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McLaurin Hill Files September 2001 Wake Law '96 |
Summary
Step
1. Making the decision to go public
Step 2.
Organizing the IPO working group
Step
3. Preparing the prospectus and registration statement
Step
4. Filing the registration statement with the SEC
Step
5. SEC review of the registration statement
Step
6. Filing the underwriting documents with and review of underwriting compensation
by the NASD
Step
7. Filing the formal application with and review by Exchange or Nasdaq
Step
8. Distributing the preliminary prospectus and conducting the road show
Step 9. Going
effective and closing
Alternative: Non-Capital Raising, Going Public Transaction
Step 1: Making the Decision to Go Public
Most Issuers are driven to go public by one of two forces: (i) a need for capital or (ii) a solicitation by an underwriter coupled with an opportunity to provide liquidity. The advantages of going public include access to capital, alternative acquisition financing, greater liquidity, incentives to employees and increased name recognition in the marketplace.
Step 2: Organizing the IPO Working Group
An IPO requires many participants to work together as a team. In addition to officers and directors of the Issuer, a list of the other members of the working group and a brief description of their duties is provided below:
1) Issuer’s Attorneys: The Issuer’s attorneys will serve as the principal coordinator of the working group. The Issuer’s attorneys will be involved in all legal due diligence meetings and drafting sessions, and will usually be responsible for drafting the registration statement. Experienced attorneys will also be able to counsel the Issuer in its choice and dealings with the remaining members of the working group. For example, the Issuer’s attorneys will have valuable knowledge assisting the Issuer to choose a managing underwriter not only having substantial experience with IPOs, but also having the needed experience in the Issuer’s particular industry to effectively market the securities to investors. Managing underwriters typically have a standard contract for IPOs; experienced attorneys will know which provisions are open for negotiation.
2) The Managing Underwriters: The managing underwriter serves as the intermediary between the Issuer who seeks capital and institutions and individuals who seek investment opportunities. The managing underwriters will provide important guidance regarding the timing, size, marketing, and valuation of the offering, as well as aid in the preparation of the prospectus. They will organize a group of lead underwriters and a selling syndicate for the offering. Usually the underwriting syndicate will purchase the entire offering of securities directly from the Issuer at an agreed upon discount which serves as their primary compensation. After the offering, the managing underwriters generally commit to providing after-market support through investment research and providing market makers (required by Nasdaq, market makers are specialists who deal in the Issuer’s stock by buying and selling such securities on a continuous basis).
3) The Underwriter’s Attorneys: The underwriter’s attorneys play a large role in satisfying the underwriters due diligence obligation with respect to the offering. Similar to the Issuer’s attorneys, the underwriter’s attorneys are involved in gathering the necessary information for and drafting of the registration statement. In addition, the underwriter’s attorneys prepare the underwriting documents, and any documents needed to comply with state securities laws (so-called "Blue Sky" laws).
4) Issuer’s Public Accountants: The Issuer’s public accountants will review all financial statements included in the registration statement to ensure that they are prepared according to generally accepted accounting procedures ("GAAP"). The accountants may also provide guidance to the Issuer about its internal accounting procedures; making sure they are adequate in light of the new disclosure requirements that the Issuer will be subject to after the IPO.
5) Financial Printers: The SEC requires that the prospectus and the registration statement be printed to specific standards; financial printers stay abreast of these requirements. They also maintain around the clock facilities to meet the time constraints that often arise during the IPO process. The financial printers will also insure that the Issuer’s electronic filings with the SEC via EDGAR comply with the latest SEC requirements.
6) Transfer Agent: Transfer agents maintain shareholder records and assist in many stock transactions, such as shareholder correspondence and dividend payments. Companies undertaking an IPO typically choose a transfer agent to represent them prior to closing the offering.
Step 3: Preparation of the Registration Statement and Prospectus
A prospectus is a document that describes the Issuer’s business and financial condition. Preparing the prospectus is usually the most time consuming part of the IPO process; usually taking between three and eight weeks, and sometimes longer. Together, the Issuer’s attorneys and the underwriter’s attorneys will conduct an extensive diligence investigation of the Issuer to learn the Issuer’s business. From the information gathered in their investigation, the attorneys will draft the prospectus which serves two purposes. First, the prospectus forms part of the Registration Statement and is a regulatory document which must be created under the strict guidelines of, and filed with, the SEC. Second, the prospectus serves as a marketing document for potential investors. These two purposes will sometimes conflict.
The prospectus provides detailed information about the Issuer, including descriptions of its industry, products and services, historical financial information, sales and marketing, research and development, facilities and competition. Both the Issuer’s attorneys and the underwriters’ attorneys will make sure that the appropriate information is disclosed in a manner that complies with the SEC regulations. Together, they will work with the managing underwriter so that the prospectus emphasizes the Issuer’s strengths yet does not mislead investors. Counsel will also work to insure that the prospectus does not disclose any confidential information of the Issuer the disclosure of which could injure the Issuer competitively. Thus, the prospectus should stimulate investor interest and also protect the Issuer from liability by disclosing all relevant information, including those risks related to investing in the Issuer’s securities.
Step 4: Filing the Registration Statement with the SEC
The drafting of the prospectus is a careful process. After a month or more of work, the document that results is called the "preliminary prospectus." The prospectus is part of a larger document, the registration statement, which contains other documents necessary for the IPO including exhibits consisting of material contracts and other key documents. At this point, on the Issuer’s behalf, its attorneys will file the registration statement with the SEC for its review.
Step 5: SEC Review of the Registration Statement (Please note that Steps 4 – 6 occur simultaneously.)
The SEC will review the registration statement once it is filed and can be expected to provide the Issuer with initial comments after about 30 – 35 days. The SEC review involves both a legal and accounting review. The Issuer’s attorneys may respond to these comments by sending to the SEC proposed amendments to the registration statement if they feel it is appropriate, or by discussing its objections with the SEC staff. Frequently the Issuer’s accountants will contact the SEC accounting reviewer. This process may result in three or more rounds of comments from the SEC staff and can take several weeks. Not until all comments are resolved to the satisfaction of the SEC staff (which may involving the filing of more than one amendment to the registration statement), can the Issuer request that the SEC declare the registration statement effective. Only after effectiveness, may initial sales be completed and trading in the Issuer’s securities begin.
Step 6: NASD Review of the Underwriting Documents
When the registration statement is filed with the SEC, underwriter’s attorneys simultaneously file a copy with the National Association of Securities Dealers (the "NASD"), which is the securities industry self-governing body. The NASD will review the proposed offering to make sure that the underwriting arrangements and compensation are fair to the Issuer and its shareholders.
Step 7: Exchange and Nasdaq Review of the Listing Application
An Issuer, in order to list its shares on an exchange (for example the New York Stock Exchange or American Stock Exchange) or on one of the National Association of Securities Dealers Automated Quotation (Nasdaq) market systems (Small Cap or National Market) must file a formal application and meet the exchange’s or Nasdaq’s requirements for listing. The applications generally requires similar information as that required by the SEC filings. The Issuer must also execute a Listing Agreement, in which it agrees to abide by the laws, rules, and procedures of the exchange or Nasdaq, the NASD, and the SEC. The application and the listing agreement take approximately two weeks to process. By qualifying to have its securities listed on certain exchanges or on the Nasdaq National Market, the upper-tier of Nasdaq, the Issuer will be exempt from the Blue Sky laws of all states due to federal preemption of Blue Sky laws for "covered securities."
Step 8: Distribution of the Preliminary Prospectus & the Road show
After the registration statement and typically an amendment replying to the SEC’s comments have been filed with the SEC, but prior to the registration statement being declared effective, the Issuer will usually have the preliminary prospectus printed. This preliminary prospectus will usually reflect the Issuer’s response to the SEC’s initial comments, but will be printed prior to the SEC’s response to the Issuer’s amendments. The managing underwriter will distribute copies of the preliminary prospectus to potential members of the underwriting syndicate and investors. The cover of the preliminary prospectus states that the registration statement has been filed with the SEC, but has not yet become effective. Because the SEC requires that this statement appear in red type, preliminary prospectuses are referred to as "red herrings." Distribution of the red herring creates interest in the securities from the investment community and protects the Issuer from liability by complying with the securities laws.
Shortly after filing the registration statement with the SEC, the managing underwriter and the Issuer will coordinate the "road show," which is the major marketing tool for the IPO. During the road show, select officers of the Issuer and representatives of the managing underwriters will travel across the U.S. and sometimes overseas to make presentations to key institutional investors. These presentations will promote the investment opportunity offered by the Issuer’s securities and address any concerns that those in attendance may have. At this time, the managing underwriters will also begin taking orders for the Issuer’s stock, called "indications of interest." These indications of interest are not sales; no money changes hands, and investors are not obligated to later purchase these shares. However, this process allows the managing underwriter to "build the book" and "price the deal" by compiling enough orders for the Issuer’s stock to meet or exceed the expected size of the offering. Because of the timing of the circulation of the preliminary prospectus, there is always a risk that the Issuer will have to recirculate or "sticker" the preliminary prospectus during or after the road show to reflect a material negative development which was not disclosed in the preliminary prospectus. Recirculation gives the investor who expressed interest in the offering the opportunity to withdraw its expression of interest, lower the price which it is willing to pay for the stock or decrease the number of shares it is willing to purchase.
Step 9: Going Effective and Closing
After the SEC has determined that the Issuer has responded to all of its comments, the SEC will ask the Company when it would like to go effective. Issuer’s counsel, Underwriter’s counsel and the SEC will coordinate the effectiveness of the registration statement based on when the Underwriter believes its book will be complete (i.e. when they can fully sell the deal). No sales may be made until the registration statement, as amended, has been declared effective. Liability for misstatements contained or omissions of information that should be contained in the registration statement attaches when the registration statement is declared effective and sales are made. After the SEC declares the registration statement effective (the "effective date"), the managing underwriter will use its book to recommend to the Issuer a final offering price and size for the IPO. Upon the Issuer’s acceptance, the preliminary prospectus will be amended to include the finalized information. This version is known as the "final prospectus." These final prospectuses will be printed and delivered by the underwriting syndicate to investors with confirmation of their purchases. Shortly thereafter, the Issuer’s stock will begin trading on the open market.
Typically one to three days after the effective date, all necessary documents will be exchanged amongst the working group at a closing. This exchange includes the underwriters wiring the proceeds of the IPO to the Issuer, and the Issuer through its transfer agent conveying the stock either by sending certificates or electronic transfer to the underwriters to give to the investors. At this point, the IPO is complete.
Alternative: Non-Capital Raising, Going Public Transaction
Given the current state of the IPO market, some issuers who seek liquidity for their stockholders have been using a different route to become a public company. An issuer will usually use an investment bank to locate a public company which has no operations, but has continued to file its required reports with the SEC. Such companies are not listed on an exchange or Nasdaq because they do not meet the requirements for listing, but their stock will usually be sold "Over The Counter" on the OTC bulletin board. The operating company will combine with the shell to become a public company. The combination will take place in one of two ways: (i) a merger or (ii) an exchange offer.
If the transaction is structured as a merger, the issuer desiring liquidity will merge with the public shell and the public shell will be the surviving entity. The shares of the issuer will be converted into restricted shares of the public shell which will become an operating company. The new combined entity will began filing reports relating to its business as a public company, but the shares of the new combined entity will only be sold using a restriction from the securities laws. As soon as possible, the new combined entity will file a registration statement to register the resale of the restricted shares held by either its more important investors or all of its stockholders. In an exchange transaction, the public shell will "purchase" the operating company by exchanging the operating company’s securities with the public shell’s securities. The securities issued in the exchange will either be registered prior to their issuance or their resale will be registered following the exchange.
The registration statement filed to register these securities will be as exhaustive as the registration statement filed for an IPO because it will be this businesses first registration statement. The SEC will review the registration statement with the same detail as it reviews IPO registration statement. This method of going public is difficult because the issuer does not have the benefit of an underwriter’s review as no securities are being sold and there is a corresponding increased burden on issuer’s counsel. Also, because no securities are sold by the issuer, there are no sales proceeds from which to pay the expenses of the offering. Following completion of the transaction, the issuer will attempt to have its securities registered on an exchange or Nasdaq in order to increase the liquidity of its shares.