about the industry; they need to be condent that there
are no signicant negative factors (e.g., susceptibility
to technological change, increased competition, and
recession-induced problems), which the company cannot
handle, and they must have condence in the people
running the company. Since the underwriters also have
potential liability for the information in the registration
statement, they must be comfortable with the disclosure.
Below are some of the factors and questions that are
typically asked with respect to underwriters:
Management quality. This is a very important factor for
investors. Investors will typically entrust their money only
to a team with strong leadership. Questions include: Do
the top managers have the necessary experience? Do
they work together as a team? Are they of high integrity?
Do they inspire condence among the companys
employees? Do they have long-term potential? Are
they effective in developing working relationships with
customers, suppliers, bankers, auditors, etc.? Is there
stability in the leadership team? The departure of a key
executive just before or after the IPO will potentially affect
the companys market competitiveness and raise concerns
with potential investors. The underwriters (and investors)
also will look at the composition and qualications of
members of the board. Often, a companys board needs to
be altered as a part of the IPO process. Your advisors can
assist you in doing so as a part of the preplanning process.
See Chapter 4 for additional information.
Employees. A strong employee base is important to the
success of most companies. Questions include: What is your
human resources strategy? How do you attract and retain
top talent? What are your compensation, stock option, and
employee benet plans? How do they compare to others in
your industry? Is there an adequate labor supply to support
your growth plans? If some of your companys employees
are represented by labor unions, how are your relations with
the unions and what is the status of your labor contracts?
Are you dependent on only a few key employees and, if
so, how are you protecting yourself from the risk of their
potential departures?
Product quality and industry potential. The quality and
future of your products in the context of your industry is
key. Questions include: What segment of the market are
you targeting? What is the growth potential? Who are
your competitors? How long a life do your products have?
Will you have to diversify or develop new products to
continue growing? Does your company have command
of its technology? What products are in research and
development? What is your product roadmap? Are you in a
growth industry? How permanent is that industry?
Production or service capability. Your ability to execute
operationally on your business plan is also key. Questions
include: Are your production facilities or product-sourcing
arrangements adequate to meet the demands of growth?
How do your production capabilities compare with others
in your industry? Are they adequate to meet the quality
requirements of your market? How efcient is your supply
chain? What risks are inherent in your supply chain? Are
your information systems adequate to support inventory
forecasting? What are your contingency plans if there is an
interruption in the supply of key raw materials, shipping, or
other key aspects of product production?
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Honestly assessing the interest that your company is likely to generate in
the public market is the rst step toward a successful IPO. While there is no
universal law to determine market interest, experience indicates that market
appeal can be predicted by certain features that are indicative of a companys
maturity and potential for future earnings.
11
Company categories
A company that offers the investment community a
high-risk/high-reward opportunity likely will be held to
evaluative criteria that differ from those applied to a
company that is perceived to be a long-term solid performer.
Taking this into account, most companies typically fall
into four general classications: early-stage, high-growth,
long-term solid performers, and spin-offs.
Early-stage companies
Some companies potential so captivates the publics
focus that they can attract funds easily. These companies
receive considerable attention when they go public even
though they may have yet to produce signicant revenues.
Some of these companies are bolstered by the strengths
of a promising industry, such as clean technology, while
others rely on the past performances of similar enterprises
that have achieved signicant growth. More typically,
however, early-stage companies have reached the point
in their development where most of the technological,
manufacturing, and marketing risks have been substantially
reduced, and their stock can command a higher price than
venture capitalists are willing to offer. The market appeal for
this type of company is heavily inuenced by three factors:
Market opportunity. An industry that can support
signicant growth.
Potential industry leadership. An unproven company
needs a product or service that indicates it is on the
leading edge in its eld.
An experienced management team. Management
personnel demonstrate the capability to deal with
anticipated growth and maintain the companys
leadership position.
Financial position. Your current nancial position is
important in assessing both how much money will
need to be raised and the effectiveness of your nancial
management. Questions include: How well are you
managing your assets? How are you nancing your working
capital needs? Are you providing any nancial support
to your customers? What nancial contingencies exist?
How leveraged are you and what is your effective cost of
capital? Do you have audited nancial statements? Are your
accounting policies well documented?
Tax matters. How you are addressing tax expense is an
important determination for investors. Questions include:
What is the effective rate of tax on operations and how
does it compare with others in your industry? What is the
forecasted amount of cash tax payments to be made? Do
you have unique or potentially difcult-to-manage tax
positions? How would proposed tax law changes affect your
tax posture?
Earnings history and potential. Reported earnings
and potential future earnings are often considered as
important for public companies as cash ow is for private
companies. Questions include: What has your earnings
history been? What is your growth potential? Is there a
strong upward trend that is likely to continue? How do you
compare (in earnings and margins) with other companies
in your industry? Do you have detailed historical and future
information about your operations, including sales and
gross margin analyses by product or product line, sales
channel mix, geographic sales breakdown, and headcount
trend reports?
Company reputation. Investors will consider your
reputation in making investment decisions. Questions
include: How do suppliers, customers, experts, and others in
your industry assess your performance? How does the public
perceive your company? What kind of relationship do you
have with your customers and your suppliers? What types
of related-party transactions has the company entered into?
How committed is your company to social responsibility and
sustainability initiatives?
The less stringent
reporting requirements
for EGCs under the
JOBS Act have many
smaller companies
reevaluating their IPO
timelines. See Chapter
12 for additional
information on the
JOBS Act.
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Strategies for Going Public 12
High-growth companies
High-growth companies also offer the potential for
signicant future growth, and they have typically matured
beyond the start-up phase to attain certain levels of
revenues and protability. The market most readily accepts
companies of this type that have achieved the following:
Sales. With some exceptions, annual sales of at least $50
million$75 million suggest an established company.
A growth track record. The investment community
generally looks for an annual growth rate of 25 percent
or more with the ability to maintain that rate in the next
few years.
An experienced management team. Generally,
institutional investors want evidence that the company
does not rely on the talents of a single entrepreneur.
Normally, the founder is surrounded by experienced
executives with responsibilities for key management areas.
Long-term solid performers
These midsize companies often have a long and continuous
record of strong sales and earnings. They may not be
nationally known, but they offer the public a long-term
investment at a reasonable price-earnings ratio (calculated
by dividing the price per share of common stock by earnings
per share) and are likely to pay dividends. Despite their
protable history, established companies may go public
for several reasons, such as to fund acquisitions or provide
liquidity to their owners. In many cases, they have sales of
several hundred million dollars; a large, stable, or growing
market; and a prot history equal to or better than the
industry average.
Spin-offs
Diversied companies, many of which may already be
public, may not be commanding the market value that their
components may realize. A continuing market trend is for
such companies to spin-off divisions or segments as a way
of realizing shareholder value. In recent years, companies
across many industries have announced plans to spin-off
divisions of their companies, some with the intention
of taking the spin-off public. It is common for existing
shareholders to receive stock in the spun-off entity.
Is the market ready for your company?
The market can be inuenced by a variety of factors,
including economic forecasts, political events, international
trends, interest rates, and ination. A company that might
easily attract public funds in a bull market could run into
considerable resistance in a bear market. When the market
becomes depressed, declines in value are generally greater
for newer, less-established issuers and companies in riskier
industries. The market for IPOs can also completely dry up
due to external and environmental factors. For example, in
the past decade, the market has been challenged with an
increased number of accounting and governance scandals,
as well as the global nancial crisis and debt concerns.
If an offering is fortunate enough to catch a rising market,
an IPO may produce a windfall of capital. Finding the
ideal offering window can be tricky. You should rely on
thorough preparation, the expertise of your IPO team, and
patience to guide your company through this decision. At
the same time, consideration should be given to alternative
nancing, such as that provided by mezzanine venture
capital investors, to protect the company in the event of an
unanticipated closing of the IPO window.
What if the offering is terminated?
The market opportunity to do an IPO can be quite short
and on occasion, due to a variety of reasons, companies
terminate their registration statements before the securities
are sold. A company can be nearly complete in its IPO
process, but sometimes the market just is not ready for an
IPO. This could be due to industry factors, economic factors
such as market volatility, or other events outside of the
companys control.
Terminating a public offering before it is nished does not
affect the ability to sell securities in a private placement
after a short period of time or to sell the company. In
both cases, much of the work done for the public offering
can be utilized in either the private placement or the
sale transaction. Chapter 4 discusses nancial reporting
considerations of deferred offering costs when an IPO is
terminated and Appendix B: Registration exemptions
includes a summary of certain registration exemptions.
13
Chapter 3. Your team
Taking your company public requires the talents of a variety of
highly specialized professionals.
Strategies for Going Public 14
Management
Throughout the IPO, management will serve as the
tangible representatives of the company. The importance
of its impression on the investment community should
not be underestimated. Investors typically place enormous
weight on their perceptions of managements abilities.
Thus, managements qualications, ethics, and experience
will likely be highly scrutinized. One way to address this is
to make a concerted effort to retain executives who are
experienced in building a company and taking it public,
and who do not have ethical issues associated with them.
Executives with a successful history of corporate growth
can substantially help to steer the company through a
successful IPO.
The organizational structure is usually headed by at least
a chief executive ofcer (CEO) and a chief nancial ofcer
(CFO). Additional executives that may be useful depending
on the industry are a chief risk ofcer, chief information
ofcer, chief technology ofcer and, depending on the
size of the company, a chief operations ofcer. Most public
companies also have a general counsel, head of human
resources, and head of investor relations.
Management is an essential participant in both the
preparation for, and the marketing of, the offering. During
the pre-ling period, managements intimate knowledge
of the company is important in making certain the story
of the company told in the registration statement is
accurate and complete. After the ling, the centerpiece
of the marketing effort is the roadshow. This is a tour by
top management with the lead underwriters to a number
In addition to a qualied management team, taking your company public
requires the expertise of underwriters, auditors, legal, accounting and tax
advisors, and nancial printers. As you near the closing, you will need to
have a transfer agent and registrar, as well as investor relations professionals.
This array of professional services providers and the time demands made on
company management will be costly. However, these costs should be viewed as
simply part of the price of going public. The success of the IPO and the future
prosperity of the company may depend in part upon the talents of this team, so
you should resolve to engage the most qualied people available.
of locations to allow management to meet with potential
investors to present strategic, nancial, and operational
information and answer questions. See Chapter 7 for
additional information.
Management is also the link between the IPO team
and the companys board. The board should be fully
supportive of the IPO. It will have to sign the registration
statement and take on securities law exposure as a part of
the process.
Board of directors
Boards have been thrust into the spotlight as a result of
extensive legislation during the past decade, which has
placed greater emphasis on the role of a public companys
board in overseeing the activities of the company. The
board and its structure its skills and knowledge,
process, behavior, and how it communicates have
never been more critically important. The expansion of
regulatory requirements mandate that public company
boards comply with enhanced independence standards,
maintain specic committees, and clearly articulate
prescriptive responsibilities in their charters, just to name
a few requirements. Furthermore, as the ownership
base changes, companies and boards may be subject to
the governance policies of institutional investors, proxy
advisors, and governance rating agencies. You should
consider addressing corporate governance issues in the
early planning stages of the IPO process, as these changes
may take time to implement. Additional corporate
governance matters are discussed at the end of Chapter 4.
Auditors
An important part of the pre-public planning effort is
to assess your companys nancial side of the house
to determine whether it will satisfy strict SEC and
underwriter demands. One step is to consider your external
auditor relationship. Your external auditor should be a
qualied public accounting rm that has signicant SEC
experience and is registered with the Public Company
Accounting Oversight Board (PCAOB). Because of their
industry specialization and extensive SEC experience,
many companies choose to engage the services of an
international professional service rm.
The Dodd-Frank Act
required the SEC
to establish rules
regarding proxy
disclosure of why
companies have
selected to either
separate or combine
the roles of the
chairman and the
CEO. For additional
information on the
Dodd-Frank Act see
Chapter 11.
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In addition to completing the audit of your nancial
statements and review of any interim nancial statements
for the registration statement, your auditors will also render
signicant assistance in the registration process. They will
read any other nancial data to be included within the
registration statement and, in doing so, may be able to
highlight concerns the SEC may raise and help you address
these in the ling. They will also assist in the responses
to the SECs accounting-related comments. All of this will
reduce the possibility of subsequent delays and revisions.
Clearly, your auditors role is a large one that would be
best facilitated by establishing a good working relationship
early in your companys development. In this way, they can
serve you better through their in-depth knowledge of your
companys particular situation.
The auditor also will furnish comfort letters (see
Chapter 6) to the underwriters, which assist the
underwriters in performing their investigation of certain
nancial and accounting data that is included in the
registration statement.
Accounting advisors
To some extent, accounting advice can be provided by your
auditor. However, some companies elect to utilize separate
accounting advisors to assist in the preparation for an IPO
as the types of advice or services will not be restricted due
to independence requirements. In your pre-public stage,
your accounting advisors can assist you by focusing on
Throughout the IPO, management will serve as
the tangible representatives of the company.
Management is also the link between the IPO
team and the companys board.
Strategies for Going Public 16
Tax advisors
Tax advisors can add value to IPO planning by highlighting
material income or transaction tax issues that could lessen
the success of the IPO prior to the offering. Specically,
they can assist in determining the direct and indirect tax
consequences of the planned use of IPO proceeds. They
can also aid in the comparison and assessment of possible
reorganization planning for effective tax rate planning
and in benchmarking the tax efciency of the enterprise
compared to similar public companies, as well as help to
make determinations regarding the availability, accuracy,
and timeliness of tax information used for nancial
reporting.
Underwriters
Lead underwriters, or investment bankers, lead the
marketing of an IPO. These professionals are selective in
their acceptance of clients and likely will conduct in-depth
research into your companys management, products or
services, nances, and business plan before accepting your
company as a client. A key task for a lead underwriter,
after accepting a client, is to determine the value of the
company according to industry and market analysis.
The lead underwriters will be joined by several other
underwriters selected by the company to market and sell
the securities. If the stock falls below the IPO price during
its distribution, your lead underwriter may seek to stabilize
the stocks performance. (The role of your lead underwriters
is extensive and is discussed in greater depth in Chapter
5.) In many cases, a successful IPO signals the beginning
of a long-term relationship between your company and
the lead underwriters. Remember that even though you
are the client of the underwriters, there are some inherent
conicts of interest between you and the underwriters.
Most important, the underwriters also have preexisting
relationships with most of the institutional customers who
will be buying your stock (as well as the stocks of other
companies which are being offered on an ongoing basis
through the underwriters). The lead underwriters will also
hire their own counsel in connection with the offering,
which will be active in the IPO process in representing the
underwriters interests in the transaction.

your business and providing the guidance and support that
you will need to help you steer your company through the
IPO process and beyond. Your accounting advisors will
be able to understand your companys current state and
perform an assessment of the gap between where you are
today and where you need to be in order to go public. This
represents a critical part of the pre-public planning stage
because the better the plan is from the start, the smoother
the IPO process will be for your company. In addition, your
accounting advisors can assist you in other ways throughout
the IPO process, such as by making introductions to
underwriters to ascertain their interest in your IPO and
compiling data so that you may evaluate the compensation
proposed by the underwriters. Many growing companies
need advice on other key issues associated with growth,
such as the size and additional competencies necessary to
staff an accounting, tax, and nance function in a public
company, as well as general business planning advice.
Attorneys
Going public is a highly technical legal process and you
will work closely with your attorneys as they assist in
your offering. SEC legal work is very complex and highly
specialized, and there are serious penalties, as well as the
risk of shareholder lawsuits, for participants in an offering
where the registration statement omits material facts or
contains material misstatements. It is extremely important
that you have legal counsel with prior SEC experience and
knowledge of the intricacies of working with the SEC.
Your counsel assists in the process of preparing the
non-nancial sections of the registration statement and
responding to the SECs comments. Experienced SEC counsel
(like experienced auditors and accounting advisors) can
also speed up the process signicantly, which can reduce
costs and allow for a more effective marketing process.
They also advise you in the pre-public planning stages. In
connection with the registration statement, they opine on
the validity of the stock being issued and sold in the IPO
and, at the closing, they issue a legal opinion addressed to
the underwriters on a variety of subjects to assist in the due
diligence process. After the IPO, your attorneys may assist
you in ongoing compliance and governance matters.
The JOBS Act amends
section 404(b) of SOX
by exempting EGCs
from the requirement
to obtain an
attestation report on
the companys Internal
Control Over Financial
Reporting (ICFR) from
its registered public
accounting rm.
See Chapter 12 for
additional information.
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Financial printers
The SEC maintains strict guidelines on the format of
registration statements and prospectuses it will accept.
These documents are led by electronic submission to
the SECs Electronic Data Gathering Analysis and Retrieval
(EDGAR) system. Financial printers stay up to date on SEC
requirements and are accustomed to the time constraints
and condentiality issues involved in their work. Typically,
these printers also maintain facilities with conference
rooms and other amenities that accommodate the unique
conditions that often surround the preparation and ling of
documents with the SEC.
Others
Investor relations is often neglected, yet can be worthwhile
to consider prior to an IPO. An effective campaign
can serve as a means of increasing the public prole
of your company. While you can maintain your prior
level of business communications (such as for product
announcements), you must be extremely careful about
communications even before you le the registration
statement. (For a discussion of the restrictions on
communications during the IPO process, see Chapter 7.)
Transfer agents and registrars
Transfer agents and registrars are important on the
technical side of share issuances and transfers. They
specialize in maintaining shareholder records and issuing
or canceling certicates to reect changes in ownership.
Transfer agents are highly recommended to meet various
listing requirements for the NYSE and NASDAQ, as well
as for trading over certain OTC markets. In addition to
maintaining shareholder records, transfer agents assist
in processing stock transactions, complying with the
requirements of the Internal Revenue Service (IRS), and
coordinating shareholder correspondence and dividend
payments. As an intermediary for the company, transfer
agents may also act as the companys proxy agent,
exchange agent, or mailing agent. Registrars, who are
usually part of the same rm, keep track of all issued stock
and safeguard against over-issues. Your attorneys or other
accounting advisors can usually recommend a reputable
rm. During the IPO process, the same rm also may act
as the custodian and/or paying agent in connection with
the sale of securities by any selling shareholders. Transfer
agents and registrars should also be engaged sufciently in
advance of pricing so that the actual sale of the securities
can occur smoothly upon closing.
Sale of securities by selling shareholders
Each selling shareholder should execute a custody agreement appointing a custodian to facilitate the offering of his
or her shares. The selling shareholder will deposit his or her shares with the custodian. If any certicates are lost,
stolen, or destroyed, the shareholder may be required to post an indemnity bond. Each shareholder may also be
required by the transfer agent to obtain a medallion signature guarantee for the transfer of securities.
Strategies for Going Public 18
Effective investor relations take
time, and you should cultivate a
relationship with a reputable frm as
early as possible.
After the offering, the role of investor relations is critical.
These efforts can work to retain existing shareholders while
attracting new investors, thereby maintaining or raising
the stock price. Often, when the marketing effort stops,
your public visibility is reduced. Effective investor relations
take time, and you should cultivate a relationship with a
reputable rm as early on as possible. Your underwriters,
attorneys, or other accounting advisors can usually
recommend an experienced rm. Another option for
your company to consider would be to bring the investor
relations function in-house. As the effective date of your
IPO registration statement draws closer, your company
may want to explore the option of establishing an investor
relations resource whose primary responsibility is to
facilitate communications between your company and the
investment community.
In addition to establishing a dedicated resource, your
company should also consider establishing a corporate
communications director who is responsible for developing
and implementing the communications strategy as well as
all written communications, including electronic and printed
communications with staff, contributions to company
publications, marketing materials, websites, and client/
community engagement communications.
19
Chapter 4. Pre-public planning
Once you decide that you want to take your company public,
you are embarking on a journey.
Strategies for Going Public 20
Increased formalization
Running a private company for a handful of investors is
vastly different from running a public company for a large
number of shareholders. Even as a private company, you
have had a duciary responsibility to all your shareholders.
As a public company, your actions will be much more visible,
therefore requiring you to be more formal and transparent
in managing the business and complying with all the
requirements imposed by federal securities laws. You should
be aware of the consequences well before you transform
your business into a public company. (Some of the most
signicant consequences are discussed in Chapter 9.)
We recommend you and your management team be
psychologically ready and appropriately staffed to accept
these added responsibilities. To prepare yourself, begin to
operate as if your company were public well before you
formally seek to go public. This means the following:
Maintain adequate records and internal controls.
Learn to generate reliable and meaningful monthly
nancial statements promptly after month-end so that
when quarterly reporting is required, the mechanisms
for producing these reports are already in place. Your
accounting and nance departments should expect to
have monthly and quarterly closes that are as accurate as a
year-end close. This is crucial on a prospective basis when
ling quarterly reports on Form 10-Q with the SEC. Private
companies can generally prepare their nancial statements
on an annual basis without any accelerated timeline. In
contrast, following their IPOs, newly public companies are
often challenged to meet ling deadlines when preparing
periodic reports, especially quarterly reports on Form 10-Q,
because they are faced with more tasks to complete in
a shorter amount of time. Additional considerations to
your closing timeline should factor in the time required
for drafting the Managements Discussion & Analysis
(MD&A), calculating the quarterly tax provision, obtaining
sub-certications from lower-level management as to the
accuracy of the nancial reports, and establishing disclosure
controls and procedures and audit committee review. In
addition, you may be asked to present historical quarterly
information for inclusion in your prospectus. In light of
the many accounting and nancial reporting matters that
must be addressed prior to becoming a public company,
you should evaluate the capabilities and stafng of your
accounting and nance departments to make sure you have
the personnel necessary to understand and manage these
additional responsibilities. Furthermore, you should consider
hiring additional employees, other than management, who
have experience with SEC reporting.
Management should also begin designing, implementing,
and documenting its internal control processes. Once the
company is public, the SEC requires all public companies
to have disclosure controls and procedures in place. The
implementation and ongoing monitoring of these controls
should be an important focus of the entire organization
from top to bottom. In order for this to be effective, it
will require signicant involvement from management as
well as oversight from your companys audit committee.
Furthermore, the SEC requires the CEO and the CFO
to certify that they are responsible for establishing and
maintaining disclosure controls and procedures to evaluate
their effectiveness, and to report the results of their
evaluation.
Ongoing nancial analysis should be performed and
reported to management. Monthly reporting packages
typically include, at a minimum, information that will permit
the analysis of sales volume and pricing trends by product
or product line; sales by major customers, sales channels,
and geographic regions; and headcount trends. In addition,
major balance sheet items (e.g., accounts receivable and
inventory) should be supported with appropriate analysis.
In receiving timely nancial information, managers can
discipline themselves to analyze operations and results more
frequently and accustom themselves to the pressure of
quarterly performance evaluations. This level of preparation
is an important step in avoiding nancial surprises.
Going public is not something you do in one day or one month. It takes
long-term planning and many months, or sometimes even a year or more, to
effect. This pre-public planning is necessary both to prepare to sell stock and to
demonstrate to the lead underwriters that you are ready to be a public company.
From the start of the IPO process, the better prepared you are, the faster you
can respond to opportunities in the capital markets. Your IPO readiness can
inspire greater condence from investors and underwriters, which may increase
your chances for a smooth IPO process.
21
Bring your stock ownership records up to date. One
of the more time-consuming aspects of preparing the
registration statement can be determining the ownership,
both direct and benecial, of your stock and agreeing
on the details of stock information for the registration
statement and related nancial statements. This includes
determining if all the proper formalities were observed in
the issuance of the stock, from both a corporate and a
securities law perspective, and identifying any registration
rights that shareholders may have. It also means addressing
any issues related to employee stock option and other
stock-based compensation plans, including knowing
about all unexercised options that may have been granted
and determining whether these options are vested. If not
addressed sufciently in advance, these matters could
lead to expensive delays in the registration process. The
SEC often raises valuation issues with respect to recent
stock issuances or the pricing of recent option grants if the
pricing is signicantly below the likely initial public offering
price (cheap stock). You should talk with your legal and
accounting advisors carefully about these matters before you
start the IPO process.
Corporate housekeeping
Once you make the decision to go public, you will likely
need to do a substantial amount of preliminary work
not directly related to the preparation of the registration
statement. Attorneys refer to this as corporate
housekeeping.
Determine whether the company is legally positioned
for an offering. Counsels role in the offering will begin
with advising you as to whether you should even undertake
an IPO. Consult with counsel to determine whether any
pending litigation could affect the companys ability to go
public. In addition, you may have arrangements, such as
royalty agreements, that need to be revised before you
are marketable as a public company. You, together with
counsel, should also examine whether you are generally
in compliance with applicable regulations, including
compliance with the Foreign Corrupt Practices Act (FCPA),
export controls, and environmental regulations.
Conduct business through a clear organizational
structure. A company going public should have an
organizational structure suitable for public investment.
Many closely held businesses are conducted by a number of
corporations under common ownership or by combinations
of business entities. They can be operated as limited liability
companies or as Subchapter S corporations. Both provide
for pass-through tax treatment that can be more tax
efcient. The company should carefully consider how its
current business structure may affect the increased nancial
reporting requirements of a public entity. Considerable
tax, legal, and nancial systems work may be required to
reorganize the various entities by mergers, liquidations, and
other restructurings.
Simplify the capital structure. Some companies planning
to go public have to make signicant changes to their
organizational or capital structure. Even when the business
has been operated as a single corporation, the capital
structure may need revision. You may need to simplify a
complex capital structure by redeeming dilutive securities,
such as stock warrants and preferred stock, or converting
them to common stock. You may need to amend your
corporate charter to authorize the issuance of more shares
to be sold in the IPO. If you currently have only a minimal
number of shares authorized and outstanding, you may
want to split the stock (or in the case of a very large number
of shares outstanding, use a reverse stock split) to bring
Strategies for Going Public 22
the number of shares and the price of the stock to an
acceptable level for the offering. While planning for these
actions should occur early in the process, often they are
completed simultaneously with the completion of the IPO.
Review organization documents. The charter and bylaws
of a private company may contain provisions that may
not be suitable for a public company. These may include
preemptive rights to purchase equity securities; requirements
of a supermajority approval to amend the charter, approve
mergers, or change of control transactions; unconventional
quorum requirements; and dual classes of common stock.
It is easier to obtain stockholder approval to amend the
charter prior to going public. Consider whether the state
of incorporation is most friendly to the company as well. If
a company is currently incorporated in a state in which the
laws are not exible in terms of corporate governance or do
not insulate ofcers and directors from liability, the company
may want to reincorporate under more favorable laws.
Consider also whether the organization documents should
include antitakeover provisions designed to discourage
unsolicited or hostile takeovers. Consider market reactions
to staggered boards, stockholder rights plans, and other
protective measures.
Review all related-party transactions and material
contracts. Generally speaking, you will need to
depersonalize your business before taking it public. The
SEC requires full disclosure of signicant related-party
transactions. You must disclose the names of highly
compensated individuals, the amount paid to them, and
any special arrangements made with them. Shareholders
agreements providing for rights of rst refusal may have
to be canceled; personal loans made by the company to
directors or executive ofcers of the company are unlawful
under SOX and are required to be repaid; the fairness of the
terms of contracts (such as leases) between the company
and insiders should be adequately documented and, if
necessary, altered; and employment contracts, stock option
plans, and stock purchase plans may have to be entered
into, revised, or canceled.
You should review all your material leases and contracts,
updating or revising them to reect their current terms or
to provide more exibility. You should consider whether
they would require any consent in connection with an IPO
or perhaps in connection with a corporate restructuring
prior to an IPO. You should also consider whether there
are any provisions that must be kept condential and
not disclosed or led. This can all lead to delays in the
registration process.
You should review your balance sheet and off-balance
sheet assets (like intellectual property) to determine
whether you can verify the legal ownership and existence
of all your assets. You should make certain that you have
all the documentation regarding your outstanding loans
and notes and that there are no provisions that may cause
you to be in default as a result of the actions you intend to
take in going public.
Anticipate major company initiatives. During the
registration process, you should consider the consequences
of undertaking any signicant company initiative. A major
initiative in the middle of your registration process may
necessitate revisions to your prospectus, another ling
with the SEC, and a new circulation of the preliminary
Both SOX and the Dodd-Frank Act require
disclosure of incentive-based compensation, as
well as policies that allow the company to recover
the compensation in the event of a nancial
restatement. Sarbanes-Oxley, however, only applies
to the CEO and the CFO and allows a company to
recover incentive-based compensation in the event
of a restatement that results from misconduct.
The Dodd-Frank Act further expands the scope of
the clawback provision to apply to any former
or current ofcer for the three years prior to any
restatement. Therefore, these incentive-based
compensation arrangements should be considered
in light of how they will appear to the public. See
Chapter 11 for additional information.
23
prospectus. To avoid any possible delay in registration, the
impact on the offering of any major initiative should be
considered. It may be benecial to complete (or abandon)
major acquisitions, new royalty and lease agreements,
and to nalize the establishment of any new management
compensation program and changes in key personnel and
directors before you start the IPO process.
Orderly nances. The SEC requires that your companys
nances be sufciently detailed and your nancial
statements audited in preparation for your IPO. You
should engage an auditor or change auditors as early as
possible to identify any unforeseen nancial obstacles that
may have detrimental consequences if uncovered later in
the IPO process.
Financial statement preparation
General
Under current SEC rules, domestic companies (other than
EGCs and smaller reporting companies) must include
three years of audited annual nancial statements in an
initial registration statement. EGCs and smaller reporting
companies must include two years. In addition, unaudited
interim nancial statements may be required, which would
require certain review procedures on interim nancial
statements by the companys auditors.
There are certain situations where additional sets of
nancial statements may be required to be included in your
companys registration statement. If your company has
recently grown through signicant merger and acquisition
activity, or if an acquisition is probable, nancial statements
of the businesses that were acquired or may be acquired
may also need to be presented. If your company has a
signicant investment accounted for under the equity
To prepare your
company for an IPO,
begin to think about
operating as if your
company were public
well before you
formally seek to
go public.
Strategies for Going Public 24
method of accounting, a full set of nancial statements of
the investee may be required. Separate nancial statements
of nancial guarantors may also be required. In the event
that any of these situations is present, the additional sets
of nancial statements may need to be audited, which
could require the coordination of the counterpartys audit
rm and your own. The SEC requirements are complex,
so you should check with your legal counsel, auditor,
and accounting advisors early in the process to be sure
you understand the specic requirements. In some cases,
the underwriters may require you to have more periods
of information audited than are strictly required by the
SEC to give potential investors more information. You
should reach agreement with your underwriters on their
recommendations that go beyond SEC requirements early
in the process. See Chapter 6 for additional information
about the nancial statements required in a registration
statement.
Audits
Because of these extensive audit requirements, many
companies establish a relationship with an auditor very early
in their development and have annual audits performed
even if the shareholders or debt holders do not require
them. Then, once the decision is made to go public,
audited nancial statements will be available. Having a
two- or three-year audit performed in the process of going
public can be time consuming. Consider having annual
audits performed in the years leading up to your IPO as
well as including additional disclosure requirements in
your nancial statements. Additionally, you should keep
adequate records to be able to determine quarterly results,
if necessary.
If your company currently utilizes a smaller or regional
accounting rm as your independent auditor, your
underwriter might make a suggestion that you switch to a
more nationally recognized public accounting rm prior to
your initial public offering. Keep in mind, however, if your
company decides to change independent auditors, the
new auditor may need to reaudit the nancial statements
for all of the years that will be included in your companys
registration statement. Another option would be to have
the new auditor only audit the current year, while keeping
the prior year(s) audited by the predecessor auditor. In this
scenario, both your new auditor and prior auditor would
be required to review separate portions of the registration
statement. Your company should weigh the pros and
cons of each option and make a determination based on
the timing and associated costs. Issues highlighted at an
early stage in the process can be tackled before the IPO,
potentially saving both time and money and minimizing
public company reputational risk. Furthermore, it may be
more difcult to have a two- or three-year audit performed
as part of the process of going public for several reasons:
It may not be feasible. If you have signicant inventories,
your auditors generally need to observe and test your
annual physical inventory counts in order to issue a clean
opinion for each of the years under audit. This cannot be
done after the fact, except possibly by a costly audit of a
roll back of a current physical inventory.
You may be surprised by the audit results. Income results
and trends may not be as you had expected due to material
audit adjustments and may lead you or the underwriters
to cancel or delay the IPO. By this time, you will have
incurred substantial costs. In addition, your previous
nancial statements may not be sufcient for an IPO. Some
accounting guidance is effective for public companies before
it is effective for nonpublic companies. See Chapter 12 for
certain allowances for EGCs as part of the JOBS Act. You
may be required to retrospectively adopt an accounting
policy since your nancial statements are prepared on a
historical basis.
Further delays could result. A two- or three-year audit is
time consuming and could delay the registration process by
several months. A few months delay could mean missing
the window when it would be most advantageous for you
to go public.
Despite the potential difculties described above, the
auditors can generate useful suggestions to organize your
accounting records, internal controls, and processes. For
example, prior to the IPO process, it is recommended
that the company document its internal controls and
processes. The auditors can provide valuable insight into
documentation of best practices as you move forward with
these tasks.
25
Tax considerations
An IPO also presents new challenges in tax and treasury
management. Your company should consider the following:
Tax issues associated with the transaction. Certain
sections of the Internal Revenue Code (IRC) may reduce
the value of net operating losses and other tax attributes
when an ownership change occurs as a result of equity
issuances. As such, the companys ability to offset its future
income with net operating losses from prior years can be
limited. Similar provisions exist within state statutes. Planning
for this prior to a public offering can help increase your
companys future utilization of net operating loss and credit
carryforwards.
Compensation and benets. There are several
compensation and benet tax implications. For example,
the tax code may affect the timing of deferrals of elections
in addition to setting limits on distribution. If your company
has deferred compensation plans, you will want to consider
if existing or future plans will be in compliance. The tax code
can also have implications on transaction success awards,
existing severance and incentive plans, stock options, and
appreciation rights, among other plans. Deductions for
compensation in excess of $1 million paid by certain publicly
held corporations to top employees may be disallowed.
Your company should consider and conrm whether this
may be relevant to any new compensation arrangements.
In addition, a company considering an IPO should also
conrm whether or not existing employment agreements/
documents have a payment event upon an IPO that would
qualify as excess parachute payments. Such payments can be
nondeductible and cause signicant excise taxes to be levied
on the recipient. You should consult with your tax advisor
and engage your underwriter in these planning discussions.
Global tax rate. Your company should model its prospective
global tax rate and then benchmark it to similar public
companies. As the overall IPO structure is being determined,
it is the perfect time to consider a tax-efcient structure.
Evaluate repatriation strategies and transfer pricing policies,
as well as reviews of accounting methods.
Tax operations. During the global review for consistency-
of-use, it is important to consider tax resources, both internal
and external, required of a public company. This includes
assessing your capabilities with respect to nancial reporting
as a public company. Your tax resources will be included in
your nancial reporting framework and may be required to
provide a sub-certication to support disclosure controls. In
addition to developing or increasing tax internal controls,
your company will need to monitor nancial and information
technology operational changes for necessary updates to
tax processes. As discussed in Chapter 9, public companies
have periodic reporting requirements that will necessitate
the need for timely and accurate tax accounting information.
Further, increased disclosure will be required. Consideration
may be given to using external resources, but, as discussed
in Chapter 9, independence standards are more restrictive
for public companies.
Tax considerations in business growth. Changes to
the business through an IPO will have direct and indirect
tax consequences and may also create potential tax
opportunities. You should consider and evaluate the tax
efciency of capital movement following an IPO and the
implications of any modications to the current debt
structure. Further, the usage of IPO proceeds may give rise to
particular credits and incentives that should be explored.
A positive image in the market
Just as your company goes to great lengths to create a
favorable public image for its customers, products, and
services, it should try, to the extent legally permissible, to
create a favorable image for the people who will buy your
stock or can inuence that buying decision. These people
include analysts, brokers, the business media, and specialty
publications that follow your industry from a nancial
standpoint. In the 24/7 media world of today, effectively
utilizing blogs and other forms of social networking can also
help create a favorable public image of your company.
Strategies for Going Public 26
Here are some additional ways you can get started
developing a positive image:
Begin an investor relations program. Name recognition
can be a very important factor in pricing your stock, but it
cannot be developed overnight. As discussed in Chapter
7, the type of publicity you can seek out is limited once
you have made the decision to go public. Consequently, it
is important that you develop your public image with the
appropriate people at least a year before you plan to go
public. In these conversations, do not mention any possible
offering. Because effective investor relations require a special
skill, you might consider engaging an investor relations rm
that is experienced in working with the business media
and analysts. Many entrepreneurial companies publicize
one or two key individuals, such as the founder or a chief
scientist or technologist. Analysts and the business media,
however, like to probe more deeply into the company. You
should certainly continue to focus attention on your key
individuals, but demonstrating your depth of management
and operating talent can be just as important.
Make presentations at conference and trade shows.
Trade associations, investment banking rms, venture capital
rms, and business media organizations frequently have
conferences at which companies can present themselves
to the media and analysts. If these exist in your industry,
arrange for a presentation of your company. In addition,
analysts frequently attend major trade shows and technical
conferences to keep abreast of products in their elds. The
key analysts will likely attend shows where you exhibit. Make
a special effort to demonstrate your products or services and
introduce your key managers and engineers, but limit your
discussions to non-nancial information or publicly disclosed
nancial results as applicable to your ownership status at
that time (for reasons further discussed in Chapter 7).
Update your companys website and effectively utilize
social networking. The emergence of the internet brought
about completely new ways of communicating with one
another, and our way of communicating continues to
evolve. Over the past decade, we have experienced a
rapid growth in the popularity and number of blogs and
other social media outlets. Know your target market and
potential investors. By knowing these, you can utilize the
most effective means of reaching your target audience and
reinforce a positive image of your company.
Again, with any marketing activity, you must be mindful
of gun-jumping, as discussed in Chapter 7. You
are strongly encouraged to speak with your attorneys
prior to participating in any of the foregoing or other
communications-related activities if you are contemplating
embarking on an IPO.
Costs of going public
The costs associated with going public are signicant, but
there are opportunities to control these costs. The main
costs come under the following two categories:
Underwriters expense
The underwriters discount, or commission, is typically
the largest single cost of going public. It is negotiated
between you and the lead underwriter. Factors that affect
the discount are the size of the offering, the type of
underwriting (see Chapter 5), the going rate for
offerings of similar size and complexity, and the
efforts perceived to be required to sell your
stock. In smaller offerings, underwriters
may seek other compensation, such
as reimbursement for some of their
expenses, warrants to purchase stock,
or some other arrangements. All
of the compensation paid to the
underwriters (or related persons)
is subject to review by FINRA to
ensure that it is not unfair or
unreasonable. An IPO cannot
proceed until FINRA has reviewed
the compensation paid and to be
paid to the underwriters. This is
discussed further in Chapter 6.
Strategies for going public 26
27 27
Accounting and audit fees. Audit fees are incurred for
the audit of the nancial statements as well as the auditors
participation in the process associated with the preparation
of the registration statement and the comfort letters for
the underwriters (explained in Chapter 6). The fees will
increase signicantly if separate nancial statement audits
of businesses acquired or to be acquired, equity method
investees, or nancial guarantors are required. Also, if
interim nancial statements are required, the audit fees
will be higher, as the auditors will have to review them,
particularly in connection with the comfort letters requested
by the underwriters. As noted above, situations could arise
where there are multiple auditors involved in the various
nancial statements that are required to be included in
the registration statement, which can further add to the
audit fees incurred. In addition, your company may want
your accounting advisors to perform an assessment of
your companys current level of compliance in the areas of
nancial/ SEC reporting, corporate governance, process,
systems and controls, and tax with any regulatory or
statutory requirements and best practices. This assessment
is valuable, in that it helps to formulate your IPO timeline
and could identify the presence of any issues that might
otherwise fall through the cracks early on in the process.
Printer and printing costs. Your nancial printer will
charge you for the preparation and ling of the registration
statement and the amendments thereto. You will also need
to have the red herring and nal prospectus printed by your
nancial printer. Printing costs vary depending on the length
of the prospectus, artwork, and the extent of the revisions
required. Signicant savings may be realized by preparing
preliminary drafts internally.
Out-of-pocket costs
Apart from the underwriters discount, you will incur
signicant out-of-pocket costs, primarily for professional
advisor fees (accounting and legal), audit fees, and printing.
The costs vary a great deal, as each offering is unique.
If unusual problems or circumstances develop, such as
an unforeseen accounting surprise, the costs could
increase substantially.
Effective pre-public planning, as discussed herein, can help
limit the number of unexpected issues that arise during the
IPO process and manage the costs of going public. You can
get a sense of the out-of-pocket expenses for other IPOs by
looking at the SECs website (www.sec.gov) for registration
statements led by other issuers in connection with their
IPOs. Item 13 in Part II of the registration statement
summarizes the expenses of the issuer in the offering.
Legal expense. Legal fees are incurred for the preparation
of the registration statement, negotiation of the
underwriting agreement, offering structuring, corporate
governance, housekeeping, due diligence, and other matters
that arise during the IPO process. If the housekeeping
is extensive, requiring a complex reorganization or the
negotiation of signicant agreements, the legal fees will
be higher. The fees will also increase if there is a large
number of selling shareholders because of the legal and
administrative work for each seller. In secondary or partial
secondary offerings, some of the legal and other fees may
be borne by the selling shareholders. Those shareholders and
the company determine the allocation of those expenses.
However, the company often bears many of the expenses
(other than the underwriters discount attributable to the
selling shareholders shares). In most cases, you will also pay
a fee to the underwriters counsel for work in connection
with Blue Sky lings, when required, and FINRA clearance.
Effective pre-public planning can help limit the
number of unexpected issues that arise during the
IPO process and manage the costs of going public.
Strategies for Going Public 28
D&O liability insurance. The cost of D&O liability insurance
varies for a company going public depending upon the
amount of coverage and market conditions. The coverage
relates to liability arising from alleged wrongdoing of
directors and ofcers while acting on behalf of their
company or organization and is critical in that it allows
a companys directors and ofcers to make strategic
decisions, in good faith, without the fear of personal liability.
Such liabilities can result from lawsuits brought against a
companys directors and ofcers by shareholders, customers,
regulators, and even competitors. You should consult with
your companys insurance agent to obtain an accurate quote
on the cost of a D&O insurance policy.
Miscellaneous expenses. Other expenses include the
SEC ling fee, the NASDAQ or NYSE listing fee, any Blue
Sky notice and/or registration ling fees, and registrar and
transfer agent fees. Each of these can range from several
hundred to thousands of dollars. If the underwriters,
company counsel, and the printer are in different cities,
substantial travel charges are likely to be incurred. You will
also need to include the cost of the roadshow and investor
relations expenses in your budget. You may also have fees of
a compensation consultant or other consultant you may hire
in connection with the IPO. In addition to these identiable
costs, signicant executive and administrative time will be
spent putting the offering together.
From a nancial statement perspective, many of the costs
associated with a successful offering can be offset against
the proceeds from the offering on your balance sheet rather
than charged directly to the income statement. For instance,
certain incremental costs incurred prior to the effective
date of an offering may be deferred and charged against
the gross proceeds of the offering. Management salaries
or other general and administrative expenses may not be
allocated as costs of the offering and, therefore, cannot be
charged against the proceeds of the offering.
Deferred costs of an aborted offering may not be deferred
and charged against proceeds of a subsequent offering
and, therefore, must be written off. A short postponement
(up to 90 days) does not constitute an aborted offering.
Therefore, should you decide to withdraw your offering,
you are required to write off the deferrable costs before any
action to start over is initiated. However, if the offering is
merely postponed, not withdrawn, and restarted within 90
days, then the deferred costs can be charged against the
gross proceeds.
Future expenses. The future costs attributable to being a
public company must also be taken into account. Making
the transition to a public company will put a strain on
the resources that your company currently has due to the
additional responsibilities and requirements that are inherent
in any public company. Additional executives may need to
be recruited to help the CEO and the CFO run the company,
and additional employees may need to be hired in the
accounting, SEC reporting, and tax functions to handle the
reporting requirements of a public company. In addition,
the CEO and the CFO will need to le certications as to
the accuracy of the nancial statements contained in the
SEC lings. The company will need to maintain its ICFR,
which may mean hiring additional employees or outside
consultants. You may be required, on an annual basis,
to have the companys auditor perform an engagement
to attest to the effectiveness of the companys ICFR. See
Chapter 9 for additional information.
Additional costs will need to be incurred in establishing an
independent board, an audit committee, and other board
committees. The company will be required to le current
and periodic reports with the SEC that may involve legal,
accounting, and printing costs. For example, companies
may incur costs associated with the printing and distribution
of a glossy annual report as well as soliciting proxies for
annual shareholder meetings. An ongoing investor relations
and corporate communications program is also advisable.
Executives will likely need to spend a signicant amount of
time on all of these matters.
29
Audit committee
Each public company is required to have an audit
committee. The audit committee is established by and
among the board of directors for the primary purpose
of assisting the board with its oversight responsibilities
pertaining to the companys nancial statements, its
compliance with legal and regulatory requirements, and
the companys independent auditors qualications,
independence, and performance, among others. The
activities of the committee are required to be articulated
in a publicly disclosed charter, the standards of which are
dened by the applicable stock exchange.
Compensation committee and nominating/corporate
governance committee
The two additional required board committees are the
compensation committee and the nominating/corporate
governance committee. Although, for NASDAQ-listed
companies, the functions of the committees may be
Corporate governance
From a corporate governance perspective, preparations for
an IPO are not only necessary but may be used as a tool for
companies to strategize on board structure and practices
prior to being forced to comply with regulatory standards.
In light of a variety of changes within the corporate
governance eld, the board has never been more critically
important. Regulatory requirements and stock exchange
listing standards mandate that public company boards
comply with a host of governance enhancements.
Board of directors
In the United States, every corporation has a board. For
a private company, the board is typically composed of
company executives, shareholders, family members, and, in
some cases, independent members. Conversely, the board
of a public company typically is, and in most situations
required to be within 12 months of the IPO, composed
of a majority of independent directors. This is one of the
many fundamental differences between a private and public
company board.
The NYSE and NASDAQ have specic governance listing
standards. These rules can be important as companies
consider their organizations corporate governance leading
up to an IPO. Broadly, the governance listing standards
of the exchanges address items such as the denition of
independence, board structure, use of executive sessions,
committee composition, committee charter requirements,
etc. While these rules are prescriptive and you should
consult with counsel to ensure compliance, this is an
opportunity to optimize board structure, composition, and
effectiveness by considering corporate governance in the
early planning stages.
Well before the IPO, it may be benecial to take a critical
look at your board. In light of the necessity to comply
with public company standards, composition will likely
be one of the more signicant areas requiring attention.
Reviewing the existing skills and knowledge of the
board, how they align with the strategic objectives of the
organization, and the gaps that may occur as a result of
shifting composition may better position the board for day
one of being a public company.
Strategies for Going Public 30
On June 20, 2012, the SEC adopted rules, rst proposed
in March 2011, to implement the Dodd-Frank Acts
requirement that national securities exchanges adopt
certain new listing standards applicable to compensation
committees. See Chapter 11 for additional information.
SEC corporate governance disclosures
In recent years, the SEC has required increased disclosure
on corporate governance matters. Disclosures include
information about board meeting attendance, if the
board has a process to allow for direct shareholder
communications, risks related to compensation structuring
and the boards consideration of diversity, among others.
Companies are also required to disclose the board
leadership structure, which includes discussion of whether
the roles of CEO and chairman are combined or separate
(and if there is a lead independent director). Also required
are discussions of the boards role with respect to risk
oversight for the company.
The objective of the increased disclosures is to provide
transparency to investors of the operations, structure, and
policies of the board and its committees. For management
and board members who have not previously been involved
with a public company, these increased disclosures should
be considered by the management team and board early in
the IPO process.
Policies and committee charters
Companies will also want to consider their corporate
governance policies and committee charters during the
pre-ling period. It is important for companies to engage
in dialogue with counsel in order to ensure that these
documents contain all of the necessary and required duties
and responsibilities. Each of these documents will need to
be disclosed on the companys website, so it is important
that they are thoroughly vetted by all applicable parties
and accurately articulate the full scope of the boards and
committees responsibilities.
performed by a majority of the independent directors of
that company. The listing standards for these committees
are very similar in terms of presence and committee
structure.
The role of the compensation committee is to set CEO
compensation and approve appropriate and supportable
pay programs, principally for executive ofcers, that are in
the companys best interests and aligned with its corporate
mission, strategy, and risk prole. The nominating/corporate
governance committee plays a critical role in overseeing
matters of corporate governance for the board, including
formulating and recommending governance principles and
policies. As its name implies, this committee is charged
with enhancing the quality of nominees to the board and
ensuring the integrity of the nominating process. The SEC
requires disclosure of the presence of a compensation
committee and a separate nominating/corporate
governance committee of the board.
31
Your primary goal when your company goes public is a
successful offering.
Chapter 5. The underwriters
Strategies for Going Public 32
If you were to conduct your own offering, you would
probably nd it very difcult to nd a sufcient number of
buyers for your stock. The key reason for using underwriters
is that they can develop a marketing structure (the
underwriting syndicate) to sell the stock. The syndicate has
access to buyers who are their clients.
Underwriters are also familiar with market conditions; they
know the level of interest of institutional and individual
investors regarding new stock issues and are familiar with
the prices of stock for similar companies. They are typically
in the best position to advise you on what price to ask for
your stock as well as on when to sell it. Their sponsorship
usually continues well past the IPO and may affect the way
your stock performs in the aftermarket.
Selecting an underwriter
A group, or syndicate, of underwriters normally conducts
IPOs. Your company needs to select the lead underwriter (or
underwriters), which will form this syndicate.
Underwriters come with various backgrounds and have
differing preferences for the kinds of companies they want
to support. Some are national rms that seek out companies
with national reputations and established growth records.
Others are regional rms that prefer companies from their
geographic area or in certain industries, such as health care
or technology.
Ideally, you will have already developed a relationship with
an investment banker by the time you decide to go public.
Most companies approach an investment banker (or vice
versa) a year or two in advance. Some start-up companies
make this connection during early-stage private placements.
In doing so, they avail themselves of the investment
bankers advice on positioning their companies to go public.
Investment bankers may assist in arranging nancing in
those years, keeping you informed of current and predicted
general market conditions and the mood of the market with
regard to your industry, and advising you on the appropriate
time to go public. Before selecting an underwriter, the
company should evaluate the prospective underwriters
selling and distribution capabilities. Does the underwriter
have a history of effectively selling IPOs and does it generally
assemble quality syndicates? The company should also
analyze whether the prospective underwriter directs its
selling efforts to the audience that the company is seeking
to target. In addition, you should meet the investment
banks research analysts and be comfortable that they get
your story. The research they write post-IPO will be an
important determinant of market interest in your stock.
If you do not already have an investment banker, there
are many things to consider when searching for one. It is
important to keep in mind that your relationship with your
investment banking rm will likely not end when your IPO is
completed. Because it may be an ongoing relationship, you
should make your choice with all the care you exercise in
selecting your auditor, accounting advisors, attorneys, and
the other professionals with whom you work.
Investment bankers, unlike other professionals, do not
typically charge hourly rates for their services. They are
compensated through commissions on any completed deals
they underwrite or advise on for you. These commissions do
not usually vary signicantly from rm to rm, so pick from
the best rms available.
An effective way to begin to consider which investment
banker you may wish to approach is through a mutual
contact (your directors, investors, accounting advisors, or
attorneys may be able to assist you).
A successful offering not only brings a fair price for your stock but also leads
to a stable or rising price for the stock after the IPO. While there is nothing
to prevent you from conducting your own initial public offering, the use of
underwriters can help ensure that the offering is successful.
33
Be prepared to shop around and compare rms. If your
company has promise and the investment bankers know you
are talking to other rms, they may show greater interest
and be more competitive (sometimes referred to as a bake-
off or beauty contest). Here are some characteristics to
look for in investment bankers:
Reputation
In an IPO, the underwriters reputation is of great
importance. Institutional and individual investors may
have greater condence in your stock if a highly regarded
investment banking rm is named in your prospectus as
the lead underwriter. Reputation can also affect the lead
underwriters ability to organize a strong syndicate of other
underwriters to assist in selling and distributing the stock.
Distribution capability
You will want the underwriters to distribute your stock
to a client base that is sufciently strong and varied to
generate ongoing market interest in the stock after the IPO.
Investment banking rms have wide client bases. You should
understand the composition of the client base and evaluate
it in the context of your strategy.
Some rms have access to many institutional investors, while
others emphasize individual or retail investors. Some have
an international emphasis, while others are domestically
oriented. Evaluate the quality of their clients, whether they
are long-term investors or speculators. You should always
ask any proposed lead underwriter what the aftermarket
performances of their IPOs have been in the recent past.
Calendar
You should ask any prospective lead underwriter what
other offerings are on their calendar of offerings.
These other offerings will be competing with your IPO
for attention from the people at the lead underwriter
responsible for the actual allocation and placement of your
shares. It is extremely important that your offering receive
sufcient attention during the last week or two prior to the
pricing of your transaction.
Experience
The investment banking rm should typically have
experience in underwriting issues of companies in the same
or similar industries. This may inuence its ability to price
the issue accurately and may give it improved credibility
when explaining and selling the company to the public.
Experience of the investment banking rm is key while
there are many investment banks with excellent reputations,
you should consider their experience with IPOs in your
companys industry and key investor markets before making
a selection.

Market-making capability
Once the stock has been issued to the public, the
lead underwriter generally assumes responsibility for
continued sponsorship of your company in the nancial
community. This sponsorship includes making a market
in the companys stock and assisting the company in
sustaining public interest in the stock, including organizing
presentations to investor groups. Other members of the
syndicate may become market makers as well. The market
makers in the stock trade in your stock, offering rm prices
to buy or sell shares. The lead underwriter generally serves
as the principal market maker. In order to maintain a market,
the lead underwriter may need to devote a sufcient
amount of capital to take large positions (i.e., short or long)
in your stock. Without this support, large shareholders may
not have much liquidity, interest may wane, and the market
price of your stock may suffer. When you consider the
aftermarket performance of the proposed lead underwriter,
you are often assessing its willingness to place its capital at
risk for its client companies.
33
Strategies for Going Public 34
Research analysts
The nancial community will look to the lead underwriter
as a primary source of information about your company.
Therefore, the selected investment banking rm should have
experienced research analysts who are respected by the
nancial community and closely follow the industry in which
the company does business.
Certain conict of interest rules between research analysts
and their investment banking rms were designed to
promote independence and objectivity of research. The rules
restricted analyst participation for certain activities such as
the roadshow and also prohibited certain communications
by analysts. The JOBS Act contains provisions designed to
liberalize the communications and interactions of analysts in
the IPO process for an EGC. See Chapter 12 for detail.
Ability to provide nancial advice
During and after your IPO, you will look to your investment
bankers for nancial advice. You may need help in obtaining
additional funding in the future, advice on potential mergers
and acquisitions, or insight into the investing publics
attitude toward your company.
Other considerations
You should talk with the proposed investment bankers
other corporate clients to nd out rsthand what their
experience has been and how they feel about their
relationship with the underwriter. You should ask both about
working with the underwriter during the offering and how
supportive the underwriter has been after the offering. Read
the prospectuses of other IPOs in which the investment
banker has acted as the lead underwriter. You should also
take the time to be sure you are comfortable not only with
the people with whom you will be initially directly involved
but also with those who will have ongoing responsibility
for market making, research, and sales sponsorship. The
personal chemistry between your investment bankers and
you, your management team, and your board is extremely
important. You may also consider using more than one
lead underwriter. A company may choose to use two or
more underwriting rms to co-manage its offerings if the
company has a good relationship with more than one
rm or if the company sees advantages to combining the
client bases, research capability, geographic strengths,
and other resources of the underwriting. It is important to
keep in mind that there will be certain conicts of interest
between you and the underwriters, such as conicts that
may arise because of their long-standing relationships with
institutional customers or with some of your competitors.
Underwriters receive their commission if the transaction is
completed, whether successful or not in the aftermarket.
Under the JOBS Act, there is increased exibility regarding research reports about EGCs. Existing rules will be
modied to:
Permit the publication or distribution by a broker or dealer of any research report about an EGC that has registered
or is proposing to register a public offering even if the broker or dealer is participating or will participate in the
registered offering of the securities of the EGC
Permit any broker, dealer, or member of a national securities association to publish or distribute research reports or
make public appearances with respect to the securities of an EGC during post-IPO quiet and lock-up periods
Permit any securities analyst to participate in communications with the management of an EGC that is also
attended by any other associated person of a broker, dealer, or member of a national securities association whose
functional role is other than as a securities analyst
See Chapter 12 for additional information.
35
What underwriters look for
Before any underwriters agree to proceed with your IPO,
they will want to investigate your company to decide
whether they want to take your company public. This
investigation constitutes a portion of their due diligence.
They will also do specic due diligence on the company
and registration statement disclosure later in the process.
Assuming they decide to back your company, the
information they gather during their investigation will also
assist them in determining how to price the stock. The
underwriters may closely investigate many of the items
described in Chapter 2, including management quality,
employees, product quality and industry potential, nancial
and tax positions, earnings history and potential, and
company reputation.
The underwriters investigation can take several weeks or
more depending on their familiarity with your company and
your industry. They will review legal, accounting, nance,
and tax materials. They will also quiz your key executives,
and they will talk to people outside the company, including
customers, suppliers, competitors, and other people who are
knowledgeable about your industry.
A written business plan is extremely helpful in providing
information about your company to the underwriters.
It should include a realistic portrayal of your companys
operations, strengths, and weaknesses and of the projected
application of an offerings proceeds. A well-done business
plan also provides a great deal of information that
will be useful when drafting the registration statement.
A detailed and thorough business plan can reduce the
time and expenses incurred by attorneys and other
professional advisors.
Remember that even if the underwriters complete this initial
investigation to their satisfaction, they will have no legal
commitment to take you public until the completion of the
marketing and pricing of the transaction, which is one of the
last steps in the IPO process.
The underwriters will also evaluate factors related to the
offering itself in determining whether to take you public.
These include:
Use of proceeds. The underwriters will evaluate how much
money you will need to effectively operate and grow the
company under your business plan. If you require more
money than can realistically be raised in the public market
at the time, it may be wise not to try to go public now. If a
large amount of the proceeds will go to shareholders or if
key employees are selling stock, the underwriters may want
some assurance that these people are not selling because
they have lost condence in the company.
Marketability. The underwriters will also consider the
state of the markets at the time, both generally and for a
company in your industry and at your stage of development.
These things can change quickly, so you must be prepared
to be exible in this process.
Selecting a trading market
Working with your lead underwriter and legal counsel, you
should consider on what trading market you want your
stock to trade after the IPO. The initial listing requirements
of the NYSE and NASDAQ are detailed in Appendix C:
The securities exchanges. In addition, both the NYSE and
NASDAQ have corporate governance requirements for their
listed companies. See Corporate governance in Chapter 4
for a general overview.
Types of underwriting
There are generally two main types of underwriting:
A rm commitment. Under this arrangement, the
underwriters agree to buy all the stock being offered at a
xed price, usually determined on the date the registration
statement becomes effective. They then resell the stock to
Strategies for Going Public 36
the public. If they are unable to resell all of the stock,
they must still buy the stock and keep it until they can
resell it later.
A best-efforts commitment. Essentially, the underwriters
agree to use their best-efforts to sell the new issue on
your behalf. If they do not sell the entire amount to the
public, they have no obligation to purchase the balance.
Thus, they are acting merely as your agent. These are rare in
IPOs and are practically impossible to do in any offering that
will be listed on an exchange.
The rm commitment is generally the preferred and by far
the most common form of underwriting arrangement, as it
ensures you that your company will receive a certain sum
of money by a certain date. It also facilitates listing on an
exchange, since the lead underwriter makes a representation
to those organizations as to the distribution of the offering.
The type of underwriting that is offered to you will depend
on the underwriting rm that you are using and the nature
of your stock offering. If one of the major rms agrees
to underwrite you, it will almost always agree to a rm
commitment. The smaller rms that handle more speculative
offerings may do so on a best-efforts basis.
Pricing the stock
As in most pricing situations, no set formula exists for
determining the proper price for a companys stock. The
pricing for an IPO is determined by a combination of factors.
Your investment bankers will examine the total market value
of each of the companies that operate in your eld. If none
exists, the underwriters will then try to nd other companies
in related areas. They will examine factors such as price-
earnings ratios, capital structure, debt-to-equity ratios, return
on assets, and return on sales of these companies. They will
weigh carefully your prospective revenues, earnings, and
dividends, the amount of stock that will be available, and
the potential demand.
If possible, it will be useful for you to perform this analysis
on other companies prior to meeting with underwriters on
price. It is a good idea to develop a valuation model well in
advance of the IPO (e.g., more than one year in advance)
and use this information to rene the business model to
maximize the long-term valuation. In addition, this valuation
model may be useful in pricing employee stock options.
There is usually a good deal of information available about
companies similar to yours to help you develop a range for
the price of your stock. This analysis will help you negotiate
realistically with the underwriters. If your company is selling
stock to the public for the rst time, pricing is different
than for a company that has its stock listed on an exchange
already. Cautious buyers may want to wait and see how
your companys stock behaves before they purchase it,
reducing demand.
It is also possible that, although your company is not well
known in comparison with others in your industry, your
growth patterns and potential are so attractive that the
public will accept a greater price-earnings ratio for your
companys stock than for others that are more seasoned.
The price for the offering will depend, in part, on the
demand for the stock during the marketing period, as
evidenced in the book-building process that the lead
underwriter has led. If demand has been particularly high
from attractive potential investors, it may be possible for the
37
plan to establish an effective aftermarket (which the lead
underwriter does in a traditional IPO), but it is a less costly
offering process alternative since the underwriter generally
does not receive the same magnitude of commissions. Some
underwriters who sponsor these offerings also suggest
that it could lead to a higher initial offering price, though
this may be at the expense of the immediate aftermarket
performance. If you are considering this type of IPO, you
should carefully discuss the advantages and disadvantages
with your advisors.
Size of the offering
Determining the appropriate offering size is important, as
it may affect the companys engagement of an investment
bank and the ability to attract high-quality investors. If the
offering is not large enough, many institutional investors will
be hesitant to invest due to the potential lack of liquidity
in the aftermarket. The median transaction size for issuers
in 2010 and 2011 was $95.5 million and $145.6 million,
respectively. An offering in this range would usually translate
into 5 million to 10 million shares being offered, which
should be sufcient to obtain broad distribution and provide
liquidity in the aftermarket. Table 5-1 shows a breakdown
of the number of shares for offerings done during calendar
year 2010 as compared to the breakdown of the number of
shares for offerings done during the calendar year 2011.
company to increase the size of the offering or the expected
price. Alternatively, if the market has weakened or demand
is not as high as expected, the expected price may have to
be cut.
It is not necessarily advantageous for your stock to be sold
for the highest possible price that underwriters could seek.
If the IPO price is set too high in relation to the companys
record, industry, and market conditions, the aftermarket
may be weak. Consequently, underwriters usually advise
you to sell slightly (up to 15 percent) below the anticipated
aftermarket price. For IPOs in 2010 and 2011, the average
increase in share price one day after the offering was 10.2
percent and 11.6 percent, respectively.
Sometimes, a stocks price will increase sharply immediately
after the IPO. This does not mean that the stock was priced
incorrectly. Underwriters try to establish a price under normal
trading conditions. Sometimes, though, speculative surprises
occur. There have been instances where the trading price has
doubled or tripled in the rst few weeks of trading. For 2010
and 2011, the greatest rst-day gain experienced was 161.3
percent and 134.5 percent, respectively, but these are not
typical at all. IPOs generally experienced signicantly more
moderate rst-day gains in previous years. The IPO market
was substantially affected by the nancial crisis and so its
results from those years are not necessarily comparable.
There is also an alternative method of marketing and pricing
an offering called a Dutch auction, which does not involve
the book-building process described above. However, it is
rare. Unlike traditional IPO pricing, this arrangement is based
on a transparent bidding process, where the bidding can be
done over a three-to ve-week period by individual investors
rather than through a nontransparent book-building process
run by a lead underwriter. The pricing demand is based on
the bids made by auction participants, with the lowest price
that can sell the total number of shares setting the price for
all the shares. This method has greater risk to the company
since it does not allow the underwriters to effectively
Table 5-1 Number of shares
% of Offerings
Number of shares offered 2010 2011
20.0 million or more 6.7% 18.5%
15.019.9 million 10.7% 7.6%
10.014.9 million 27.3% 25.2%
5.09.9 million 40.7% 37.8%
1.04.9 million 14.7% 10.9%
Less than 1.0 million 0.0% 0.0%
Strategies for Going Public 38
Table 5-2 shows a breakdown of the initial price for
offerings completed during 2010 compared to the
breakdown of the initial price for offerings completed during
2011. Underwriters typically like to price the offering near
the $10-$20 range in order to allow 100-share round lots to
be priced in a range that facilitates the participation of more
retail investors.
Sometimes, a company will decide that it does not need
that much money. A partial secondary offering, in which
the existing shareholders sell some of their shares, may be
made to obtain the desired number of shares to be sold.
In general, early-stage companies are not encouraged
to make secondary offerings of any signicance. If these
companies want other people to invest in them, the existing
shareholders must show condence in the potential of the
stock. Underwriters may become concerned if they see
investors who may have held stock for only a short time and
already want to sell. As for management and key directors,
sales of less than 10 percent of any one individuals stock
may be acceptable. Of course, the underwriters may make
exceptions if there are valid reasons.
The number of shares is a function of price and total
valuation of the company. Issuing too many or too few
shares can unfavorably alter the share price and thus the
total amount to be raised in the offering.
Keep in mind that underwriters have some exibility on this
matter at the time of the offering, as they are generally
allowed to offer and sell up to 15 percent more shares
than set forth on the cover page of the prospectus for
the offering. This option, which is agreed upon in the
underwriting agreement, is referred to as the over-allotment
option or a green shoe and is described in more detail in
Chapter 9.
Table 5-2 Initial public offering price
% of Offerings
Price of shares 2010 2011
$20.01 or more 8.7% 15.1%
$15.01$20.00 13% 29.4%
$10.00$15.00 51% 37.8%
Strategies for going public 38
39
Chapter 6. Registration
The entire IPO process revolves around your companys
registration with the SEC.
Strategies for Going Public 40
During the preparation phase, a series of planning and
review meetings are held, often referred to as all hands
meetings. Meeting participants generally include company
ofcials, counsel, underwriters, and their counsel, as well
as the companys external auditors and other advisors.
The purpose of the meetings is to establish an initial
timetable, assign responsibilities, discuss the components
of the registration statement, present nancial and legal
information, and assess other aspects of the offering. An
illustrative timetable is available in Appendix D: A timetable
for going public.
When an initial registration statement is completed, it is led
with the SEC. The registration statement is then reviewed
by the SEC in order to determine if it is compliant with the
applicable disclosure and accounting requirements. The
SEC will then issue a comment letter on the registration
statement requesting clarications, modications, and
other information. The company formally responds to the
comments by letter, modies the registration statement,
and les an amended version. This process continues
until the SEC is satised with the disclosure. The SEC staff
has issued guides designed to assist potential registrants
such as the Division of Corporation Finances Financial
Reporting Manual, as well as Staff Observations in the
Review of Smaller Reporting Company IPOs, which may be
helpful when preparing the initial registration statement.
The interval between the initial ling of the registration
statement and its effective date is the so-called quiet
period or waiting period.
Typically, after several rounds of comments, the preliminary
prospectus is printed for use in the marketing efforts. The
preliminary prospectus must bear a legend stating that a
registration statement related to the offering has been led
with the SEC, but has not yet become effective, and that
the securities may not be sold, nor may offers to buy be
accepted, before the effective date. Because this legend is
printed in red ink, the preliminary prospectus is commonly
referred to as the red herring. The red herring is typically
printed and distributed to potential investors after the
company and its advisors resolve all potentially signicant
SEC comments. The red herring also includes an estimated
pricing range for the shares to be offered.
The merits of your offering may need to be reviewed and
approved by the states in which the stock is to be sold, and
the underwriters compensation must be reviewed by FINRA.
Once these requirements are addressed, the registration
statement is declared effective, the pricing of the offering
occurs, a nal prospectus is printed, and the securities may
be sold. There is also an accompanying registration of the
class of stock being sold under the 1934 Act. This concise
registration document incorporates portions of the 1933 Act
registration statement. See Chapter 9s discussion of the
1934 Act.
T
i
t
l
e
?
Historically, FPIs were able to submit condential
draft registration statements to the SEC for review
prior to public ling. In December 2011, the
SEC changed this policy and now only reviews
condential draft registration statements of FPIs in
specied circumstances. With the passing of the
JOBS Act, an EGC is permitted to submit to the
SEC a draft registration statement for condential
review prior to public ling, provided that the draft
submission and any amendments are publicly led
with the SEC no later than 21 days before the EGC
conducts a roadshow.
Registration is achieved through the ling of a legal document referred to as
the registration statement, and the contents of this statement are governed
by the securities laws. Preparing the registration statement can be a lengthy
process even if the process goes smoothly. It is not uncommon for completion
of the registration statement to take three or four months or even longer. The
company is strictly liable for the information in the registration statement and so
great care must be taken in its preparation. Since directors and ofcers who sign
the registration statement also may have liability for misstatements or omissions
in the registration statement and prospectus, they are responsible for ensuring
the accuracy of the information included in the registration statement.
41
Who does what
The better prepared the company and its executives are to
complete the registration statement, the more efcient the
external professionals can be. While each party has specic
responsibilities, the entire group must be comfortable with
the nal product. Everyone is associated with the registration
statement in some way and it is in everyones interest that
the registration statement is as accurate as possible. Here
are the basic expectations for each party:
Company management
The most important team members are the companys
management, led by the CEO and the CFO. Your
management team acts as a liaison between the working
group and the companys board, and plays a critical role in
all aspects of the IPO process. The management team will
make structural and timing decisions relevant to the IPO and,
with assistance from the companys advisors, will prepare
the registration statement, respond to the SEC comments,
and make the roadshow presentations.
The best way for executives to expedite the process is
to have a detailed and up-to-date business plan ready
for outside professionals to use as a reference. The plan
normally includes the companys plans for the future, as
well as analyses of the companys place in its industry,
details about its market, an assessment of the competition,
a complete description of its products or services, and
consideration of weaknesses in the companys performance.
Your CEO and CFO must also be ready to certify the
accuracy of the nancial statements and disclosures as part
of the annual reporting process.
Company counsel
As the registration statement is a legal document, the
attorneys generally take the lead in drafting it. The
companys management will gather information and answer
questions as needed. Based on the information gathered by
management, counsel will be able to assist you in deciding
which particulars should be included in the registration
statement (i.e., what facts are material) and how they
should be included. Additionally, counsel will coordinate
and assist in the drafting of responses to the SEC comments.
The companys counsel is also responsible for helping you
with pre-IPO corporate housekeeping and IPO preparations,
coordination of the due diligence process, negotiation of
the underwriting agreement on behalf of the company,
securities-related matters, issuance of a legal opinion on the
validity of the securities being offered, and completion of an
accurate and comprehensive registration statement.
Auditors
The companys auditor must audit the nancial statements
included within the registration statement and render a
report on the audit upon whether or not the nancial
statements present fairly, in all material respects, the
nancial position of the entity as of the balance-sheet date
and the results of its operations and its cash ows for the
period then ended, in conformity with generally accepted
accounting principles. If your nancial statements have been
audited on a regular basis in the years leading up to the
ling of a registration statement, ensuring that the nancial
statements are in SEC-required form may be less difcult.
Subsequent to registration, your auditor may be required
to issue an opinion on the companys ICFR. See Chapter 9
If your fnancial statements have been
audited on a regular basis in the years
leading up to the fling of a registration
statement, ensuring that the fnancial
statements are in SEC-required form may
be less diffcult.
Strategies for Going Public 42
for additional information. In conjunction with preparation
of the registration statement, your auditor will also review
drafts of the registration statement for accuracy and
consistency of nancial information. Your auditors may also
assist in the resolution of accounting and nancial reporting
questions raised by the SEC during the SEC review process
and will issue comfort letters to the underwriters as part of
the due diligence process.
Advisory
An accounting advisor, not restricted by the independence
standards of auditors, can provide assistance to
management with SEC reporting requirements, evaluation
of new and revised accounting policies, review of the
draft prospectus, and responses to SEC comment letters.
The accounting advisor can also assist you with post-IPO
issues involving information systems, internal controls, SEC
reporting, business process improvements, and corporate
governance.
Underwriters
The lead underwriter will form an underwriting syndicate
to provide you with advice on the pricing and timing of
the issue. In addition, the lead underwriter will organize
the roadshow to help promote the securities and
increase demand for the offering. Underwriters are also
active participants in the drafting process, particularly
with respect to the summary section of the prospectus
(otherwise known as the box), and the description of
the industry in which the company operates as well as in
responding to SEC comments.
Underwriters counsel
One of the principal roles of underwriters counsel is to
conrm that the registration statement is complete and not
misleading. To do so, the underwriters counsel will review
the registration statement and related exhibits, conduct
due diligence meetings, draft the underwriting agreement,
and request comfort letters from your auditors. They will
also participate in drafting the registration statement and
responding to comments from the SEC.
Pre-ling activities
Due diligence
Due diligence is the process of ensuring that the
information in the registration statement is accurate in
all material respects and that the registration statement
does not contain any untrue statements of material fact or
omit material facts required to be stated in the registration
statement or that are necessary to prevent statements in
the registration statement from being misleading. One
component of due diligence includes questioning key
management personnel about company activities, matters
disclosed in the prospectus, and matters not disclosed in
the prospectus.
Under the 1933 Act, securities fraud liability may be incurred
if a registration statement contains misstatements of
material facts or omissions of material facts required to be
included at the time that the registration statement becomes
effective. The company, its directors, the ofcers who sign
the registration statement (the principal executive, nancial,
and accounting ofcers), the underwriters, and any experts
(such as auditors) participating in the registration may all
be potentially liable. The company itself is liable for any
material deciencies, regardless of good faith or the exercise
of due diligence. This requires that a complete due diligence
process be performed, which greatly increases the length of
the preparation phase.
Corporate documents and related information
Your counsel and underwriters counsel will review articles
of incorporation, bylaws, minutes of board and committee
meetings, major contracts, employment agreements, stock
option plans, and other signicant company documents
to verify that the prospectus disclosures are accurate.
Questionnaires are circulated to all directors and ofcers,
requesting certain information including their names,
prior experience, direct and other remuneration, options,
warrants and rights, transactions with the company,
indemnication agreements, and the number of shares
owned of record and benecially (shares in which they,
directly or indirectly, have or share voting or investment
power). In some cases, the individual directors and ofcers
may be interviewed by your advisors.
43
Financial statements
The audited nancial statements will be included in the
prospectus, with reliance on the auditors report given on
the authority of the auditors as experts in auditing and
accounting. In order for a company to include the audit
rms report in the ling and to refer to the rm as experts,
the company must request and obtain the auditors consent
to the inclusion of their report in the prospectus and to
being named as experts. Before these consents are given,
the auditors must perform a reasonable investigation
through the ling dates, conducting a subsequent events
investigation to determine whether the nancial statements
and their opinion thereon are still appropriate.
This investigation includes inquiries into any events that
occurred or became known after the date of the auditors
last report, which, had they been known at the time, would
have been disclosed or reected in the nancial statements.
Your auditors will review and discuss with management
any concerns they may have with the interim nancial
statements. They will also read the entire registration
statement for inconsistencies between the nancial and
non-nancial portions and any material matters that have
not been disclosed. The auditors are also asked by the
underwriters to provide comfort (as explained below)
on certain nancial amounts disclosed in the registration
statement (outside of the audited nancial statements).
Comfort letters
During the registration process, the underwriters and
their counsel will discuss with your auditor the nancial
statements and reach an agreement on the auditor
comfort letters. In requesting these comfort letters, the
underwriters are seeking assistance in performing a
reasonable investigation of nancial and accounting
data in the prospectus that is not covered by the auditors
report. Two comfort letters are generally issued, one on
the effective date of the registration statement and one
on the closing date, the latter of which is often referred
to as the bring-down comfort letter. The comfort
letters list specic procedures performed at the request of
the underwriters. Your auditor will be requested by the
underwriters to furnish a preliminary draft well in advance
of the rst due date so that the underwriters may decide
whether the procedures described in the letter are consistent
with what they requested. The procedures, performed by
the auditor, usually include comparison of nancial data,
contained throughout the prospectus, to accounting records
or nancial statements. They also include consideration
of nancial results available subsequent to the last audit
for purposes of determining whether there have been
any decline in sales or income or other trends that are not
adequately disclosed in the document. It is important for
the company to be involved in the procedures requested
by the underwriters early in the process as management
may be able to identify items that can be resolved with the
underwriters in advance of the issuance date. The company
may choose to discuss these situations with the underwriter
prior to the issuance date of the comfort letter to avoid
surprises or potential delays in ling. For example, sales for
the most recent month may have declined from sales for
the same month a year ago, and this decline will be noted
in the comfort letter (unless such information is publically
disclosed, such as in a press release).
Types of issuers
There are four main types of public company issuers:
domestic issuers, smaller reporting companies, EGCs and
FPIs. Domestic issuers (which are the primary focus of this
publication) are generally organized under the laws of a
state of the United States of America.
The primary determining factor for eligibility as a smaller
reporting company is that the company has less than $75
million in public oat as of the last day of its most recently
completed second scal quarter. When a company is unable
to calculate public oat, such as where no market price for
its outstanding common equity exists at the time of the
determination, the eligibility requirement will be less than
$50 million in revenue in the last scal year.
EGCs are a new classication of issuer that was created by
the JOBS Act. An EGC is dened as a company with total
annual gross revenues of less than $1 billion during its most
recently completed scal year. An EGC will continue to be
an EGC until the earliest of: the last day of the scal year
during which it had total annual gross revenues of at least
$1 billion; the last day of the scal year following the fth
anniversary of the IPO of its equity; the date on which it
has, during the previous three-year period, issued more
than $1 billion in non-convertible debt; or the date on
which it is considered to be a large accelerated ler under
the 1934 Act.
Strategies for Going Public 44
FPIs are incorporated or organized outside the U.S., but
register securities to be sold in the U.S. The SEC offers
certain nancial statement and disclosure accommodations
for FPIs. Chapter 10 denes foreign private issuers and
summarizes some of the more important accommodations.
You should consult with your legal counsel to determine if
your company may qualify as a smaller reporting company,
EGC, or FPI.
The registration statement
Most registration statements for IPOs of domestic issuers are
prepared on Form S-1. There are, however, scaled disclosure
requirements for smaller reporting companies and EGCs.
The registration statement consists of two principal parts.
Part I contains the prospectus, which is a legal offering
document that will be distributed to prospective buyers. The
prospectus also serves as a marketing document for the IPO.
Part II contains other detailed information.
The following discussion focuses on the Form S-1
registration statement. You should consult with your legal
counsel regarding the specic requirements of each part of
the registration form.
Part I: The prospectus
The registration forms contain a series of detailed items
and instructions, in response to which disclosures must be
made. Because the prospectus is the selling document as
well as the legal document, it is usually written in narrative
form and is highly stylized. The SEC requires the use of
plain English for parts of the document (the cover page,
summary, and risk factors sections) and encourages such
for the whole document. The plain English rules require
the use of short sentences that avoid technical and legal
jargon. The SEC also emphasizes the necessity of carefully
organizing information in the prospectus in a logical
sequence and presenting that information in an easy-to-
read, understandable manner.
The prospectus serves two potentially conicting purposes.
On the one hand, as the basic selling document, the
underwriters and company want it to present the best
possible image of the company. On the other hand, to
protect the company, controlling persons, directors and
ofcers, and underwriters from potential liability under
the 1933 Act, it should not be written with the air and
style of marketing literature. Its emphasis should be on
complete and accurate disclosure, and while the company
will highlight the positive aspects of the company, negative
aspects will also be addressed. Reading prospectuses of
other companies in your industry will help you prepare
for drafting your companys prospectus, especially with
regard to the level of detail required when preparing your
companys description of business and MD&A, as well
as identifying potential weaknesses associated with your
company. Note that most investors are accustomed to
reading prospectuses and understand that they are not
entirely sales pitches.
Reading prospectuses of other companies
in your industry will help you prepare for
drafting your own companys prospectus,
especially with regard to the level of detail
required.
45
In practice, the information in the registration statement is
generally presented in the following order:
Cover page. The outside front cover of the prospectus
provides key facts about the offering, including the name of
the registrant, the names of the underwriters, the title and
number of shares of the securities to be sold, a distribution
table (the price to the public, the underwriters discount,
net proceeds to the company, and net proceeds to selling
shareholders on per-share and aggregate basis) and the
date of the prospectus. At the time of the red herring, the
cover page will include a range of per-share prices (e.g., It
is currently estimated that the initial public offering price will
be between $12 and $14 per share.) and the distribution
table will be blank. The inside front or outside back cover
includes a table of contents and information regarding the
distribution of the prospectus.
Prospectus summary. This section of the prospectus,
sometimes referred to as the box, highlights the
prominent features of the offering and includes brief
descriptions of the companys business, the offering, the
use of proceeds, and the risk factors. An introductory
statement about the company is generally given, explaining
what business it is in, its main products or services, when
it was formed, and where it is located. The summary will
also disclose condensed nancial information. As it will
often serve as the basis for a potential investors decision
to consider the stock further, the summary may require
considerable time to prepare.
Risk factors. The prospectus includes a discussion of the
most signicant factors that make the offering speculative
or risky. These may include such things as a lack of
operating history, an accumulated decit, operating losses
in recent periods, an expectation of future losses, industry-
related risk factors, uncertainty of market acceptance of
the product, dependence on key personnel or certain
customers, competition, and history of material weakness.
Other factors include risks related to rst-time offerings;
the potential impact of current or proposed legislation;
the companys dependence on strategic relationships or
alliances; integration of acquired businesses, the need to
expand parts of the organization, such as sales, support or
production; and any relevant and material technological
issues. The issuer also should highlight risk factors relative
to the company and its operations. As other portions of the
prospectus are written, be alert for issues that should be
highlighted in this section.
Use of proceeds. This section describes the purpose of
the offering, explaining how the funds will be spent, such
as to reduce debt or acquire a new business, and must be
carefully drafted.
Dividend policy. The companys dividend history and any
restrictions on future dividends should be explained. Note
that many companies have never paid dividends, retaining
all earnings to nance continuing operations and expansion.
Any intent to not pay dividends in the near future must be
disclosed as well.
Capitalization. This section contains a table exhibiting the
capital structure (debt and equity) of the company before
and after the offering (i.e., on a pro forma basis).
Dilution. When substantial disparity exists among the IPO
price, the book value and the price that was paid for existing
shares owned by ofcers, directors and major shareholders,
the resulting dilution of the purchasers equity interest is
shown. Tables will compare the price paid by new investors
with that paid by existing investors, and the net tangible
book value of the stock with the price paid by new investors.
Selected nancial data. This section includes certain
selected nancial data for each of the last ve scal
years or from the date of the companys inception, if
shorter, and any interim periods that are included in the
nancial statements. The purpose is to highlight certain
signicant trends in the companys nancial condition and
its operations. Consequently, the data generally includes
revenues; income (loss) from continuing operations, in total
and per share (in practice, many companies disclose most
of the details contained in their statements of operations);
total assets; long-term obligations (e.g., debt, capital leases)
and redeemable preferred stock; shareholders equity; and
cash dividends declared per share. A company may also
include additional items that it believes would enhance an
understanding of and highlight other trends in its nancial
condition and results of operations. Under the JOBS Act, an
EGC is allowed to reduce the number of periods presented
in selected nancial data to a minimum of two years
Strategies for Going Public 46
corresponding to the earliest period of audited nancial
statements included in the registration statement. There is
no requirement for a smaller reporting company to present
selected nancial data, although the underwriters may
request this information to be presented.
Selected quarterly nancial data. There is no requirement
to provide selected quarterly nancial data within an initial
registration statement. However, the underwriters may ask
for quarterly nancial data to provide more information
to potential investors. You should discuss this with your
underwriters early in the process as the accumulation of
this data may be time-consuming. Additionally, if included,
your auditors would be required to perform a review of
this information. After the initial registration statement is
declared effective, the company must be prepared to include
selected quarterly nancial data in subsequent lings with
the SEC.
MD&A. The purpose of the MD&A is to provide
managements view of current performance and
expectations of the future and to enhance disclosure,
quality, and variability of earnings and cash ows.
Management should provide a balanced explanation of
the companys operations, historical results, and nancial
condition, and highlight both positive and negative
trends that may reasonably affect the companys future.
Management should also disclose critical accounting
policies, signicant estimates made; any trends,
commitments, or events that may affect working capital,
commitments for capital expenditures; and the source of
funds for those expenditures. Signicant changes from
year to year in line items on the income statement should
be explained, and signicant related-party transactions
should be discussed. Anticipated liquidity and capital
resource issues should be highlighted, including future
material capital expenditures, signicant payments due on
obligations, discretionary payments, acquisitions requiring
cash nancing, and other commitments. Any identied
material deciency in short- or long-term liquidity, as well
as the proposed remedy or the fact that the deciency
has not been remedied, should be disclosed. Off-balance
sheet arrangements that have, or are reasonably likely to
have, a current or future effect on various aspects of the
business should also be disclosed. Contractual obligations
should be shown in a table showing future payments for
certain contractual obligations. Because of the amount
and varied nature of the information that is required to be
included in the MD&A, you should become familiar with
the SECs guidance in this area, well in advance of the initial
drafting. In addition, accumulation of information for all
periods presented may take some time. In addition to the
SECs rules for MD&A, the SEC staff has issued interpretive
guidance in this area and expects companies to follow
these interpretations. Before companies begin drafting their
MD&A sections, it would be benecial to consider available
guidance in Item 303 of Regulation S-K, SEC Release Nos.
33-6835 and 33-8350 and other SEC staff guidance.
Market risk. This section requires quantitative and
qualitative information about the market risks to which the
company is exposed, with a distinction being made between
instruments entered into for trading or speculative purposes
and those entered into for hedging and other purposes.
Categories of market risk include interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other
relevant market rate or price risks. This disclosure may be
provided in a variety of formats. Although the underwriters
may request it, there is no requirement for a smaller
reporting company to present market risk.
Description of business. This section often the longest in
the prospectus. It is intended to provide the reader with
material information essential to the evaluation of the
companys products or services and industry. Disclosure
should include, but is not limited to:
The companys historical development
Plans for the future
Principal products produced or services provided
Principal company markets and methods of distribution
The status of any announced new products under
development
Sources and availability of raw materials
Customer service and support
Patents, 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
signicant amounts of inventory to meet rapid delivery
requirements or if you provide extended payment terms to
customers)
Dependence on one or a few customers
Under the JOBS
Act, the periods
required for selected
nancial data in both
registration statements
and periodic lings do
not extend to periods
before the rst year
presented in the EGCs
IPO. See Chapter
12 for additional
information on the
JOBS Act.
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Dollar amount of rm backlog
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
Management and certain security holders. This section
should provide background information about management
personnel and major shareholders, and their nancial
relationship with the company. Specically, the company
must provide:
The names and ages of the directors, executive ofcers,
signicant employees, their business experience, their
remuneration (including stock options, perquisites
and other indirect amounts), and any employment or
severance agreements
A description of the involvement in certain types of legal
proceedings by a director and nominees for director or
executive ofcer during the past 10 years
A compensation discussion and analysis section that
describes the material factors underlying compensation
awarded to, earned by or paid to executive ofcers in
order to give the investor the information needed to
understand the compensation policies, and decisions
made by management, including how the specic
compensation elements are determined
Tabular schedules of compensation for the executive
ofcers, the most notable being the summary
compensation table, the grants of equity-based awards
outstanding at the end of the year, and the options
exercised and vested schedules
Tabular schedule of director compensation
A description of all stock option and other employee
benet plans that provide clear, concise, and
understandable disclosure of all plan and non-plan
compensation awarded to, earned by or paid to the
named executive ofcers and directors
The stock holdings of ofcers, directors, and any share-
holders who benecially own more than ve percent of
any class of stock
Certain transactions between the company and its
ofcers, directors, and principal shareholders
Loans by the company to ofcers or directors
Transactions with promoters, if the company has been in
existence for less than ve years
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Compensation disclosure is an area of frequent
comment by the SEC, typically asking companies
to improve the analysis of compensation policies
and strategies, with comments often focusing
on the determination of the amounts of specic
compensation elements.
After your IPO, the amount of disclosure required
depends on your ler status. Large accelerated
lers and accelerated lers have the most
signicant disclosure requirements, while smaller
reporting companies have more limited disclosure
requirements. For example, a smaller reporting
company does not have to provide, among other
things, a Compensation Disclosure and Analysis
(commonly referred to as a CD&A) or provide
disclosure of the relationship of compensation
policies and practices to risk management. Under
the JOBS Act, an EGC is only obligated to provide
the limited disclosures required for a smaller
reporting company.
Compensation disclosures continue to be a focus
in recent legislation. The Dodd-Frank Act directs
the SEC to create a rule regarding additional
compensation disclosures within any proxy
or consent solicitation for an annual meeting
of shareholders. See Chapter 11 for further
information on these additional disclosures.
Strategies for Going Public 48
If your management team or company founders have not
previously been associated with public companies, the
amount of sensitive information that must be disclosed in
this area may not be known. You should consider preparing
this information early in the registration statement drafting
process to allow for adequate review by all parties.
Related-party transactions. This section includes
information on related parties, including names of related
parties, related parties interest in the transaction, dollar
amount of transaction, and the dollar amount of each
related partys interest. If related-party transactions are
signicant within a company, they could come under intense
scrutiny during the IPO process.
Description of securities. This section gives the par or
stated value of stock, explanations of dividend rights and
voting, liquidation, preemptive rights, and the transferability
of each class of stock. It also describes any provision of the
companys charter or bylaws that would have the effect of
delaying, deferring or preventing a change in control of the
company. Any outstanding warrants or registration rights
should also be disclosed.
Information about underwriters. This section should
explain the plan of distribution for the offering. The various
underwriters in the syndicate must be disclosed, as well
as the number of securities to be purchased by each.
The underwriters obligations, indemnication by the
company and any material relationships between any of the
underwriters and the company should also be disclosed. In
addition, any lock-up arrangement, whereby shareholders
agree not to sell their shares for a period of time after the
offering, is described here. See additional discussion on
lock-ups at the end of this chapter.
Financial statements. The last section of the prospectus
will normally be the nancial statements. Form S-1 requires
the following:
Audited balance sheets as of the end of the last two scal
years and audited statements of operations, cash ows,
and changes in shareholders equity and comprehensive
income for the last three scal years, including footnotes
to those statements
Unaudited interim nancial statements (covering three-,
six- or nine-month periods subsequent to the companys
latest scal year), if the registration statement will not
be led/declared effective within 135 days subsequent
to the companys most recent scal year end. Note
that interim balance sheets for the current year are
compared to the prior scal year balance sheet while the
statements of operations are compared to the prior year
corresponding period.
Smaller reporting companies and EGCs are required to
provide audited balance sheets, statements of operations,
cash ows, and changes in shareholders equity as of and
for the two most recent scal years, including related
footnotes.
Currently, the nancial statements included in a registration
statement on Form S-1 must be prepared in accordance with
U.S. GAAP. FPIs are permitted to use International Financial
Reporting Standards (IFRS) as an alternative to U.S. GAAP.
Audited nancial statements of a business acquired or
likely to be acquired may be required to be included in
the registration statement. If your company has acquired
a business within the last three years, or an acquisition
is probable, calculations will need to be performed to
determine if the acquisition is large enough to warrant
the nancial statements of the business to be included
in the registration statement. The size of the acquisition
will determine the number of periods for which nancial
statements are required. In addition to including audited
nancial statements of an acquired business in the
registration statement, the company may also be required to
present unaudited pro forma nancial information reecting
the business acquisition. Separate nancial statements of
equity method investees and nancial guarantors may also
be required if certain criteria are met.
Refer to Chapter 10 for nancial statement requirements
for foreign private issuers.
Other. Other information in the registration statement
includes tax consequences, shares eligible for future sale,
identication of the law rms providing legal opinions,
the identication of experts, and the availability of
additional information.
Under the JOBS Act,
only two years of
audited nancial
statements are
required in an initial
public offering by an
EGC. See Chapter
12 for additional
information on the
JOBS Act.
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Part II: Information not required in prospectus
Part II of Form S-1 requires disclosure of the expenses
of issuance and distribution (excluding underwriters
commissions), indemnication of directors and ofcers,
and sales by the company of unregistered securities within
the past three years. It also requires the ling of various
exhibits, including the underwriting agreement, articles of
incorporation and bylaws, stock option plans, pension plans,
and certain contracts that are material to the company
(e.g., employment agreements, leases and mortgages, and
key supply contracts). Companies may request condential
treatment of the material terms and provisions of certain
contracts (e.g., pricing terms, royalty rates, milestone
payments). If granted by the SEC, such terms and provisions
are redacted and only the redacted version of the contract
is available to the public. Obtaining condential treatment
from the SEC is not an automatic process and may involve
substantial discussion with the SEC, which can delay the
offering process. Concerns about public disclosure of
market-sensitive terms of material contracts should be
addressed with your counsel early in the IPO process.
An EGC is permitted to submit its registration statement
for condential review by the SEC. However, a public ling
of the condential lings must be made at least 21 days
Financial statements in a registration statement
In addition to the number of periods required, one of the most critical
steps for a company undergoing an IPO is to determine the appropriate
nancial statements to include in its registration statement with the SEC.
Common considerations in identifying the appropriate registrant nancial
statements include:
Recently organized registrant. Sometimes the legal entity registering
securities in an IPO is a newly formed company that will succeed to
the operations of an existing business before the effective date of
the initial registration statement. In such cases, a balance sheet of
the recently organized registrant is often required in addition to the
nancial statements of the existing business.
Age of nancial statements. Financial statements of a registrant
must meet the age of nancial statements requirements as of every
ling date as well as when the registration statement is declared
effective. The age of nancial statements generally refers to the
specic annual and interim periods for which nancial statements are
required in a ling. Regulation S-X, Rule 3-12, provides guidance on
such periods and on when the nancial statements become stale (i.e.,
should be updated).
Predecessor nancial statements. A designation of predecessor
is required when a registrant succeeds to substantially all of the
business (or a separately identiable line of business) of another entity
(or group of entities) and the registrants own operations before the
succession appear insignicant relative to the operations assumed or
acquired. Because a predecessors historical nancial information is
considered important to an investing decision, when a predecessor
is identied, the registration statement must also present the
predecessors nancial information and reect such information as if
it were the registrants. In other words, nancial statements for both
the registrant and its predecessor should be presented as of and for all
periods that are required by
Regulation S-X.
Carve-out nancial statements. Historical operations of a registrant
may consist of a subsidiary or line of business that was previously part
of a larger entity (parent). In many cases, the parent may not have
historically accounted for the subsidiary or business line separately,
and the registrant may have relied on the parent for certain functions.
It is critical that carve-out nancial statements identify the appropriate
assets and operations of the registrant and capture all costs of doing
business. Determining the composition of the carve-out nancial
statements can require signicant judgment and depends greatly on
the registrants specic facts and circumstances. In determining the
appropriate nancial statements, registrants may want to consider
the overall objectives of the carve-out nancial statements, which
are to allow an investor to see (1) managements track record for the
business and (2) how that business has evolved over time.
Strategies for Going Public 50
prior to a roadshow. FPIs may also request a condential
review of a registration statement, but only in specied
circumstances.
The red herring. The preliminary prospectus is typically
printed after the company and its advisors conclude that
resolution of the remaining comments from the SEC is
not likely to require material revisions to the preliminary
prospectus and a new circulation to potential investors. As
the required cautionary language is printed on the front
cover in red ink, the preliminary prospectus is typically
referred to as a red herring. This language is as follows:
The information in the preliminary prospectus is not
complete and may be changed. These securities may not be
sold until the registration statement led with the Securities
and Exchange Commission is effective. This prospectus is
not an offer to sell these securities, and it is not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
The red herring prospectus may be distributed to the
general public. Since it is created before the pricing of
the offering, it does not contain the exact offering price.
However, the SEC requires that a bona de estimated price
range be disclosed. If the nal pricing is outside the range
set forth on the red herring that was distributed, you will
have to determine the necessary legal requirements, which
require a thorough and sometimes complex analysis, and
may require an additional ling and other actions. If this
change occurs, you should consult with counsel and refer
to the SEC guidelines on this topic.
Printing. Early drafts of the registration statement are
typically managed by the companys attorneys. After the
initial drafts have been discussed and edited, the document
is usually sent to a nancial printer. Only a few rms
specialize in nancial printing. These printers will be alert to,
and aware of, changing SEC rules and regulations regarding
prospectus and registration statement presentation,
format, and required size of type. The printers will also be
sensitive to your need for complete accuracy, timelines,
and condentiality. The registration statement, including all
exhibits, is required to be led on the SECs EDGAR system.
The major nancial printers are set up to accommodate the
EDGAR ling process. The SECs EDGAR system provides
online access (at www.sec.gov) to most SEC lings and may
be extremely useful to you when drafting your registration
statement. Through the SEC website, you can access
previous registration statement lings to utilize as examples.
Your underwriter will also supply examples of previous
registration statement lings since the underwriters typically
have their own preferences.
Printing costs vary with the number of proofs and revisions
made and the extent of the revisions required between the
original ling and the nal printing. Once the drafts are in
printed form, involved 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 reect updates, clarications, and other changes.
With careful planning and organization, you can minimize
revisions to save time, money, and frustration.
Keep everyone involved in reading the early drafts and do as
much in-house editing as possible in advance of forwarding
your draft to the printer. Color art for the inside cover of
the prospectus, illustrations and related legends, pie charts,
and graphs should be prepared and approved in advance.
The artwork must be just as accurate as the rest of your
prospectus and must be submitted to the SEC for review. For
example, in a companys registration statement, a four-color
illustration of all its various products was presented. The
SEC questioned why one of the depicted products was not
described in the prospectus and found that the product was
no longer being manufactured. The result was the artwork
had to be redone and reprinted.
The printing of the nal prospectus will be done after the
registration statement is declared effective by the SEC and
pricing occurs. The printing is done rapidly to facilitate its
distribution. Most nancial printers are familiar with these
time constraints.
Post-ling activities
SEC Review. Once the registration statement is completed
and the initial form has been led with the SEC, it will be
reviewed by the SECs Division of Corporation Finance (DCF)
to monitor compliance with the applicable disclosure and
accounting requirements. You should anticipate that your
The JOBS Act changes
previous legislation
to allow an EGC to
provide condential
draft IPO registration
statements to the SEC
staff for review before
its public ling (i.e.,
the SEC is prohibited
from disclosing the
information being
reviewed). However,
an EGC is required
to publicly le such
draft and any related
amendments with
the SEC no later
than 21 days before
its roadshow.
See Chapter 12 for
additional information
on the JOBS Act.
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IPO registration statements will receive a full cover-to-cover
review by both a legal and accounting examiner. The DCFs
staff commonly nds deciencies or items that it questions
or believes require additional explanation. These are
communicated through a comment letter.
The SEC typically responds to the initial ling within 30 days
by issuing a comment letter that requests clarication and
seeks changes in the registration statement and prospectus.
The company, with the assistance of its advisors, prepares
a written response to each comment. The accounting and
legal responses are typically submitted to the SEC along with
an amendment to the registration statement that includes
any changes made as a result of the SEC comments and
other changes to update the registration statement. The
SEC will review the amended registration statement and
response letter when led and provide another comment
letter. This process continues until all questions are resolved
and involves a number of rounds of comments and
additional amendments. The timing of the SEC review on
the amendments can vary based on the signicance of the
changes and the SECs workload at the time, but is usually
within 10 days.
The comment letters from the SEC and the companys
response letters ultimately will be available publicly on the
SEC website. However, companies can request to have
portions of their responses remain condential. Some regular
areas of focus for SEC comment letters are as follows:
Executive compensation discussion and analysis
Share-based compensation
Signicant business acquisitions and pro forma nancial
information
Revenue recognition
Complex equity instruments
Clarication of accounting policies
Clarication of related-party transactions
Need for consent if a reference to a valuation rm
regarding the valuation of a registrants common and
preferred stock is included
You will need to reach agreement with the SEC in response
to all comments before the registration statement can
become effective. Any contentious issues with the SEC can
be discussed via telephone. It is recommended that this
be done early in the process, if it becomes clear there is a
misunderstanding of facts. You should discuss these issues
with your legal advisors and auditors prior to conversations
with the SEC.
As the comment letter process nears completion, you will
need to decide when to print the red herring. If the red
herring is distributed before all substantive SEC comments
are resolved, there is a risk that the SEC will require
additional changes to the registration statement, and a
redistribution of the red herring may need to occur. Due
to the risk of potentially having to distribute a revised red
herring and the associated costs, most companies do not
print their red herring until substantially all of the SECs
comments have been resolved.
The roadshow is timed to coincide with the distribution
of the red herring. Since the red herring used during the
roadshow contains a price range, pricing discussions will
have occurred prior to ling the amendment containing
the red herring. Final pricing discussions occur after the
completion of the roadshow. See further discussion of the
roadshow in Chapter 7.
Companies (together with the lead underwriter) must
le a request for acceleration of effectiveness. When
the SEC grants your request for acceleration, it issues an
order declaring your registration statement effective. The
exchange (wherever the stock will trade upon completion of
the offering) will also submit its approval of the company for
listing. See further discussion of the closing in Chapter 8.
As soon as you receive notication of the effectiveness
of the registration statement and pricing occurs, the
transaction team will work to complete the nal prospectus.
This prospectus will have the nal pricing information
included and the red herring legend removed.
Blue Sky and FINRA clearance. Even though you le
a registration statement with the SEC, you may need to
comply with the Blue Sky Laws of the states where the
stock is offered and sold. Blue Sky is the general term
Strategies for Going Public 52
applied to the states securities laws and regulations.
The name is derived from a court decision on the
constitutionality of Kansas securities regulations, which were
aimed at preventing speculative schemes which have no
more basis than so many feet of blue sky. Many states have
adopted the Uniform Securities Act as the model for their
state blue sky laws, which facilitates the state ling process;
however, some states, like California, Illinois, New York,
and Texas, have their own securities regulatory statutes and
regulations, adding complications to the process. In order
to facilitate an orderly national distribution of securities in
offerings where the securities will be traded on national
markets (and in certain other cases), Congress enacted
the National Securities Markets Improvement Act (NSMIA)
in 1996, which preempts from state registration public
offerings of securities to be traded on national markets.
Where NSMIA does not apply, you will be subject to each
individual states securities laws and regulations. Many states
do not permit you to circulate a preliminary prospectus until
you have led their state application forms for registration
or notice. Thus these lings should be completed and led
with the applicable states when the registration statement
is led with the SEC. In contrast to the SEC, which focuses
on disclosure only, some states do evaluate the merits
of the offering and its suitability for investors in their state.
The lead underwriter will generally advise you of the states
in which the underwriters wish to sell the securities and
the amount of securities to be qualied in each state.
Underwriters counsel generally takes care of the lings,
which vary from ling a notication of intent to sell to
qualifying the offer and sale with a registration statement in
other states.
SEC regulations also call for clearance by FINRA of the
amount of the underwriters compensation and other
terms of the offering. FINRA reviews not only the
underwriting discount, but also other compensation that
the underwriters are deemed to receive in connection
with the offering (such as options or warrants, nders
fees and reimbursement of expenses normally borne by
the underwriters) to determine whether the underwriting
arrangements are fair and reasonable. It is mandatory to le
the registration statement with FINRA within one business
day of ling with the SEC if the offering is not exempt
from ling with FINRA. This allows sufcient time for
FINRA clearance and possible changes in the underwriting
agreement that FINRA may require.
Lock-up agreements. At the time of ling the registration
statement, the underwriters will want to make sure that
highly visible employees and shareholders of the company
do not sell their shares for a period of time after the IPO
is completed. This is generally done to allow an orderly
trading market to develop without additional shares being
dumped into the market. To make sure that this occurs,
the underwriters will most likely require that the ofcers,
directors, large shareholders, and other listed management
enter into a lock-up agreement whereby such shareholders
agree not to sell or otherwise transfer their shares for
a certain period of time. The duration of the lock-up
agreement is typically 180 days, but can range in its
duration from 90 days to one year.
As you prepare for the registration process, you may
want to consider your communication strategy with your
employees and management team about these types
of agreements.
53
Chapter 7. Marketing the offering
Understanding quiet period activities is key to getting your IPO
to the nish line.
Strategies for Going Public 54
The marketing process
After the registration statement is led with the SEC, the
lead underwriter begins the process of forming a group, or
syndicate, of underwriting rms that agree to participate
in the offering. The syndicate is formed to obtain a broad
distribution of the stock and to provide a balance between
institutional and retail investors. The primary forms of
underwriting are the rm commitment, best-efforts and
Dutch auction process, with the rm commitment being by
far the most common. In a rm commitment underwriting,
the underwriters bear the risk of selling the shares, while in
a best-efforts, process the underwriters are not responsible
for any unsold shares. In a Dutch auction, the price is
determined through a bidding process with the price of the
shares set at the highest price that will result in the entire
offering being sold. As rm commitment underwriting
accounts for the vast majority of IPOs, we have focused on
this type of offering in this publication.
In a rm commitment underwriting, the syndicate members
participate with the lead underwriter in assuming the risk
of selling the stock. The lead underwriter usually purchases
the largest portion of the shares offered and brings 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 sufciently comfortable to print the red herring, the
salespeople for the rms 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 specic number of shares at the public
offering price less a selling concession. These selling group
members do not share all the potential liabilities under
the securities laws with the underwriters and, as a result,
receive less compensation.
Selling the shares is really a group effort. The lead
underwriter builds the book, keeping track of the
outstanding indications of interest. Some participating
underwriters may actually sell two or three times their
commitment, and others may sell none. The companys
participation in the roadshow is the single most important
vehicle for building momentum for the offering. If
momentum is strong, the lead underwriters book may
reect demand that signicantly exceeds the size of the
offering. This is good, as it allows for some inevitable
slippage in actual orders (from the number of indications
of interest) and provides for continuing demand in the
secondary market. Because the underwriting agreement
is not signed, the lead underwriter and the syndicate
members know how strong the demand is for the stock
before they are legally committed to purchase shares
from the company. So, as a practical matter, their risks in
selling the shares are limited. After pricing occurs and the
underwriting agreement is signed, the underwriters will be
required to purchase the full amount of their commitment
(except under very limited circumstances).
As indicated previously, the underwriters have a good
sense of how many shares can be sold before they enter
into the underwriting agreement. Although the preliminary
prospectus indicates the anticipated number of shares to
be sold and the expected price range, the underwriters nd
out during the quiet period just how acceptable that price
and offering size are to investors. Both factors may change
before a registration statement becomes effective.
If your underwriters have done a thorough job, any changes
during this period will generally reect only changes in
market conditions. Throughout the registration process, a
series of pricing discussions are likely to occur between you
and the lead underwriter to set the initial price and size of
the offering and to apprise you of any needed revisions.
The 1933 Act prohibits any public offers of a security, either
orally or in writing, before the initial ling of the registration
statement. In this context, what constitutes an offer has
been dened very broadly by the SEC and the courts. Any
publicity effort, if deemed to create a favorable attitude
toward the securities to be offered and to stimulate the
The time period between the initial ling of your registration statement and
the time the registration statement is declared effective by the SEC is referred
to as the waiting period or quiet period. This is a misnomer, however, as there
is a urry of extremely important activity during this time, occupying both the
underwriters and the company. It is during this period that the marketing effort
takes place.
55
market articially, may lead to what is called gun jumping
and result in possible sanctions or nes by the SEC in
addition to delaying the offering.
The JOBS Act created an important exception to this general
rule prohibiting gun jumping. An EGC or its authorized
representative may test the waters before or after ling
a registration statement by engaging in oral or written
communications with qualied institutional buyers (QIBs) or
institutions that are accredited investors to assess interest
in a contemplated offering. Communications to test the
waters will not have to be led with the SEC as free writing
prospectuses (discussed below).
The SEC, through various releases and rules, has established
guidelines for the publication of information other than
the prospectus, both before and after the ling of the
registration statement. It is very important that everyone
in the company be aware of these guidelines. From the
time that you begin to work on the IPO process, it is
strongly recommended that all press releases and interview
requests be cleared with your legal counsel and your lead
underwriter. Your key executives should also meet with
company counsel and the lead underwriter to review what
may and may not be said publicly about the company, as
failure to comply can lead to a halt in the IPO process until
the interest that has been stimulated has cooled down.
The practical period of time covered by the guidelines
extends from 30 days prior to the ling of the registration
statement to 25 days after the effective date of the
registration statement, when broker-dealers are no longer
required to deliver a prospectus to potential investors (or
90 days if, following the IPO, the company is not listed on a
stock exchange or certain OTC markets). During this period,
any publicity release can raise questions about whether
the publicity is part of the selling effort, even if the release
contains no offer or even a mention of the companys effort
to sell securities. Even before this period starts, there can
be problems with communications that make any reference
to the contemplated offering. In addition, if company
executives give interviews where the ultimate date of
publication is uncertain, problems can arise. In those cases,
the company must take reasonable steps within its control
to prevent further distribution of the information during
the 30-day period prior to ling the registration statement.
There have been many recent examples of companies
having difculty with the quiet period restrictions. Most
notably, companies have granted interviews that were
published during the quiet period. This can require the
company to delay its offering until the increased publicity
surrounding the offering has dissipated, and it may require
additional lings with the SEC.
Rules promulgated by the SEC under the 1933 Act provide a
safe harbor for continued communications at any time by
or on behalf of a non-reporting issuer of regularly released
factual business information by the same employees
who have historically been responsible for providing such
information to persons other than investors or potential
investors. This safe harbor does not permit the publication
or dissemination of forward-looking information by
non-reporting issuers. In addition, the safe harbor does
not permit communications containing information about
a registered offering or communications released as part
of offering activities. The company should particularly not
disclose anything as to valuation or projections of future
performance. In addition, a specic rule (Rule 135) provides
a safe harbor whereby certain limited announcements
regarding a proposed public offering are deemed not to
constitute an offering. In particular, Rule 135 provides that
a notice of a proposed offering (e.g., a press release or a
written communication directed toward employees) will not
be deemed to be an offer if it states that the offering will
be made only by a prospectus and the notice contains no
more than the information specied by the rule, including
Strategies for Going Public 56
the amount of securities you propose to sell, the proposed
timing of the offering, and a brief explanation of the
manner and purpose of the offering.
Companies should also pay particular attention to what
information is on their company websites (including
any hyperlinked information). Specically, the company
should avoid establishing a new website or expanding
its existing website, other than in a manner consistent
with past practice; avoid discussing the possibility of any
issuance or offering of securities; have internal counsel or
outside counsel review all information before it is posted
on the companys website; review its website and remove
any incorrect factual information as soon as possible;
avoid posting hype regarding its anticipated nancial
performance; and avoid posting or hyperlinking to third-
party websites or reports, if any exist. The SEC will typically
review the company website and anything included there
that contains information inconsistent with information
in the registration statement or information that could
relate to the offering may generate questions and result in
potential legal issues.
Restrictions on offers
Once you have led the registration statement and the
quiet period begins, you are forbidden to make any
written offers, such as through sales literature regarding
the offering, except by means of the red herring
prospectus and a free writing prospectus (described
below). Oral selling efforts (conversations between the
company or its underwriters and the prospective buyers
relating to information in the prospectus) are allowed,
but you must be careful even in oral conversations. If
oral communications are taped for broadcast or placed
on a website, they can be considered a written offer in
violation of SEC rules. With the continued expansion in
use of the internet and social media, the SEC has adopted
rules to set the boundaries between oral and written
communications. Written communication is dened to
be any communication that is written, printed, a radio
or television broadcast, or a graphic communication.
Graphic communication includes all forms of electronic
media, including audio and video recordings, facsimiles,
digital storage devices, e-mail, internet websites,
computers, computer networks, or other forms of
computer data compilation. However, it does not include
a communication that at the time of the communication
originates live, in real time to a live audience, and does
not originate in recorded form or otherwise as a graphic
communication, although transmitted through graphic
means. These denitions become very important in dealing
with the roadshow (described below) and information
distributed through social networking media. As a part
of the brieng that counsel provides to ofcials in the
company, these rules and their application, including to
social networking sites, should be reviewed.
Free writing prospectus
To provide companies more exibility during the offering,
in light of modern communication methods and the wide
dispersion of information, companies entering an IPO can
use what are called free writing prospectuses during
the quiet period after the registration statement that
contains a price range has been led with the SEC. Free
writing prospectuses are any written communication that
constitutes an offer to sell or solicitation of an offer to buy
securities that are or will be the subject of a registration
statement, other than the statutory prospectus included
in the registration statement, or a communication after
the effective date of the registration statement that is
accompanied or preceded by a statutory prospectus.
Free writing prospectuses must include a prescribed legend
and most must be led with the SEC. In addition, free
writing prospectuses must be accompanied or preceded
by a physical copy of the most recent statutory prospectus,
although this requirement will be satised, in the case of
an electronic free writing prospectus, if the latter contains
an active hyperlink to the statutory prospectus. The free
writing prospectus may contain additional information
that is not found in the registration statement, but cannot
conict with the information found in the registration
statement. The rules pertaining to the free writing
prospectus are complicated and you should work with your
legal counsel to ensure compliance.
The JOBS Act allows
oral or written
communications with
QIBs or institutions
that are accredited
investors to gauge
investor interest in a
potential offering before
or after the ling of a
registration statement
(commonly referred to
as testing the waters).
See Chapter 12 for
additional information
on the JOBS Act.
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Also allowed are short press releases under Rule 134. Rule
134 safe harbor permits written communications that
include information with respect to the securities being
offered (the title, amount being offered, offering price, etc.);
proposed stock exchange listing; the type of underwriting,
names of underwriters, names of selling security holders,
and a brief description of the intended use of proceeds
of the offering, if then included in the disclosure in the
prospectus that is part of the led registration statement;
the anticipated schedule for the offering and a description
of marketing events (including dates); and a description of
the procedures by which the underwriters will conduct the
offering. The purpose of the press release is to announce the
offering in the press and to tell interested parties where they
can obtain a copy of the prospectus.
Also allowed is a tombstone advertisement under Rule
134, so-called because of its formal, sparse wording,
and lack of adornment. Traditionally the tombstone
advertisement is issued after the pricing of the offering.
The roadshow
Common during the quiet period is a two-or three-week
speaking tour of the companys top executives and the lead
underwriter, often referred to as a roadshow. The tour often
covers a dozen or more cities with key nancial centers
where institutional or individual investors have indicated
strong interest. In offerings where some shares will be sold
internationally, the roadshow can include international stops.
The roadshow is usually organized by your lead underwriter.
The ling requirements of roadshows are covered by an SEC
rule (Rule 433 under the 1933 Act). Most roadshows will not
be deemed to be free writing prospectuses and, therefore,
will not need to be led. Most are live presentations and will
be deemed not to be written or graphic communications
even if they are simultaneously webcast or transmitted with
the live presentation into other locations. The slides that are
generally used in presentations are also not deemed to be
written or graphic communications if they are transmitted
simultaneously with the live presentation. In contrast,
prerecorded electronic roadshows for an IPO will be deemed
free writing prospectuses and will have to be led, unless
the company makes at least one version of the electronic
roadshow available without restriction to any person (for
example, by posting it on the companys website), which
many companies do to avoid the ling requirement.
The roadshows purpose is to make presentations to key
potential investors, portfolio managers, and analysts.
These meetings allow people to ask questions about the
company and the material contained in the prospectus.
The information covered during the presentations and the
questions from participants will be similar to the earnings
and analyst calls expected after you go public. They are
meant to build enthusiasm and momentum for the offering
and normally occur within days of the pricing of the
offering.
You should view these meetings as opportunities to present
the story of your company to those people who will buy
your stock, sell the stock for you, or inuence the people
who buy. The company needs to be extremely cautious prior
to presenting forecasts to potential investors and should
discuss the advisability of this with counsel well in advance
of the roadshow.
Many of these key investors, portfolio managers, and
analysts will be participating in future quarterly earnings
announcement conference calls (after you go public) and
will otherwise follow the companys progress. If you are
meeting them for the rst time, you should take care to
convince them that you and your associates are people of
ability and integrity who will provide solid leadership for your
company in the years ahead. Your purpose is to demonstrate
not only the growth potential of your company, but also the
executive capacity of your team.
An investor relations advisory services rm may assist you
with independent and objective counsel on prospective
investors. The ranking of institutional investors based on
investment criteria and quantitative modeling will assist
in prioritizing opportunity and time during the investor
outreach process. This will allow an issuer to be selective
and precise when dealing with the institutional investment
community.
Strategies for Going Public 58
Roadshows (like all other publicity during the offering), even
if they do not have to be led with the SEC, are still subject
to the antifraud provisions of the securities laws. You should
be very careful about what is said in the roadshow, and
the companys legal counsel should review the roadshow
presentation. The underwriters, legal counsel, and investor
relations advisory services rm may provide coaching on
what questions to expect, how to answer them, and what
you can and cannot say during those meetings. A roadshow
can be very grueling but it is an important component of
the IPO process. Before, after and between presentations,
including at meals, you may meet with individual analysts
who specialize in your industry and can help build
relationships and coverage of your offering. The tour can
educate the nancial community about your company and
help generate and sustain interest in your stock through the
period of the offering.
Making the best presentation
When you and your top executives present the roadshow
and appear before analysts, brokers, and investors,
your company will likely be judged in large measure
on the strength of your performance. How clear is the
presentation? How well organized is everyone? Can you take
the heat of tough questions?
While you can expect guidance and suggestions from your
underwriters, attorneys, and others on how to conduct
yourselves, you should be sure that you are comfortable
with the presentation both what is in it and how it is
presented. This is your opportunity to tell your companys
story, and you will have to execute operationally to meet
the expectations that you and your management team have
set through these presentations and the disclosure in the
prospectus.
Choreography. Each member of the executive team should
have a specic role in the presentation. It could be that
the CEO provides a summary and an introduction to the
company and his or her vision for its future. Other members
of the team would provide more detail on marketing, sales,
production and nances.
Visuals. Given todays sophisticated presentation packages
and easy-to-produce graphics, audiences expect some
visual backup in the form of slides or visual presentations
to support statements about market share and nancial
performance. While the presentation should not be based
entirely on such visuals, they can be used judiciously to
make the presentation clear and interesting. Anticipate
potential problems and have back-up alternatives
immediately accessible.
Demonstration. A demonstration of your companys
product or service can save a lot of explanation and will
emphasize its importance much more compellingly than a
verbal description. This is especially true if your product is
technologically advanced. If the product is too big or the
service is too complex for a demonstration, the use of videos
or other visuals showing it being used by customers is a best
practice.
Preparation. Rehearse your presentation as much as
possible. Each time, executives will discover a weakness or
problem that should be corrected. Also practice answering
potential questions; use team members (counsel and
underwriters) to ask tough questions and then rehearse
your answers. Videotaping the rehearsals will facilitate
spotting the problem areas. The management teams formal
presentation should not last longer than about 30 minutes.
You should also allow for 30 minutes or so of questions
following the presentation.
59
Chapter 8. Closing the deal
You have come a long way: stay focused as the IPO is around
the corner.
Strategies for Going Public 60
Signing the underwriting agreement
Generally, you do not enter into a written underwriting
agreement until the end of the IPO process, after the
registration statement is declared effective by the SEC and
the offering price has been determined.
Until that time, you have only a draft copy of the
underwriting agreement (that has been negotiated
by your attorneys and the underwriters counsel) and
an oral understanding with the underwriters. The
oral understanding with the underwriters is not a
legal commitment by either side to proceed with any
predetermined transaction.
Timing becomes quite important as the effective date of the
registration statement approaches. The end of the roadshow
and the completion of the book-building process (resulting,
it is hoped, in signicant public momentum for the offering)
are targeted to occur at about the same time as the SEC
review process is completed. The registration statement
is then declared effective by the SEC. On that day, the
lead underwriter and the board (or the pricing committee
of the company), which is responsible for reviewing the
underwriters report of indications of interest and allocation
of shares, as well as agreeing on nal pricing, agree on the
selling price to the public. The lead underwriter and the
other underwriters participating in the syndicate also legally
agree to their participation in the underwriting.
The agreement among underwriters authorizes the lead
underwriter to sign the underwriting agreement, species
the terms on which the other underwriters will participate in
the syndicate, and spells out the responsibilities of the lead
underwriter to manage the offering.
Immediately after the pricing of the offering, the
underwriting agreement is signed by the company, the
lead underwriter, and the selling shareholders, if any.
The agreement includes the offering price of the stock;
commissions, discounts, and expense allowances; the
method of underwriting; representations and warranties;
and an indemnication agreement. It also sets a number
of conditions to the underwriters obligation to complete
the offering (for example, that there is no material adverse
development impacting the company between pricing and
closing). Until the underwriting agreement is signed, the
company has no legal right to compel the underwriters to
proceed with the IPO. Once the underwriting agreement is
signed, the company les a Rule 424 nal prospectus with
the SEC and actual sales commence.
As a practical matter, once preparation of the registration
statement begins, underwriters rarely refuse to complete
the offering, unless signicant adverse changes in market
conditions occur or the registration process reveals serious
problems at the company of which the underwriters were
previously unaware. The lead underwriter has substantial
motivation for completing the offering, since it has
invested considerable time and expense in investigating
the companys business and affairs, helped to prepare the
registration statement, and organized a selling syndicate.
The public perception of a failed IPO is damaging to the
reputations of both the company and the lead underwriter.
Should the market cool signicantly during the waiting
period, however, it is not unusual for an IPO to be
postponed or canceled after the registration process starts. If
the market is not willing to accept the originally anticipated
price range or to absorb an offering as big as the one
contemplated, the company may be faced with the choice
of accepting an offering of unsatisfactory size or price,
postponing the offering until the market improves, or even
abandoning the IPO altogether and pursuing other nancing
options. Additionally, if the nal size or pricing of the
offering is outside the range originally on the distributed red
herring prospectus, it may be necessary to recirculate a new
red herring prospectus with an updated price range.
The JOBS Act
also amends the
Securities Act to
allow brokers,
dealers, or members
of a national
securities exchange
to more freely
distribute or publish
research reports
about an EGC and
prohibits the SEC or
national securities
associations from
creating rules that
would restrict such
ow of information
among the parties
to an EGCs IPO
transaction. See
Chapter 12
for additional
information.
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The closing of a public offering is not a simple affair, as it is governed by both
the underwriting industrys traditions and government regulation through the
SEC. It is important that everything be done properly, so as not to risk wasting
the long and costly preparation work and damaging the public perception of
your company.
61
Transfer agents and registrars
You will need to appoint a transfer agent and registrar
before the closing of your IPO. Stock registration and
transfer services are provided by commercial banks and trust
companies. Companies often appoint the same organization
to provide both services. Furthermore, the same rm can
assist during the IPO process by acting as the custodian and/
or paying agent in connection with the sale of securities by
any selling shareholders.
For most companies undertaking an IPO, the question of
transfer agents and registrars is one of both expediency and
regulation. Both the NYSE and NASDAQ require that all listed
securities be eligible to participate in the Direct Registration
System (DRS) offered by The Depository Trust Company
(DTC). In order for any securities to become DRS-eligible,
the DTC requires that the issuer appoint a transfer agent
who is a participant in the DTCs Fast Automated Securities
Transfer program, as well as meet certain other eligibility
requirements. The DRS enables the registered shareholders
to maintain and transfer their shares on the books and
records of the transfer agent in book-entry form instead of a
physical stock certicate. Participating in DRS can save costs
involved with replacing stock certicates that are lost, stolen,
or destroyed.
A public company will usually have a large number of
shareholders and, as regular trading develops, shares likely
will change hands daily. Not only is this an administrative
burden, but transfers must be handled with absolute
accuracy, because any mistake can lead to claims against
the company and possible nancial liability. An independent
transfer agent and registrar can assume responsibility for
making sure that mistakes in stock transfers do not occur.
Further, as a practical matter, your agreement with the
underwriters may require such independent agents.
The transfer agents primary responsibilities are to handle
the transfer of shares from one person to another and to
maintain the stock books that are the ofcial records of
the names and addresses of the companys shareholders.
Ancillary responsibilities assigned to transfer agents may
include disbursing cash dividends, mailing annual reports
and proxies, distributing stock dividends, responding to
shareholder inquiries relating to their shares, and keeping
custody of unissued stock certicates.
Registrars are responsible for making sure that stock is not
over-issued in excess of the number of authorized shares.
They countersign all stock certicates to make sure the
number of shares issued is not greater than the number
surrendered for cancellation, and they keep active records
of all the shares that are outstanding. Registrars also keep
records of the certicates that have been canceled, lost, or
destroyed, as well as those that have been issued, so that
at any given moment they have an exact record of shares
outstanding. Part of their role is to cross-check the work of
the transfer agent.
A summary of the transfer agent/registrar process is listed
on the next page. See also Appendix D: A timetable
for going public for steps taken by a transfer agent and
registrar in the illustrative IPO timeline.
Strategies for Going Public 62
Transfer agent/registrar process
Appointment Custody
agreements
Shareholder
data provided
Paying agent Notice of
offering
Closing call IPO
complete
Transfer agent
receives the
following
documents:
Certicate of
appointment
form (signed
and dated)
CUSIP
Conrm of
Depository
Trust
Company
(DTC)
eligibility
Certicate of
incorporation
Bylaws
Prospectus
List of
insiders/pre-
existing
holders
The custody agreement
(applicable if there are
selling shareholders) is
typically nalized no later
than three weeks prior to
pricing. The nal custody
agreement package
should contain the
following:
Signed power of
attorney for selling
holder(s)
Signed custody
agreement
Medallion guaranteed
stock power
- Signed by the selling
holder(s)
- Undated
- Shares being sold
left blank
Appropriate tax forms
- W-9 for U.S.
residents
- W-8BEN for
non-U.S. residents
Wire information form
- To indicate which
nancial institution
will be receiving the
funds
Transfer agent
receives the nal
spreadsheet
along with any
restriction
requirements
and an
instruction letter
for upload.
At least 24 hours
prior to closing,
transfer agent
receives the fund
ow spreadsheet
template to
proactively set up
for execution
immediately after
closing.
Transfer agent
receives a
Notice of
Offering. The
same
procedure
would apply to
any offering
that would
occur post-IPO.
Transfer agent will
release the shares
to the underwriters
account, following
a formal
conrmation of
shares to the
shareholders
through the DTC
system.
Upon closure of the
offering, the shares
will be released to
the underwriters;
then the wires will
be released to the
underwriters and
any selling
shareholders.
The closing
The closing marks the conclusion of the IPO. In a rm
commitment offering, the closing typically occurs three
business days after the pricing. This period allows the
underwriters to receive payment from purchasers of the
stock in the offering. In a best-efforts offering, the closing
will occur after all the shares have been sold, or the
company and underwriters agree that selling efforts can
be concluded.
The closing is a formal meeting to exchange executed
documents, including certicates and legal opinions. The
closing is usually attended (in person or by phone) by the
company and its counsel, the lead underwriter and its
counsel, the registrar and transfer agent, and the auditors.
Among the actual exchanges that occur, the underwriters
wire the company immediately available funds for the
net proceeds of the offering, the registrar and transfer
agent record the stock, the stock sold is credited to the
underwriters accounts through DTC, counsel provide their
legal opinions, and the auditors give the underwriters a
second comfort letter as of the closing date, referred to as
the bring-down comfort letter.
63
Chapter 9. After you go public
The transition from a private to a public company marks the
entrance to a dramatically new compliance and regulatory
environment.
Strategies for Going Public 64
Trading and aftermarket support
As part of its aftermarket support for your stock, your lead
underwriter will typically be the principal market maker.
Your underwriter should stand ready to purchase or sell your
companys stock in the inter-dealer market. Upon the initial
sale of your stock, some buyers may purchase shares with
the intention of getting in for the initial price rise and then
selling. These buyers will likely sell your stock the same day
as the IPO or a few days after. This is typically referred to as
ipping. Some ipping is good in an IPO, since it provides
for additional supply in the aftermarket. But if too much
occurs, ipping could adversely affect the aftermarket and
force a stocks market price below its original IPO price. One
of the key responsibilities of both the lead underwriter and
the syndicate is to nd the proper mix of short-term and
long-term investors.
To stabilize the market and prevent or delay a decline in the
stocks market price, the lead underwriter, acting on behalf
of the syndicate, may enter bids to buy the stock from
investors wishing to sell shortly after the IPO. This process is
referred to as stabilization. Stabilization is a highly technical
practice allowed by the SEC only when certain requirements
are met.
Underwriters are also allowed to engage in over-allotment,
whereby more shares than initially purchased by the
underwriter under the underwriting agreement are offered
and sold. This practice automatically creates a short
position, as the underwriters have then sold shares they do
not own. The short position may be subsequently covered
by the stock resold by speculative buyers. In addition, the
underwriting agreement in a rm commitment offering
often gives the underwriters an option to purchase more
shares from the company for the purpose of covering
over-allotments. This option is referred to as a greenshoe
option, as it was rst used in an offering by the Green Shoe
Manufacturing Company. A typical over-allotment provision
enables the purchase of an additional number of shares
equal to up to 15 percent of the total shares offered in the
IPO. The over-allotment option provides exibility to the
underwriters to ne-tune the distribution and to help create
an orderly aftermarket.
Additionally, working with an investor relations advisory
services rm can help you understand the subtle nuances
of each potential investors investment criteria. An analysis
of trading in real-time fashion will give you the most
current shareholder data available. By understanding
how the former, current, and potential investors view the
company and the management, you can deal with the
investment community more efciently and effectively, and
cultivate long-term investment partners rather than short-
term traders.
Your relationship with the nancial community
Investment banking rms and retail brokerage houses
maintain investment research departments or groups
of analysts that continually study the progress of public
companies. In addition, several independent analysts also
follow specic industries as well as companies within
those industries. The role of an analyst is to assist investors
in evaluating and interpreting the nancial performance of
companies. You will likely run into analysts during
your roadshow, so knowing who they are may prove
to be helpful.
Appearances before societies of analysts can also be an
integral part of your investor relations program. Analysts
are in a position to recommend to investors the purchase
or sale of your stock. Analysts that develop an interest in
your company may conduct management interviews and
visit your company to gather additional information. You
should welcome opportunities to present to analysts, but
always ensure the content of your presentation is limited
to public information. You may want to consider having an
analysis performed of the secondary market trading of your
stock. You may see trading patterns within the institutional
and retail investor base that will provide insight into voting
sensitivities and help you anticipate voting results.
After going public, you will want to maintain the nancial communitys interest
in your company. It is critical that you develop a strong relationship with the key
members of the nancial community (brokers, analysts, etc.), as they will play a
signicant role in sustaining the markets interest in your company.
65
As a public company, in general, you will timely disclose
material information (both positive and negative) to investors
unless you have a legitimate business reason for keeping the
information condential (absent certain circumstances). You
should consult with legal counsel for guidance in this area,
as the legal requirements are complex and very fact-specic.
You may be required to le a Form 8-K Current Report with
the SEC to disclose this information. See further discussion
on Form 8-K requirements in the 1934 Act discussion below.
Public disclosures are generally made through SEC lings,
press releases, and investor presentations. SEC Regulation
FD (which stands for Fair Disclosure) is the guidance
that must be followed with respect to such disclosures. To
make sure that you have satised your obligations of full
disclosure under SEC Regulation FD, you should select the
method that best provides for broad and non-exclusionary
distribution of information to the public in light of your
particular distribution circumstances. You should never
release material non-public information to individuals who
may rely on the information to buy or sell stock. Non-public
material information may include, among other things,
earnings guidance and changes in trends in the issuers
business or industry, regulatory developments, and merger
and acquisition activity. If the company or its representatives
disclose material nonpublic data, SEC Regulation FD requires
simultaneous or prompt public disclosure via Form 8-K.
To ensure appropriate, adequate, and timely disclosure,
you should consult with legal counsel to adopt written
disclosure policies and procedures that are consistent with
Regulation FD. You may want to designate an Investor
Relations Ofcer who will be responsible for (1) responding
to requests for information from analysts, the nancial
press, and other interested parties and (2) reviewing all
proposed content to be disseminated publicly, including
press releases, speeches, and interview material. Only certain
employees should be authorized to speak with members of
the nancial community. Public companies generally have a
disclosure committee. The committees purpose is to review
public disclosures prior to their issuance. The committee will
normally be composed of members of senior management
(including legal counsel) as well as employees from key areas
of the organization.
With the increased popularity of social media venues,
companies should assess if the information disseminated
through these media venues is considered a public
disclosure of material information. The SEC has released
guidance that includes considerations to help determine
whether information on a companys website is considered
public. Information on other media venues has yet to be
formally addressed by the SEC.
Your rst annual shareholder meeting and proxy
matters
Your rst annual shareholder meeting is a major event for
both your company and your shareholders. A successful
annual meeting will support key corporate goals, whether
that is obtaining approval for specic corporate actions,
election of directors, or addressing issues relating to
executive compensation. Planning the annual shareholder
meeting is a process that can be lled with complexities of
all kinds from complying with regulatory requirements
to navigating industry challenges to awlessly executing the
mechanics. There are activities that require coordination
among your transfer agent, the SEC, stock plan
administrators, and other third parties. You should seek the
advice of your transfer agent, as many offer services to assist
you with the annual meeting.
Success at your rst annual meeting requires an
understanding of those investors who are eligible to vote.
Depending on the amount of time and trading activity since
your IPO, your voter base may have evolved. Comprehensive
secondary market stock surveillance can help you separate
institutional trading from retail trading, and gives you the
ability to break out voting rights from investment rights
and identify the current positions of large investors, their
investment styles, and portfolio turnover rates.
Key sources of ownership information include (1) your
transfer agent and equity plan administrator(s); (2) public
lings, including SEC Form 13F and Schedules D and G; (3)
voluntary disclosures via your investor relations dialogue;
and (4) stock activity surveillance rms.
You also should become familiar with additional inuencers,
including institutional proxy advisory and corporate
governance rating agencies. Also, many major institutional
investors maintain dedicated internal corporate governance
Issuers that qualify
as EGCs under the
JOBS Act are not
required to become
EGCs. However, if
such issuers choose
to forego EGC status,
they are subject to
all the requirements
of non-EGCs (i.e.,
they may not apply
a hybrid approach).
See Chapter 12 for
additional information
on the JOBS Act.
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Strategies for Going Public 66
and proxy voting groups that may operate in coordination
with the investment management side of their organization
(i.e., the portfolio managers and analysts who are the
primary focus of your investor relations dialogue). A proxy
solicitation rm can help you to understand the relationships
between these various parties and inuencers; how they
impact your unique ownership base (as it continues to
evolve over time), and share with you best practices for
investor engagement, proxy and corporate governance
messaging, and proxy solicitation. These rms also have
capabilities in projecting the vote on potential future
voting issues, which many companies consider to be an
important element of their due diligence prior to committing
to particular courses of action.
As a company matures, there is typically a shift in the
representative ownership prole. At the time of an IPO,
the ownership prole is typically composed of a majority
of founders and venture capitalists, shifting to a majority
institutional investor ownership over time. Companies that
retain majority founder/insider control following the initial
IPO may be relatively immune from outside shareholder
pressure in the early stages. That said, with board
independence requirements and increased disclosure of your
corporate activities, you will want to become familiar with
shareholder inuences and voting processes, and how they
may impact your activities. You should consult with your
legal advisors and proxy advisors about these matters.
Voting results from your annual shareholder meetings must
be made public via an 8-K ling with the SEC (discussed later
in this chapter) within four business days of the meeting.
These are readily accessible to investors, the media, and
potential activists. Poor voting results may invite additional
scrutiny of your company and potentially subject it to
additional activism at future meetings. For these reasons, all
voting matters must be attended to carefully.
Other after market activities
As a newly public company, you will be required to make
sure your stock records are in order. Keeping track of
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 dividend, stock splits,
or repurchases. Additionally, stock compensation plans for
your employees may have complex formulas and requires
continuous monitoring to ensure compliance.
Compliance with securities laws
Once you are a public company, you are subject to a
number of federal securities laws. You, your ofcers,
and your directors should meet with your legal counsel
to determine your obligations and responsibilities under
these laws. This section briey addresses some of the key
obligations and responsibilities below. However, securities
laws are extremely complex. Therefore, your legal counsel
should be involved in ensuring that your company complies
with the applicable laws.
The 1934 Act
As part of the IPO process, your stock is listed on a stock
exchange and a Form 8-A must be led with the SEC to
register the class of securities under the 1934 Act. Form 8-A
is a short document that effectively incorporates portions of
the 1933 Act registration statement. The 1934 Act subjects
your company to certain legal and reporting requirements,
some of which are described below.
Periodic reporting requirements
Form 10-K. A domestic registrant must le a Form 10-K
report annually with the SEC. Form 10-K is designed to
provide a continuing update of the disclosures in your
registration statement. Consequently, it will contain
information about the business, risk factors, management,
the latest audited nancial statements, managements
certications regarding the accuracy of the nancial
statements and the effectiveness of the companys ICFR, and
MD&A of nancial condition and results of operations. The
due dates for the Form 10-K annual report vary depending
on your accelerated ler status.
A smaller reporting company, as dened by Item 10(f)
(1) of Regulation S-K, is subject to fewer disclosure and
information requirements. These scaled-down requirements
include a less detailed description of the companys
business, no requirement to present selected nancial data,
a condensed management discussion and analysis, and
no requirement for qualitative and quantitative disclosure
regarding market risk. In addition, under the JOBS Act,
EGCs are subject to reduced disclosure requirements for a
limited period of time, including no selected nancial data
for any period prior to the earliest audited period presented
in connection with an IPO. See table below for the 10-K
ling deadlines.
67
Form 10-Q. A domestic registrant must le quarterly reports
on Form 10-Q (other than with respect to the fourth quarter
of each year). These reports contain quarterly unaudited
nancial statements that must be reviewed (but not
audited) by an auditor prior to the ling of the Form 10-Q
and managements certications regarding the accuracy
of the nancial statements. These reports also contain
managements discussion and analysis of nancial condition,
and results of operations and narrative disclosures in the
event that specic reportable events (e.g., legal proceedings,
material changes in previously disclosed risk factors, changes
in securities, and defaults on senior securities) have occurred
during the quarter. The Form 10-Q is due at different dates
depending on your accelerated ler status. See table 9-1
below for the 10-Q ling deadlines.
Form 8-K. Form 8-K must be led (or furnished, as
applicable) within four business days of a reportable event,
subject to certain exceptions (as indicated below). Failure
to le certain Form 8-Ks will result in the issuer losing its
eligibility to use the short form registration statement
on Form S-3 for a period of 12 months. The reportable
events include:
Entrance into, or termination of, a material denitive
agreement
Bankruptcy or receivership
Completion of a signicant acquisition or disposition of
assets
Results of operations and nancial condition
Creation of a direct nancial obligation or an obligation
under an off-balance sheet arrangement
Triggering events that accelerate or increase a direct
nancial obligation or an obligation under an off-balance
sheet arrangement
Costs associated with exit or disposal activities
Material impairments
Notice of delisting or failure to satisfy a continued listing
rule or standard or transfer of listing
Unregistered sales of equity securities
Material modications to rights of security holders
The submission of matters to a vote of security holders
A change in the registrants auditor
The non-reliance on previously issued nancial statements
or a related audit report or completed interim review
Changes in control of the registrant
The departure of directors or principal ofcers
Shareholder director nominations
Director elections
Principal ofcer appointments
Compensatory arrangements of certain ofcers
Amendments to articles of incorporation or bylaws
A scal year change
A temporary suspension of trading under the registrants
employee benet plans
Amendments to the registrants code of ethics
Waiver of a provision of the code of ethics
Regulation FD disclosure
Other material events
The JOBS Act also
directs the SEC to
examine Regulation S-K
to determine ways to
modernize and further
streamline reporting
processes for EGCs.
See Chapter 12 for
additional information
on the JOBS Act.
Filer
SEC Form
10-K
SEC Form
10-Q
SEC Form 8-K IPO Considerations
Large accelerated ler
60 days
after end
of scal
year
40 days
after end
of scal
quarter
Generally four business
days after occurrence
of event, with some
exceptions
Not considered a large
accelerated ler for the
rst 10-K ling after
an IPO
Accelerated ler (including
emerging growth
companies)
75 days
after end
of scal
year
40 days
after end
of scal
quarter
Generally four business
days after occurrence
of event, with some
exceptions
Not considered an
accelerated ler for the
rst 10-K ling after
an IPO
All other lers (Non-
accelerated lers, smaller
reporting companies,
emerging growth
companies)
90 days
after end
of scal
year
45 days
after end
of scal
quarter
Generally four business
days after occurrence
of event, with some
exceptions
Filing deadlines remain
the same for rst 10-K
ling after an IPO
Table 9-1 SEC ling deadlines:
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Strategies for Going Public 68
practicable but no later than 24 hours after the disclosure is
learned of and it is both material and nonpublic.
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 companys annual report on Form 10-K must
contain a report of management on the companys internal
control over nancial reporting and an independent auditors
attestation report on managements assessment. Item 308(c)
requires that a company disclose, on a quarterly basis in its
quarterly report on Form 10-Q (or annual report on Form
10-K in the case of the fourth quarter of the companys scal
year), any change in internal control over nancial reporting
that occurred during the most recent scal quarter that
materially affected, or is reasonably likely to materially affect,
the companys internal control over nancial reporting.
Filer
404 (a) reporting
requirements:
Management
Assessment report
404 (b) reporting
requirements:
Auditor report IPO Considerations
Large accelerated ler yes yes
Both the 404(a) and 404(b)
reports are not required for
the rst annual ling after
an IPO, but are required for
all annual lings thereafter,
if applicable.
Accelerated ler yes yes
Non-accelerated ler yes no
Smaller reporting company yes no
Emerging growth company yes no
Table 9-2 Section 404 ling requirements:
The section 404 reports are due at the same time as the
related annual report (Form 10-K) in accordance with the
above schedule.
XBRL requirements. Domestic and foreign lers that use
U.S. GAAP and have a worldwide public company common
equity oat above $5 billion as of the end of the second
scal quarter of their most recently completed scal year
are required to le an exhibit that contains their nancial
statements in an interactive data format, called eXtensible
Business Reporting Language (XBRL). XBRL allows investors
and others to pinpoint facts and gures by recognizing the
information in the interactive data format through the use of
searching software and analytical tools. New registrants will
Of the Form 8-K reportable events listed above, disclosure
of signicant acquisitions or dispositions is one of the most
cumbersome. Companies are required to initially report the
consummation of a signicant business acquisition within
four business days. Financial statements of the acquired
business and pro forma nancial information may be
required to be led depending on the level of signicance
of the acquisition. You may want to consult with your
auditors or accounting advisors when acquisitions are
possible to assess the need for nancial statements of the
acquired entity early in your due diligence process. Such
nancial statements and pro forma nancial information
may be led by amendment to the Form 8-K up to 71 days
after the initial Form 8-K reporting the acquisition was
required to be led.
In addition, some material changes may occur after the
ling of a Form 10-K and require the nancial statements
in the previously led Form 10-K to be retrospectively
adjusted for a material change. Such material changes may
include those for the initial adoption of certain accounting
pronouncements, or the classication of a component of
your business as a discontinued operation. If you plan to
le a new registration statement after you led interim
nancial statements for the period of such a change, you
generally must le updated nancial statements and other
nancial information (e.g., MD&A, selected nancial data) to
reect the retrospective adjustments for the periods before
adoption of the change. If this situation occurs, you would
typically le the updated nancial statements and additional
information on Form 8-K.
Filings to satisfy Regulation FD. For Form 8-K lings
designed to satisfy Regulation FD, Form 8-K states, [a]
registrant either furnishing a report on this form under Item
7.01 (Regulation FD Disclosure) or electing to le 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 ling, 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 led simultaneously for an intentional
disclosure and promptly for a non-intentional disclosure.
Promptly is dened to mean as soon as reasonably
69
The SECs nal rules
on whistleblowers
provides for rewards
of 10 percent to 30
percent of monetary
sanctions for
whistleblowers who
provide the SEC with
original information
leading to securities
law enforcement
actions that recover
more than $1 million.
For additional
information on the
Dodd-Frank Act see
Chapter 11.
be required to submit an interactive data le for their rst
periodic report on Form 10-Q or Form 10-K or rst annual
report on Form 20-F or Form 40-F, if applicable. An XBRL
exhibit is not required in an IPO ling.
Proxy statements and annual reports. Before you hold a
shareholders meeting or seek a written shareholder vote
on a matter, you must send out an information statement
or, if you are soliciting proxies, a proxy statement. If it is
an annual meeting and directors will be elected, you must
also send an annual report (often a glossy report updating
the shareholders about the company, and its activities and
nancial results for the past year). The SEC dictates the form
of the proxy card and the content of the proxy statement
(and any other proxy materials), which in some cases must
be led with the SEC 10 days before they are sent or given
to shareholders. The SEC also has rules governing the annual
report. The Dodd-Frank Act, discussed further in Chapter
11, contains provisions that affect proxy statements for
public companies. The Dodd-Frank Act requires companies
to include in proxy statements the non-binding shareholder
vote to approve compensation of executive ofcers and to
conduct a say-on-pay vote. Under the JOBS Act, an EGC is
exempt from the requirement to hold non-binding advisory
shareholder votes on executive compensation arrangements
for one to three years after it no longer qualies as an EGC.
The U.S. Foreign Corrupt Practices Act (FCPA). The
FCPA applies to issuers of securities registered pursuant
to the 1934 Act. The FCPA deals with certain foreign
payments and imposes a statutory requirement for such
companies to:
Maintain reasonably accurate detailed records of their
transactions
Maintain a system of internal accounting control that will
be sufcient to reasonably assure that (1) transactions
are executed in accordance with managements
authorization, (2) the transactions are recorded properly,
(3) access to assets is adequately safeguarded, and (4)
there is adequate accountability for the assets
The FCPA was enacted after widespread publicity about
sensitive payments by companies to government
ofcials, foreign companies and governments, suppliers,
customers, and others. Even without the existence of the
FCPA, companies (both private and public) would want to
maintain adequate records and internal controls. With the
FCPA, companies and their employees are subject to legal
sanctions for non-compliance.
In addition, the FCPA contains strict prohibitions against
bribery of foreign ofcials in order to obtain or retain
business. Foreign ofcials can include certain individuals in
state-owned commercial enterprises.
Tender offers. The 1934 Act regulates tender offers and
requires disclosure before the commencement of a tender
offer. A tender offer is generally made in an effort to gain
control of a registrant. As with proxy materials, the goal of
disclosing information about tender offers is to ensure that
investors are able to make informed non-coerced decisions.
Stock repurchase programs. Stock repurchase programs
allow issuers to purchase shares of common stock in
the open market. These programs can be viewed as
manipulation of the price of the common stock. Rule
10b-18 issued by the SEC allows companies to repurchase
shares without the liability of sections 9(a)(2) and 10(b) of
the 1934 Act, and Rule 10b-5 under the 1934 Act if the
repurchase is performed in accordance with the manner,
timing, price, and volume conditions. Your attorneys should
be consulted in connection with the establishment of a
stock repurchase program.
Benecial ownership reporting. Any person or entity that
benecially owns, directly or indirectly, more than 5 percent
of the outstanding shares of a class of stock must le with
the SEC a statement containing certain information related
to such persons or entitys ownership of such shares. This
can be done, depending on the lers status and intentions,
on a Schedule 13D or 13G.
Trading activities by insiders. Certain insiders, consisting
of shareholders benecially holding more than 10 percent
of the stock and all directors and certain ofcers (dened in
Rule 16a-1(f) of the 1934 Act), must le with the SEC reports
regarding their stock holdings. An initial report must be led
by the time the companys 1934 Act registration becomes
effective. Any person who subsequently becomes subject
to this requirement must le an initial report within 10 days
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of acquiring that status. Once the initial report is led, any
changes in benecial holdings (such as through a purchase,
sale, gift, exercise of options, etc.) must be reported before
the end of the second business day following the change.
The related ling requirements are complex, as are the
denitions of benecial ownership of shares under section
16 of the 1934 Act. As a result, informing all persons subject
to these rules is critical.
All such reporting persons (except as noted below) are also
subject to the short-swing prot provisions of section 16 of
the 1934 Act. If these individuals realize any prots from the
purchase and sale or sale and purchase of the companys
stock within a six-month period, they may have to turn over
such prots to the company. This can apply whether or not
the trading was based on insider information.
Reporting persons are also not permitted to sell securities
that they do not own at the time (sell short) or, if they do
own them, that they do not deliver within 20 days after the
sale (sell short against the box).
Some companies have window periods during which they
encourage insiders who want to buy or sell stock to do so.
Window periods are considered to be periods of time when
all material information known by employees is public. They
are typically dened as the period shortly after a public
announcement of material events, such as earnings releases.
There are advantages and disadvantages to using window
periods; you should discuss them with your legal counsel
before nalizing your policy.
Regulation BTR (Blackout Trading Restriction) of the SEC,
adopted pursuant to section 306(a) of SOX, generally
prohibits directors and executive ofcers from trading
company stock acquired in connection with service or
employment as a director or executive ofcer when
participants in company stock and retirement plans are
temporarily prohibited from trading. Regulation BTR was
enacted to address the perceived abuses from the Enron
case, where employees were prohibited from selling
company stock in their company stock plans, but executives
were not.
Trading on inside information
No person in possession of material non-public information
about the company, including those who are merely aware
of the information, should trade the companys securities
before the information is made public. This applies to
ofcers, directors, and employees. It also applies to people
outside the company who gain access to this information,
including family members of ofcers, directors, and
employees of the company. If an insider tips another person,
both parties may be liable for damages under federal
securities laws.
Private Securities Litigation Reform Act of 1995. The
Private Securities Litigation Reform Act of 1995 (Reform
Act) provides a safe harbor for companies to include
forward-looking information within 1934 Act reports.
Companies had historically held back from disclosing these
forward-looking statements due to legal actions asserting
companies failed to meet these projections. The Reform Act
provides a safe harbor for these statements. The Reform
Act safe harbor does not apply in connection with certain
transactions, such as IPOs.
Disposition of restricted securities and securities held
by afliates. Once an IPO is completed, the shares sold as
a part of the IPO are freely tradable under the 1933 Act.
If there was outstanding stock previously issued in private
placements, the stock is considered restricted for purposes
of the 1933 Act and may be subject to resale restrictions.
Restricted stock, and any stock owned by persons who
are considered afliates of the issuer, generally cannot be
resold in the public market unless the stock is included in
a registration statement or is sold in compliance with Rule
144 under the 1933 Act. See Appendix B: Registration
exemptions for a summary of certain exemptions from the
registration requirements of the 1933 Act.
71
Chapter 10. Foreign private issuers
Foreign companies going public in the United States use essentially
the same process, but there are some special rules that apply.
Strategies for Going Public 72
Some foreign companies that conduct IPOs in the United
States are called foreign private issuers under the federal
securities laws. A foreign private issuer is dened as an issuer
that is incorporated or organized under the laws of a foreign
country, except if: (1) more than 50 percent of the issuers
outstanding voting securities are directly or indirectly held
by residents of the U.S. and (2) any of the following: (a)
the majority of the executive ofcers and directors are U.S.
citizens or residents, (b) more than 50 percent of the assets
of the issuer are located in the U.S., or (c) the business of
the issuer is administered principally in the U.S. This test is
required to be performed annually as of the last business
day of the issuers most recently completed second scal
quarter. A foreign issuer (other than a foreign government)
that does not meet the denition of a FPI must use the
same registration and reporting forms as a domestic issuer.
A foreign private issuer may also voluntarily elect to use the
registration and reporting forms that domestic issuers use.
However, if the issuer elects to do so, it must comply with all
the requirements of the domestic company forms.
The marketing process for the U.S. IPO of a foreign private
issuer is generally very similar to that described for a
domestic issuer in Chapter 7. Both the team members and
the pre-public planning process are the same, and there
are also SEC lings. These processes, however, may be
more time consuming because of a lack of familiarity with
U.S. disclosure requirements and the integration of those
requirements with requirements of the companys home
jurisdiction. This may be especially true for the accounting
and due diligence portion of the work. In addition, the same
SEC rules govern public communications before, during, and
after the IPO.
Some foreign private issuers that publicly offer securities in
the U.S. do so using American Depositary Receipts (ADRs).
ADRs are issued by a depositary institution in the U.S. (which
has contracted with the foreign private issuer to provide
this service) and represent a specied number of equity
securities of the foreign private issuer. To go public in the
U.S., equity shares of a foreign private issuer are deposited
with the depositary. The depositary then issues ADRs to
investors purchasing securities in the IPO. ADRs are meant to
mirror the underlying equity securities (though there can be
important differences, which should be discussed with legal
counsel). ADRs are appealing to investors, as they can help
mitigate risks related to securities held in other countries.
For instance, ADRs are priced in U.S. dollars and usually pay
dividends in U.S. dollars. In addition, the SEC considers ADRs
to be separate securities from the issuers underlying equity
securities; therefore, a Form F-6 is required to be led by the
depositary bank with the SEC.
Set forth below are short summaries of some key differences
in the IPO process for foreign private issuers. The summaries
do not describe all the differences in disclosure and the
application of the securities laws between foreign and
domestic issuers. You should consult with your advisors
before moving forward on the IPO process.
1933 Act ling and disclosure differences
Form F-1 (and not Form S-1) is used by foreign private
issuers to register with the SEC. Form F-1 takes most of its
disclosure requirements from those found in Form 20-F.
Form F-1 provides certain nancial statement and disclosure
accommodations different from those found in Form S-1.
While the SEC provides these accommodations, often the
underwriters will try to make most parts of the prospectus
(other than the compensation disclosure) for a foreign
private issuer look similar (substantively) to a prospectus for a
domestic issuer.
The SEC permits certain foreign private issuers to submit
their rst registration statement on a draft, condential
basis to the SEC. Foreign private issuers able to take
advantage of this are (1) a foreign government registering
its debt securities; (2) a foreign private issuer that is
listed or is concurrently listing its securities on a non-U.S.
This chapter highlights some special rules for foreign companies considering
whether to go public in the United States and should be read in conjunction
with the remaining chapters that further describe that process. There are
many advantages to trading in the U.S. capital markets for foreign companies,
that may include higher stock valuations and improved visibility for consumer
marketing and corporate recruiting.
73
securities exchange; (3) a foreign private issuer that is
being privatized by a foreign government; or (4) a foreign
private issuer that can demonstrate that the public ling
of an initial registration statement would conict with
the law of an applicable foreign jurisdiction. This is a
signicant accommodation to these foreign private issuers,
as it permits them to resolve SEC comments condentially
before ling the registration statement publicly and
commencing the roadshow.
Certain accommodations are available for a foreign
private issuer in the Selected Financial Data section of the
registration statement. For example, if the foreign private
issuer is unable to provide information for the earliest two
years of the ve-year period without unreasonable effort or
expense, those periods may be omitted. However, issuers
are required to disclose the omission and the reason for the
omission within the document. Also, the information may be
requested by the underwriters. In Selected Financial Data, a
foreign private issuer is required to disclose items generally
corresponding to the following:
Net sales or operating revenues
Income (loss) from operations
Income (loss) from continuing operations
Net income (loss)
Net income (loss) from operations per share
Income (loss) from continuing operations per share
Diluted net income per share
Total assets
Net assets
Capital stock (excluding long-term debt and redeemable
preferred stock)
Number of shares as adjusted to reect changes in capital
Dividends declared per share
Selected Financial Data should be presented in the same
currency as the nancial statements.

A foreign private issuer must include a statement of
capitalization and indebtedness in the Form F-1 registration
statement. While the form requires that this be dated no
earlier than 60 days before the date of the prospectus,
the SECs Financial Reporting Manual section 6270 allows
companies to use data as of the same date as the most
recent balance sheet.
The equivalent of the MD&A in a Form S-1 can be titled the
Operating and Financial Review and Prospects in a Form
F-1; however, substantively, it is very similar to the MD&A in
domestic issuer offerings and is often titled the same.
Differences between a domestic issuer and a foreign private
issuer in compensation disclosures are perhaps the area
of most interest to executives. Foreign private issuers are
permitted to provide only aggregate data (if that is what
is provided in the issuers home country) and much less
information concerning individual executive compensation.
This was done in part to accommodate disclosure to that of
the home market.
Foreign private issuers must also disclose the effect of any
laws, decrees, regulations, or other legislation of the home
country of the issuer that may affect the import or export
of capital, including the availability of cash for use by the
parent company or the remittance of dividends, interest, or
other payments to non-resident security holders. Any tax
consequences that can affect non-resident security holders
must also be disclosed.
Certain accommodations are available for a foreign private
issuer in the IPO process.
Under the JOBS Act, FPIs
are not excluded from
the denition of EGCs, if
they otherwise qualify.
See Chapter 12 for
additional information
on the JOBS Act.
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Strategies for Going Public 74
Audit requirements
A foreign private issuer is generally required to include
audited balance sheets as of the end of the two most
recent scal years, and audited statements of operations,
cash ows, and changes in shareholders equity and
comprehensive income for the three most recent scal years.
Such nancial statements may be presented in accordance
with either U.S. GAAP, IFRS (as issued by the IASB), or local
accounting principles reconciled to U.S. GAAP. Eligible
foreign private issuers reporting under U.S. GAAP that meet
certain criteria may be eligible to present only two years of
audited statements of operations, cash ows, and changes
in shareholders equity and comprehensive income, instead
of three. Issuers reporting under IFRS (as issued by the
IASB) are permitted to only include one year of comparative
nancial statements (in the year of transition to IFRS). Per
International Accounting Standard (IAS) 1, however, the
nancial statements should include a third balance sheet as
of the beginning of the comparative period. If the foreign
private issuer presents its nancial statements in accordance
with local accounting principles, it must quantify and
reconcile material differences to U.S. GAAP and provide all
other information required by U.S. GAAP and Regulation
S-X. However, rst-time foreign private issuer registrants
that present their nancial statements in accordance with
local accounting principles are only required to provide
reconciliations of the nancial statements and selected
nancial data to U.S. GAAP for the two most recently
completed scal years and any interim period required in
the registration statement. While reconciliations to U.S.
GAAP initially are required only for two years, the registrants
nancial statements still need to be presented in the
registration statement for all of the periods noted above.
Foreign private issuers may use any reporting currency
they deem appropriate. The reporting currency must
be prominently disclosed on the face of the nancial
statements.
Audited nancial statements must be no older than
12 months at the date of ling of the IPO registration
statement. This requirement is waived if the company is able
to represent adequately to the SEC that it is not required
to comply with this requirement in any other jurisdiction
outside the U.S. and that complying with the requirement is
impracticable or involves undue hardship. In that case, the
nancial statements should be no older than 15 months at
the date of ling.
Unaudited interim nancial statements covering at least the
rst six months of the scal year, as well as the comparable
period in the prior year will be required when the Form F-1
registration statement is dated more than nine months after
the end of the last audited nancial year. If the issuer has
published interim nancial information for a more current
period, the most current interim nancial statements must
be included. In practice, however, the underwriters may
require a foreign private issuer to include interim nancial
information consistent with the domestic requirements.
The XBRL rules applicable to foreign private issuers are set
forth in Chapter 9. The SEC has postponed the requirement
for foreign private issuers with nancial statements prepared
in accordance with IFRS to comply with XBRL rules. As
indicated in the no-action letter issued by the SEC on April
8, 2011, foreign issuers using IFRS are not required to
comply until the Commission species on its website a
taxonomy for use by such foreign private issuers in preparing
their Interactive Data Files.
75
Corporate governance differences
The requirements governing the composition of the board
and the audit committee can be different for foreign
private issuers. Foreign private issuers are exempt from
certain of the audit committee independence rules and
can have certain members of the audit committee who
are not independent, such as non-management employee
representative, a non-management afliated person
who only has observer status, or a non-management
governmental representative. In addition, the foreign private
issuer is exempt from the audit committee independence
rules if the foreign private issuer has a board of statutory
auditors (or similar body) or has statutory auditors,
established and selected pursuant to home country legal
or listing provisions requiring or permitting such a board
or body, and that board or body comports with additional
SEC standards that are meant to assure that board or body
or statutory auditors are independent of management.
The SEC also has a provision under its independence rules
recognizing that where, as in some foreign countries,
companies have two-tiered boards, the Board of Directors
means the supervisory or non-management board.
Both the NYSE and NASDAQ also permit foreign private
issuers generally to follow home country rules rather than
their rules. However, both specify certain exceptions to
these accommodations. The NYSE requires that all foreign
private issuers (i) meet the SEC requirements for audit
committees; (ii) notify the exchange of non-compliance
with exchange corporate governance rules; and (iii) provide
an annual written afrmation to the NYSE. NASDAQ
species that foreign private issuers (i) must meet the SEC
requirements for audit committees; (ii) are not exempt from
the requirement to make a public announcement if its audit
report contains a going concern qualication; and (iii)
must notify it in the event of any material non-compliance
with NASDAQ corporate governance rules. In each case,
the foreign private issuer must also disclose differences
between home country and NYSE and NASDAQ corporate
governance rules, as applicable.
After the IPO 1934 Act lings
Periodic lings. A foreign private issuer is required to le a
Form 20-F annual report with the SEC within four months
after the scal year end. A Form 20-F is similar to a Form
10-K and extends certain accommodations to FPIs. However,
similar to domestic issuers, annual reports on Form 20-F
must contain the ofcer certications required by SOX.
A FPI is exempt from the Form 10-Q quarterly reporting
and Form 8-K current reporting requirements. Rather, an
FPI is required to furnish promptly on Form 6-K material
information which the issuer (1) les or is required to le
with a stock exchange on which its securities are traded,
if made public by that exchange; (2) makes or is required
to make public by its domestic laws; or (3) distributes or
is required to distribute to its securities holders. Also, the
foreign private issuer must provide either a full English
translation or an English summary of its documents that are
written in a foreign language, in accordance with 1934 Act
Rule 12b-12(d).
Corporate governance. Foreign private issuers with
securities listed on a national securities exchange are
required to provide a concise summary in their annual
reports of any signicant ways in which its corporate
governance practices differ from those followed by domestic
companies under the listing standards of that exchange.
Proxy rules. Section 14 of the 1934 Act requires public
companies to comply with certain rules regarding proxies.
The 1934 Act makes it unlawful for companies to solicit
proxies and to provide untrue statements with respect
to tender offers, and also requires companies to provide
equivalent information to holders, prior to any meetings,
that would have been compulsory if a solicitation had been
made. Rule 3a12-3(b) of the 1934 Act, however, exempts
foreign private issuers from the proxy rules included within
sections 14(a), 14(b), 14(c), and 14(f).
Under sections 14(d) and 14(e), foreign private issuers are
prohibited from making tender offers that would allow the
issuer to benecially own more than ve percent of the class
of securities (subject to complying with certain conditions)
or that include untrue statements of material fact.
Strategies for Going Public 76
Reporting of trading activities by insiders. FPIs and their
ofcers and directors are exempt from the insider reporting
and short-swing trading provisions of section 16 of the 1934
Act (as discussed in Chapter 9).
Regulation FD. As discussed in Chapter 9, Regulation FD
requires companies to make public any material data or
relevant information that may affect investment decisions
that were disclosed to certain enumerated persons.
Regulation FD, however, specically 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.
Foreign Corrupt Practices Act. Foreign private issuers are
subject to both the books and records provisions and the
anti bribery provisions of the FCPA, just as are domestic
companies. This can be a surprise to foreign companies and
a number have been prosecuted under the FCPA.
SOX. Foreign private issuers that are reporting companies
under the 1934 Act are subject to the provisions of
SOX, though there are some limited accommodations
made for foreign private issuers. These accommodations
include the following: certain aspects of the audit
committee independence rules (see above), periods in
which trading is prohibited under company stock and
retirement plans (Regulation BTR) and the use of non-GAAP
nancial measures (Regulation G). Issuers, both foreign
and domestic, conducting an IPO are not required
to immediately comply with the independent auditor
attestation of the effectiveness of the ICFR under section
404 of SOX. See the chart in Chapter 9 on this subject for
the implementation schedule of such attestations. Because
of the time and effort to implement SOX requirements,
FPIs should pay particular attention to the requirements
of SOX before they decide to proceed with an IPO in the
U.S. See the impact on the JOBS Act on FPIs below and
Chapter 12 for more information on the auditor attestation
requirement for FPIs that are also EGCs.
Impact of Dodd-Frank Act on Foreign
Private Issuers
Certain provisions of the Dodd-Frank Act are applicable
directly to foreign private issuers. The Dodd-Frank
Act increases the SECs ability to pursue enforcement
actions against foreign companies, including increased
extraterritorial jurisdiction for enforcement action, increased
liability imposed on secondary actors, increased resources
for the SEC to administer these actions, and increased
bounties for whistleblowers. Also applicable to foreign
private issuers, the Dodd-Frank Act instructs the SEC to
conduct a study to determine if reducing the guidelines
in section 404(b) of SOX (described in Chapter 9) for
companies whose market capitalization is between $75
million and $250 million will encourage companies to list on
U.S. exchanges.

In addition, there are provisions of the Dodd-Frank Act
that are applicable to domestic companies that will also
be relevant to foreign private issuers. For example, the
Dodd-Frank Act requires the SEC to direct the national
securities exchanges to adopt listing standards that include
enhanced independence requirements for compensation
committees. Foreign private issuers will also be subject to
these independence rules or must disclose the reasons for
not complying.
As certain sections of the Dodd-Frank Act are still within
the SECs rule-making process, there is uncertainty as to
their applicability to foreign private issuers. These potential
impacts are discussed in Chapter 11.
Impact of JOBS Act on FPIs
Foreign private issuers that are also EGCs may be able to
take advantage of certain provisions in the JOBS Act. While
the JOBS Act is arguably of less signicance to foreign
private issuers because of the series of accommodations
already available them (as discussed above), the JOBS Act
may provide some additional accommodations to certain
foreign private issuers. For instance, a foreign private issuer
that is not able to submit its IPO registration condentially
could submit condentially in reliance on the JOBS Act.
Further, foreign private issuers could benet from the
reduced nancial statement disclosure requirements under
the JOBS Act and the relaxation of the audit attestation
requirements under SOX for EGCs. See Chapter 12 for more
information about the JOBS Act.
77
Chapter 11. Dodd-Frank Wall Street Reform
and Consumer Protection Act
The Dodd-Frank Act was signed into law by President Obama
on July 21, 2010.
Strategies for Going Public 78
The SEC has had a full agenda in recent months to
promulgate the voluminous rules and studies mandated
under the Dodd-Frank Act. When combined with changes
in the SECs structure, composition, and budget in recent
years, the addition of these responsibilities has created a
tumultuous regulatory landscape that is likely to last for
some time. Primarily through the issuance of proposals
and nal rules on disclosure and proxy issues, the SEC has
historically played a powerful role in regulating corporate
governance, but the Dodd-Frank Act certainly has expanded
its responsibilities.
By all accounts, the SEC has been working diligently.
Nonetheless, the SEC has fallen behind on a number of
statutory deadlines, so implementation is likely to continue
to be a focus. To track its progress and provide its projected
timing, the SEC has created a Web page devoted specically
to its activities under the Dodd-Frank Act. One thing appears
certain the Dodd-Frank Act, combined with certain other
pressures, promises that the SEC will maintain a strong focus
on enforcement activities and investor advocacy over the
longer term.
Things to consider before and concurrent with the
initial public offering
Certain provisions of the Dodd-Frank Act require public
companies to adopt policies and programs. Because these
policies and programs will be required once an entity is
public, we recommend that companies consider adopting
them prior to an IPO to minimize the related transition
efforts during the IPO process.
Committees and committee independence
Compensation committee. On June 20, 2012, the SEC
adopted rules, rst proposed in March 2011, to implement
the Dodd-Frank Acts requirement that national securities
exchanges adopt certain new listing standards applicable to
compensation committees. The SEC also adopted a new
issuer disclosure requirement relating to compensation-
consultant conicts of interest.
The impact on compensation committee membership will
not be known until the exchanges propose new listing
standards; however, there will be a transition period for
newly public companies. The new disclosure requirements
which apply to proxy statements for 2013 annual
meetings will require that compensation committees take
another look at their current compensation consultants,
assess whether conicts of interest may exist (as articulated
under the new rules), consider how to address those
conicts, and determine what disclosures will be required
under the new rules.
Risk committee. Section 165 of the Dodd-Frank Act
requires banks with greater than $10 billion of consolidated
assets, as well as certain non-bank nancial companies, to
establish risk committees that will be responsible for risk
oversight of the company. These committees must contain a
certain number of independent directors, determined by the
board of directors.
In December 2011, the Federal Reserve issued its notice
of proposed rulemaking (NPR) on enhanced prudential
supervision, which involves government regulation and
monitoring of the banking system. Proposed rules would
require each of the following to establish a risk committee
with a formal written charter approved by the companys
board: 1) publically traded companies and bank holding
companies with greater than $10 billion in assets and 2)
non-bank nancial companies designated as systemically
important. In addition, certain other requirements would
be applicable for banks and bank holding companies
The Dodd-Frank Act was signed into law by President Obama on July 21, 2010.
The Dodd-Frank Act, which is one the most signicant pieces of legislation since
the 1933 Act and the 1934 Act, requires various agencies to make numerous
rules, conduct studies and create regulators as part of nancial regulatory
reform. While there are many provisions of the Dodd-Frank Act that are relevant
to public companies.
79
with greater than $50 billion in assets. For example, the
NPR would further require U.S. banks and bank holding
companies with greater than $50 billion in assets and
non-bank nancial companies designated as systemically
important to (1) segregate board risk committees if
previously housed within another committee by reporting
directly to the board and (2) regularly receive and review
reports from the chief risk ofcer.
Executive compensation
Clawback policies. To the extent a registrant restates
its nancial statements, current law includes clawback
provisions that registrants must consider for reimbursement
of cash bonuses and equity-based incentives. Section 304
of SOX created clawback provisions that apply to chief
executive ofcers and chief nancial ofcers. However,
the Dodd-Frank Act expanded these provisions to include
additional executives. Under section 954, the company
must have a policy that requires recovery of incentive-
based compensation in the event of a nancial restatement
due to material non-compliance with nancial reporting
requirements under the securities laws. The SEC is currently
developing related rule proposals.
Systemically important is dened under
section 803 of the Dodd-Frank Act as a situation
where the failure of or a disruption to the
functioning of a nancial market utility or the
conduct of a payment, clearing, or settlement
activity could create, or increase, the risk of
signicant liquidity or credit problems spreading
among nancial institutions or markets and thereby
threaten the stability of the nancial system of the
United States.
Say-on-pay votes and golden parachutes. On January 25,
2011, the SEC adopted nal rules implementing section 951
of the Dodd-Frank Act concerning shareholder approval of
executive compensation and golden parachute agreements.
Under the rule, companies must hold say-on-pay votes
at least every three years. In addition, section 957 of the
Dodd-Frank Act prohibits brokers from voting on executive
compensation and other signicant matters without
receiving specic instructions from the actual shareowners.
Additionally under this rule, companies must disclose golden
parachute compensation for ofcers in connection with
mergers and acquisitions. Companies considering an IPO
should consider their compensation structures in light of
these new rules.
Employee and director hedging. The SEC is currently
working to propose rules on section 955 regarding
employee and director hedging of compensation. The
Dodd-Frank Act requires companies to disclose in their proxy
materials whether hedging the value of their equity shares
in the company is allowed. Companies are encouraged to
review their policies to determine if changes are required
prior to when they are required to disclose them.
Additional compensation disclosures. The Dodd-Frank
Act obligates the SEC to create a rule regarding additional
compensation disclosures within any proxy or consent
solicitation for an annual meeting of shareholders.
Section 953 asks for information showing the relationship
between executive compensation actually paid and the
nancial performance of the issuer, taking into account any
Strategies for Going Public 80
change in the value of the shares of stock and dividends
of the issuer and any distributions and the median annual
total compensation for all employees, annual compensation
for the CEO, and the ratio of CEO compensation to the
employee median compensation. Companies may want
to review the compensation ratios before disclosures need
to be made to ensure they can appropriately explain the
rationale supporting their compensation decisions.
Whistleblower protection
On May 25, 2011, the SEC issued its nal rules on section
922 of the Dodd-Frank Act to implement the Whistleblower
Incentives and Protection Programs. Through monetary
rewards, the nal rule provides incentives to individuals
to supply the SEC with original information regarding
possible violations of securities laws. However, the nal
rules do not require that a whistleblower rst report
the information internally to a registrant. As a result,
a registrants internal whistleblower process may be
circumvented. Companies should review their internal
reporting and whistleblower policies to help meet the nal
rules requirements and support internal reporting
of information.
On August 21, 2012, the SEC issued its rst award under
the whistleblower program. The SEC paid the maximum
award permitted and also protected the whistleblowers
anonymity signs that the SEC will continue to be
aggressive in encouraging potential whistleblowers.
Strategies for going public 80
Some issuers may already meet this requirement
as a result of current SEC proxy disclosure rules
specically, in December 2009, the SEC adopted Item
407(h) of Regulation S-K, which already required
board structure information to be disclosed.
81
General corporate governance
Within 180 days after enactment of the Dodd-Frank Act, the
SEC was required in section 972 to issue rules that require
companies to disclose in the proxy statement why the same
or different persons serve as chairman of the board and the
CEO. Companies may want to review their board leadership
structure policies to ensure they are comfortable with them
before disclosures need to be made.
Smaller reporting companies
On September 15, 2010, the SEC issued a nal rule with
regard to section 989G, providing that section 404(b) of
SOX, which requires the auditors attestation on internal
control over nancial reporting, is not applicable to any
audit report prepared for an issuer that is neither an
accelerated ler nor a large accelerated ler. It is important
to note that section 404(b) only addresses the auditor
attestation requirement related to a companys internal
control over nancial reporting; companies subject to the
exemption are still required to provide a management
assessment of the effectiveness of ICFR pursuant to section
404(a) of SOX.
Credit rating agencies
The Dodd-Frank Act includes provisions intended to
remove reliance on nationally recognized statistical ratings
organizations (NRSROs) and imposes on NRSROs essentially
the same securities-law liability standard for ratings
opinions included in prospectuses as outside auditors have
for nancial statement opinions. Other provisions require
operational changes at the NRSROs, including changing
personnel; governance and business practices requiring
certain annual reporting; and additional disclosures about
ratings methodologies and historical ratings performance.
The credit rating agency-related provisions will likely affect
existing registrants (e.g., there could be impacts to short
registration form eligibility Forms S-3 and F-3) and
companies that sell asset-backed securities (ABS) through
registered offerings.
Strategies for Going Public 82
Specialized disclosures
Among the more miscellaneous requirements of the
Dodd-Frank Act, in that they do not seem to have a
nexus to the nancial crisis, are the specialized disclosure
provisions related to so-called conict minerals and
disclosures specic to the mining and extraction industry. On
December 15, 2010, the SEC proposed rules to implement
three separate requirements of the Dodd-Frank Act and,
When combined with
changes in the SECs
structure, composition and
budget in recent years, the
addition of these
responsibilities has created
a challenging regulatory
landscape that is likely to
last for some time.
in December 2011, issued a nal rule related to mine
safety disclosures pursuant to section 1503. On August
22, 2012, the SEC adopted nal rules to implement the
conict minerals provisions in section 1502, which require
companies to make disclosures concerning their use of
conict minerals originating in the Democratic Republic of
the Congo and adjoining countries.
83
Chapter 12. Jumpstart Our Business
Startups Act
On April 5, 2012, President Obama signed into law the JOBS Act.
Strategies for Going Public 84
The discussion below does not address all of the provisions
of the JOBS Act, but rather briey outlines the so-called
IPO On-Ramp provisions of the JOBS Act, which establish
a new category of issuers called emerging growth
companies (EGCs).
EGCs
An EGC is dened as an issuer that had total annual gross
revenues of less than $1 billion during its most recently
completed scal year. An issuer that is an EGC will continue
to be considered an EGC until the earliest of: (1) the last
day of the scal year during which it had total annual gross
revenues of at least $1 billion; (2) the last day of the scal
year following the fth anniversary of the initial public
offering of its equity; (3) the date on which it has, during
the previous three-year period, issued more than $1 billion
in non-convertible debt; or (4) the date on which it is
considered to be a large accelerated ler under the 1934
Act. An issuer does not qualify as an EGC if its IPO occurred
on or before December 8, 2011.
EGCs are exempt from, or subject to reduced, compliance
with various regulatory requirements for a limited period
of time in an effort to encourage them to go public in the
United States. It is important to remember that while some
provisions of the JOBS Act are currently in effect, others will
require additional rulemaking. Additionally, with respect to
certain provisions, it will take some time for the market to
settle on standards and procedures.
Benets afforded to EGCs include:
Reduced nancial information in SEC lings. An EGC
need not present more than two years of audited nancial
statements in its IPO registration statement, and in any other
registration statement, an EGC need not present selected
nancial data for any period prior to the earliest audited
period presented in connection with its IPO.
Condential submissions of draft IPO registration
statements. EGCs are permitted to submit a draft IPO
registration statement for condential review by the
SEC staff prior to public ling, provided that the initial
condential submission and all amendments are publicly
led with the SEC not later than 21 days before the EGC
conducts a roadshow.
Increased communications with qualied institutional
buyers (QIBs) and accredited investors. The JOBS Act
expands permissible communications during a securities
offering by amending the 1933 Act to permit an EGC, or
any person authorized to act on behalf of an EGC, either
before or after the ling of a registration statement, to test
the waters by engaging in oral or written communications
with potential investors that are QIBs or institutions that are
accredited investors to determine whether such investors
might have an interest in a contemplated securities offering.
Increased exibility to issue research reports. The JOBS
Act permits the publication or distribution by a broker or
dealer of any research report about an EGC, the common
equity securities of which are the subject of a proposed
public offering pursuant to a registration statement that
the EGC proposes to le, has led or that is effective, will
be deemed not to constitute a regulated offer, even if the
broker or dealer is participating or will participate in the
registered offering of the securities of the EGC. In addition,
the JOBS Act prohibits the SEC and any registered national
securities association from adopting or maintaining any rule
or regulation prohibiting any broker, dealer, or member of a
national securities association from publishing or distributing
any research report or making a public appearance with
respect to the securities of an EGC during post-IPO quiet and
lock-up periods.
Relaxed restrictions on securities analyst
communications. The JOBS Act prohibits the SEC and any
registered national securities association from imposing
any rule or regulation in connection with an EGCs IPO that
restricts: (i) which associated persons of a broker, dealer, or
member of a national securities association may arrange for
communications between a securities analyst and a potential
The JOBS Act consists of a package of bills intended to make it easier for smaller
companies to raise public and private capital in the U.S. nancial markets. The
JOBS Act seeks to increase the number of U.S. public offerings after a decline
over the course of the last decade and to facilitate capital raising by smaller
companies. Under the JOBS Act, many of the primary regulatory burdens
imposed on private and public capital raising transactions conducted by smaller
companies are substantially reduced, thereby potentially facilitating quicker and
more cost-efcient capital formation by these companies.
85
investor; or (ii) a securities analyst from participating in any
communications with the management of an EGC that is
also attended by any other associated person of a broker,
dealer, or member of a national securities association whose
functional role is other than as a securities analyst.
Auditor attestation regarding assessment of internal
controls. The JOBS Act amends section 404(b) of SOX to
exempt a registered public accounting rm that prepares
or issues an audit report for an EGC from the requirement
that it provide an attestation report on the EGCs internal
controls.
Accounting standards. An EGC is not required to comply
with any new or revised nancial accounting standard until
such standard applies to companies that are not subject to
1934 Act public company reporting. An EGC may choose
to comply with accounting standards to the same extent
that a non-EGC is required to comply with such standards.
However, should an EGC choose to comply with non-EGC
accounting standards, it will not be able to select some
accounting standards to comply with and not others, but
must then comply with all non-EGC accounting standards.
Auditor rotation and other PCAOB rules. Any rules of
the PCAOB requiring mandatory audit rm rotation or a
supplement to the auditors report in which the auditor
would be required to provide additional information about
the audit and the nancial statements of the issuer will not
apply to an audit of an EGC. Further, any additional rules
adopted by the PCAOB after the date of enactment of the
JOBS Act will not apply to an audit of any EGC unless the
SEC determines that the application of such additional
requirements is necessary or appropriate in the public
interest after considering the protection of investors and
whether the action will promote efciency, competition, and
capital formation.
Executive compensation disclosure. An EGC may
comply with reduced executive compensation disclosure
requirements generally available to smaller reporting
companies and would not be required to calculate and
disclose the ratio of the CEOs compensation to the median
compensation of all other employees.
Say-on-pay. The JOBS Act exempts an EGC from the
requirement to provide shareholders a separate, non-binding
advisory vote on executive compensation, including golden
parachute compensation, until one to three years after it no
longer qualies as an EGC.
Opt-in right for EGCs. The JOBS Act permits an EGC to
choose to forego an exemption and, instead, comply with
the requirement that applies to a company that is not an
EGC (except that if an EGC chooses to comply with non-EGC
accounting standards, it cannot pick and choose which
accounting standards would apply to it as described above
under Accounting standards).
SEC review of Regulation S-K. The JOBS Act also mandates
that the SEC conduct a review of Regulation S-K with a view
to modernizing and simplifying the registration process and
reducing the costs and other burdens for EGCs.
Other JOBS Act considerations
Crowdfunding exemption. The JOBS Act creates an
exemption from 1933 Act registration requirements for
crowdfunding transactions meeting certain criteria.
Crowdfunding allows a company to gain access (through
social media or other means) to a large pool of investors
that contribute small amounts as a means to raise capital
and achieve growth. Securities purchased by investors
through crowdfunding transactions are not considered
held of record and thus are excluded from an issuers
shareholder cap.
To qualify for the exemption, the offering intermediary (e.g.,
a broker-dealer or funding portal) cannot offer investment
advice, solicit the details of the offering, or advertise the sale
of securities. The exemption allows non-reporting issuers to
annually raise up to $1 million in reliance on the exemption.
Investor safeguard provisions limit the amount of the funds
that may be contributed by an individual investor on the
basis of annual income or net worth.
An issuer of securities in a crowdfunding transaction is also
required to le certain information with the SEC and to give
the intermediary and investor group specic information
about the issuer and the transaction. The intermediary
acting as the broker or funding portal is required to register
Strategies for Going Public 86
with the SEC and any self-regulatory organization (if
applicable) and would be required, among other things, to
take certain actions specically designed to:
Reduce the risk of fraud
Sufciently inform investors of the investment risks
Ensure that investors included in the pooled transaction
do not exceed the investment limits in the aggregate if
participating in multiple offerings in a given year
The JOBS Act provides for a civil liability provision for
material misstatements in, or material omissions from, the
offering materials.
Small company capital formation (Regulation A). The
JOBS Act requires the SEC to amend Regulation A or to
create a new exemption from Regulation A but with an
increased offering amount and additional conditions. The
JOBS Act increases the cap in the exemption for small
public issuances of unrestricted debt, equity, or convertible
securities from $5 million to $50 million in any 12-month
period and adds a civil liability provision related to the
offering or sale of securities. The JOBS Act also requires the
issuer utilizing the exemption to le annual audited nancial
statements with the SEC, authorizes the SEC to require an
issuer to make certain periodic non-nancial disclosures
available to investors, and authorizes the SEC to require
an issuer to le and distribute an offering statement to
prospective investors. In addition, the SEC is required every
two years to revisit (and potentially increase) the limits on
exempt securities offerings and, if no changes are made,
report to Congress its reasons for not increasing the limits.
Shareholder thresholds for reporting. Under the JOBS
Act, section 12(g) of the 1934 Act is amended to increase
the shareholder threshold that triggers the requirement
for companies to register with the SEC from 500 to 2,000
shareholders of record. For private companies that are
not banks or bank holding companies, no more than 499
shareholders of record may be nonaccredited investors. In
addition, holders of crowdfunded securities and persons
who received their shares pursuant to exempt transactions
under an employee compensation plan are excluded in the
determination of the number of shareholders of record.
Access to capital in private offerings. The JOBS Act directs
the SEC to revise Rule 506 of Regulation D to eliminate the
ban on general solicitation and advertising in connection
with private offerings made pursuant to Rule 506, provided
that all purchasers of the securities are accredited investors
and the issuer took reasonable steps to verify that all
purchasers of the securities are accredited investors. In
addition, the JOBS Act directs the SEC to revise Rule 144A
to provide that securities sold under the revised exemption
may be offered to persons other than qualied institutional
buyers (QIBs), including by means of general solicitation or
general advertising, provided that securities are resold only
to persons that the seller and any person acting on behalf of
the seller reasonably believe are QIBs. On August 29, 2012,
the SEC proposed rule amendments to implement these
changes.
The JOBS Act also amends the 1933 Act to provide that
persons who maintain a platform or mechanism that
facilitates offerings under Rule 506 and engage in general
solicitation and advertising, coinvest in securities, or provide
certain ancillary services would not be subject to broker-
dealer registration under the 1934 Act, provided that
certain conditions are met, including no compensation in
connection with the purchase or sale of securities and no
possession of customer funds or securities in connection
with the purchase or sale of securities. See Appendix B:
Registration exemptions for additional information on Rule
506 of Regulation D and Rule 144A of the 1933 Act.
Implementation guidance
Since the passing of the JOBS Act, the SEC staff has issued
implementation guidance in FAQ format through the SECs
website, and more guidance, as well as rulemaking, is
expected. You should pay attention to current and future
interpretive guidance, as well as rules, issued by the SEC
with respect to implementation of the JOBS Act as such
guidance and rules could potentially affect your IPO process.
87
Before and after the JOBS Act
The following table reects regulatory requirements prior to the enactment of the JOBS Act with respect to the foregoing matters for issuers, including EGCs,
and what those requirements are under the JOBS Act for EGCs.
Regulatory requirement Prior to the JOBS Act Under the JOBS Act
Financial Information in SEC lings Three years of audited nancial statements
Selected nancial data for each of ve years (or for life of issuer, if
shorter) and any interim period included in the nancial statements
Two years of audited nancial statements
Not required to present selected nancial data for any period
prior to the earliest audited period presented in connection with
an IPO
Within one year of IPO, EGC would report three years of audited
nancial statements
Condential submissions of draft IPO
registration statements
Historically, only foreign issuers were permitted to submit condential
draft registration statements with the SEC
In December 2011, the SEC announced that, effective immediately,
it would only review submissions by foreign private issuers on a
condential basis in specied circumstances; as a result, many non-U.S.
companies submitting their initial registration statement to the SEC in
connection with a U.S. IPO or listing will have to do so via a public ling
An EGC is permitted to submit to the SEC a draft IPO registration
statement for condential review prior to public ling, provided
that such submission and any amendments are publicly led
with the SEC not later than 21 days before the EGC conducts a
roadshow
Communications before and during
the offering process
Limited ability to test the waters Expand permissible communications to allow EGCs, either prior
to or after ling a registration statement, to test the waters
by engaging in oral or written communications with QIBs and
institutional accredited investors to determine interest in an
offering
Research reports Generally, managing underwriters of an IPO are prohibited from
publishing research on the issuer until 40 days after the IPO
Permits publication and distribution by brokers or dealers of
research reports about an EGC that is the subject of a public
offering even if the brokers or dealers are participating or will
participate in the offering
Investor protections such as those in section 501 of SOX re:
potential conicts of interest remain in effect
Securities analyst communications Communications by analysts with companies and potential IPO
investors are subject to a number of conicts of interest and other
restrictions
Removes restrictions on who may arrange for communications
among securities analysts and investors in connection with an IPO
and allows securities analysts to participate in communications
with management of an EGC, along with other representatives of
a broker or dealer
Auditor attestation on internal
controls
Auditor attestation on effectiveness of internal controls over nancial
reporting required in second annual report after IPO
Non-accelerated lers not required to comply
Transition period for compliance up to ve years (i.e., for so long
as the issuer is deemed to be an EGC)
Accounting standards Must comply with applicable new or revised nancial accounting
standards
Not required to comply with any new or revised nancial
accounting standard until such standard applies to companies
that are not subject to 1934 Act public company reporting
EGCs may choose to comply with non-EGC accounting standards
but may not selectively comply
Auditor rotation and other PCAOB
rules
Mandatory audit partner rotation every ve years
The PCAOB is considering a mandatory audit rm rotation requirement
and has issued a concept release on the matter
Mandatory audit partner rotation requirement unchanged
Exempt from any PCAOB mandatory audit rm rotation
requirements and PCAOB rules relating to supplements to the
auditors report
PCAOB rules adopted after the date of enactment of the
JOBS Act will not apply to an audit of an EGC unless the SEC
determines otherwise
Executive compensation disclosure Must comply with executive compensation disclosure requirements,
unless a smaller reporting company (which is subject to reduced
disclosure requirements)
Upon adoption of SEC rules under the Dodd-Frank Act, will be required
to calculate and disclose the median compensation of all employees
compared to the CEO
May comply with executive compensation disclosure
requirements by complying with the reduced disclosure
requirements generally available to smaller reporting companies
Exempt from requirement to calculate and disclose the median
compensation of all employees compared to the CEO
Say-on-Pay Must hold non-binding advisory shareholder votes on executive
compensation arrangements
Smaller reporting companies are currently exempt from say-on-pay until
2013
Exempt from requirement to hold non-binding advisory
shareholder votes on executive compensation arrangements for
one to three years after no longer an EGC
Strategies for Going Public i
Appendix A: The U.S. Securities and
Exchange Commission
In the chaotic securities markets of the 1920s, companies
often sold stocks and bonds on the basis of promises
of fantastic prots without disclosing any meaningful
information to investors. These conditions contributed to
the disastrous stock market crash of 1929. In response,
the U.S. Congress enacted the federal securities laws and,
through the 1934 Act, created the Securities and Exchange
Commission (SEC) to administer them.
The SEC is an independent regulatory agency with
responsibility for administering the federal securities
laws. The purpose of these laws is to protect investors
by (1) promoting securities markets that operate fairly
and (2) ensuring that investors have access to all material
information concerning publicly traded securities. The SEC
also regulates rms engaged in investing, reinvesting or
trading of securities (including mutual funds); people who
provide investment advice; and investment companies.
The SEC consists of ve presidentially appointed
commissioners with one designated as chairman by the
President of the United States and no more than three from
one political party. The SECs functional responsibilities are
organized into ve divisions and 18 ofces, each of which is
headquartered in Washington, D.C. The SECs staff is located
in Washington, D.C., and in 11 regional ofces throughout
the country. The divisions of the commission are:
Division of Corporation Finance
Corporation Finance has overall responsibility to oversee
public disclosure of information important for investment
decisions. Its work includes reviewing registration statements
and periodic reports (e.g., Form 10-Ks, 10-Qs, 8-Ks, and
20-Fs) of domestic issuers and foreign private issuers,
as well as documents concerning tender offers, proxy
solicitations, and mergers and acquisitions. Corporation
Finance also assists issuers with interpreting the SECs rules
and regulations.
Division of Trading and Markets
Trading and Markets assists the SEC in maintaining standards
for fair, orderly, and efcient markets. This includes the
registration and regulation of broker-dealers and the
oversight of the stock exchanges, the Municipal Securities
Rulemaking Board, self-regulatory organizations, and other
participants (such as transfer agents and credit rating
agencies). Trading and Markets also oversees the Securities
Investor Protection Corporation (SIPC), a private, non-prot
corporation that either acts as a trustee or works with an
independent court-appointed trustee to recover funds in
cases of missing assets. Essentially, the SIPC insures the
securities and cash in the customer accounts of member
brokerage rms.
Division of Investment Management
Investment Management ensures compliance with
regulations regarding the registration, nancial
responsibility, sales practices, and advertising of investment
companies and of investment advisors. In carrying out its
responsibilities, Investment Management also reviews new
product lings and other offering registration statements,
proxy statements, and periodic reports.
Division of Risk Strategy and Financial
Innovation
Created in September 2009, the Division of Risk Strategy
and Financial Innovation assists the SEC in protecting
investors by identifying new and developing risks and trends
in the nancial markets and making recommendations
with respect to how these risks and trends affect the SECs
regulatory activities. Risk Strategy and Financial Innovation
was formed by combining the Ofce of Economic Analysis,
the Ofce of Risk Assessment and other functions.
Division of Enforcement
As its name indicates, the Division of Enforcement is
responsible for ensuring issuers compliance with federal
securities laws. Enforcements responsibilities include
investigating possible violations and recommending
appropriate action and remedies for consideration by the
SEC.
For more information about the SEC, its responsibilities, and
its organizational structure, visit its website: www.sec.gov.
ii
Appendix B: Registration exemptions
Registration requirements apply to offerings of securities
of both U.S. and foreign companies or governments in
the U.S. An offering of securities may qualify for one or
more exemptions or safe harbors from such registration
requirements. The following exemptions and safe harbors
under the federal securities laws are the ones most
commonly relied upon. You must also comply with all
applicable state securities law registration requirements or
qualify for an exemption under state law.
It is also important to note that, whether or not securities
are registered, the antifraud provisions under the federal
and applicable state securities laws apply to all sales of
securities. The following descriptions of the exemptions
and safe harbors are summaries only, and an issuer should
consult with its legal counsel prior to attempting any
issuance of securities.
Private offering exemption
Section 4(2) of the 1933 Act exempts from registration
transactions by an issuer not involving any public offering.
Whether a transaction involves a public or private offering
is essentially a question of fact, and you should consider all
surrounding circumstances, including factors such as the
relationship between the offerees and the issuer, as well as
the nature, scope, size, type, and manner of the offering.
General solicitation and advertising in connection with this
type of offering is prohibited. (See discussion of JOBS Act
impact on general solicitation and advertising discussed
under Rule 506 below.)
To qualify for this exemption, the purchasers of the securities
must:
Have enough knowledge and experience in nance and
business matters to evaluate the risks and merits of the
investment (the sophisticated investor) or be able to
bear the investments economic risk
Have access to the type of information normally provided
in a prospectus
Agree to buy the securities for their own account without
a view to resell or distribute to others immediately
The precise limits of this private offering exemption are
uncertain and have generally been created pursuant to
SEC interpretations and fact-specic court decisions. As the
number of purchasers increases and their relationship to the
company and its management becomes more remote, it is
increasingly difcult to show that the transaction qualies
for the exemption. If securities are offered to even one
person who does not meet the necessary conditions, the
exemption may be unavailable.
Regulation D of the 1933 Act
Regulation D establishes three exemptions from 1933 Act
registration, each with its own offeree qualications
and limitations.
Denitions of Regulation D terms
A sophisticated person is dened as someone with sufcient
knowledge and experience in nancial and business matters
to make the person capable of evaluating the merits and
risks of the prospective investment.
An accredited investor is currently dened as:
A bank, insurance company, registered investment
company, business development company, private
business development company, or small business
investment company
An employee benet plan (within the meaning of the
Employee Retirement Income Security Act of 1974) if
a bank, insurance company, or registered investment
adviser makes the investment decisions or if the plan has
total assets in excess of $5 million or, if a self-directed
plan, with investment decisions made solely by persons
that are accredited investors
A charitable organization, corporation, or partnership
with assets exceeding $5 million
A director, executive ofcer, or general partner of the
company selling the securities
A business in which all the equity owners are accredited
investors
A natural person with an individual net worth, or
joint net worth with that persons spouse, of at least
$1 million
A natural person with individual income exceeding
$200,000 in each of the two most recent years or joint
income with a spouse exceeding $300,000 for those
years and a reasonable expectation of the same income
level in the current year
A trust with assets of at least $5 million, not formed to
acquire the securities offered, and whose purchases are
directed by a sophisticated person
Strategies for Going Public iii
In December 2011, the SEC adopted nal rules amending
the denition of an accredited investor to conform to
changes implemented by the Dodd-Frank Act. Under the
new denition, in calculating a persons net worth, the value
of the persons primary residence is not included as an asset,
and the amount of debt secured by the primary residence,
up to its estimated fair market value, is not included as a
liability (subject to certain exceptions).
Rule 504
Exemption for limited offerings and sales of securities
not exceeding $1 million
Rule 504 provides an exemption for the offer and sale by
certain private companies of securities with an aggregate
offering price not to exceed $1 million in a 12-month
period. Some of the most important characteristics of a Rule
504 offering are:
You can sell securities to an unlimited number of persons
You may make a general solicitation or advertise to
market the securities under certain circumstances
Purchasers receive securities that are restricted
except under limited circumstances. This means that
they generally may not resell their securities without
registration or qualifying for an exemption from
registration
Rule 504 permits general solicitation or advertising in
certain circumstances where state securities laws provide for
investor protections or where only accredited investors (as
dened above) purchase the securities. Rule 504 does not
require issuers to give disclosure documents to investors.
Nonetheless, sufcient information should be provided to
investors to avoid violating the antifraud provisions of the
securities laws.
Rule 505
Exemption for limited offers and sales of securities not
exceeding $5 million
Rule 505 provides an exemption for offers and sales of
securities with an aggregate offering price not to exceed $5
million in any 12-month period by an issuer that is not an
investment company. Under this exemption, you may sell
to an unlimited number of accredited investors (dened
above) and up to 35 other persons (who do not need to
satisfy the sophistication or wealth standards associated with
other exemptions). The issued securities are restricted.
General solicitation and advertising are not allowed. There
are also required disclosures to non-accredited investors and
certain other requirements.
Rule 506
Exemption for limited offers and sales without regard to
dollar amount of offering
Rule 506 is a non-exclusive safe harbor under section 4(2)
and provides guidance on the availability of section 4(2).
Issuers often try to comply with Rule 506 when conducting
section 4(2) private placements.
Under Rule 506:
Any issuer may raise an unlimited amount of capital
You can sell securities to an unlimited number of
accredited investors (dened above) and up to 35 other
purchasers. Unlike Rule 505, all non-accredited investors
(either alone or with a purchaser representative) must be
sophisticated (dened above)
It is up to you to decide what information you give to
accredited investors (dened above), so long as it does
not violate the antifraud prohibitions. Non-accredited
investors must be given disclosure documents that
generally are the same as those used in registered
offerings
You must be available to answer questions by prospective
purchasers
Purchasers receive restricted securities. Consequently,
purchasers may not freely trade the securities in the
secondary market after the offering
The JOBS Act directs the SEC to revise Rule 506 of
Regulation D to eliminate the ban on general solicitation
and advertising in connection with private offerings made
pursuant to Rule 506, provided that all purchasers of the
securities are accredited investors and the issuer took
reasonable steps to verify that all purchasers of the securities
are accredited investors. The JOBS Act also tasks the SEC
with determining the appropriate methods of verication
of accredited investor status. On August 29, 2012, the SEC
proposed rule amendments to implement these changes.
iv
Rule 144A of the 1933 Act
Rule 144A provides a safe harbor from registration for
sales by persons other than issuers who sell securities in
compliance with four conditions:
Securities may be sold only to types of entities that
may be characterized as qualied institutional buyers or
QIBs, as dened in Rule 144A(a)(1). Generally, a QIB is
an institutional investor deemed to have a certain level of
nancial sophistication (knowledge and wealth)
The seller must take reasonable steps to ensure that the
purchaser is aware that the seller may rely on the Rule
144A safe harbor
The securities must not, at the time of issuance, be of
the same class of securities listed on a national securities
exchange or quoted on a U.S. automated inter-dealer
quotation system
When the securities sold are of an issuer that is neither a
1934 Act reporting company nor a company exempt from
reporting pursuant to Rule 12g3- 2(b) related to foreign
lers, the holder of the securities and any prospective
purchaser have the right to obtain certain specied,
reasonably current information from the issuer
Rule 144A does not apply to sales by the issuer of the
securities (the company). However, because sales pursuant
to Rule 144A are deemed not to be a distribution of
securities, it allows issuers to make private placements of
securities to QIBs, who can then resell such securities under
Rule 144A. A large market for Rule 144A securities exists
among institutional investors; however, this market is less
liquid than equity markets.
The JOBS Act directs the SEC to revise Rule 144A to provide
that securities sold under the revised exemption may be
offered to persons other than QIBs, including by means of
general solicitation or general advertising, provided that
securities are resold only to persons that the seller and any
person acting on behalf of the seller reasonably believe
are QIBs. On August 29, 2012, the SEC proposed rule
amendments to implement these changes.
Regulation S of the 1933 Act
Regulation S claries that the registration requirements
of section 5 of the 1933 Act do not apply to offers and
sales outside the U.S. and to non-U.S. persons. Regulation
S provides two non-exclusive safe harbors: an issuer safe
harbor (which distinguishes among three categories of
securities) and a resale safe harbor. 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 U.S. Purchasers receive restricted securities.
The JOBS Act does not change the prohibition on directed
selling efforts in such transactions. As a result, once the
SECs rulemaking is complete, consideration will have to
be given to the type of general solicitation and advertising,
if any, in an offering that includes a Regulation S tranche.
However, the SEC proposing release on August 29, 2012,
makes clear that, consistent with historical practices,
concurrent offshore offerings that are conducted in
compliance with Regulation S would not be integrated with
domestic offerings that are conducted in compliance with
Rule 506 or Rule 144A, each as proposed to be amended.
Rule 701
Exemption for sales of securities through employee
benet plans
The SECs 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 $1,000,000, 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 $5 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
Strategies for Going Public v
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 exchanges
listing standards. Such standards may include requirements as to the companys 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 Capital Market 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 securities N/A $50 million N/A
Net income from continuing operations (in the latest scal year or in two of the last
three scal years)
N/A N/A $750,000
Publicly held shares 1 million 1 million 1 million
Bid price $4 $4 $4
Shareholders (round lot holders) 300 300 300
Market makers4 3 3 3
Corporate governance5 Yes Yes Yes
1
The term listed securities is dened as securities listed on NASDAQ or another National Securities Exchange.
2
Publicly held shares is dened as the total shares outstanding less any shares held directly or indirectly by ofcers, directors, or any other person who is the benecial 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 benecial 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.
vi
Requirements Standard 1 Standard 2 Standard 3 Standard 4
Pretax earnings
1
(income from
continuing operations before
income taxes)
Aggregate in prior three scal years $11
million and
Each of the two most recent scal years
$2.2 million and
Each of the prior three scal years > $0
N/A N/A N/A
Cash ows
2
N/A
Aggregate in prior three scal years
$27.5 million and
Each of the prior three scal years
$0
N/A N/A
Market makers
3
3 or 4 3 or 4 3 or 4 3 or 4
Revenue N/A Previous scal year $110 million
Previous scal year $90
million
N/A
Market capitalization
4
N/A
Average $550 million over prior
12 months
Average $850 million
over prior 12 months
$160 million
Bid price
5
$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 shares
6
1,250,000 1,250,000 1,250,000 1,250,000
Market value of publicly held
shares
$45 million $45 million $45 million $45 million
Corporate governance
7
Yes Yes Yes Yes
NASDAQ Global Select Market initial listing requirements
Companies must meet all of the criteria under at least one of the four standards below.
1
In calculating income from continuing operations, NASDAQ will rely on a companys annual nancial information as led with the Securities and Exchange Commission (SEC) in the companys
most recent periodic report and/or registration statement. If a company does not have three years of publicly reported nancial 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 scal years. A period of less than three months shall not be considered a scal year even if reported as a stub period in the companys publicly reported nancial statements.
2
In calculating cash ows, NASDAQ will rely on the net cash provided by operating activities reported in the statements of cash ows, as led with the SEC in the companys 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 scal
year even if reported as a stub period in the companys publicly reported nancial statements.
3
A company that also satises 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 market capitalization requirements of Rules 5315(f)(3)(B) and 5315(f)(3)(C) will be based on
the companys 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 dened as total shares outstanding, less any shares held directly or indirectly by ofcers, directors, or any person who is the benecial owner of more than
10 percent of the total shares outstanding of the company.
7
See Corporate governance in Chapter 4.
Strategies for Going Public vii
Requirements Standard 1 Standard 2 Standard 3 Standard 4
Stockholders equity $15 million $30 million N/A N/A
Market value of listed securities
1
N/A N/A $75 million N/A
Total assets and N/A N/A N/A $75 million and
Total revenue (in latest scal year or two of last three scal
years)
N/A N/A N/A $75 million
Income from continuing operations before income taxes (in
latest scal year or two of last three scal years)
$1 million N/A N/A N/A
Publicly held shares
2
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 shares
3
$8 million $18 million $20 million $20 million
Bid price $4 $4 $4
4
$4
Shareholders (round lot holders)
5
400 400 400 400
Market makers
6
3 3 4 4
Corporate governance
7
Yes Yes Yes Yes
NASDAQ Global Market initial listing requirements
Companies must meet all of the criteria under at least one of the four standards below.
1
The term listed securities is dened as securities listed on NASDAQ or another National Securities Exchange.
2
Publicly held shares is dened as the total shares outstanding, less any shares held directly or indirectly by any ofcers, directors, or any other person who is the benecial 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 benecial 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.
viii
REIT U.S. standards
Stockholders equity $60 million
Funds and BDCs U.S. standards
Net assets $60 million
Distribution and size criteria U.S. standards
Non-U.S. standards
Domestic Worldwide
Round lot holders or 400 400 (U.S.) 5000
Total shareholders ...together with N/A 2200 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 outstanding
1
1,100,000 1,100,000 2,500,000
Market value of public shares: IPOs, spin-offs, carve-outs, and afliated companies
1
$40 million $40 million $100 million
Market value of public shares: All other listings $100 million $100 million N/A
Stock price criteria
Stock price $4 $4 $4
Financial criteria
4
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 million
2
$2 million
3
$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 ow
Global market capitalization
1
$500 million $500 million $500 million
Revenues in the most recent 12 month period $100 million $100 million $100 million
Aggregate cash ow for the last three years $25 million
3
$25 million
3
$100 million
Minimum cash ow in each of two preceding years N/A N/A $25 million
Pure valuation with revenues
Global market capitalization
1
, and $750 million $750 million $750 million
Revenues for the most recent scal year $75 million $75 million $75 million
Asset and equity
Global market capitalization
1
$150 million N/A N/A
Total assets $75 million N/A N/A
Shareholders equity $50 million N/A N/A
1
In connection with IPOs, the NYSE will accept assurance from the companys 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 afliated company listed on the NYSE, the global market capitalization requirement is $500 million if the afliated company has at least 12 months of
operating history, the afliated listing company is in good standing, and the afliated listed company retains control of the entity.
NYSE Initial listing requirements
U.S. companies must meet the minimum distribution criteria and one of the four nancial criteria earnings, cash ow, pure valuation, or assets and equity
under the U.S. standards.
For non-U.S. 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 nancial criteria (earnings and either cash ow or pure valuation) within that particular standard.
Strategies for Going Public ix
Appendix D: A timetable for going public
A projected timetable for an IPO is offered below. In this example:
The companys scal year end is December 31.
Audited nancial statements are available for each year that the company has been in existence, and the auditors are in the process of completing the
current years audit.
The company is not an Emerging Growth Company as dened by the JOBS Act.
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 companys rst 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 reected 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 nancial statements December 27 13
Due diligence/rst drafting session January 6 23
Second drafting session January 14 31
Third drafting session January 2122 45
Final drafting session at printers February 45 5253
Target ling date with audited nancial statements where other parts of prospectus are prepared well in advance February 5 53
Expected receipt of rst round of SEC comments March 78 8384
Drafting session March 910 8586
Roadshow April 116 108119
Public offering effective April 16 124
Closing April 20 127
x
Detailed schedule
Date Activity Responsibility
Prior to December 1 Board meeting(s) to discuss IPO and ultimately to authorize preparation of registration statement and engagement
of legal counsel and the lead underwriter
ABC, CC
December 15 Initial organization meeting and due diligence:
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 fnancial 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
All
December 27 First draft of registration statement distributed ABC, CC
January 6 First drafting session and due diligence:
Complete business/due diligence presentations
Review draft of registration statement
Discuss obstacles
All
January 610 Revise registration statement; underwriters counsel to draft and distribute underwriting agreement All
January 11 Distribution of second draft of registration statement ABC, CC
January 1415 Second drafting session to review registration statement All
January 1531 Questionnaires and lock-ups completed by ofcers, directors, and 10 percent shareholders, and returned to
company and underwriters counsel for review
ABC, CC
January 18 Distribution of third draft of registration statement ABC, CC
January 18 Distribution of draft of managements discussion and analysis of nancial position and results of operations ABC, CC, A
January 2122 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 offering, including to
authorize ling of the registration statement, appointment of transfer agent and registrar, and listing on an
exchange and any other matters
Authorize any Blue Sky ling, 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
ABC, CC, U
February 3 Year ended December 31 audited nancial statements available and provided to printer ABC, A
February 45 All hands meetings:
Discuss any discrepancies between text of registration statement and fnancial statements
Review and fle registration statement
All
QUIET PERIOD BEGINS
February 5 File underwriting agreement with FINRA UC
File listing application with exchange; make any required Blue Sky ling ABC, CC
February 6 Begin roadshow presentation preparation and rehearsal ABC, U
March 78 SEC comments received; responses prepared All
March 910 Make changes in registration statement or otherwise address SEC comments; miscellaneous discussions with SEC
staff regarding comments
All hands meeting to review rst amendment to registration statements, discuss other issues, review underwriting
agreement, etc.
All
March 12 File rst amendment with responses to rst round of SEC comments
Continue roadshow preparation and rehearsal
ABC, CC, UC
ABC, U
March 22 SEC comments on amendment received; responses prepared All
March 23 Second amendment led with SEC ABC, CC

Strategies for Going Public xi
Detailed schedule (continued)
Date Activity Responsibility
March 2330 Receive and respond to second/third round of SEC comments
File amendment #3/4 to Form S-1
Finalize roadshow presentation
Set price range
Custody agreement and powers of attorney drafted if there are selling shareholders (selling shareholder counsel is also
involved in this activity)
All
ABC, CC, UC
ABC, U
ABC, U
ABC, U
March 30 Board approves such matters as deemed necessary in connection with the offering (including any pre-IPO transactions,
such as stock splits or reorganizations)
ABC, CC
March 31 Distribute red herring ABC, U
April 15 Roadshow presentations to underwriters
Complete selling holder documents
Complete company information form
ABC, U
ABC, T
ABC, T
April 816 Roadshow ABC, U
April 10-15 Finalize FINRA review and receive No Objection Letter from FINRA
Draft original issuance instructions
UC
ABC, T
April 15 File acceleration requests with SEC ABC, CC, U, UC
April 15 File Form 8-A with the SEC
File Form 3 for ofcers and directors
ABC, CC
April 16 Registration statement declared effective by SEC
Pricing agreed upon and approved by ABC Pricing committee; Underwriting agreement signed
Comfort letter delivered
Sales activities commence

ABC, U
A
U
QUIET PERIOD ENDS
POST EFFECTIVE PERIOD
April 17 Funds schedule and full wire instructions prepared
Closing documents for review at least two days prior to closing
Print and le nal prospectus
ABC, U, T
ABC, U, T
ABC, CC, UC
April 20 Final review of closing documents (evening before or morning of closing)
Closing
ABS, U, T
All
POST-CLOSING FILINGS
Due within 40 or 45 days
(depending on ler category)
of the end of each of the rst
three scal quarters*
File Form 10-Q ABC, A, CC
Due within 60, 75, or 90 days
(depending on ler category)
from end of scal year ending
after effectiveness of IPO*
File Form 10-K ABC, A, CC
Typically due within four
business days of the
triggering event but varies
based on nature of triggering
event
File Form 8-K (to provide information on certain specied current material events) ABC, CC
Timing dependant on Form
S-8 applicability
File Form S-8 if applicable (to register securities that will be offered via benet plans) ABC, CC
*IPO issuers are non-accelerated lers during the rst year following their IPO irrespective of their publicly oated equity. Accordingly, the rst report on Form 10-K will be due 90 days
after scal year end. Thereafter, the company must determine ling deadlines based on its SEC-designated ler status (larger accelerated ler, accelerated ler, or smaller reporting
company) determined by the worldwide public oat as of the last business day of its most recently completed scal quarter. Filing deadlines referenced above will vary depending on the
category of ler. See Chapter 9 for a table of ling deadlines.
xii
Appendix E: A sample due diligence checklist
I. Financial information
A. Annual and quarterly nancial information for the past three
years
1. Income statements, balance sheets, cash ows, and footnotes
2. Planned versus actual results
3. Management nancial reports
4. Breakdown of sales and gross prot by:
a. Product type
b. Channel
c. Geography
5. Current backlog by customer (if any)
6. Accounts receivable aging schedule
7. Inventory valuation, including turnover statistics and
obsolescence analyses
B. Financial projections
1. Quarterly nancial projections for the next three scal years
a. Revenue by product type, customers, and channel
b. Full income statements, balance sheets, and cash ow
statements
2. Major growth drivers and prospects
3. Predictability of business
4. Business plan, if available
5. Risks attendant to foreign operations (e.g., exchange rate
uctuation, government instability)
6. Industry and company pricing policies
7. Economic assumptions underlying projections (different scenarios
based on price and market uctuations)
8. Explanation of projected capital expenditures, depreciation, and
working capital requirements
9. External nancing arrangement assumption
10. Budgets
C. Capital structure
1. Current shares outstanding
2. Schedule of all options, warrants, rights, and any other
potentially dilutive securities with exercise prices and vesting
provisions
3. Summary of all debt instruments/bank lines with key terms and
conditions
4. Off-balance sheet liabilities
5. Schedule of number of shares held in treasury
D. Other nancial information
1. Taxes
a. Summary of current federal, state, and foreign tax positions,
including net operating loss carryforwards
b. Federal, state, local, and foreign tax returns for last ve scal
years
c. A description of all audits by any federal, state, local, or
foreign taxing authorities, including the date and a summary
of each audit
d. All tax elections led by the company or any subsidiary
e. All legal or accounting tax opinions received by the company
or any subsidiary during the last ve calendar years from
outside advisors that relate to any tax reporting matters
f. Legal entity and product or service structures in place
g. Transfer pricing and other intercompany agreements
2. General accounting policies (revenue recognition, etc.)
3. Schedule of nancing history for equity, warrants, and debt (date,
investors, dollar investment, percentage ownership, implied
valuation, and current basis for each round)
II. Products
A. Description of each product (including product literature)
1. Major customers and applications
2. Historical and projected growth rates
3. Market share
4. Speed and nature of technological change
5. Timing of new products, product enhancements
6. Cost structure and protability
B. Product warranties and liability issues
1. A description of all product warranties relating to any products
developed or sold by the company or any subsidiary
2. Explanation of any product recalls in last ve years
III. Customer information
A. List of signicant customers for the past two scal years and
current year to date by application (contact name, address,
phone number, product(s) owned, and timing of purchase(s))
B. List of strategic relationships (contact name, phone number,
revenue contribution, and marketing agreements)
C. Revenue by customer (name, contact name, phone number for
any customers accounting for ve percent or more of revenue)
D. Brief description of any signicant relationships severed within
the last two years
E. List of top 10 suppliers for the past two scal years and
current year to date with contact information
IV. Competition
A. Description of the competitive landscape within each market
segment, including:
1. Market position and related strengths and weaknesses as
perceived in the marketplace
2. Basis of competition (e.g., price, service, technology, and
distribution)
V. Marketing, sales, and distribution
A. Strategy and implementation
1. Discussion of domestic and international distribution channels,
including any value added resellers or original equipment
manufacturers
2. Positioning of the company and its products
Strategies for Going Public xiii
3. Marketing opportunities/marketing risks
4. Description of marketing programs and examples of recent
marketing/product/investor relations/media information on the
company
B. Major customers
1. Status and trends of relationships
2. Prospects for future growth and development
3. Pipeline analysis
C. Principal avenues for generating new business
D. Sales force productivity model
1. Compensation
2. Quota average
3. Sales cycle
4. Plan for new hires
E. Ability to implement marketing plan with current and
projected budgets
VI. Research and development (R&D)
A. Description of R&D organization
1. Strategy
2. Key personnel
3. Major activities
B. New product pipeline
1. Status and timing
2. Cost of development
3. Critical technology necessary for implementation
4. Risks
VII. Operations
A. List of properties
B. Summary of supply chain, risks and contingency plans
C. History of any business interruptions
VIII. Management and personnel
A. Organization chart
B. Historical and projected headcount by function and location
C. Summary biographies of senior management, including
employment history, age, service with the company, years in
current position
D. List of board members, biographies, and compensation
arrangements
E. Compensation arrangements
1. Copies of key employment agreements
2. Benet plans
F. Discussion of incentive stock plans
G. Signicant employee relations problems, past or present; labor
contracts
H. Personnel turnover
1. Data for the last two years
2. Key unlled vacancies
I. Completed directors and ofcers questionnaires
IX. Legal and other matters
A. Pending lawsuits against the company, detail on claimant,
claimed damages, brief history, status, anticipated outcome,
and name of the companys counsel
B. Pending lawsuits initiated by the company detail on
defendant, claimed damages, brief history, status, anticipated
outcome, and the name of companys counsel
C. Description of environmental and employee safety issues and
liabilities
1. Safety precautions
2. New regulations and their consequences
D. List of material patents, copyrights, licenses, and trademarks
issued and pending
E. Summary of insurance coverage/any material exposures
F. Summary of material contracts
G. History of SEC or other regulatory agency problem, if any, and
all correspondence with regulatory agencies
H. Organization and standing
1. Articles of incorporation, including amendments
2. Current bylaws
3. Board committee charters
4. Corporate minute books
5. A list of all jurisdictions in which the company or any subsidiary
owns or leases assets (including real property), has employees, or
is qualied to do business as a foreign corporation
6. A list of all current and former subsidiaries of the company
7. Internet domain names, website linking, afliate, cobranding,
content provider, and other e-commerce agreements
8. Non-competition, exclusivity, on-solicitation and indemnication,
and license agreements in favor of the company or by which the
company is bound
9. Patents, trademarks, copyrights, and other evidence of intangible
property
10. A schedule of signicant xed assets, owned or used by the
company, including the person holding title to such assets and
any material liens or restrictions on such assets
X. Other company information
A. List of all shareholders with shareholdings, options, warrants,
or notes
B. Schedule of ofcers, directors, and committees of the board
C. Press releases relating to the company, its management, or its
products and services
D. Shareholder agreements, proxies, and voting trusts
E. Schedule of ownership by ofcers, employees, and directors
F. Any analyst reports covering the company or industry
generally
xiv
Glossary
Acceleration. Procedure in which the SEC declares a registration statement
effective, waiving the statutory 20-day waiting period.
Accelerated ler. An issuer after it rst meets the following conditions at
the end of its scal year: (1) public oat of $75 million or more but less than
$700 million at the end of its most recently completed second scal quarter;
(2) subject to the ling requirements of the 1934 Act for at least 12 months;
(3) at least one annual report led under the 1934 Act; and (4) not eligible to
be a smaller reporting company.
Accredited investor. The SEC designation for an individual or entity meeting
certain strict criteria specied in Regulation D. Certain restricted offerings are
open only to accredited investors.
Aftermarket. Trading activity in a security immediately following its IPO.
Agreement among underwriters. An agreement signed by the members
of the underwriting syndicate empowering the lead underwriter to sign
an underwriting agreement with the company selling the stock (issuer).
This is now generally accomplished electronically through a standardized
document.
All hands meeting. A meeting of all the parties involved in preparing the
registration statement (normally company management, company counsel,
underwriters, underwriters counsel, and auditors).
American depository receipts (ADRs). Securities issued by a U.S. bank in
place of the foreign shares held in trust by that bank, thereby facilitating the
trading of foreign shares in U.S. markets.
Analyst. An individual who studies the development of individual companies
or industries for the purpose of advising investors; also called nancial
analyst or securities analyst.
Best-efforts. An underwriting agreement in which the underwriters agree
to use their best efforts to sell the issue (without any up-front nancial
commitment), acting only as agents of the issuer.
Bid and asked. The quoted prices for trading in the OTC market. The bid is
the highest price someone is willing to pay; the asked is the lowest price at
which someone will sell.
Blue Sky Laws. A popular name for the various states securities laws and
regulations that have been enacted to regulate the offering and sales of
securities in that particular state, as well as the registration and reporting
requirements for broker-dealers and investment advisers in the states. The
National Securities Markets Improvement Act (NSMIA) created categories of
securities, referred to as covered securities, the offer and sale of which are
preempted from the state securities registration requirements of the Blue Sky
Laws for many IPOs.
Bring-down comfort letter. The update to the comfort letter issued by the
companys auditors as a condition of closing an offering. The bring-down
letter reafrms the detailed comfort letter issued when the registration
statement becomes effective.
Broker. An individual or rm that acts as an intermediary between a buyer
and a seller, usually charging a commission.
Broker-dealer. An individual or rm in the business of buying and selling
securities for itself and others. When acting as a broker, a broker-dealer
executes orders on behalf of its clients. When acting as a dealer, a broker-
dealer executes trades for its rms own account, for which such securities
may be sold to clients or other rms or become a part of the rms holdings.
Capitalization. The total amount of the various securities issued by a
company. For registration-statement purposes, capitalization includes all
short- and long-term debt and shareholders equity.
Closing. A meeting at the conclusion of an offering, held for the purpose of
completing the issuance and sale of the stock. It includes delivery of funds
for the net proceeds of the offering, as well as a number of documents,
including certications, legal opinions, and a bring-down comfort letter.
Comfort letter. A letter provided by the auditors to the underwriters,
indicating the results of agreed-upon procedures performed on nancial
data included in the registration statement (other than the audited nancial
statements), as requested by the underwriters.
Condential treatment. The method whereby a company can request that
certain sensitive or condential information contained in exhibits to lings
made with the SEC be redacted from the documents and not made available
to the public.
Dealers. Individuals or rms in the securities business who buy securities for
their own account and sell to customers from inventory.
Depository Trust Company (DTC). A securities depository that provides
clearing and settlement services to securities brokers and dealers, banks,
trust companies, clearing companies, and other DTC participants to hold
their securities and to facilitate transfers of such securities through electronic
book-entry changes. (Book-entry means the companys transfer agent
maintains your shares on your behalf without the need for physical share
certicates. Shares held in uncerticated book-entry form have the same
rights and privileges as shares held in certicate form.)
Dilution. The reduction of ones relative equity interest; the sale of
additional shares dilutes the percentage of ones ownership. Also, a
disclosure in the registration statement comparing the offering price to the
tangible book value per share of the companys stock before and after the
offering.
Directors and ofcers questionnaires. Questionnaires circulated by
the companys counsel and underwriters counsel before registration. The
questionnaires verify information about the directors and ofcers that is to
be disclosed in the registration statement.
Strategies for Going Public xv
Direct Registration System (DRS). A service offered by the depository trust
company, which enables the registered shareholders to maintain and transfer
their shares on the books and records of the transfer agent in book-entry
form instead of a physical stock certicate.
Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed
into law on July 21, 2010, the Dodd-Frank Act was a response to the
2007-2010 nancial crisis. The act was passed to promote the nancial
stability of the United States and prevent another signicant nancial crisis
by creating new nancial regulatory agencies and processes that enforce
transparency and accountability while implementing rules for consumer
protection.
Domestic issuer. An issuer other than a FPI.
Due diligence. An investigation conducted by the parties involved in
preparing a registration statement to form a reasonable basis for believing
that the statements contained therein are true and that no material facts are
omitted.
Effective date. The date on which the registration statement is declared
effective by the SEC and the sale of securities pursuant to the registration
statement can commence.
Electronic Data Gathering, Analysis, and Retrieval (EDGAR). An
electronic system developed by the SEC that allows companies to le
electronically SEC documents. The site can be visited via the SECs website at
www.sec.gov.
Emerging growth company (EGC). An issuer with total annual gross
revenues of less than $1 billion during its most recently completed scal year.
Financial printer. A printer that specializes in the printing of nancial
documents, including prospectuses and registration statements.
The Financial Industry Regulatory Authority (FINRA). The largest
self-regulatory organization for the securities industry in the U.S., FINRA
provides oversight of brokerage rms. It also performs market regulation
under contract for, among others, NASDAQ. FINRAs Corporate Finance
Department reviews underwriters compensation to determine whether
underwriting agreements are fair and reasonable.
Firm commitment. An underwriting agreement in which the underwriters
agree to buy the entire issue and then resell it.
Foreign Corrupt Practices Act (FCPA). Federal law, which includes
provisions within the 1934 Act, that requires companies to maintain
adequate records and systems of internal control with regard to certain
foreign payments. It also prohibits bribery of foreign governmental ofcials in
order to obtain or retain business.
Foreign private issuer (FPI). A company that is incorporated or organized
under the laws of a foreign country, except an issuer meeting the following
conditions: (1) more than 50 percent of the issuers outstanding voting
securities are directly or indirectly held by residents of the U.S., and (2) any of
the following: (a) the majority of the executive ofcers and directors are U.S.
citizens or residents; (b) more than 50 percent of the assets of the issuer are
located in the U.S.; or (c) the business of the issuer is administered principally
in the U.S.
Form 8-K. Current report required to be led with the SEC by most domestic
companies when specic material events or corporate changes occur.
Form F-1. Basic registration form used to register securities by FPIs.
Form S-1. The most commonly used SEC form for registering securities in an
IPO.
Form 6-K. Current report required to be furnished by foreign private issuers
with the SEC for reporting material information that is either (1) distributed
to shareholders or led with a foreign stock exchange, if made public by that
exchange; or (2) required to be made public by its domestic laws.
Form 8-A. The registration form to register a class of securities under the
1934 Act to allow trading to occur.
Form 10-K. Annual report required to be led with the SEC by domestic
companies in compliance with the 1934 Act.
Form 10-Q. Quarterly report, containing primarily unaudited quarterly
nancial information, which must be led by domestic companies with the
SEC in compliance with the 1934 Act.
Form 20-F. Unlike other SEC forms, this form is both a registration
statement an annual report form used by foreign private issuers under the
1934 Act.
Free writing prospectus. Written communications that constitute offers to
sell or a solicitation of an offer to buy the issuers securities after the ling of
a registration statement other than the statutory prospectus or certain post-
effective communications.
Gun jumping. Communications in advance of the ling of a registration
statement designed to prepare or condition the market for the offering in
violation of the 1933 Act.
International Financial Reporting Standards (IFRS). A set of accounting
standards developed by the International Accounting Standards Board (IASB)
used in many countries. The SEC currently allows FPIs to le reports using
IFRS as an alternative to U.S. GAAP.
xvi
Independent director. A member of the companys board who is not
an employee of the company or any subsidiary and who does not have
a relationship which, in compliance with the requirements of the listing
exchange independence rules and in the opinion of the companys board,
would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director.
Insider. Ofcer, director, or a 10 percent shareholder of a public company.
Institutional investor. A bank, mutual fund, pension fund, or other
corporate entity that trades securities in large volumes.
Investment banker. The intermediary between the company issuing new
securities and the investing public. Also known as an underwriter.
IPO. Initial public offering. An issuers rst public distribution of a security.
Jumpstart Our Business Startups Act (JOBS Act). Signed into law on April
5, 2012, the law consists of a package of bills intended to make it easier for
smaller companies to raise capital in the U.S. nancial markets.
Large accelerated ler. An issuer after it rst meets the following
conditions as of the end of its scal year: (1) public oat of $700 million or
more as of the last business day of its most recently completed second scal
quarter; (2) subject to the ling requirements of the 1934 Act for at least 12
months; (3) at least one annual report led under the 1934 Act; and (4) not
eligible to be a smaller reporting company.
Lock-up agreement. An agreement with underwriters whereby certain
shareholders agree not to sell their shares in the company for a period of
time after the effective date of a registration statement (usually lasting
180 days).
Making a market. Efforts by a dealer to maintain trading activity in a
particular stock by offering rm bid and asked prices in that stock.
Managements discussion and analysis (MD&A). A report from
management to shareholders that accompanies the companys nancial
statements in the annual report. It explains the periods nancial results and
enables management to discuss topics that may not be apparent in the
nancial statements.
Market maker. A dealer who maintains rm bid and offering prices by
standing ready to buy or sell at publicly quoted prices in a particular security.
Material information. Refers to information that a reasonably prudent
investor would nd of importance in making an investment decision.
Medallion signature guarantee. A stamp provided by an eligible guarantor
institution (nancial institutions, such as a bank, broker, credit union, or
savings association) to guarantee the genuineness of the shareholders
signature in connection with the transfer of securities.
NASDAQ. NASDAQ is the worlds largest computer-based stock market that
includes the NASDAQ Global Select Market, NASDAQ Global Market, and the
NASDAQ Capital Market.
Nonaccelerated ler. An issuer that does not meet the denition of an
accelerated ler or a large accelerated ler.
NYSE. Founded in 1792, New York Stock Exchange is the largest organized
securities market in the U.S.
Over-allotment. An option in a rm commitment underwriting agreement
allowing the underwriters to purchase additional shares than what is
required under the underwriting agreement. Also known as a greenshoe.
Over-the-counter (OTC) market. A securities market made up of dealers
who buy and sell securities not listed on an exchange. The dealers in the
OTC market are linked by telephones and computer screens.
Partial secondary offering. An offering in which securities are offered for
sale by both the company and existing shareholders.
Price-earnings ratio. A measurement of stock value calculated by dividing
the price per share of common stock by earnings per share.
Private placement. An offering of securities exempt from registration,
which is limited in distribution.
Private Securities Litigation Reform Act of 1995 (PSLRA). Legislation
passed by Congress in 1995 to stem the ling of frivolous or unwarranted
securities lawsuits. The PSLRA increased the amount of evidence plaintiffs
were required to have before ling a securities fraud case with the federal
courts. It also changed the way securities class action lawsuits were handled
by giving judges the authority to determine plaintiffs and to take other
actions to reduce legal system abuses.
Prospectus. The ofcial document included in the registration statement
led with the SEC, used as the selling document in an offering that discloses
pertinent information regarding the issuer and the securities being sold. It
must be given (or deemed given) to original purchasers of the security no
later than the conrmation of their purchase.
Proxy solicitation. The request to be authorized to vote on someone elses
behalf. A proxy statement must be furnished to shareholders before soliciting
their proxies.
Proxy statement. A document that the SEC requires a company to send to
its shareholders, which provides material facts concerning matters on which
the shareholders will vote.
Public Company Accounting Oversight Board (PCAOB). A private-sector,
nonprot corporation, created by SOX, to oversee the auditors of public
companies in order to protect the interests of investors and further the
public interest in the preparation of informative, fair, and independent audit
reports.
Strategies for Going Public xvii
Public oat. The aggregate worldwide market value of the issuers
outstanding voting and nonvoting common equity held by nonafliates.
Qualied institutional buyer (QIB). A purchaser of securities that is
deemed nancially sophisticated and is legally recognized by security market
regulators to need less protection from issuers than most public investors.
QIB primarily refers to an institution that manages at least $100 million in
securities from issuers not afliated with the institution. Also included are
registered broker-dealers owning and investing, on a discretionary basis, $10
million in securities of non-afliates.
Quiet period. Generally, the period between the time the registration
statement is led and the effective date, so called because of the restrictions
on publicity. There are also restrictions on publicity both before and after
the quiet period, also known as the waiting period. The JOBS Act created
an important exception to this general rule of the quiet period for EGCs. An
EGC or its authorized representative is allowed to communicate with QIBs or
institutions that are accredited investors to assess interest in a contemplated
offering.
Red herring. The preliminary prospectus, circulated during the waiting
period, which bears a legend in red ink stating that the registration
statement has not yet become effective.
Registrar. An agency that issues certicates to new shareholders and veries
the transfers of stock to make sure that the number of new shares issued is
the same as the number of shares canceled.
Registration. The administrative procedure for ling information required
under the 1933 Act.
Registration statement. A document led with the SEC to register securities
under the 1933 Act. The registration statement (e.g., Form S-1) comprises
the prospectus and other information not required in the prospectus.
Regulation D. Provisions of the 1933 Act that contain rules governing
certain private-placement offerings.
Regulation fair disclosure (FD). The rule governing selective disclosure
by issuers of material nonpublic information, requiring that when an issuer
or person acting on its behalf discloses material nonpublic information to
certain enumerated persons, it must disclose that information simultaneously
for intentional disclosures or promptly for nonintentional disclosures by a
method or methods reasonably designed to effect broad, nonexclusionary
distribution of the information to the public.
Regulation S-K. The primary integrated disclosure rules for preparing the
portions (other than the nancial statements) of forms led under the 1933
and 1934 Acts.
Regulation S-X. The primary rules governing the preparation of the nancial
statements in forms led under the 1933 and 1934 Acts.
Restricted stock. Securities, usually issued in a private placement, that have
limited transferability. Also called legend stock or lettered stock.
Roadshow. A series of presentations by company executives during
the waiting period, for the purpose of introducing the company and its
management to potential investors, analysts, and underwriters.
Rule 144. An exemption provided in the 1933 Act that allows, under certain
conditions, the resale of restricted stock and other stock by controlling
persons in the public market without registration of that stock.
Rule 144A. An exemption provision of the 1933 Act that provides a safe
harbor, under certain conditions, for resales of securities to certain qualied
institutional buyers, as dened in Rule 144A.
Sarbanes-Oxley Act of 2002 (SOX). Congress-enacted reforms aimed at
restoring investor condence, which hold public companies to a higher
standard of corporate governance than in the past.
SEC. The Securities and Exchange Commission is a federal agency created by
the 1934 Act to administer federal securities laws.
Secondary offering. An offering in which securities of previously
unregistered stock are offered for sale by existing shareholders.
Securities Act of 1933, as amended (1933 Act). Sets forth the disclosure
and antifraud requirements for securities offered and sold in interstate
commerce and through the mails.
Securities Exchange Act of 1934, as amended (1934 Act). Regulates and
controls the securities markets and related practices and matters. Includes
ongoing disclosure requirements and antifraud provisions.
Smaller reporting company. A company that meets all the following
criteria: (1) is not an investment company, an asset-backed issuer, or the
majority-owned subsidiary of a parent that is not a smaller reporting
company; (2) had a public oat of less than $75 million as of the last
business day of its most recently completed second scal quarter or in the
case of an IPO, as of the date within 30 days of the date of the ling of the
registration statement, and in the case of an issuer whose public oat was
zero; and (3) had annual revenues of less than $50 million during its most
recently completed scal year for which audited nancial statements are
available on the date of ling.
Stabilization. Attempts by the underwriters to stabilize prices during the
distribution of a new issue, specically through the purchase of securities
for their own account when the market price is at a dip below the public
offering price.
xviii
Syndicate. A group of investment bankers that, together, underwrite and
distribute an offering of securities.
Tender offer. A formal offer to purchase shares of stock from existing
shareholders, usually in connection with an attempt to gain control of the
company.
Tombstone ad. An advertisement with limited information announcing an
offering of securities and indicating where a copy of the prospectus can be
obtained.
Transfer agent. An agency that keeps the ofcial records of the names and
addresses of a companys shareholders and handles the transfer of shares
from one person to another.
Underwriter. See investment banker.
Underwriters discount. A percentage of the gross proceeds of an IPO that
constitutes the compensation paid to the underwriters for marketing and
selling the offering.
Underwriting agreement. An agreement between a company and its
underwriters setting forth the terms of the offering, including method of
underwriting, the offering price, and commissions.
Waiting period. The period between the date the registration statement is
initially led with the SEC and the date it is declared effective.
Warrants. Certicates giving the holder the right to purchase securities at a
stipulated price within a specied time limit or perpetually.
XBRL. eXtensible Business Reporting Language, a language for the
electronic communication of business and nancial data. SEC lers are
required to add a tag to every numeric amount in the nancial statements
and to every numeric amount in the notes to the nancial statements (but
excluding MD&A or other disclosures).
Strategies for Going Public xix
About Skadden, Arps, Slate, Meagher &
Flom LLP & Affliates
Serving clients in every major international nancial center, Skadden is one of the leading law rms in the world, with 23 ofces and approximately 1,800
attorneys.
The Corporate Finance Group at Skadden advises on initial public offerings, regularly representing both issuers and underwriters in the IPO process. Skadden
has counseled on some of the largest and most notable IPOs worldwide and also regularly represents companies and underwriters in connection with small
and midsize IPOs. Skadden has represented clients in international IPOs, as well as overseas companies in their U.S. IPOs.
Skadden consistently has been recognized as a leading rm globally in capital markets by Chambers Global and Chambers USA, with many of our attorneys
identied as leaders in their elds. For 12 consecutive years, Skadden has been named the top corporate law rm in the United States in Corporate Board
Member magazines annual survey of Americas Best Corporate Law Firms, which asked directors of publicly traded companies to identify the rms
considered the best. Skadden also ranked rst in a separate survey conducted by the magazine that asked general counsel which law rms they would most
want to represent their companies on national matters.
Our attorneys frequently publish articles, memoranda and newsletters on relevant legal issues, including corporate nance-related topics. To view recent
Skadden-authored publications visit www.skadden.com/insights.
Attorney contacts:
New York ofce
Richard B. Aftanas
+1 212 735 4112
richard.aftanas@skadden.com
Gregory A. Fernicola
+1 212 735 2918
gregory.fernicola@skadden.com
David J. Goldschmidt
+1 212 735 3574
david.goldschmidt@skadden.com
Stacy J. Kanter
+1 212 735 3497
stacy.kanter@skadden.com
Phyllis G. Korff
+1 212 735 2694
phyllis.korff@skadden.com
Andrea L. Nicolas
+1 212 735 3416
andrea.nicolas@skadden.com
Yossi Vebman
+1 212 735 3719
yossi.vebman@skadden.com
Dwight S. Yoo
+1 212 735 2573
dwight.yoo@skadden.com
Michael J. Zeidel
+1 212 735 3259
michael.zeidel@skadden.com
Frankfurt ofce
Katja Kaulamo
+49 69 74220 130
katja.kaulamo@skadden.com
Stephan Hutter
+49 69 74220 170
stephan.hutter@skadden.com
Hong Kong ofce
Z. Julie Gao
+852 3740 4850
julie.gao@skadden.com
Jonathan B. Stone
+852 3740 4703
jonathan.stone@skadden.com
Alec P. Tracy
+852 3740 4710
alec.tracy@skadden.com
London ofce
Richard A. Ely
+44 20 7519 7171
richard.ely@skadden.com
James P. Healy
+44 20 7519 7042
james.healy@skadden.com
Pranav L. Trivedi
+44 20 7519 7026
pranav.trivedi@skadden.com
Los Angeles ofce
Jonathan B. Ko
+1 213 687 5527
jonathan.ko@skadden.com
Gregg A. Noel
+1 213 687 5234
gregg.noel@skadden.com
Palo Alto ofce
Thomas J. Ivey
+1 650 470 4522
thomas.ivey@skadden.com
Sydney ofce
Adrian J.S. Deitz
+61 2 9253 6015
adrian.deitz@skadden.com
Washington D.C. ofce
Brian V. Breheny
+1 202 371 7180
brian.breheny@skadden.com
xx
About American Stock Transfer &
Trust Company, LLC
American Stock Transfer & Trust Company, LLC (AST) provides comprehensive stock transfer and employee plan services to over 2,800 public companies and
maintains approximately 6,000 issues. Our clients are located throughout the United States and in over 22 foreign countries, ranging in size from initial public
offerings to Fortune 100 companies.
Founded in 1971 and headquartered in New York, AST provides clients with customized solutions to t their specic needs along with access to the best
systems, services, processes and products available today around the globe.
AST is privately owned by Pacic Equity Partners (PEP), a large private equity rm based in Australia. PEPs resources allowed AST to expand its powerful
technology platform and operating systems, while incorporating the best-in-class performance metrics of Link Market Services, a leading international
shareholder services company also owned by PEP.
AST has an international presence in Australia, Canada, India, New Zealand, South Africa, Hong Kong and the United Kingdom. Global resources allow AST to
provide its clients who have increasingly expanded their operations beyond the domestic market with a fully integrated global equities servicing solution.
In addition to our ability to serve as transfer agent, our direct relationship with AST Equity Plan Solutions allows us to provide equity compensation
recordkeeping as well. The Equity Plan Solutions team simplies the equity plan administration process for human resource and nancial professionals, plan
administrators and, most importantly, plan participants.
AST provides complete asset recovery services, through LINK Shareholder Services (LINK). LINK offers a complete solution for lost, deceased and un-
exchanged shareholders, assisting AST clients with the important process of reuniting shareholders with their assets prior to the escheatment process.
Through ASTs division AST Phoenix Advisors, we offer clients year-round corporate governance consulting and advisory services. AST Phoenix Advisors is a
specialized consulting and advisory rm, providing a full range of proxy solicitation, governance, information agent and investor relations consulting services.
We offer comprehensive services for both annual and special meeting issues, including merger and acquisition transactions, contentious equity compensation
plan proposals, Environmental, Social and Governance (ESG) issues and Say on Pay.
AST Fund Solutions is a leading provider of transfer agent and shareholder servicing to closed-end funds, as well as proxy solicitation and shareholder
communication services for the open-end and closed-end fund industry in North America. AST Fund Solutions offers a suite of mutual fund services for open
and closed-end funds, including mutual fund proxy management, governance consulting, proxy voting analytics, regulatory mailing services, closed-end fund
transfer agent solutions and CEFinsight.com.
AST offers clients a self-directed retail investor portal through AST Investor Services. Issuers and shareholders are able to consolidate multiple security
positions into one account, invest in equities, mutual funds and xed income securities, while accessing investment tools to easily manage investments.
Contact the specialists:
Thomas G. Kies
Executive Vice President
American Stock Transfer & Trust Company, LLC
+1 718 921 8527
tkies@amstock.com
John D. Baker
Senior Vice President
American Stock Transfer & Trust Company, LLC
+1 651 328 4405
jbaker@amstock.com
To learn more on how AST can assist your company, visit www.amstock.com,
call +1 888 267 8625 or email newbusiness@amstock.com.
Strategies for Going Public xxi
About Deloitte
Deloitte offers a dedicated group of professionals with extensive IPO experience across all industries. As a truly multidisciplinary organization, we offer fully
integrated, customized solutions and provide accounting, nancial reporting, tax, systems, and technology short-term deliverables and long-term solutions.
We can call on our deep and diverse experience to tailor an approach to help you address your specic needs in preparing for your IPO no matter what
your companys level of readiness.
Our access to the resources of the member rms of Deloitte Touche Tohmatsu Limited enables us to deliver quality services on a global scale, including
accounting, nancial reporting, tax, and technology, through a network of professionals located in business centers around the world. Deloittes Financial
Accounting, Valuation & Securitization practice offers vast experience and a strong track record with U.S. GAAP, IFRS, and regulatory lings (SEC and other
regulatory agencies). This enables us to assist with a broad set of issues wherever you operate in the world as well as help you explore options to list on both
domestic and foreign exchanges.
The Deloitte Center for Corporate Governance (the Center) supports executives, boards of directors, and others active in governance by providing them with
resources pertaining to current boardroom issues and governance trends. The Centers activities demonstrate its focus to encourage dialogue, knowledge
sharing, and collaboration among corporations, board members, the accounting profession, academia, and government.
Deloittes Accounting Standards & Communications practice helps organizations stay informed on the latest developments within the accounting profession,
offering a variety of information resources on accounting standards, nancial reporting, regulatory updates, and technical trends. Resources include timely
newsletters; special reports; an ongoing webcast series called Dbriefs for Financial Executives; and the highly acclaimed Technical Library, the Deloitte
accounting research tool. Our experienced professionals are distinguished in the accounting profession many have held positions with organizations such
as the SEC and the Financial Accounting Standards Board.
Contact the specialists:
Tom Omberg
Partner
Deloitte & Touche LLP
+1 212 436 4126
tomberg@deloitte.com
Tom McGee
Partner
Deloitte & Touche LLP
+1 973 602 6410
tmcgee@deloitte.com
Sandy Pfeffer
Director
Deloitte & Touche LLP
+1 215 405 7846
spfeffer@deloitte.com
Steve Alogna
Director
Deloitte LLP
+1 203 708 4844
salogna@deloitte.com
Links to relevant sites
In addition to this publication, Deloitte has a range of publications to assist with IPO-related
matters, legislative changes to the IPO process, and accounting standards related to IPO
lings. These publications can be found at the websites listed below.
For more information on Financial Accounting, Valuation & Securitization, click here.
For more information on the Center for Corporate Governance, click here.
For more information on Accounting Standards & Communications, click here.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, nancial, investment, legal, tax, or other professional
advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before
making any decision or taking any action that may affect your business, you should consult a qualied professional advisor.
This publication is for educational and informational purposes only and is not intended and should not be construed as accounting, business, nancial, investment, legal, tax, or other
professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your business, you should consult a qualied professional advisor. This publication is considered attorney advertising
under applicable state laws.
Deloitte, its afliates, and related entities, American Stock Transfer & Trust Company, LLC, and Skadden, Arps, Slate, Meagher & Flom LLP & Afliates shall not be responsible for any actions
taken or loss sustained by any person who relies on this publication.

Copyright 2012 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited