Initial Public Offerings: An Issuer's Guide
Initial Public Offerings: An Issuer's Guide
Initial Public Offerings: An Issuer's Guide
mayer brown ii
If you have any questions regarding initial public offerings, please contact any of our US Capital Markets partners listed below
or your regular contact at Mayer Brown.
MICHAEL L. HERMSEN
JOHN P. BERKERY +1 312 701 7960
+1 212 506 2552 [email protected]
[email protected]
DAVID A. SCHUETTE
JEFFREY M. DOBBS +1 312 701 7363
+1 713 238 2697
[email protected]
[email protected]
The authors gratefully acknowledge the assistance of Catherine Henderson in the preparation of this guide.
European issuers should consult our guide Initial Public • An enhanced ability to attract and retain key talent for
Offerings—an Issuer’s Guide (European Edition) and Asian the company through equity incentive arrangements
issuers should consult our guide Initial Public Offerings—an for executives and other employees, including restricted
Issuer’s Guide (Asia Edition) for additional information that shares, stock options or similar arrangements.
foreign private issuers organized under the laws of those • A generally enhanced company profile and increased
jurisdictions should consider when contemplating an initial confidence in the company by investors, creditors, cus-
public offering in the United States. tomers, suppliers and other stakeholders in the company,
deriving from public company status and the resulting
What Are the Potential Benefits of Conducting enhanced transparency and disclosure.
an IPO?
What Are the Potential Costs and Other
There are a number of different reasons why a company may
Potential Downsides of Conducting an IPO?
consider an IPO, including:
While being a public company can offer many advantages, the
• The need to raise additional capital to fund growth, either owners of a private company should not make the decision to
organically or through acquisitions. conduct an IPO lightly and will need to carefully consider the
• The need to provide existing stockholders with a “liquid- various costs and other potential downsides that can come
ity event” and an option to “exit” all or part of their with being a public company, including:
investment.
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• The costs resulting from an IPO: conducting the IPO itself The company’s “equity story” needs to be considered—
as well as the ongoing costs of being a public company. investors must be provided with facts, figures and details as
These include costs of maintaining a public company to why they should consider purchasing shares in the
board and management team, costs of ongoing reporting company. The financial advisers, together with the company
obligations, listing fees, costs of the company’s auditors, and its owners, will need to develop the equity story by
costs of legal advisers and other general compliance focusing on the position of the company as a growth or
costs. income play, its position within its market and sector and its
• The loss of control by the existing owners: accom- strengths, strategy, track record and business plan, together
modating the potentially divergent interests of other with macro data. All of this must be clearly and convincingly
stockholders, adhering to a new set of rules and regula- outlined in a management presentation or other document at
tions, meeting requirements for increased transparency, the outset of the process for the benefit of the financial and
including disclosure of beneficial ownership of stock- legal advisers involved in the proposed IPO. Management will
holders, management compensation and related party need to ensure that any key assumptions and projections are
transactions, and the potential for a hostile takeover of supported with independent information (to the extent
the company. possible) in order to allow the company’s underwriters and
other financial advisers to assess the feasibility of an IPO.
• Exposure to potential liability under the US securities laws
in connection with the IPO and ongoing SEC reporting
requirements.
• Exposure to potential scrutiny and activism by public
stockholders and other interested parties.
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multiple classes of common and preferred stock. While in a • Place restrictions on actions of the stockholders and the
pre-IPO world the existence of many different share classes may company.
be acceptable, the circumstances for a listed company are very • Define how company decisions are made.
different. It may therefore be necessary to significantly simplify
• Determine who gets to nominate or appoint directors.
the share capital structure of the IPO candidate and, ideally,
• Define the circumstances in which stockholders can sell
convert or collapse the different classes of shares into a single
shares in the company or under which the company can
class of common stock on or before the IPO date. Venture
issue new shares.
capital documents will typically provide for the conversion of
multiple classes or series of common and preferred stock into a Again, while certain types of stockholders’ agreements and
single class of common stock upon the completion of a arrangements may be typical and workable for a private
“qualifying” IPO. It is important to understand the parameters company, it may be necessary to terminate or substantially
of a “qualifying” IPO to ensure that the contemplated IPO will revise them on or prior to the IPO date. On the other hand, if
meet these parameters. there will continue to be a “controlling stockholder” after the
IPO, market expectations may require that this relationship
The rights of the holders of the different share classes and the
be formalized and appropriate protections for non-control-
interaction of those rights across the different classes can be
ling/minority stockholders be put in place.
highly complex. If these are not structured and documented
properly at the time of each funding round, certain classes of Key stockholders of an IPO candidate and their affiliates may
stock or even individual stockholders may effectively be able also be significant customers or suppliers of the company or
to block necessary or desirable changes to the company’s may have other significant relationships with the company.
capital structure, creating potentially significant holdout For example, the founder or controlling stockholder of the
value for the relevant investors even when the relevant early IPO candidate, rather than the company itself, may be the
round investors may otherwise have been significantly legal owner of key operating assets or intellectual property
diluted as a result of subsequent funding rounds and only rights that the company relies on to operate its business.
hold a small economic stake in the company. Matters can be Formalizing and properly documenting these “related party
further complicated by the existence of options, warrants or transactions” and commercial arrangements among the
convertible bonds. company and its pre-IPO owners on “arm’s-length” terms
and properly describing them in the IPO prospectus can be
A stock split or reverse stock split may be necessary to
crucial for the success of the IPO. This may involve entering
achieve a target price per share in the IPO or a threshold
into formal, long-term, purchase, supply or licensing agree-
number of shares available for trading post-IPO. Care should
ments or transferring key assets to the company.
be taken to ensure that the company has an authorized
capitalization large enough to support conversion of senior The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)
securities, future financings and acquisitions and compensa- prohibits a company from extending or maintaining credit, or
tion under employee equity plans. Changes in capital structure arranging for the extension of credit, in the form of a personal
may create complicated accounting, tax or securities law issues loan to any of its executive officers, with limited exceptions. It
that require many months of preparation. In addition, may not be obvious whether an extension of credit by a
structural changes must be adequately explained to potential company to an executive officer is a personal loan, rather than
investors and may impact the presentation of financial a short-term loan related to a business purpose, such as a
statements. cash advance for business-related travel to pay anticipated
expenses. Any personal loans to executive officers will have to
REVISITING RELATIONSHIPS WITH KEY be repaid prior to the filing of a registration statement with
STOCKHOLDERS AND OTHER RELATED PARTIES the SEC. As a result, any loans should be reviewed sufficiently
The company and its key stockholders are often parties to a far in advance of the filing of the registration statement to
stockholders’ agreement that governs their relationship. permit the executive officer to obtain a loan from another
Stockholders’ agreements usually include provisions that: source, if necessary.
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Other corporate governance questions that frequently arise The SEC will review an IPO company’s financial statements to
in connection with an IPO include: ensure compliance with its requirements. One of the areas
that receives a great deal of scrutiny is the company’s revenue
• Whether the roles of chairman of the board and chief
recognition practices. The SEC will often raise questions to
executive officer should be performed by a single
ensure that the company is not recognizing revenues until all
individual or split between two individuals.
of the applicable GAAP revenue recognition criteria have
• Whether the chief financial officer should be a director. been satisfied. Some SEC questions can be avoided by
• Whether the company should adopt any anti-takeover benchmarking the IPO company’s accounting policies and
defenses such as advance notice bylaws, supermajority disclosures against those of other companies in the same
voting requirements or blank check preferred stock. industry as the IPO company.
How Should Investor Relations Be Handled? The need for effective communication with the company’s
Among the benefits of being a private company is that there investors and other stakeholders does not end on the date of
is rarely any need to regularly engage with public investors, the IPO, and many would argue it only begins. The company will
analysts or the media, and there are no public reporting need to continue to work effectively with its investors in order
obligations. Private companies, even those of significant to fully realize many of the benefits of being a public company.
size, typically do not have full-time personnel dedicated to Strong communications can engage investors and keep them
interacting with public investors, securities analysts or the updated about the company’s strategy and progress in
media. To the extent financial information is shared with executing its plans, as well as ensuring that they are not sur-
third parties at all, it is generally limited to the company’s prised by any unexpected developments. It will also accrue to
finance/accounting department providing limited financial the benefit of management and the board in the event an
information to lenders under existing credit facilities on a activist investor agitates for a change in the company’s
confidential basis. To the extent there are any regular or strategy.
formal dealings with the media, these typically support the
company’s sales and marketing efforts.
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It’s important that, post-IPO, the company maintains an The NYSE and Nasdaq both have initial quantitative listing
effective investor relations program. This involves: standards that an issuer must satisfy at the time of listing and
continued quantitative listing standards that apply after the
• Implementing best practices regarding disclosure polices
initial listing. Appendix 2 to this guide sets forth the initial and
and procedures.
continued quantitative listing requirements for the NYSE
• Establishing and maintaining close relationships with and for Nasdaq’s three market tiers. The NYSE and Nasdaq
investors and the media. also impose substantive corporate governance require-
• Regularly bringing senior management to meet with ments on listed companies. There are exceptions and
investors. phase-ins for some of these corporate governance require-
• Developing processes for earnings and key announce- ments for IPOs and controlled companies (i.e., companies
ments and reports. for which 50 percent or more of the voting power to elect
directors is held by an individual, a group or another com-
In the early days after its IPO, a company is likely to consult pany). The non-quantitative and quantitative listing
more frequently with its legal advisers to determine what requirements for NYSE and Nasdaq listed companies are
announcements are required, when they should be made and contained in Appendix 1 and Appendix 2 to this guide.
what they should contain. A post-IPO company is also likely to
require enhanced assistance from its legal advisers and The underwriters will assist the IPO candidate in selecting a
investor relations consultants in the preparation of its initial securities exchange upon which to list the company’s shares.
regulatory filings, such as annual and quarterly reports. Among the factors considered will be the markets on which
other companies in the IPO candidate’s industry are listed,
Which Securities Exchange to List On? the exchange’s listing requirements and the initial and
ongoing fees charged by the exchange.
There are more than 20 national securities exchanges in the
United States. Some specialize in certain types of securities or The IPO candidate will typically select a market before the
the securities of certain types of issuers. The trading volume registration statement is filed with the SEC, as the listing
is small on several of these exchanges. For most IPO issuers, application is generally submitted to the selected exchange at
the choice comes down to either the NYSE or Nasdaq, which the same time that the registration statement is filed with the
has three markets tiers: (i) Nasdaq Global Select Market SEC. As soon as the market is selected, the company should
(large cap), (ii) Nasdaq Global Market (mid cap) and (iii) select a trading symbol and reserve it with the chosen
Nasdaq Capital Market (small cap). exchange to ensure that the symbol is available when trading
begins several months later.
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• The investor’s investment philosophy— is the investor a
long-term holder or a short-term trader?
• Participation of the investor in the roadshow.
• Transparency of the investor’s purchase intentions.
• Potential deal feedback and price indications from the
investor.
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federal securities laws for alleged material misstatements or Each of these sections and related disclosure requirements is
omissions in connection with the offer and sale of the shares. described briefly below. The disclosure requirements are
subject to a number of important exceptions and qualifica-
SEC rules require that information contained in a prospectus
tions, all of which are not discussed below. As noted above,
be presented in a clear, concise, understandable manner. The
Regulations S-K and S-X contain scaled disclosure for smaller
SEC requires the use of plain English principles in the organiza-
reporting companies and EGCs. The discussion below
tion, language and design of the front and back cover pages,
generally describes the requirements for issuers that do not
the summary and the risk factors section of a prospectus.
fall into either of those categories. A summary of the accom-
Nevertheless, it is common to use plain English principles
modations for EGCs and smaller reporting companies is
throughout the prospectus. The SEC has published A Plain
contained in Appendix 3 to this guide.
English Handbook: How to create clear SEC disclosure
documents to assist companies in creating documents using Summary. (S-K Item 503) The summary has a marketing
plain English principles.2 focus and provides (i) a brief description of the company’s
business and strategy and key investment highlights, (ii) a risk
The prospectus contains, among other sections:
factor summary, (iii) an offering summary and (iv) summary
• A summary of the company and its results of operations, financial data. The company and underwriters spend
its financial condition and the offering. considerable time on the summary section since it is the first
• A description of the risks associated with an investment in section that investors will read in determining whether to
the shares. purchase shares in the IPO.
• A discussion of the use of proceeds from the offering. Risk Factors. (S-K Item 503) The risk factors section of the
• A capitalization table. prospectus includes a discussion of the factors making an
investment in the IPO speculative or risky. The discussion
• Dilution.
must be concise and organized logically. The risk factors
• Selected financial information.
should be described in order of importance, and the section is
• “Management’s Discussion and Analysis of Financial often divided into subsections, such as:
Condition and Results of Operations” (MD&A), which
provides management’s analysis of current trends and • Risks related to the business of the issuer.
recent financial performance of the company. • Risks related to the industry in which the issuer operates.
• A description of the company’s business, including • Risks related to an investment in the common stock of the
strengths and strategies of the company, and of the issuer.
industry and markets in which the company operates.
Specific risk factors may include:
• Biographies of executive officers and directors.
• The issuer’s lack of an extensive operating history.
• Information about compensation of executive officers and
directors. • Any lack of profitable operations in recent periods.
• A description of any related party transactions. • The company’s current or anticipated financial position.
• Information about principal and any selling stockholders. • Prospects for success of the company’s proposed busi-
ness or new business lines.
• A description of the company’s capital stock.
• The company’s ability to successfully implement the
• A discussion of shares eligible for future sale.
strategy described elsewhere in the prospectus.
• A description of the underwriting arrangements.
Issuers should review the types of risks that public companies
• Historical financial statements.
in the issuer’s industry include in their filings. SEC comment
letters can also be a valuable resource in determining the
SEC’s views on risk factors appropriate to companies in
2 The handbook is located at the SEC’s website at https://www.sec.
gov/pdf/handbook.pdf. particular industries or situations.
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MD&A. (S-K Items 303 and 305) The MD&A (Management’s With regard to focus and content of the MD&A, the SEC
Discussion and Analysis of Financial Condition and Results of emphasizes that:
Operations) is a key part of all prospectuses. Because of its
• In deciding on the content of the MD&A, companies
importance, the SEC has, over the years, issued extensive
should focus on material information and eliminate
rules, as well as detailed interpretive guidance regarding the
immaterial information that does not promote under-
content, format and purpose of the MD&A.
standing of companies’ financial condition, liquidity, and
In SEC Release No. 33-8350, the SEC states that purpose of the capital resources, changes in financial condition and
MD&A section is to provide readers information necessary to results of operations—both in the context of profit and
gain an understanding of a company’s financial condition, loss and cash flows.
changes in financial condition and results of operations. The • Companies should identify and discuss key performance
MD&A requirements are intended to satisfy three principal indicators, including non-financial performance indicators,
objectives: that their management uses to manage the business and
• To provide a narrative explanation of a company’s finan- that would be material to investors.
cial statements that enables investors to see the company • Companies must identify and disclose known trends,
through the eyes of management. events, demands, commitments and uncertainties that
• To enhance the overall financial disclosure and provide are reasonably likely to have a material effect on financial
the context within which financial information should be condition or operating performance.
analyzed. • Companies should provide not only disclosure of informa-
• To provide information about the quality of and potential tion responsive to the technical requirements for an
variability of a company’s earnings and cash flow so that MD&A under the relevant SEC rules, but also an analysis
investors can ascertain the likelihood that past perfor- that explains management’s view of the implications and
mance is indicative of future performance. significance of that information and that satisfies the
objectives of the MD&A.
The MD&A should not be a recitation of financial statements
in narrative form or an otherwise-uninformative series of Potential investors should be able to read and understand the
technical responses to the MD&A requirements, neither of MD&A on a standalone basis, so the MD&A often starts with
which provides this important management perspective. an “Overview” that briefly outlines the company and its
business.
The SEC expressly encourages early top-level involvement by
a company’s management in identifying the key disclosure This discussion is typically followed by “Key Drivers/Factors”
themes and items that should be included. that have affected the company’s past performance and that
management expects to affect the company’s results of
With regard to overall presentation of the MD&A, the SEC operations going forward. These key drivers may relate to the
emphasizes the following points: economy as a whole, the industry in which the issuer operates
• Within the universe of material information, companies or factors unique to the specific issuer. They may include:
should present their disclosure so that the most impor- • Revenue drivers (such as cyclicality or seasonality of
tant information is most prominent. demand, competitive developments, loss of patent
• Companies should avoid unnecessary duplicative protection or introductions of new products or services).
disclosure that can tend to overwhelm readers and act • Cost drivers (such as fluctuations in raw material prices or
as an obstacle to identifying and understanding material changes in labor costs).
matters.
• The impact of strategic initiatives (such as acquisitions,
• Many companies would benefit from starting their MD&A divestitures or restructurings).
with a section that provides an executive-level overview
• External factors (such as exchange rate fluctuations).
that provides context for the remainder of the discussion.
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company’s financial condition and operating performance. the cash from the offering will be sufficient for the
While accounting policy notes in the financial statements company’s needs and whether it will be necessary to
generally describe the method used to apply an accounting raise additional capital in the next six months.
principle, the discussion in the MD&A should present a • Financial information about geographic and reporting
company’s analysis of the uncertainties involved in applying a segments.
principle at a given time or the variability that is reasonably
• A narrative description of the company’s business for each
likely to result from its application over time. It should address
reportable segment, focusing on:
specifically why its accounting estimates or assumptions bear
»» The principal products produced and services
the risk of change (for example, because there is an uncer-
rendered, the principal markets for, and the methods
tainty attached to the estimate or assumption or that it just
of distribution of, the products and services.
may be difficult to measure or value).
»» A description of the status of a product or segment
Equally important, companies should address the questions and if there has been a public announcement of a new
that arise once the critical accounting estimate or assumption product or segment that would require an investment
has been identified by analyzing to the extent material, such of a material amount of assets or that is otherwise
factors as: material.
• How the company arrived at the estimate. »» The sources and availability of raw materials.
• How accurate the estimate/assumption has been in the »» The importance and duration and effect of all patents,
past. trademarks, licenses, franchises and concessions
• How much the estimate/assumption has changed in the held.
past. »» Seasonality.
• Whether the estimate/assumption is reasonably likely to »» Practices of the company and the industry relating to
change in the future. working capital items.
Since critical accounting estimates and assumptions are »» Dependence of the segment upon a single customer,
based on matters that are highly uncertain, this section or a few customers, naming any customer that
should cover their specific sensitivity to change based on accounts for 10 percent or more of the company’s
other outcomes that are reasonably likely to occur and would consolidated revenues.
have a material effect. »» The dollar amount of firm backlog orders.
Business. (S-K Items 101, 102 and 103) The business section »» A description of any material portion of the business that
of the prospectus provides information about the company’s may be subject to renegotiation of profits or the
business operations, the products it makes or the services it termination of contracts at the election of the
provides, as well as factors that affect its business. It also government.
provides information regarding the adequacy and suitability »» The principal markets in which the company competes,
of the company’s properties and any plans for future changes. the company’s main competitors in those markets, the
Drafting the business section requires significant factual basis of competition and the company’s competitive
input from the issuer, including senior management, and can position.
be time-consuming. • The amount spent during each of the last three fiscal years
on research and development activities.
Among other things, the business section contains:
• The material effects that compliance with environmental
• Technical details about the company, including the date laws may have upon the capital expenditures, earnings
of formation, legal form and a discussion of its history and competitive position of the company.
and development over the past five years.
• The number of company employees.
• If the company has not received revenue from opera-
• A discussion of material contracts.
tions during each of the three years preceding the date
of filing of the registration statement, the company • Information relating to materially important properties
must discuss its plan of operations, including how long owned or leased by the company.
The disclosure requirements for smaller reporting compa- Executive Compensation. (S-K Item 402) The executive
nies are less onerous that described above. See Appendix 3. compensation section discusses the compensation of the
company’s principal executive officer, principal financial
The business section is a key opportunity for the issuer to officer and the next three most highly compensated executive
present its “equity story” and explain its operations and officers. The company is not required to disclose the compen-
business prospects to potential investors. The section sation of an employee that is not an executive officer, even if
generally includes a separate subsection towards the that employee earns more than one or more of the executive
beginning describing the company’s strengths and competi- officers whose compensation is discussed. Information with
tive advantages as well as management’s strategy for respect to former executive officers may also need to be
capitalizing on those strengths in pursuing future growth of discussed. The persons whose compensation is disclosed are
the business. This “strengths and strategy” subsection commonly referred to as “named executive officers.” This
frequently receives a very high level of attention and scrutiny section includes a compensation discussion and analysis
by all offering participants, as it impacts the core marketing (CD&A), which is a narrative description of the material
message for the IPO. For this reason, the lead underwriter for information about the compensation objectives and policies
the IPO, with input from the company’s management as well for the named executive officers. The company is required to
as the relevant industry coverage team, may prepare the describe what the compensation program is designed to
initial draft of the “strengths and strategy” subsection for reward, each element of compensation, why the company
review and comment by the company and its counsel. chose to pay each element, how the company determines the
Management. (S-K Item 401) This section provides bio- amount for each element and how each element and the
graphical information for each of the company’s directors and company’s decisions regarding that element fit into the
executive officers for at least the last five years, including in the company’s overall compensation objectives and affect
case of directors, any specific experience, qualification, decisions regarding other elements.
attributes or skills that lead to the conclusion that such person In addition, the company is required, in specified tabular
should serve as a director of the company. The disclosure format, to disclose compensation for each of the named
must identify which of the directors are independent and also executive officers during the past fiscal year (although if the
on which of the audit, compensation and nominating commit- information was previously included in a filing with the SEC,
tees of the board of directors each director serves. the information could be required for up to three fiscal years)
The SEC defines an executive officer of a company as its in a summary compensation table that includes salary, bonus,
president, any vice president in charge of a principal business stock awards, option awards, non-equity incentive plan
unit, division or function (such as sales, administration or compensation, change in pension value and non-qualified
finance), any other officer who performs a policy making deferred compensation earnings and all other compensation.
function or any other person who performs similar policy Other required tables show for the named executive officers,
making functions for the company. In some cases, executive grants of plan-based awards during the most recently
officers of subsidiaries may be deemed executive officers of completed fiscal year, outstanding equity awards at the end
the company if they perform such policy making functions for of the most recently completed fiscal year, option exercises
the company. Determining who is an executive officer can and stock vested during the most recently completed fiscal
have important consequences. For example, executive year, pension benefits as of the most recently completed
officers are subject to liability for short-swing profits under fiscal year end and nonqualified deferred compensation as of
Section 16 of the Exchange Act of 1934 (Exchange Act), as the most recently completed fiscal year. Finally, issuers must
discussed below under “Ongoing Obligations as a Public disclose amounts that would be payable to the named
Company—Section 16,” and the company is required to executive officers upon their termination or a change of
disclose the compensation of the principal executive officer, control of the company, assuming that the termination or
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change of control had occurred at the end of the most total assets at year end for the last two completed fiscal years.
recently completed fiscal year. Narrative disclosure accompa- The information must be provided for the current and
nying certain tables is required to provide additional material preceding fiscal years. Smaller reporting companies are not
factors necessary to understand the information disclosed in required to disclose their procedures for review and approval
those tables. or ratification of related party transactions. Smaller reporting
companies must list all parents of the smaller reporting
To the extent that risks arising from the company’s compen-
companies, showing the basis of control and as to each parent,
sation policies and practices for its employees are reasonably
the percentage of voting securities owned or the other basis of
likely to have a material adverse effect on the company, the
control by its immediate parent.
company must discuss its policies and practices of compen-
sating its employees, including non-executive officers, as they Principal and Selling Stockholders’ Table. (S-K Items 403
relate to risk management practices and risk-taking and 507) The stockholders’ table presents in tabular form,
incentives. before and after the IPO, the number of shares and percent-
age of any equity securities of the company or its subsidiaries
SEC rules also require that information regarding director
beneficially owned by each of the named executive officers
compensation be disclosed in tabular format.
and directors and the executive officers and directors as a
EGCs and smaller reporting companies are not required to group. The company must also show the number of shares and
present more than two years of information in the summary percentage of each class of voting securities of the company
compensation table and need only provide information for for any person or entity known to beneficially own more than
the principal executive officer, next two most highly compen- five percent of such securities. Similar information must be
sation executive officers and up to two additional persons no shown for any stockholder selling shares in the IPO.
longer serving as executive officers at year end. EGCs and
Description of Capital Stock. (S-K Item 202) The descrip-
smaller reporting are also not required to include a CD&A, the
tion of capital stock section describes the company’s equity
grants of plan-based awards table, the option exercises and
capital structure as set forth in the company’s governing
stock vested table, changes in present value of pension
documents, with a detailed description of the rights and
benefit, a discussion of compensation policies relating to risk
privileges of the various classes of equity. It also includes a
management or the pension benefits table.
description of any anti-takeover measures that the company
Related Person Transactions. (S-K Item 404) This section may have adopted.
describes any transaction or series of related transactions,
Shares Eligible for Future Sale. This section describes the
during any of the company’s last three completed fiscal years
numbers of shares that will become eligible for sale immedi-
and the current year, or any currently proposed transaction,
ately following the IPO, after the expiration of the lockup
in which the company was or is to be a participant and the
period (for those shareholders that signed lockup agree-
amount involved exceeds $120,000 and in which any related
ments), upon satisfaction of any applicable Rule 144 period,
person had or will have a direct or indirect material interest. A
and after expiration of any other restrictions on transfer that
related person means any officer or director of the company,
may be applicable to the shares. As sales of substantial
any immediate family member of a director or executive
numbers of shares into the market can have an adverse effect
officer of the company or any beneficial owner of more than
on the price of the stock, it is important that shareholders be
five percent of the company’s voting securities or any
made aware of these dates.
immediate family member of such holder. The company is
also required to disclose its policy and procedures relating to Underwriting. (Items 505 and 508) This section describes
the review, approval or ratification of any related person the underwriting arrangements between the company and
transactions, and identify any transactions for which the the underwriters, including the makeup of the underwriting
policy and procedures were not followed. syndicate and any underwriter conflicts of interest. It also
describes the lock-up agreement and various selling restric-
The threshold related person transactions disclosure for
tions in jurisdictions where the shares may be offered outside
smaller reporting companies is the lesser of $120,000 or one
the United States.
percent of the average of the smaller reporting companies’
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A class of shares is registered under the Exchange Act only The underwriting agreement sets out the relationship and
once (unless the class was de-registered, in which case a arrangements—in particular the allocation of potential liability
new Exchange Act registration statement will be required), arising from the offer and sale of securities—among the
unlike registration under the Securities Act, which registers underwriters for the IPO, the issuer and any selling
the sale of a specified number or dollar amount of shares. stockholder(s). In the underwriting agreement, the company
When the dollar amount or number of shares has been sold, agrees to issue and sell, and any selling stockholders agree to
the company must file a new Securities Act registration sell, a specified number of shares to the underwriters. Subject
statement before additional shares are sold to the public. to specified conditions, the underwriters agree to purchase the
agreed number of shares from the company and the selling
By registering a class of shares under the Exchange Act, the
stockholders at an agreed price at closing (typically 3-5
company and its officers and directors and, in some cases, its
business days after the signing of the underwriting agreement).
shareholders will become subject to additional requirements
such as the SEC’s proxy rules and tender offer rules, Section The underwriting commitment given by the underwriters can
16 short swing profit liability and beneficial ownership take one of two forms:
reporting, which are discussed below under “Ongoing
• A “firm commitment” to underwrite, in which the
Obligations as a Public Company.” The company will also
underwriter takes up any shares that are not purchased by
become subject to periodic reporting requirements of the
investors, or
Exchange Act. While a company that has filed a registration
statement has an obligation to file quarterly, annual and other • A “best efforts” obligation, where the underwriters are
reports with the SEC following the effective date of the required to use their best efforts to sell the shares but are
registration statement, it can cease filing those reports under no legal obligation to take up any shortfall in sales.
without any further action or consent from the SEC or other The underwriting agreement also includes numerous
third parties provided that certain conditions are met. When representations and warranties made by the issuer covering
the Form 8-A becomes effective, the company is required to matters such as the company’s business and the complete-
file quarterly, annual and other reports under the Exchange ness and accuracy of the prospectus and other offering
Act with the SEC. While a company can take action to materials. One of the most important provisions from the
deregister under the Exchange Act, the deregistration cannot perspective of the underwriters is an agreement by the issuer
be effective until the exchange on which the company’s to indemnify the underwriters for any losses resulting from
securities are listed agrees, thus ensuring that so long as the any material misstatements or omissions in the offering
company’s securities are listed on a securities exchange there materials. Any stockholders selling shares in the offering are
will be an informed marketplace. also required to make at least some representations, for
example, with regard to their capacity to enter into the
Underwriting Agreement underwriting agreement and title in the shares they are selling
and are required to indemnify the underwriters with respect
OVERVIEW
to limited information.
The underwriting agreement is typically entered into at the
Where the selling stockholders hold a significant stake in the
end of the offering process, usually after the marketing of the
company pre-IPO or are otherwise involved in the strategic
shares (i.e., the “roadshow”) and when the underwriters and
or day-to-day management of the company, they may also
the company are prepared to “price” the offering (i.e.,
be required to provide representations, warranties and
commit to the exact number of shares to be sold and to a fixed
indemnities with regard to the company’s business and the
price per share) based on the feedback from investors as to
completeness and accuracy of the offering materials – at
the number of shares that they are willing to purchase and at
least with regard to those portions of the prospectus that
what prices. However, the underwriters usually want the
relate to them.
underwriting agreement to be in a final, agreed form earlier
than pricing, especially where an engagement letter has not Upon execution of the underwriting agreement, the under-
been executed. writers take on the risk of distributing the shares to investors
where they have given a firm commitment to underwrite.
The underwriters earn the fees for their services and the That said, a greenshoe option can be a valuable tool that can
underwriting risk they take by underwriting an IPO from the benefit the issuer, any selling stockholders and the underwrit-
price difference between the price at which they agree to ers by increasing the overall size of the IPO and facilitating
purchase the shares from the issuer and any selling stock- stabilization activities within the 30 days following the listing.
holders and the public offering price at which the shares will Their use, typically at the 15 percent level, has become
be sold by the underwriters to investors. This is known as the standard in IPOs.
“underwriting spread” or “underwriting discount.”
Lock-Up Agreements
GREENSHOE OPTION The underwriters usually expect the company, any significant
An underwriting agreement for an offering of common stock stockholders (whether or not selling shares in the IPO), the
usually includes a “greenshoe option” or over-allotment directors and executive officers, to agree to “lock-up” up their
option allowing the underwriters to purchase additional shares for a specified period of time. In the case of the
shares from the issuer and/or the selling stockholders. This company, the lock-up restricts its ability to issue any new
option facilitates the underwriters’ ability to “short sell” securities, other than in connection with a greenshoe option
shares at the agreed public offering price: that is, to sell more or its equity incentive programs or upon conversion of
shares to investors than the fixed number of shares initially outstanding convertible securities. In the case of stockhold-
agreed with the issuer and the selling stockholders in the ers, directors and executives, a lock-up restricts their ability
underwriting agreement. This can help the underwriters to sell shares for an agreed period after the IPO. The existence
stabilize the trading price of the shares in the after-market and duration of lock-up agreements can be important factors
immediately following the IPO and might therefore have a in the investment decision of key institutional investors,
positive impact on the achievable IPO price, in that the especially if there is a large “overhang” (that is, a large existing
underwriters may be able to agree to a higher/more aggres- stockholder that could potentially sell a large stake in close
sive IPO price with a greenshoe option rather than without proximity to the IPO, flooding the market with additional
one. shares, thereby increasing pricing pressure on the newly listed
shares). In addition to concerns about a potential oversupply
The greenshoe option may vary in size but must not normally
and the resulting downwards pressure on the trading price,
exceed 15 percent of the original number of shares offered.
even smaller volume sales by “insider” stockholders (such as
This is due to applicable securities laws and requirements of
directors, officers or large stockholders) could potentially be
the Financial Industry Regulatory Authority (FINRA) and the
misinterpreted as a lack of confidence in the company or
fact that the sale of more than an additional 15 percent of
share price and disrupt a potentially volatile market in the
shares could arguably be considered material information
shares of the company in the period immediately following
that may require the issuer and underwriters to go back to
the IPO.
investors in the IPO and give them an opportunity to recon-
sider their investment decision. This is particularly the case A lock-up period of 180 days for both the issuer and key
should the issuer agree to sell additional primary shares stockholders has become an almost universal minimum
pursuant to the greenshoe option because any such addi- standard for IPOs, but the period can sometimes be longer. In
tional shares would further dilute the other stockholders. some instances, lock-up agreements may contain a “waterfall
Raising a significant amount of additional capital for the issuer provision” whereby a limited number of shares are released
may also be inconsistent with the “equity story” and the “use from the lock-up over a period of time. The lead underwriters
of proceeds” described in the offering documents. This can also typically waive the lock-up, although this is rarely
concern is less relevant for secondary shares, i.e., to the done, except in connection with a subsequent public offering
extent the greenshoe option is provided by one or more that occurs within the lock-up period. FINRA rules requires
selling stockholders, although a significant increase in the that any waiver by the underwriters of a lock-up period be
total offer size, by way of the greenshoe option, could publicly disclosed.
mayer brown 21
Legal Opinions and Negative Assurance Letters The underwriting agreement will also typically provide that
the lawyers for both the underwriters and the issuer will
Various sections of the US federal securities laws impose
deliver certain legal opinions to the underwriters as a
liability on an issuer, its officers and directors, the underwrit-
condition to closing, for example, with regard to due
ers and other offering participants in a securities offering if
organization of the issuer, due authorization of the shares,
the registration statement or the prospectus contains:
no violation of the company’s organization documents or of
• Any untrue statement of a material fact or any laws or agreements by which the issuer is bound,
• An omission of a material fact. accuracy of the disclosure in specified portions of the
prospectus and the due authorization, execution and
The nuances of the potential liability are discussed below
delivery of the underwriting agreement by the company.
under “The IPO Process – Liability.”
mayer brown 23
Key Parties
The following discussion provides a brief overview of the need to convey information relating to the company’s vision for
various parties involved in IPO. the future and its financial position. Other members of the
management team—for example, heads of divisions/product
Issuer areas, the general counsel (if there is one), the human resources
The “issuer” is the legal entity whose shares are offered to manager, the investor relations officer—also have roles in
investors and subsequently listed on the relevant stock explaining what their respective departments do, how they
exchange. The sales of newly issued shares by the issuer (where function and how they fit into the broader corporate struc-
the issuer receives the proceeds from the sale of the shares) is ture and strategy. These team members also need to be
known as a “primary offering.” available to respond to due diligence queries that may arise.
Legal Advisers
Separate legal advisers are retained by the issuer and by the
underwriters. While legal counsel to the issuer may be able to
represent the selling stockholders, institutional selling
stockholders will typically retain separate counsel.
Depending on the jurisdiction of organization of the issuer
and proposed securities exchange for listing, there may also
be separate “local counsel” to both the issuer and the
underwriters.
mayer brown 25
The IPO Process
Organizational or “Kick-Off” Meeting room of a similar company in a similar industry. Areas of
interest in most document request lists include the issuer’s
Once a team has been assembled, a kick-off meeting is
corporate structure and organization, board minutes, finance
organized to officially launch the IPO process. This meeting
and accounting procedures, governmental authorizations,
generally includes the following activities:
stockholder information, presentations and reports from the
• Introduction of the working group: The working group is issuer, material agreements and other documents relating to
introduced and their respective roles and responsibilities intellectual property, tax issues, assets, cybersecurity,
are defined. environmental issues and current and pending litigation.
• Timetable: The meeting sets a tentative timetable and sets
After receiving a due diligence request list, the issuer begins
out the key milestones, as well as deliverables expected
preparing a data room containing documents responsive to
from the various working group members.
the due diligence request list as well as any documents not on
• Discussion of key terms of the offering: These include the the due diligence request list but deemed by the issuer to be
size and structure of the offering, use of proceeds, etc. material. The location of the data room itself varies, based on
• Discussion of other key issues: These include legal, regula- the location of the documents and the parties that need to
tory, accounting, publicity guidelines and other issues review the documents. For most issuers, it is more efficient
that have implications for the successful completion of and economical to make the documents available for review
the IPO. via a secure, password-protected website, accessible only to
• Presentation by management: A presentation on the busi- those parties involved in the offering. For certain issuers, it is
ness, financial and other aspects of the issuer is generally more efficient and economical to set up a space at their place
given by the senior management of the issuer. of business where all of the documents may be reviewed.
The information received during the due diligence process Business due diligence. Underwriters, underwriters’ counsel
facilitates the drafting of the prospectus and helps to ensure and issuer’s counsel will also conduct a series of meetings
that all material aspects of the issuer’s business are properly with senior management of the issuer. These meetings afford
disclosed. The due diligence exercise also helps to ensure that the underwriters and their legal counsel the opportunity to
disclosure contained in the prospectus is accurate and based understand the operational and strategic aspects of the
on the most current data available. issuer’s business and the industry in which the company
operates and to raise issues identified during drafting
The due diligence review also serves to establish a record that
sessions and the legal due diligence process. These meetings
the underwriters have made a reasonable investigation upon
also serve to facilitate review and discussion of the
which their defense against potential liability can be based.
prospectus.
See “The IPO Process—Liability.”
The underwriters may conduct interviews with the major
Legal due diligence. The underwriters and their counsel
suppliers, subcontractors, customers and bankers of the
provide the issuer with a list of documents they would like to
issuer as well as experts and other professional parties
review. This due diligence request list is comprehensive and
engaged by the issuer. In appropriate circumstances, business
broad. As the requesting party is not fully apprised of the
due diligence will also involve visits to the company’s manu-
issuer’s documentation, the list necessarily includes a range
facturing and other important or strategic sites.
of items that counsel would normally expect to find in the data
Underwriters generally request legal counsel to issue a Filing with the SEC, FINRA, a Securities
so-called “negative assurance letter,” above under the Exchange and the State Securities
heading “Key Documents – Legal Opinions and Negative Commissions
Assurance Letters.” Obtaining comfort letters from the
issuer’s independent auditors is another procedure used by SEC
underwriters to establish a written record that they have Generally, all documents filed with the SEC must be filed
made a reasonable investigation. Comfort letters serve to electronically via the SEC’s Electronic Data Gathering,
provide comfort on certain financial and accounting data Analysis and Retrieval system (EDGAR). Registration
contained in an offering document—for example unaudited statements and amendments filed with the SEC are available
financial statements and other information. For a discussion immediately on the SEC’s website. Issuers submitting a draft
of comfort letter requirements, see “Key Documents— registration statement confidentially may submit their filings
Comfort Letters” above. through the EDGAR system or through the SEC’s secure email
system. A confidential submission is not considered a “filing”
Drafting Responsibility and Drafting Sessions and is therefore not available on the SEC’s website, until it is
The issuer and its counsel are responsible for preparing the filed, as described below.
initial draft of the prospectus. It typically takes two or more
To file electronically on EDGAR, the issuer must have EDGAR
weeks to complete the draft of the prospectus to be distrib-
access codes. The SEC typically issues access codes within
uted to the working group. Ideally, to keep up momentum the
two business days of receipt of a completed and notarized
draft should be distributed prior to the kick-off meeting,
application from the company.
mayer brown 27
Prior to filing a registration statement, the issuer must wire weeks for FINRA to issue a “no objection” opinion for an IPO.
the filing fee associated with the registration statement to the
FINRA’s rules require that anything of value received by an
SEC. The amount of SEC filing fee payable in connection with
underwriter within the 180-day period preceding the filing
the IPO is based on the value of the securities to be sold in
date be included in the amount of underwriting compensa-
connection with the IPO. As of October 1, 2016, the current
tion. Examples of items of value that would be included as
fee rate is US$115.90 per US$1,000,000 of securities regis-
underwriter compensation are: discounts or commissions;
tered. The filing fee is reset annually on October 1 of each year.
reimbursement of expenses; the payment of fees and
Issuers are not required to pay the fee at the time of the
expenses of underwriter’s counsel (other than any fees
confidential submission of the draft registration statement,
associated with state securities laws filings, sometimes called
but rather when the registration statement is filed with the
“blue sky” laws) by the company; finder’s fees; wholesaler’s
SEC, as described below.
fees; financial consulting and advisory fees; common or
The Form 8-A may be filed with the SEC concurrently with the preferred stock, options, warrants and other equity securi-
registration statement or anytime thereafter but prior to the ties; special sales incentive items; and rights of first refusal to
effective date of the registration statement. Most often, the participate in future public offerings, private placements or
Form 8-A is not filed until about two weeks prior to the other financings. FINRA’s list of items of value is extensive and
anticipated effective date of the registration statement. This subject to numerous exceptions and qualifications.
allows time for SEC staff to review the Form 8-A and time for
If an underwriter involved in the offering has a conflict of
the company respond to any comments that the staff may
interest, FINRA rules require that the nature of the conflict be
raise. As discussed above, the Form 8-A is quite short and
prominently disclosed and may require that a qualified
contains no substantive disclosure, consequently it is
independent underwriter (which can be a member of the
uncommon for the SEC to have comments on the document.
underwriting syndicate that does not have a conflict) has
The Form 8-A must be filed electronically through the EDGAR
participated in the preparation of the registration statement
system. There is no SEC filing fee for a Form 8-A.
and the prospectus and has exercised the usual standards of
“due diligence” in respect thereto. Among other things, an
FINRA
underwriter has a conflict if (i) the underwriter owns 10
No later than the business day after the registration state- percent or more of the issuer’s common stock or preferred
ment is filed with the SEC, underwriters’ counsel, on behalf of stock or otherwise has the power to direct or cause the
the underwriters, will file with FINRA the registration direction of the management or policies of the company or
statement and supporting documents, including the under- (ii) at least five percent of the net offering proceeds of the
writing agreement, when available. Information is filed IPO, not including underwriting compensation, will be used to
electronically with FINRA through its Public Offering System. reduce or retire the balance of a loan extended by the
The filing fee, which is paid by the company, must be paid at underwriter, its affiliates and its associated persons or will
the time of filing. The current filing fee is $500 plus .015 otherwise be directed to the underwriter, its affiliates and
percent of the proposed maximum aggregate offering price associated persons.
or other applicable value of all securities registered on an SEC
registration statement, but not more than $225,500. SECURITIES EXCHANGE
FINRA is a self-regulatory organization that regulates certain The listing application is typically filed with the applicable
aspects of the US securities industry. Among other things, it securities exchange concurrently with the filing of the
ensures that the underwriting compensation charged by registration statement with the SEC. The application is filed
member firms, which includes virtually all US broker-dealers, with the NYSE in paper and electronically with Nasdaq. The
in a securities offering is fair and reasonable and that any application fee must be paid at the time of filing. It typically
underwriter conflicts of interest are addressed. Member takes four to six weeks for the exchange to complete its
firms are prohibited from participating in an offering unless review and discussions with the company. The SEC will not
FINRA has issued a “no objection” opinion on the compensa- declare the Form 8-A effective until the applicable securities
tion arrangements. FINRA has not publicly stated the exchange certifies to the SEC that the securities are approved
threshold above which underwriter compensation would be for listing, which will occur after all of the exchange’s ques-
deemed unfair or unreasonable. It typically takes two to three tions and comments have been addressed.
mayer brown 29
When the SEC is satisfied that an amended registration The offer price is fixed between the issuer and the book-run-
statement adequately addresses its comments and after ning manager(s) based on the level of interest expressed (the
receipt of clearance from FINRA and the applicable stock number of shares desired and the price(s) that they are willing
exchange, upon written request (called an acceleration to pay) by prospective institutional investors during the
request) of the issuer and the managing underwriters book-building process. In a successful offering, the order
following the roadshow, the SEC will declare the registration book contains orders for more shares than the company and
statement and the Form 8-A effective on a date and at a time selling stockholders, if any, are offering. In that case, the
requested by the issuer and the underwriters. Sales to the number of shares allocated to investors will be “cut back,”
public may commence as soon as the registration statement potentially leading investors to purchase additional shares in
becomes effective, although offers and other publicity about the market leading to a more orderly market.
the proposed IPO are technically permissible as soon as the
Prior to fixing the price, the underwriters and legal counsel
registration statement has been filed.
for the underwriters and the issuer will conduct a bring-down
The entire process from the initial kick-off meeting for an IPO due diligence call with issuer’s management to confirm that
to final SEC clearance typically takes between three and five there has not been any material change to the information
months. For a more detailed indicative timeline of both the contained in the preliminary prospectus and that there have
regular, public SEC review process and the confidential SEC been no material developments concerning the issuer.
review process, see Appendix 4.
The negotiation of the financial terms between the issuer and
the underwriters (including the determination of the public
Book-Building and Roadshow offering price) will be completed either immediately before
Following any pre-marketing, the book-building process or shortly after the registration statement is declared
commences. “Book-building” refers to the pricing and effective. If these negotiations are completed before the
underwriting method typically used on an IPO whereby the registration statement is declared effective, the underwriting
final offer price is fixed and the offer underwritten, after a book agreement will be executed, a final “pricing” amendment to
of preliminary orders has been built at the end of the marketing the registration statement will be filed with the SEC, and,
phase/roadshow. Book-building allows the “bookrunner(s)” immediately after the registration statement is declared
among the underwriters to compile a comprehensive picture effective, the underwriters will complete sales of shares to
of the strength of institutional demand for the shares over a investors identified during the pre-effective period. If the
range of prices by obtaining non-binding expressions of offering is successful, all sales will be confirmed within hours,
interest from potential investors. The aim is to ensure that the or even minutes, of SEC effectiveness.
shares are spread across a wide range of high-quality investors
and that pricing tension is maximized. “Bookrunner” refers to Rule 430A under the Securities Act permits registration
the underwriter(s) responsible for keeping the books for the statements to be declared effective that do not include final
offering – the underwriter(s) responsible for the syndication, pricing information, so long as the registration statement is
marketing, book-building, pricing, allocation and stabilization otherwise complete in all respects. If Rule 430A is being relied
of an offering. upon, the negotiation of the public offering price and
underwriting discount will be completed shortly after the
Book-building is usually conducted at the same time as a registration statement is declared effective. The underwrit-
management roadshow over a period of a few days to two weeks. ing agreement will then be executed and sales confirmed
immediately thereafter. When the parties are relying upon Rule
Price Determination 430A, a copy of the final prospectus, reflecting the agreed-
SEC rules require that the issuer disclose in the registration upon offering price and underwriting discount, must be filed
statement filed with the SEC a good faith estimate of the with the SEC within two business days after the date of
range of the maximum offering price and maximum number determination of the offering price.
of shares to be offered. The SEC Staff generally takes the Following execution of the underwriting agreement, the
position that a good faith price range means a range no larger auditors will deliver a signed comfort letter to the
than $2 (for ranges below $10) or 20 percent of the high end underwriters.
of the range (for maximum prices above $10).
mayer brown 31
After a registration statement has been filed and before the information permitted to be disclosed under these rules is
registration period ends, it is also unlawful to deliver a quite limited. Any press conference, meeting or press-related
prospectus relating to the securities that are the subject of materials relating to the offering in any way should be
the registration statement unless the prospectus meets the reviewed by counsel.
technical and detailed disclosure requirements prescribed by
Issuers must also regulate communications made via the
the Securities Act. “Prospectus” is broadly defined under the
Internet or through their websites. During the registration
Securities Act, and has been interpreted by the SEC to include
period, issuers should limit both direct and hyperlinked
written communications, including e-mails and other
information on their websites to prospectuses meeting the
electronic documents, that could arguably encourage the
requirements of the Securities Act and permissible communi-
purchase of a security during the registration period as part
cations under available safe harbors. The posting of regularly
of a selling effort. A quote from an executive of the issuer that
released factual information, such as new product announce-
appears in a newspaper story or on a radio or television
ments, receipt of awards, etc., is generally permitted.
interview can also constitute a “prospectus” in violation of
Principal factors in determining whether information is
this prohibition. Securities Act rules permit issuers and
publicity are whether its release serves a legitimate business
underwriters to use certain types of written offering
purpose independent of the offering and the issuer’s
materials not meeting the requirements of a prospectus,
historical track record of conducting similar activities. Issuers
called “free writing prospectuses,” so long as certain
undertaking an initial public offering should not establish a
conditions are met, including that the information in the free
website contemporaneously with beginning the IPO process,
writing prospectus not conflict with information contained in
as the content could be viewed as conditioning the market,
the registration statement, that in some cases the free writing
without any “ordinary course of business” practice having
prospectus be accompanied or preceded by a preliminary
been established.
prospectus or a final prospectus and that in some cases the
free writing prospectus be filed with the SEC. In addition, subject to certain exceptions, issuers, underwrit-
ers and persons on behalf of whom securities are being
The US securities laws do not require a “news blackout” prior
distributed are also broadly prohibited by SEC Regulation M
to the completion of the offering. However, communications
under the Exchange Act from bidding for or purchasing, or
during the registration period to the press, public or share-
inducing others to bid for or purchase, certain securities until
holders concerning the offering or other non-factual
the subject distribution has been completed. The SEC’s
information concerning the business or future prospects of
trading practices rules, including Regulation M, impose a
the issuer should be carefully considered, generally discour-
number of restrictions particularly relevant to the activities
aged and, in any case, held to a minimum. Such
of underwriters and their affiliates, such as “stabilization,”
communications may be construed as part of a selling effort
“passive market-making” and the publication of analysts’
to “condition the market”, may result in delays in the offering
research reports. A detailed discussion of these regulations is
schedule and may potentially result in serious civil and
outside the scope of this guide.
criminal liability. SEC rules provide that communications
made more than 30 days prior to the filing of a registration The SEC has an active monitoring program and may raise
statement will generally not be considered an offer of a questions during the review process if any publicity concern-
security so long as the communication does not reference a ing an offering appears in the United States, particularly if
securities offering, provided that reasonable steps are taken statements are attributed to an offering participant. As a
to prevent further distribution or publication of such practical matter, the SEC may delay or postpone an offering
communication during the 30 days immediately preceding by imposing a “cooling-off” period for the effects of improper
the date of filing of the registration statement. publicity to dissipate. The SEC also may demand that under-
writers associated with the dissemination of improper
Securities Act Rule 134, which applies to communications
publicity be removed from the selling syndicate. In addition, a
made after a registration statement has been filed, and Rule
purchaser may bring a lawsuit to rescind the purchase of the
135, which applies to all communications made during the
securities—recovering the consideration paid plus interest
registration period, set forth specific information notices
minus the amount of any income received—or to recover
regarding an offering that may be publicly disseminated
damages, if the securities are no longer owned. Additional
without running afoul of the US securities laws. The
mayer brown 33
Liability
Section 11 of the Securities Act communication, which includes an untrue statement of
material fact or omits to state a material fact necessary in
The Securities Act can subject an issuer and its directors and
order to make the statements, in the light of the circum-
officers and other parties involved in an offering to substantial
stances under which they were made, not misleading . . .” is
liability. Section 11 of the Securities Act provides that if any
liable for any investment loss suffered by any purchaser of the
part of a registration statement, when that part became
security. Liability is determined for Section 12(a)(2) purposes
effective under the Securities Act, contained an untrue
as of the “time of sale,” which is at the time the investor agrees
statement of a material fact or omitted to state a material fact
to purchase the securities being offered (and before delivery
necessary in order to make the statements therein not
of the final prospectus), not the settlement date.
misleading, any person acquiring such a security can sue: (i)
the issuer; (ii) every person who signed the registration Section 12(a)(2) applies to “offer[ors] or seller[s]” of securities,
statement; (iii) every person who was a director of the issuer which US courts have found to include persons who “solicit
at the time of the filing of that part of the registration state- purchases of securities, motivated by a desire to serve [their]
ment, even if the person did not sign the registration own financial interest.” Accordingly, Section 12(a)(2) has been
statement; (iv) every expert who, with his consent, has been applied to issuers, underwriters, directors, officers and
named in the registration statement as having prepared or principal shareholders. Section 12(a)(2) does not require
certified any portion of the registration statement; and (v) fraudulent intent on the part of the seller, nor must a pur-
every underwriter. Section 11 contains no requirement that chaser prove that it relied on the misstatement or omission,
any such person have acted with fraudulent intent or that any though the purchaser cannot have knowledge of the misstate-
such misstatement or omission have been relied upon by the ment or omission at the time of the purchase.
investor in connection with its purchase. In addition, civil
Like Section 11, Section 12(a)(2) provides a defendant with a
penalties are provided for under Section 11 and criminal
due diligence defense to a lawsuit, although the standard to
penalties are provided for under Section 24 of the Securities
establish the defense under Section 12(a)(2) differs from the
Act.
Section 11 standard. Section 12(a)(2) provides that a defendant
Liability under Section 11 is absolute against the issuer. shall not be liable under that section “if he did not know, and in
However, all other identified persons may be able to avoid the exercise of reasonable care, could not have known, of such
liability for any part of the registration statement not purport- untruth or omission.”
ing to be made on the authority of any expert (e.g., audited
financial statements) if such person had, after reasonable Section 10(b) of the Exchange Act
investigation, reasonable grounds to believe, and did believe,
Section 10(b) of the Exchange Act and Exchange Act Rule
at the time such part of the registration statement became
10b-5 also subject issuers of securities and other participants
effective under the Securities Act, that the registration
in a securities offering to potential liability. Under Exchange
statement contained no material misstatements or omissions.
Act Rule 10b-5, it is unlawful: “(a) to employ any device,
This is referred to as the “due diligence” defense, discussed
scheme, or artifice to defraud, (b) to make any untrue
above in “The IPO Process—The Due Diligence Process.”
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light
Section 12(a)(2) of the Securities Act of the circumstances under which they were made, not
Section 12(a)(2) of the Securities Act also serves as a basis for misleading, or (c) to engage in any act, practice or course of
liability for participants in a registered public offering of business that operates or would operate as a fraud or deceit
securities. Under Section 12(a)(2), “any person who . . . offers upon any person, in connection with the purchase or sale of
or sells a security . . . by means of a prospectus or oral any security.”
mayer brown 35
Ongoing Obligations as a Public Company
The disclosure of accurate, comprehensive and timely SEC Reporting
information about security issuers builds sustained investor
As a result of either a public offering of securities under the
confidence and allows an informed assessment of their
Securities Act or a listing of a company’s shares on a stock
business performance and assets. This enhances both
exchange in the United States, issuers become subject to
investor protection and market efficiency.
periodic and ongoing public reporting as well as other
Listed companies must ensure appropriate transparency for obligations under the Exchange Act. These reporting obliga-
investors through a regular flow of information. This is tions commence immediately upon the effectiveness of a
important not only because they may be required to do so registration statement or a listing and continue until the issuer
under applicable listing rules or legislation but also to build successfully deregisters or its reporting obligation is
strong investor relations in order to be able to fully reap the suspended.
potential benefits of being a public company, such as ready
US domestic issuers must prepare and file annual reports on
access to the capital markets. To the same end, stockholders,
Form 10-K, quarterly reports on Form 10-Q and current reports
or natural persons or legal entities holding voting rights or
on Form 8-K, as well as a proxy statement in connection with the
financial instruments that result in an entitlement to acquire
solicitation of votes for their shareholder meetings.
existing shares with voting rights, will typically also be required
to inform issuers of the acquisition of or other changes in
FORM 10-K
major holdings in listed companies so that the latter are in a
position to keep the public informed. An Annual Report on Form 10-K must be filed with the SEC 60
days after the end of the company’s fiscal year end if the
The specific nature and extent of the obligations that apply to company is a large accelerated filer, 75 days after the end of
the company post-IPO is dictated by: the company’s fiscal year end if the company is an accelerated
• The stock exchange on which the company’s securities filer and 90 days after the end of the company’s fiscal year end
are listed. for all other companies. A large accelerated filer is a company
that has an aggregate worldwide market value of common
• The US federal securities laws.
equity held by non-affiliates of at least $700 million. An
The following section provides an overview of ongoing accelerated filer is a company that has an aggregate world-
obligations applicable to US companies choosing to conduct a wide market value of common equity held by non-affiliates of
US IPO. The discussion is not intended to be exhaustive. at least $75 million but less than $700 million. In both cases, the
market value is determined as of the last day of the company’s
The principal ongoing obligations of, or with respect to, listed
second fiscal quarter. To be a large accelerated filers or an
companies in the United States include:
accelerated filer, the company must also have been subject to
• SEC reporting. the requirement to file periodic reports for at least 12 months
• Section 16—short-swing profits. and have filed at least one annual report with the SEC.
• Beneficial ownership reporting. The information that must be provided in a Form 10-K is
• Compliance with corporate governance rules (for broadly identical to the information required to be
example, stipulating numbers of independent directors). included in the initial registration statement on Form S-1.
Below are the headings of the items requirements for the
• Disclosure rules (for example, Regulation FD (which is
Form 10-K. A detailed discussion of the items is beyond the
designed to prevent selective disclosure and is discussed
scope of this guide.
below) and rules governing Non-GAAP financial
measures).
• FCPA compliance.
• Information that should have been reported on a Form • Defaults upon senior securities.
8-K during the company’s fourth fiscal quarter but was • Mine safety disclosure.
not. • Information that should have been reported on a Form
8-K during the fiscal quarter but was not and any material
Part III
changes to the procedures by which shareholders recom-
• Information about directors, executive officers and mend nominees to the company’s board of directors.
corporate governance. • Exhibits.
• Executive compensation.
While financial statements included in a quarterly report on
• Security ownership of certain beneficial owners and
Form 10-Q do not need to be audited, they do need to be
management and related stockholder matters.
reviewed by the company’s auditors.
• Certain relationships, related transactions and director
independence. FORM 8-K
• Principal accountant fees and services. Companies are required to file a current report on Form 8-K
Part IV within four business days following the occurrence of the
following events (other than (i) a Regulation FD disclosure,
• Exhibits and financial statement schedules. which must be furnished simultaneously with an intentional
• Form 10-K summary. public disclosure or promptly for a non-intentional public
disclosure and (ii) those described in the last bullet for
FORM 10-Q which there is no deadline):
Quarterly Reports on Form 10-Q must be filed with the SEC 40 • Entry into of a material definitive agreement.
days after the end of the company’s first, second and third fiscal
• Termination of a material definitive agreement.
quarters if the company is a large accelerated filer or an
accelerated filer. All other filers must file within 45 days after the • Filing for bankruptcy or receivership.
end of the company’s first, second and third fiscal quarters. • Mine Safety—reporting of shutdowns and patterns of
violations.
mayer brown 37
• Completion of an acquisition or disposition of assets. PROXY STATEMENT
• Public announcements of results of operations and The US federal securities laws do not require that a public
financial condition. company solicit proxies from its shareholders in connection
• Creation of a direct financial obligation or an obligation with a shareholders’ meeting—that requirement arises from
under an off-balance sheet arrangement. the securities exchange listing requirements. State corporate
law governs the setting of a record date and the amount of
• The occurrence of triggering events that accelerate or
time between a record date and the meeting date.
increase a direct financial obligation or an obligation
under an off-balance sheet arrangement. When a company does solicit proxies, SEC rules govern the
• Commitment to exit or disposal activities that result in content of the proxy statement and the form of proxy. The
material charges. proxy statement contains, among other things: the date, time
• Determination that a material charge is required to reflect and location of the meeting and how abstentions and broker
impairments. non-votes affect the outcome of each matter voted upon, the
date by which shareholders must submit proposals for
• Receipt of a notice of delisting or failure to satisfy a
inclusion in the company’s next proxy statement and the date
continued listing rule or standard; transfer of listing.
by which shareholders must submit potential nominees for
• Unregistered sales of securities. consideration by the company for election as a director of the
• Material modifications to rights of security holders. company. Other information required in the proxy statement
• Change in the company’s certifying accountant. depends on the matters being voted on at the meeting. For
example, if directors are being elected, then the company
• Non-reliance on previously issued financial statements or
must include background information on each director,
a related audit report or completed interim review.
information relating to corporate governance and executive
• Changes in control of the registrant.
and director compensation information, similar to that
• Departure of directors or certain officers; election of included in the company’s IPO registration statement, CEO
directors; appointment of certain officers; new or modi- pay ratio disclosure, a “say-on-pay” proposal every one, two
fied compensatory arrangements of certain officers. or three years, and a proposal (at least once every six years)
• Amendments to articles of incorporation or bylaws; concerning the frequency of such “say-on-pay” proposals. A
change in fiscal year. detailed discussion of these items and the information
• Temporary suspension of trading under the company’s required for other matters that shareholders are being asked
employee benefit plans. to vote on are beyond the scope of this guide.
• Amendments to the company’s code of ethics or waiver of SEC rules exempt smaller reporting companies and the JOBS
a provision of the code of ethics. Act exempts EGCs from the requirement to hold “say-on-
• Change in shell company status. pay,” “say-on-frequency” and “say-on-golden parachute”
votes, as well as from certain other requirements, such as
• Reporting voting results of matters to a vote of security
CEO pay ratio disclosures. EGCs and smaller reporting
holders.
companies are also permitted to comply with less burden-
• Shareholder director nominations.
some executive compensation disclosure rules than other US
• Various matters relating to asset-backed securities domestic issuers. See Appendix 3.
issuers.
• Regulation FD disclosure. Section 16
• Other material events not required by one of the bullets Section 16 of the Exchange Act requires that officers,
above that the company, at its option, elects to disclose. directors and beneficial owners of more than 10 percent of
the equity securities registered under the Exchange Act
A detailed description of these items is beyond the scope of
(Section 16 Persons) of a company (the Subject
this guide.
Company) file reports on Form 3 with the SEC no later than
mayer brown 39
the exercise of an option or through the conversion of another or term of directors, or to fill any existing vacancies on the
security. It follows from these provisions that a security may board, (v) any material change in the present capitalization or
have multiple beneficial owners—for example, the person who dividend policy of the issuer, (vi) any other material change in
owns the security and the person who has an option to acquire the issuer’s business or corporate structure, (vii) changes in
that same security within 60 days. All such 5 percent beneficial the issuer’s charter, bylaws, or instruments corresponding
owners must file a Schedule 13D or 13G. In addition, multiple thereto, or other actions which may impede the acquisition of
entities within a given corporate group may be deemed to control of the issuer by any person, (viii) causing a class of
own the same shares and may be required to file jointly. securities of the issuer to be de-listed or to cease to be
authorized to be quoted, (ix) a class of equity securities of the
“PERSON” AND “GROUPS” issuer becoming eligible for termination of registration with
“Person” is defined broadly and includes corporations and the SEC, under the Exchange Act, or (x) any action similar to
other entities, as well as individuals. Section 13(d)(3) further any of those enumerated above. In addition, Schedule 13D
provides that, when two or more persons act as partners of a must also describe any contracts, arrangements, under-
general or limited partnership, syndicate, or other group, for standings, or relationships, with respect to any securities of
the purpose of acquiring, holding, or disposing of securities of the issuer—including the transfer or voting of any security,
an issuer, such group will be deemed one single “person” for loan or option arrangements, puts or calls, and name of the
purposes of Section 13(d). This means that if these persons, in persons with whom such contracts, arrangements, under-
the aggregate, acquire more than five percent of the equity standings or relationships have been entered into. Finally, the
securities of the issuer, they will either need to file one joint exhibits that the reporting person must file with the Schedule
Schedule 13D, or each group member may file a separate 13D include copies of all agreements relating to the sources of
Schedule 13D. Individual persons will only be deemed to funds used to finance the acquisition of the securities, and
constitute a group, and thus one single person under Section copies of all agreements relating to the transactions
13(d)(3), if they have some kind of formal or informal agree- described above.
ment to act together with respect to the equity securities.
However, the case law concerning what actions constitute SCHEDULE 13G
the formation of a group is unsettled. The existence of a As mentioned above, certain types of investors acquiring
group depends on the specific facts and circumstances of beneficial ownership of more than five percent of a class of
the case. registered equity securities may, rather than filing a Schedule
13D within 10 days after the acquisition, file a short-form
REQUIRED INFORMATION disclosure statement on Schedule 13G. The main advantage
The information to be disclosed on Schedule 13D includes of filing on a Schedule 13G is that it requires significantly less
information about the identity or identities of the beneficial information to be disclosed and therefore is less burdensome
owner(s) of the acquired securities, the sources, and amount to prepare. The required disclosure is essentially limited to
of funds used in making the purchases, and the number of information regarding the identity of the filer and the number
shares of such security owned by the beneficial owner(s). In of shares owned. In addition, the requirements for periodi-
addition, the person filing Schedule 13D is also required to cally updating the filing are more limited and depend on the
disclose the purpose of the acquisition of the securities and identity of the filer.
any plans or proposals that the reporting person may have Schedule 13G is available to three types of investors: domestic
that relate to (i) the acquisition by any person of additional “Qualified Institutional Investors” (QIIs), “exempt investors”
securities of the issuer, or disposition of such securities, (ii) an and “passive investors.” Investors that qualify as QIIs include
extraordinary corporate transaction, such as merger, US registered broker-dealers, banks, savings associations,
reorganization or liquidation, involving the issuer or any of its registered investment companies and employee benefit
subsidiaries, (iii) a sale, or transfer, of a material amount of plans, as well as control persons of such entities. Foreign
assets of the issuer or of any of its subsidiaries, (iv) any change institutional investors typically do not qualify as QIIs. To
in the present board of directors, or management of the qualify for a Schedule 13G, as opposed to a Schedule 13D filing,
issuer, including any plans or proposals to change the number
mayer brown 41
NON-GAAP FINANCIAL MEASURES payments or gifts by a non-US employee, or agent of the
Many companies disclose “Non-GAAP financial measures”, or company, to an official in a developing country, for example,
financial measures not taken directly from their financial could expose the company to expensive and time-consuming
statements that exclude (or include) amounts, or are subject investigations by the SEC or the US Department of Justice
to adjustments that have the effect of excluding (or including) (DOJ).
amounts, that are included (or excluded) in the most directly Consequences for a breach of FCPA include large monetary
comparable measure calculated and presented in accordance penalties and a variety of other sanctions in the United States,
with GAAP in the company’s statement of income, balance including a potential suspension of the right to do business
sheet or statement of cash flows. with the US government. Prohibited payments or gifts are
The SEC has adopted a series of regulations—sometimes often made through middlemen, so the FCPA is drafted
generically referred to as “Reg. G”—designed to address this broadly to pick up the actions of distributors, brokers,
practice in public disclosures and in SEC filings. It has taken suppliers and other agents. As a result, companies listed in the
this step because of perceived abuses and the habit of some United States could incur significant liability as a result of
companies to disclose what the SEC has humorously called actions taken by contract counterparties. For that reason,
“EBT-BS” or “earnings before the bad stuff.” Among other FCPA compliance efforts cannot stop at a company’s own
things, the relevant rules require companies, in the case of doorstep but must extend to its business partners.
SEC filings and earnings announcements required to be To avoid being held liable for corrupt payments made by third
furnished on a Form 8-K, to: parties, the DOJ encourages companies to exercise due
• Present, with equal or greater prominence, the most diligence and to take all necessary precautions to ensure that
directly comparable financial measure calculated and they have formed a business relationship with reputable and
presented in accordance with “GAAP.” qualified partners and representatives.
• Reconcile the differences between the non-GAAP finan- In addition, companies should also be aware of so-called “red
cial measure and the most directly comparable financial flags,” including:
measure calculated and presented in accordance with
• Unusual payment patterns or financial arrangements.
GAAP.
• A history of corruption in the country.
• Disclose the reasons why management believes that pre-
sentation of the non-GAAP financial measure provides • A refusal by the foreign joint venture partner or represen-
useful information to investors regarding the registrant’s tative to provide a certification that it will not take any act
financial condition and results of operations. that would cause a violation of the FCPA.
• To the extent material, disclose the additional purposes • Unusually high commissions or unusual payment terms/
for which management uses the non-GAAP financial deal structures.
measure. • Lack of transparency in expenses and accounting records.
In addition, there are certain non-GAAP financial measures • Apparent lack of qualifications or resources on the part
that may not be used in a filing with the SEC. of the joint venture partner or representative to perform
the services offered.
FOREIGN CORRUPT PRACTICES ACT • Whether the joint venture partner or representative
has been recommended by an official of the potential
One of the highest profile and potentially largest dollar
governmental customer.
compliance risks associated with the US securities laws is the
Foreign Corrupt Practices Act (FCPA). The FCPA generally
prohibits corrupt payments or gifts to foreign (non-US)
officials to obtain or retain business. “Foreign officials”
includes employees of state-owned entities such as public
hospitals, utilities or universities. Companies with US listings,
and thus registrations with the SEC, are subject to potential
liability under the FCPA for their worldwide operations. Illegal
mayer brown 43
Appendix 1
NYSE and NASDAQ Non-quantitative Listing Requirements
The following table summarizes certain of the NYSE and Nasdaq non-quantitative listing requirements for corporate issuers,
primarily corporate governance in nature. Section references under the NYSE column refer to the NYSE Listed Company
Manual and references under the Nasdaq column refer to the Nasdaq Listing Rules. The following table is only a high level
summary of the requirements and should be read in connection with the full text of the applicable rule or regulation. In
addition, many of the requirements set forth below contain exceptions for companies in bankruptcy proceedings, controlled
companies, cooperatives, foreign private issuers, investment companies registered under the Investment Company Act of
1940, limited partnerships, passive investment entities and smaller reporting companies. You should review the text of the
applicable rules or regulations for any such exceptions.
Regularly scheduled executive sessions are required of Independent directors must have regularly sched-
either: uled meetings at which only independent directors
EXECUTIVE are present. Nasdaq expects that the executive
• non-management directors or
SESSIONS OF sessions will occur at least twice a year, in conjunction
• independent directors. with regularly scheduled board meetings. (Rule
NON-
If a company chooses to hold meetings of non- 5605(b)(2) and IM 5605-2)
MANAGEMENT
management directors, the NYSE recommends that
DIRECTORS the independent directors hold a separate meeting at
least once a year. (Section 303A.03)
A company is required to have an audit committee A company is required to have an audit committee
consisting of at least three members, each of whom: consisting of at least three members, each of whom:
• satisfies the requirements of SEC Exchange Act • satisfies the requirements of SEC Exchange Act
Rule 10A-3; Rule 10A-3;
• is independent as defined in the NYSE’s indepen- • is independent as defined in Nasdaq’s indepen-
dence requirements; and dence rules;
• is financially literate (or will become financially lit- • did not participate in the preparation of the
erate within a reasonable time after appointment). financial statements of the company or any of its
current subsidiaries during the past three years;
In addition, at least one member of the audit commit- and
AUDIT tee must have accounting or related financial
COMMITTEE management expertise. (Sections 303A.06 and • can read and understand fundamental financial
303A.07) statements.
A company that is listing in connection with its IPO In addition, one member of the audit committee
must have at least one independent member by the must have experience that results in his or her
listing date, at least a majority of independent financial sophistication. (Rule 5605(c))
members within 90 days of the effective date of its A company that is listing in connection with its IPO
registration statement and a fully independent must have at least one independent member at the
committee within one year of the effective date of its time of listing, a majority of independent members
registration statement. (Section 303A.00) within 90 days of listing and be fully independent
within one year of listing. (Rule 5615(b)(1))
mayer brown 45
REQUIREMENT NYSE NASDAQ
»» setting specific policies for hiring employees
or former employees of the company’s
auditors; and
»» reporting regularly to the board of directors
any issues that arise regarding the company’s
financial statements, legal and regulatory
compliance, the auditors’ qualifications and
independence, and performance of the
company’s internal audit department (or
third-party providers) and auditors.
(Section 303A.07(b))
In addition, the board must consider all factors In addition, the board must consider all factors
relevant to determining whether a director has a relevant to determining whether a director has a
relationship to the company which is material to that relationship to the company which is material to that
director’s ability to be independent, including: director’s ability to be independent, including:
• the source of compensation of the director, • the source of compensation of the director,
including any consulting, advisory or other including any consulting, advisory or other
COMPENSATION compensatory fee paid by the company to such compensatory fee paid by the company to such
COMMITTEE director; and director; and
• whether the director is affiliated with the company, • whether the director is affiliated with the com-
a subsidiary of the company or an affiliate of a pany, a subsidiary of the company or an affiliate
subsidiary of the company. of a subsidiary of the company. (Rule 5605(d))
A company that is listing in connection with its IPO A company that is listing in connection with its IPO
must have at least one independent member by the must have at least one independent member at the
earlier of the date of the IPO closing or five business time of listing, a majority of independent members
days from the listing date, at least a majority of within 90 days of listing and be fully independent
independent members within 90 days of the listing within one year of listing. (Rule 5615(b)(1))
date and a fully independent committee within one
year of listing. (Section 303A.00)
mayer brown 47
REQUIREMENT NYSE NASDAQ
»» the conflict of interest policies and proce- »» any business or personal relationship of the
dures of the person who employs the compensation consultant, legal counsel or
compensation adviser; adviser or the person employing the adviser
»» any relationship of the compensation adviser with an executive officer of the company.
with a member of the compensation Compensation advisers do not need to be
committee; independent, but the compensation committee
COMPENSATION »» any stock of the company owned by the must undertake an evaluation of their independence.
COMMITTEE compensation adviser; and (Rule 5605(d)(1) and Rule 5605(d)(3))
CHARTER »» any relationship of the compensation adviser
The compensation committee must review and
with an executive officer of the company.
reassess the adequacy of the compensation
Compensation advisers do not need to be indepen- committee charter annually. (Rule 5605(d)(1))
dent, but the compensation committee must
undertake an evaluation of their independence
(Section 303A.05(c) and related commentary).
mayer brown 49
REQUIREMENT NYSE NASDAQ
A company must adopt and disclose a code of business A company must adopt a code of conduct for
conduct and ethics for directors, officers and directors, officers and employees that addresses the
employees. Waivers of the code for directors and following matters:
executive officers may be made only by the board or a
board committee. Any such waivers must be promptly • honest and ethical conduct, including the
disclosed to shareholders within four business days. ethical handling of actual or apparent conflicts
of interest between personal and professional
Each company may determine its own policies, but all relationships;
CODE OF listed companies should address the most important • full, fair, accurate, timely and understandable
BUSINESS topics, including: conflicts of interest, corporate disclosure in the periodic reports required to be
opportunities, confidentiality, fair dealing, protection filed by the company; and
CONDUCT AND and proper use of company assets, compliance with
ETHICS • compliance with applicable governmental rules
laws, rules and regulations and encouraging the
and regulations.
reporting of any illegal or unethical behavior.
The code must also provide for an enforcement
The code of business conduct and ethics must contain mechanism.
compliance standards and procedures that will
facilitate the effective operation of the code, including Waivers of the code for directors and executive
prompt and consistent action against violations of the officers must be approved by the board. Any such
code. (Section 303A.10) waiver must be disclosed to shareholders within four
business days. (Rule 5610)
A company must review and evaluate all related party Each company must conduct appropriate review and
transactions (including transactions between officers, oversight of all related party transactions for
directors, principal shareholders, and the company). potential conflict of interest situations by the
CONFLICTS OF The review can be conducted by the audit committee company’s audit committee or another independent
INTEREST/ or another comparable body. body of the board of directors. (Rule 5630)
RELATED PARTY Following the review, the company should determine
TRANSACTIONS whether or not a particular relationship serves the best
interests of the company and its shareholders and
whether the relationships should be continued or
terminated. (Section 314.00)
ANNUAL A company is required to hold an annual shareholders’ A company is required to hold an annual meeting of
meeting during each fiscal year. (Section 302.00) shareholders no later than one year after the end of
SHAREHOLDER
its fiscal year. (Rule 5620(a))
MEETINGS
A quorum sufficiently high to insure a representative A company must provide for a quorum not less than
vote is required for any meeting of the holders of 33 1/3 percent of the outstanding shares of its
common stock. In authorizing a listing, the NYSE gives common voting stock for any meeting of the holders
careful consideration to provisions fixing any of its common stock. (Rule 5620(c))
proportion less than a majority of the outstanding
QUORUM shares as the quorum for shareholders’ meetings. In
general, the NYSE has not objected to reasonably
lesser quorum requirements in cases where compa-
nies have agreed to make general proxy solicitations
for future meetings of shareholders. (Section
310.00(A))
Actively operating companies are required to solicit A company is required to solicit proxies for all
SOLICITATION proxies for all meetings of shareholders. (Section shareholder meetings. (Rule 5620(b))
OF PROXIES 402.04)
A company must obtain shareholder approval for A company is required to obtain shareholder
certain issuances of securities, including: approval of certain issuances of securities, including:
• With limited exceptions, if the common stock has, • Acquisitions where the issuance equals 20 per-
or will have upon issuance, voting power equal cent or more of the pre-transaction outstanding
to or in excess of 20 percent of the voting power shares (or 5 percent or more when a related
outstanding before the issuance of such stock party has a 5 percent or greater interest in the
or of securities convertible into or exercisable acquisition target) ((Rule 5635(a));
for common stock or if the number of shares of • Issuances resulting in a change of control (Rule
common stock to be issued is, or will be upon 5635(b));
issuance, equal to or in excess of 20 percent of the
• Equity compensation, including establishing or
number of shares of common stock outstanding
materially amending a plan or other arrangement
SHAREHOLDER before the issuance of the common stock or of
(Rule 5635(c) and IM-5365-1); and
APPROVAL OF securities convertible into or exercisable for
common stock. (Section 312.03(c)) • Private placements where the issuance (together
SECURITIES
with sales by officers, directors or substantial
ISSUANCES • Issuances resulting in a change of control (Section
shareholders) equals 20 percent or more of the
312.03(d));
pre-transaction outstanding shares at a price
• Equity compensation plans and any material less than the greater of book value or market
revisions to those plans (Sections 303A.08 and value. (Rule 5635(d) and IM-5635-3)
312.03(a)); and
• Certain related party transactions greater than
1 percent of the number of shares of common
stock or 1 percent of the voting power outstanding
before the issuance, unless the company qualifies
as an “early stage company” and the transaction
involves a sale of stock for cash (Section 312.03(b)).
mayer brown 51
REQUIREMENT NYSE NASDAQ
A company’s CEO must promptly notify the NYSE in A company must promptly notify Nasdaq after an
NOTIFICATION OF writing after any executive officer of the company executive officer of the company becomes aware of
NON- becomes aware of any non-compliance with any any non-compliance by the company with any
COMPLIANCE applicable provision of Section 303A. (Section requirements of Rule 5600. (Rule 5625)
303A.12(b))
A company’s CEO must certify to the NYSE each year A company must certify to Nasdaq that it is comply-
(within 30 days after annual meeting) that he or she is ing with certain corporate governance listing
ANNUAL not aware of any violation by the company of NYSE standards at the time of listing. After the initial
CERTIFICATION corporate governance listing standards, qualifying the certification, an updated certification form only
certification to the extent necessary. (Section needs to be filed if the prior certification is no longer
303A.12(a)) accurate due to a change in the company’s status.
US domestic companies are also required to meet all of the following distribution standards.
DISTRIBUTION STANDARDS
SHAREHOLDERS 400 round lot
PUBLICLY HELD SHARES 1.1 million
MARKET VALUE OF PUBLICLY $40 million
HELD SHARES
MINIMUM SHARE PRICE $4.00
mayer brown 53
CONTINUED QUANTITATIVE LISTING CRITERIA
A US domestic company can remain listed on the NYSE as long as it satisfies the NYSE’s continued listing requirements. The
NYSE will consider delisting a company if it falls below any of the following criteria:
AND and
OR:
AND and
$50 million
TOTAL STOCKHOLDERS’ EQUITY
Even if a company meets the thresholds above, the NYSE will take steps to suspend and delist a company if it is determined that
the company has an average global market capitalization over a consecutive 30-trading-day period of less than $15 million.
LIQUIDITY REQUIREMENTS
ROUND LOT 450
SHAREHOLDERS
or
OR
TOTAL SHAREHOLDERS 2,200
mayer brown 55
Continued Quantitative Listing Criteria
Once listed, companies must meet all of the criteria under at least one of the following three standards below to remain listed.
AND and
$50 million
TOTAL REVENUE (IN LATEST
FISCAL YEAR OR IN TWO OF THE
LAST THREE FISCAL YEARS)
MARKET MAKERS 2 4 4
TOTAL ASSETS/
INCOME EQUITY MARKET VALUE
REQUIREMENTS TOTAL REVENUE
STANDARD STANDARD STANDARD*
STANDARD
INCOME FROM CONTINUING $1 million
OPERATIONS BEFORE INCOME
TAXES (IN LATEST FISCAL YEAR
OR IN TWO OF THE LAST
THREE FISCAL YEARS)
PUBLICLY HELD SHARES 1.1 million 1.1 million 1.1 million 1.1 million
MARKET VALUE OF PUBLICLY $8 million $18 million $20 million $20 million
HELD SHARES
BID PRICE $4 $4 $4 $4
MARKET MAKERS 3 3 4 4
*Currently traded companies qualifying solely under the Market Value Standard must meet the $75 million Market Value of
Listed Securities and the $4 bid price requirement for 90 consecutive days before applying.
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NASDAQ CAPITAL MARKET
MARKET MAKERS 3 3 3
BID PRICE $4 $4 $4
OR
CLOSING PRICE** $3 $3 $3
* Currently traded companies qualifying solely under the Market Value Standard must meet the $50 million Market Value of
Listed Securities and the applicable bid price requirement for 90 consecutive days before applying.
** To qualify under the closing price alternative, a company must have (i) average annual revenues of $6 million for three years,
or (ii) net tangible assets of $2 million and a 3-year operating history, in addition to satisfying the other financial and liquidity
requirements listed above.
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Appendix 3
EGC and Smaller Reporting Company Disclosure Accomodations
SCALED DISCLOSURE
EMERGING GROWTH COMPANY SMALLER REPORTING COMPANY
REQUIREMENT
AUDITED FINANCIAL • 2 years in a Securities Act registration state- 2 years.
STATEMENTS REQUIRED ment for an IPO of common equity
• 3 years in an IPO of debt securities.
• 3 years in an annual report or Exchange Act
registration statement, unless the company
is also a smaller reporting company.
DESCRIPTION OF BUSINESS Standard disclosure requirements apply. • Development of its business during the
(S-K ITEM 101) most recent three years, including:
»» Form and year of organization;
»» Bankruptcy proceedings;
»» Material reclassification, merger,
sale or purchase of assets; and
»» Description of the business.
• Not required:
»» Seasonality
»» Working capital practices
»» Backlog; or
»» Government contracts.
• Names of principal suppliers.
• Royalty agreements or labor contacts.
• Need for government approval of
principal products and services.
• Effect of existing or probable
governmental regulations.
MARKET PRICE OF AND Standard disclosure requirements apply. Not required to provide the stock
DIVIDENDS ON THE performance graph.
REGISTRANT’S COMMON
EQUITY AND RELATED
STOCKHOLDER MATTERS
(S-K ITEM 201)
SELECTED FINANCIAL DATA Not required to present selected financial data Not required.
(S-K ITEM 301) for any period prior to the earliest audited
period presented in initial registration
statement.
EXTENDED TRANSITION FOR • May elect to defer compliance with new or Standard disclosure requirements apply.
COMPLYING WITH NEW OR revised financial accounting standards until
a company is not an “issuer”1 as required to
REVISED ACCOUNTING comply with such standards.
STANDARDS • Any decision to forego the extended
transition period is irrevocable.
COMPLIANCE WITH PCAOB • Need not comply with any PCAOB require- Standard requirements apply.
REQUIREMENTS APPLICABLE ments for auditor rotation or auditor
discussion and analysis reports.
TO THE AUDITS OF PUBLIC
• Do not need to comply with other PCAOB
COMPANIES requirements adopted after April 5, 2012
unless the SEC determines the new require-
ments are necessary for protection of the
public.
INTERNAL CONTROL OVER • Not required to provide attestation report Non-accelerated filers, a category that
FINANCIAL REPORTING of the registered public accounting firm. includes smaller reporting companies,
• Not exempt from S-K Item 308(a), but are not required to provide an attesta-
(S-K ITEM 308) tion report of the registered public
newly public company is not required to
comply until it either has filed or has been accounting firm.
required to file an annual report for the
prior fiscal year.
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SCALED DISCLOSURE
EMERGING GROWTH COMPANY SMALLER REPORTING COMPANY
REQUIREMENT
CERTAIN RELATIONSHIPS Standard disclosure requirements apply. • Lower threshold to disclose related
AND RELATED PARTY party transactions in certain cases.
TRANSACTIONS • Not required to disclose procedures
for review, approval or ratification of
(S-K ITEM 404) related party transactions.
• Additional requirements to disclose
certain controlling entities.
• Required to disclose related party
transactions not only since the
beginning of the last fiscal year, but
also for preceding fiscal year.
CORPORATE GOVERNANCE Standard disclosure requirements apply. Not required to disclose whether it has an
(S-K ITEM 407) audit committee financial expert until its
second annual report following IPO.
RISK FACTORS Standard disclosure requirements apply. Not required in periodic reports.
(S-K ITEM 501(C))
RATIO OF EARNINGS TO Required for same number of years for which it Not required.
FIXED CHARGES provides selected financial data disclosures.
(S-K ITEM 503(D))
REQUIREMENT TO REPORT Standard disclosure requirements apply. Do not need to report unless the amount of
CERTAIN UNREGISTERED securities sold exceed 5 percent of the
number of shares outstanding, rather than
SALES OF SECURITIES ON the standard 1 percent threshold.
FORM 8-K
WEEK
• Kick-off meeting
0 • Discuss timing and marketing mechanics
• File Amendment No.1 with FINRA and respond to FINRA comments, if any
• Finalize free writing prospectus, if any
10 • Finalize roadshow materials
• Update due diligence, as needed
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• Receive SEC comments on Amendment No.1
• Finalize valuation, determine price range
11 • Respond to SEC comments and file Amendment No.2
• Print red herrings
• Commence roadshow
12
• Sales force meetings
14 • Roadshow continues
• Clear SEC
• Clear FINRA
• Clear stock exchange
• File Forms 3
• SEC declares Form S-1 “effective”
15
• Bring-down due diligence call
• Pricing
• Sign underwriting agreement
• Deliver comfort letter
• File 424 prospectus with SEC
The following indicative timetable assumes that the company makes its first public filing of the IPO registration statement once:
• The bulk of SEC comments have been resolved through the confidential review process and there is a strong expectation
that it will be possible to complete the review process and finalize the registration statement relatively quickly.
• The underwriters advise the company that market conditions are favorable for a successful IPO and that it is advisable to
commence the roadshow.
The following indicative timetable also assumes that the company makes its first public filing in week 9 or 10 to permit com-
mencement of a public roadshow, consistent with the indicative timetable for the regular, public SEC review described above.
While the timeline below gives the impression that certain of the items occur in a short period of time, some of those items may
actually occur over the course of several weeks.
WEEK
• Kick-off meeting
0
• Discuss timing and marketing mechanics
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• Respond to SEC comments and file Amendment No. 1 (FIRST PUBLIC
9 FILING OF FORM S-1 WITH THE SEC)
• Update due diligence, as needed
• File Amendment No.1 with FINRA and respond to FINRA comments, if any
10 • Finalize free writing prospectus, if any
• Finalize roadshow materials
• Commence roadshow
12 • Sales force meetings
14 • Roadshow continues
• Clear SEC
• Clear FINRA
• Clear stock exchange
• File Forms 3
• SEC declares Form S-1 “effective”
15 • Bring-down due diligence call
• Pricing
• Sign underwriting agreement
• Deliver comfort letter
• File 424 prospectus with SEC
1An “issuer” is defined in Section 2(a) of the Sarbanes-Oxley Act to mean an issuer whose securities are registered under Exchange Act Section 12, that is required to file reports under Securities
Act Section 15(d) or that has filed a registration statement that has not yet become effective and that it has not withdrawn.
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