Subject to improvement and expansion in subsequent editions, dated June 15, 2024
US IPO Guide
2024 EDITION
_______________________________________
This is our initial public offering guide. It will help you decide whether an IPO is the right move for your
company and, if so, help you make sure your IPO goes off as quickly and as smoothly as possible,
without any unpleasant surprises.
Prior to this offering, there will have been no public market for your common stock, but we will help
you understand what will be required of you as a public company and how to make the transition to
life in the limelight.
_______________________________________
Undertaking an IPO involves risks. See “Summary” beginning on page 1 to read about common pitfalls and
how good advance planning and legal advice can help you avoid them.
Per
Share Total
Price to the public ..................................................................................................................... $ $
Underwriting discounts and commissions
(1)
.............................................................................. $ $
Proceeds, before expenses, to us ............................................................................................ $ $
_______________________________________
(1)
The underwriters are crucial players in conducting a successful offering. You and your counsel will be
spending lots of quality time with them, their counsel, and your auditors.
Closing of your offering should occur approximately 120-180 days after you say “go.”
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved
of this guide, or passed upon the accuracy or adequacy of this guide. We hope this guide will make the IPO
process less mysterious and the goal of going public more attainable.
Athos & Co. Porthos Securities LLC Aramis Inc.
The information in this guide represents only a fraction of our accumulated expertise in capital markets transactions and does not constitute legal advice.
Never hesitate to check with us for up-to-the-minute guidance.
iTable of Contents
Summary ........................................................................................................................................................................1
The IPO Business ........................................................................................................................................................11
Some Basics .............................................................................................................................................................11
Securities Act of 1933 and Securities Exchange Act of 1934 ..............................................................................11
JOBS Act..............................................................................................................................................................11
EGC Status ..........................................................................................................................................................11
Elements of the IPO On-Ramp ............................................................................................................................12
EGCs and the IPO Process .................................................................................................................................12
Testing the Waters ..........................................................................................................................................12
Scaled Financial Disclosures ..........................................................................................................................12
Research..............................................................................................................................................................12
Gun Jumping — Restrictions on Communications During the IPO Process ............................................................13
How It All Works Together — The Gun-Jumping Flowchart .................................................................................13
What Is Gun Jumping? ........................................................................................................................................14
Restrictions on Communications During the Quiet Period ...................................................................................14
The 30-Day Bright Line Safe Harbor — Securities Act Rule 163A ..................................................................15
Pre-Filing Public Announcements of a Planned Offering — Securities Act Rule 135 .....................................15
Factual Business Communications by Non-Reporting Issuers and Voluntary Filers —
Securities Act Rule 169 ...................................................................................................................................16
Restrictions on Communications During the Waiting Period ...............................................................................16
Limited Post-Filing Communications — Securities Act Rule 134 .........................................................................16
Testing the Waters ...............................................................................................................................................17
Preliminary Prospectus (Red Herring) .................................................................................................................18
Road Shows.........................................................................................................................................................18
Free Writing Prospectuses (FWPs) .....................................................................................................................19
Overview .........................................................................................................................................................19
Why Are FWPs Permitted? — Securities Act Rule 164(a) ..............................................................................19
Use of FWPs — Securities Act Rule 433(b) ....................................................................................................20
What Can Be in an FWP? — Securities Act Rule 433(c) ................................................................................20
Media FWPs — Securities Act Rule 433(f) .....................................................................................................20
When Must FWPs Be Filed? — Securities Act Rule 433(d) ............................................................................21
Certain Failures to File and Failures to Include the Required Legend — Securities Act Rule 164 ..........................21
Restrictions on Communications After Effectiveness of the Registration Statement;
Prospectus Delivery .............................................................................................................................................22
Concurrent Private Offerings ...............................................................................................................................22
IPO Financial Statements ...........................................................................................................................................27
What Financial Statements Must Be Included? ........................................................................................................27
What Financial Statements Must Be Included to Begin SEC Review?.....................................................................28
Additional Financial Information That Is Typically Included ......................................................................................28
Summary Financial Data......................................................................................................................................28
Recent Financial Results .....................................................................................................................................28
Recent Developments..........................................................................................................................................28
Non-GAAP Financial Measures ...........................................................................................................................29
Selected IPO Financial Statement Issues ................................................................................................................29
Cheap Stock ........................................................................................................................................................29
Segment Reporting ..............................................................................................................................................29
Internal Control Over Financial Reporting ................................................................................................................30
Upsizing and Downsizing an IPO ...............................................................................................................................33
Rule 430A .................................................................................................................................................................33
Instruction to Rule 430A(a) ..................................................................................................................................34
C&DI 227.03 ........................................................................................................................................................34
C&DI 627.01 ........................................................................................................................................................35
Section 11 and Section 12 ........................................................................................................................................35
The Section 12 File ..............................................................................................................................................36
Securities Act Rule 159; FWPs; Exchange Act Rule 15c2-8(b) ......................................................................36
Filing Fee Issues — Securities Act Rules 457 and 462(b)........................................................................................38
Rule 457...............................................................................................................................................................38
Rule 462(b) ..........................................................................................................................................................39
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Specic Issuers and Industries..................................................................................................................................41
Foreign Private Issuers .............................................................................................................................................41
Master Limited Partnerships .....................................................................................................................................41
What Is an MLP? .................................................................................................................................................41
Cash Distributions and Equity Structure ..............................................................................................................42
Securities Law Considerations.............................................................................................................................42
Governance Considerations ................................................................................................................................42
REITs ........................................................................................................................................................................43
Life Sciences ............................................................................................................................................................44
Crossover Investors .............................................................................................................................................44
Testing the Waters ...............................................................................................................................................44
The FINRA Review Process ........................................................................................................................................47
FINRA’s Corporate Financing Rule and Related Requirements ...............................................................................47
Beginning Life as a Public Company ........................................................................................................................51
Overview ...................................................................................................................................................................51
Exchange Act Reporting ...........................................................................................................................................52
When Are Exchange Act Reports Due? ...............................................................................................................52
Current Reports on Form 8-K..........................................................................................................................52
Quarterly Reports on Form 10-Q ....................................................................................................................53
Annual Reports on Form 10-K ........................................................................................................................53
Proxy Statements.................................................................................................................................................53
Pending Material M&A Transactions ....................................................................................................................53
PSLRA Safe Harbor .............................................................................................................................................54
Regulation FD ...........................................................................................................................................................54
Disclosure to Securities Market Professionals or Securityholders .......................................................................54
Material Nonpublic Information ............................................................................................................................55
Timing of Disclosure ............................................................................................................................................55
Form of Disclosure ...............................................................................................................................................55
Non-GAAP Financial Measures ................................................................................................................................55
Regulation G ........................................................................................................................................................56
Regulation S-K Item 10(e)
...................................................................................................................................56
Earnings Guidance ...................................................................................................................................................57
A Review of the Basics ........................................................................................................................................57
How Far to Go .................................................................................................................................................57
What to Say.....................................................................................................................................................57
Guidance Guidelines............................................................................................................................................58
Scope ..............................................................................................................................................................58
Cautionary Statements....................................................................................................................................58
The Delivery ....................................................................................................................................................58
Anticipating Questions ....................................................................................................................................59
Updating or Confirming Prior Guidance ..........................................................................................................59
The Sarbanes-Oxley Act of 2002 ..............................................................................................................................60
Internal Control Over Financial Reporting — Section 404 ...................................................................................60
Disclosure Controls and Procedures ...................................................................................................................61
Certification Requirements — Sections 302 and 906 ..........................................................................................61
Listed Company Audit Committees — Rule 10A-3 ..............................................................................................61
Audit Committee Financial Expert........................................................................................................................62
Loans to Executives — Section 402 ....................................................................................................................62
Forfeiture of Bonuses — Section 304 ..................................................................................................................63
Incentive-Based Compensation Clawbacks ............................................................................................................63
NYSE and Nasdaq Corporate Governance and Board Composition Requirements ................................................64
Schedule 13D and 13G Reporting ............................................................................................................................65
Schedule 13D ......................................................................................................................................................65
Schedule 13G ......................................................................................................................................................65
Section 16 of the Exchange Act ................................................................................................................................66
Who Is a Section 16 Reporting Person? ..............................................................................................................67
Section 16(a) Reports ..........................................................................................................................................67
What Is Beneficial Ownership? .......................................................................................................................67
Form 4 Filings .................................................................................................................................................68
iiiTable of Contents
Form 5 Filings .................................................................................................................................................68
Filing Issues ....................................................................................................................................................68
Some Additional Issues ............................................................................................................................................69
Rule 144 Resales.................................................................................................................................................69
Affiliates ...........................................................................................................................................................69
Non-Affiliates ...................................................................................................................................................69
Conflict Minerals ..................................................................................................................................................70
Liability Under the US Federal Securities Laws .......................................................................................................75
Registration — Section 5 of the Securities Act .........................................................................................................75
Antifraud ...................................................................................................................................................................75
What Is Material? .................................................................................................................................................76
Fraud in Connection With the Purchase or Sale of Securities — Rule 10b-5 ......................................................77
Elements of a Claim Under Rule 10b-5...........................................................................................................77
Scope of Rule 10b-5 .......................................................................................................................................77
Insider Trading ................................................................................................................................................77
Damages Under Rule 10b-5 ...........................................................................................................................78
Registered Offerings — Section 11 of the Securities Act .....................................................................................78
Registered Offerings — Section 12(a)(2) of the Securities Act ............................................................................79
Timing of the Investment Decision Under Section 12(a)(2) — Rule 159 ........................................................80
Controlling Person Liability .......................................................................................................................................80
Enforcement .............................................................................................................................................................80
Background ..........................................................................................................................................................80
Civil Liability for Short-Term Transactions Under Exchange Act Section 16 .............................................................81
Recovery of Profits Under Section 16(b) .............................................................................................................81
Purchase and Sale ..........................................................................................................................................81
Calculation of Profits .......................................................................................................................................82
Criminal Liability for “Short Sales” Under Section 16(c).......................................................................................82
Legal Matters ...............................................................................................................................................................85
Where You Can Find More Information .....................................................................................................................85
Report of Non-Independent Editors ......................................................................................................................... F-1
Annex A: Sample IPO Checklist ............................................................................................................................... A-1
Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards ........................................B-1
Quantitative Initial Listing Standards ...................................................................................................................... B-1
Minimum Distribution Requirements .................................................................................................................. B-1
Market Value of Publicly Held Shares ................................................................................................................ B-1
Financial Standards ........................................................................................................................................... B-1
Alternate Listing Standards for Foreign Private Issuers Only ................................................................................. B-1
FPI Minimum Distribution Requirements ........................................................................................................... B-1
FPI Market Value of Publicly Held Shares ......................................................................................................... B-2
Financial Standards ........................................................................................................................................... B-2
Quantitative Maintenance Requirements................................................................................................................ B-2
Minimum Distribution Requirements .................................................................................................................. B-2
Minimum Financial Standards............................................................................................................................ B-3
Price Criteria ...................................................................................................................................................... B-3
Other Maintenance Requirements ..................................................................................................................... B-3
NYSE Corporate Governance Requirements ......................................................................................................... B-3
Majority of Independent Directors ...................................................................................................................... B-4
Executive Session.............................................................................................................................................. B-5
Recovery of Erroneously Awarded Compensation (“Claw Back” Rules) ........................................................... B-5
Nominating/Corporate Governance Committee ................................................................................................. B-5
Compensation Committee ................................................................................................................................. B-5
Audit Committee ................................................................................................................................................ B-6
Composition .................................................................................................................................................. B-6
Charter .......................................................................................................................................................... B-6
Internal Audit ...................................................................................................................................................... B-7
Shareholder Meetings ........................................................................................................................................ B-7
Shareholder Approval of Certain Transactions .................................................................................................. B-7
Related Party Transactions ................................................................................................................................ B-8
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Latham & Watkins – US IPO Guide
Corporate Governance Guidelines .................................................................................................................... B-8
Code of Business Conduct and Ethics............................................................................................................... B-8
NYSE Communication and Notification Requirements ...................................................................................... B-9
Corporate Governance Requirements for Foreign Private Issuers......................................................................... B-9
Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards.....................................C-1
NGM Quantitative Listing and Maintenance Standards ..........................................................................................C-1
NGM Quantitative Initial Listing Standards ........................................................................................................C-1
NGM Quantitative Maintenance Standards .......................................................................................................C-2
NGSM Quantitative Listing and Maintenance Standards .......................................................................................C-2
NGSM Quantitative Initial Listing Standards ......................................................................................................C-2
Liquidity Requirements..................................................................................................................................C-3
NGSM Quantitative Maintenance Requirements ...............................................................................................C-3
NCM Quantitative Listing and Maintenance Standards ..........................................................................................C-3
NCM Quantitative Initial Listing Standards ........................................................................................................C-3
NCM Maintenance Requirements ......................................................................................................................C-4
Failure to Meet Continuing Listing Requirements (NGM, NGSM, and NCM) .........................................................C-4
Nasdaq Corporate Governance Requirements ......................................................................................................C-4
Majority of Independent Directors ......................................................................................................................C-5
Meetings of Independent Directors ....................................................................................................................C-6
Recovery of Erroneously Awarded Compensation (“Claw Back” Rules) ...........................................................C-6
Director Nominees .............................................................................................................................................C-6
Compensation Committee .................................................................................................................................C-6
Audit Committees...............................................................................................................................................C-7
Sarbanes-Oxley ............................................................................................................................................C-7
Charter ..........................................................................................................................................................C-8
Composition ..................................................................................................................................................C-8
Responsibility and Authority ..........................................................................................................................C-8
Cure Periods .................................................................................................................................................C-9
Shareholder Meetings ........................................................................................................................................C-9
Quorum ..............................................................................................................................................................C-9
Proxy Solicitation ...............................................................................................................................................C-9
Conflicts of Interest and Related Party Transactions .........................................................................................C-9
Shareholder Approval of Certain Transactions ..................................................................................................C-9
Auditor Registration .........................................................................................................................................C-10
Code of Conduct ..............................................................................................................................................C-10
Notification of Non-Compliance .......................................................................................................................C-10
Corporate Governance Certification ................................................................................................................C-10
Nasdaq Communication and Notification Requirements .................................................................................C-10
Corporate Governance Requirements for Foreign Private Issuers....................................................................... C-11
Annex D: Exchange Act Reporting Requirements .................................................................................................D-1
Form 8-K .................................................................................................................................................................D-1
Form 10-Q ..............................................................................................................................................................D-2
Financial Statements and MD&A .......................................................................................................................D-2
Other Disclosures ..............................................................................................................................................D-3
Certification ........................................................................................................................................................D-3
Form 10-K ...............................................................................................................................................................D-3
Audited Financial Statements ............................................................................................................................D-3
Description of the Company...............................................................................................................................D-4
Miscellaneous ....................................................................................................................................................D-4
Certification ........................................................................................................................................................D-6
Proxy Statements ...................................................................................................................................................D-6
Preliminary Proxy Statement .............................................................................................................................D-6
Broker-Dealer Search ........................................................................................................................................D-6
Content of Proxy Statement ...............................................................................................................................D-6
Stockholder Proposals .......................................................................................................................................D-7
Say on Pay, Frequency, and Golden Parachute Votes ......................................................................................D-8
1Summary
THE LATHAM US IPO GUIDE
SUMMARY
This Summary does not contain all of the information that you will need to successfully complete your IPO. You
really should read this entire guide as well as the other Latham & Watkins publications referred to in this guide if
you want to get the full picture. Actually, you should just hire Latham & Watkins to act as your IPO counsel and
then you will not need to read any of this stu. However, if you want an advance copy of the playbook and are not
yet ready to choose your counsel, you can read this Summary and get a pretty good sense of what to expect in
the IPO process.
Our Mission
We are among a select group of leading IPO law firms in the United States — having been a market leader in
every year since 2010. Between 2021 and 2023, we advised on more than 275 global IPOs, helping companies
raise more than $217 billion. Our mission in this guide is to arm you with a thorough overview of the IPO process,
including practical tips gleaned from our unparalleled experience in the trenches. This guide is different from any
other guide you might come across, because we do more than just recite the rules — we share the secret sauce.
We believe that our leadership position in the IPO market positions us to give you the practical advice you need to
navigate the IPO process successfully.
The Market Opportunity
There are lots of good reasons to consider an IPO. Public companies and their shareholders can:
• monetize an equity interest in the company at the rich price-to-earnings multiples that are typically available
only in the public markets;
• cash in a portion of the owner’s or founder’s equity without giving up control completely;
• access public equity markets for future capital raising;
• more easily attract and reward key employees and directors by providing them with an opportunity to share in
the upside of the enterprise through stock-based compensation; and
• acquire other companies by issuing public equity either directly to the sellers or to the public to raise the funds
for a cash purchase.
The first of these considerations is usually paramount. The owners of a private company can always sell out to a
purchaser looking to acquire all of the company’s equity, but the public markets typically offer a higher earnings
multiple and, hence, a higher enterprise value than any private purchaser is willing to pay. In our view, this is the
single best reason to go public, although it can take years for the pre-IPO stockholders to sell out in full. Where
the public market valuation does not exceed the valuation available in a private sale of the enterprise, most
owners of private companies who are looking to exit will opt for a private sale. The private sale lets you get out in
full in one fell swoop, which is nearly impossible in the public markets.
Of course, an IPO is not the right answer for every private company. A private sale to an industry player or a
private equity shop may provide a quicker way to monetize your investment. One possibility is to consider both
alternatives simultaneously through a dual-track process (simultaneously pursuing a sale and an IPO). It is not
unheard of for a private company to venture most of the way down the IPO road and decide to sell privately at the
last minute.
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Latham & Watkins – US IPO Guide
After all, there are some distinctly unpleasant things about being public. In fact, it’s pretty sweet to be a private
company. Here are some of the privileges that private companies enjoy:
• they do not need to share their financial results with competitors, customers, or suppliers;
• they do not need to disclose what they pay their top executives;
• they do not need to pay an outside accounting firm to audit their internal controls over financial reporting;
• they can approve major corporate events without the need for a public solicitation of shareholder votes;
• they enjoy a flexible corporate governance environment, with no requirements for independent directors; and
• they can make significant corporate acquisitions even if the target company does not have audited historical
financial statements available.
Public companies enjoy none of these privileges. Moreover, public companies are subject to market expectations
for regular growth and must live in a world governed by a thicket of regulation. It’s not for everyone.
The Preliminary Checklist
Even before the organizational meeting that kicks off the IPO process, you will want to start grappling with a
number of key issues. These include the following:
• Will the market regard you as an attractive IPO candidate? Some of the key business attributes of a company
that is ready for an IPO typically include:
– a leading market position with a compelling investment thesis;
– an attractive financial model;
– appropriate and foreseeable revenue growth and profitability;
– an established quarterly forecast process and reliable financial reporting controls;
– a proven management team; and
– a robust corporate governance framework.
• Which bank will be “lead left” and who will be your other underwriters? You probably already have a
relationship with potential underwriters, and you may be thinking of adding others to the syndicate. The lead
left bank — the underwriter whose name is listed to the left of the other banks on the prospectus cover — acts
as the quarterback for the IPO. The other underwriters listed in the first tier on the prospectus cover page will
also play an active role in the process.
• Will you qualify as an Emerging Growth Company, or EGC? If so, you will benefit from the accommodations
provided by Title I of the JOBS Act, which will make the entire IPO process easier. Most IPO issuers with less
than $1.235 billion of revenue in their most recently ended fiscal year will qualify as an EGC and be entitled to
cost-saving regulatory accommodations, which we discuss in more detail below.
• Is the right audit team in place and are the auditors ready to go? Public company auditors need to be
registered with the Public Company Accounting Oversight Board, or PCAOB, and the audits need to be
conducted in accordance with PCAOB standards. Public company auditors must also meet the SEC’s and
the PCAOB’s rigorous independence standards. Private companies with smaller auditors sometimes find their
existing auditors are not experienced in these matters or are not enthusiastic about the prospect of their audit
being part of a public registration statement. Some private companies decide to switch to a larger accounting
3Summary
firm in order to gain from the experience the larger firm has amassed. Also, an auditor that is considered
independent for a private company may not meet the independence test for public companies. Obviously,
these decisions have timing and cost implications.
• Do you have the right law rm in your corner? A strong, experienced legal team can significantly reduce the
burden of the IPO drill on management. This is important because the management team will still be obligated
to run the business during the time-consuming IPO process. Also, life as a public company will involve new
challenges that an experienced legal team can help you navigate. As with your auditors, you will want to make
sure your law firm is the right fit.
• Are the nancials ready for prime time? The SEC’s financial statement requirements impose reporting
obligations on top of what is already required by US GAAP for private companies. Topics such as financial
statements for recent significant acquisitions, financial statements for certain significant subsidiaries, segment
treatment, and the like can be time-consuming to address.
• Is quarterly data available? Some underwriters will want to see selected quarterly data for the most recent
eight quarters in the S-1 (that’s the name of the registration statement form you will file with the SEC for your
IPO). This is not an SEC requirement for the S-1 disclosure, but note that it will be required once you are
public. Either way, you will want to anticipate the need for quarterly data before the rules or the banks require
it so that you can have it prepared and scrubbed by your accountants well before you need it.
• Are you ready for life as a public company? Will changes need to be made to ownership structures,
shareholder agreements, employment arrangements, and the like? Will it be necessary to hire a treasurer,
a general counsel, an investor relations officer, or other individuals with public company experience? Are
you ready to start turning out annual and quarterly financial statements on the timeline required of public
companies? Will revisions be needed to bring executive compensation arrangements in line with public
company practices and those of key public competitors? Do you have appropriate internal controls in place?
• Do you have a communications plan in place? The SEC’s rules impose strict limitations on communications
around a planned IPO. These rules can cause significant friction, especially for companies that are used to
being transparent and have active PR programs. On the other hand, violations of the SEC’s communications
restrictions — often called “gun jumping” — can cause an offering to be delayed for weeks or even months.
You will need to ensure you have a plan in place to prevent unauthorized public statements during the public
offering process.
• Will there be a concurrent private capital raise? Is there a possibility that you will pursue an unregistered
private placement concurrently with the IPO? If so, care must be taken to avoid taking steps that could
potentially threaten the private placement or inadvertently cause offerees in the private offering to be excluded
from participation in the IPO.
• Can material contracts be led publicly? The SEC requires material contracts to be publicly filed as
exhibits. The definition of material contracts sweeps in many related-party agreements but excludes most
ordinary-course agreements. You will, however, need to file ordinary-course contracts on which your business
is “substantially dependent.” You may be able to redact limited, commercially sensitive portions of filed
contracts, but the need to publicly file the balance of those agreements can raise difficult business issues.
Do you have any material contracts that contain commercially sensitive information, or that are subject to
confidentiality agreements that would be violated if they were filed publicly? Are any third-party notices or
consents required before the contracts can be filed?
• Are there “cheap stock” issues? Have you granted stock options within the 12 months prior to filing an IPO
registration statement? Was there a contemporaneous equity valuation performed at or near the time of
grant? If there is a significant difference between the exercise price of those options and the expected IPO
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Latham & Watkins – US IPO Guide
price, the grant may trigger compensation expense that could reduce net income and/or prompt the SEC to
ask for a detailed explanation of the rapid change in the issuer’s valuation.
• Will there be a directed share program, or DSP? In a DSP, the issuer requests the underwriters to reserve a
certain number of IPO shares for the company’s customers, vendors, suppliers, and other friends and family.
The size of the DSP needs to be set (it typically will not exceed 5% of the offering, although market practice
varies). Communications with potential DSP participants must be designed to fit within the communications
restrictions on pre-IPO publicity known as the “gun jumping” rules.
• Will there be any industry data? If so, you may need an expert’s consent if you include or summarize an
industry expert’s report, valuation, or opinion in your S-1. This is separate from the consent you will need from
your auditors for the inclusion of their audit report.
This list is just the tip of the iceberg. We have included a more comprehensive checklist in Annex A.
The IPO Timeline
Our initial focus in this guide is on the IPO process — how to get public. It’s important to understand the “how to”
aspects of going public so that you know what to expect over the next few months and can stay one step ahead
of the issues. We will walk you through the critical steps on the road to glory assuming the following timeline for a
typical IPO:
Day 1 Day 60 Day 100 Day 130 Day 160 Day 165 Day 176 Day 177 Day 180
Org Meeting First
Confidential
Submission
to SEC
Second
Confidential
Submission
to SEC
First Public
Filing With
SEC
Second
Public Filing
With SEC
Commence
Road Show
SEC
Declares
S-1
Effective/
Pricing
Occurs
Trading
Begins
Close IPO
However, we will not limit our discussion to process. Most of the work to be done in preparing for an IPO is
actually preparation for being public after the IPO closes. You will need to revamp your corporate governance
architecture, disclose everything material about your business, decide whether to regularly provide your analysts
with guidance about future operating results, scrub your accounting controls and procedures, set up mechanisms
for timely current reporting, and otherwise prepare for life in the public market fishbowl. The IPO road show is
just the beginning of your formal interaction with the buy-side investors who will be your future owners (and there
are earlier, less formal, events to discuss too). Once you are public, you will be under the constant scrutiny of
research analysts and buy-side investors. You will be expected to know what to do and not do, and what to say
and not say.
There is simply no substitute for good preparation. First impressions are important, and you want (need) to know
what is coming so you are ready when it arrives.
The First Month. Some of the most important decisions you will make during this process will be made right at
the outset, even before the organizational meeting. These include selection of your:
• lead investment bank;
• law firm(s); and
• auditors.
The quality of the team you assemble will have a major impact on the rest of the process and, perhaps, the
success of your IPO. Take the time to get this part right. You will want to build a team of bankers, lawyers, and
5Summary
auditors who have experience with IPOs and, ideally, with your industry. IPO issuers may even interview law firms
to propose as counsel for their underwriters. If the issuer develops a relationship with a prominent IPO law firm
that will be acceptable to the investment banking community in the role of underwriters’ counsel, this can help
streamline the process from the issuer’s perspective. The underwriters’ counsel is an important partner in the IPO
process (and in subsequent offerings, and bank and bond financings down the road), and it is important to the
issuer to make sure that the underwriters choose a firm that will bring the right expertise and attitude to the party.
Experienced bankers, lawyers, and auditors will be more efficient with your time and get you to market when
conditions are optimal. They are informed about, and will focus on, what matters to investors. They will know
what about your company or the IPO is likely to draw the attention of the SEC or other regulators and will help
anticipate and pre-empt those comments.
The organizational meeting is the official kickoff of the IPO process. It is attended by all of the professionals
we mentioned above and most of the company’s executive officers. However, you will not want to use the org
meeting to start getting organized — you should begin that process well before the org meeting. Ideally, a month
or so before the org meeting, you will have hired counsel, identified the three or four most useful IPO filings by
comparable companies (the “comps”), and started working with your counsel to flesh out a rough draft of the
registration statement so that you are ahead of the curve by the time the org meeting arrives. It is never too soon
to start discussing the content of the road show with your underwriters since the information in the road show
should also be consistent with the registration statement. If you start ahead of the curve, you can stay in control of
the process from beginning to end. If you start behind, you will be on your heels for the duration.
The org meeting also marks the beginning of the legal, business, and accounting due diligence process. The
underwriters will engage in a thorough due diligence exercise designed to provide a reasonable basis to believe
that the prospectus included in the registration statement (as well as the other offering materials such as the
road show presentation) are free of material misstatements and omissions. Underwriters take due diligence very
seriously, for both liability and reputational reasons. The due diligence process starts with a detailed management
presentation about the business (usually at the org meeting) and continues through all of the drafting sessions
and right up to the closing.
As part of their diligence exercise, the underwriters will ask you to prepare a binder of evidence to support
the accuracy of certain factual assertions in the registration statement (such as market share, size of market
opportunity, and recent industry awards). Compiling these materials can be a time-consuming process and will
slow you down if left until the end.
The Second Month. Most of the second month will be spent working to finalize the disclosure in your registration
statement and helping the underwriters with their due diligence drill. IPOs are registered with the SEC on an
appropriate registration form (usually Form S-1 for US domestic companies). The registration statement includes
a prospectus containing prescribed categories of financial and non-financial disclosure, as well as additional
information not included in the prospectus such as copies of key corporate documents and material contracts that
are filed as exhibits. Here is a brief summary of the contents of your registration statement:
• The Box. Form S-1 requires a summary of the information that is contained in the prospectus. This
information is presented at the beginning of the prospectus on pages that are marked with a box border (like
this page), which is why the summary section is referred to as the summary box, or the “box.” In IPO drafting
sessions, the working group will spend considerable time drafting the box since it is at the beginning of the
prospectus and sets out the issuer’s story and value proposition in a few easy-to-read pages. Typically,
the summary box will include the following headings: Company, Industry, Competitive Strengths, Business
Strategies, Risk Factors, Offering Summary, and Summary Financial Data.
• MD&A. The IPO prospectus must contain a “management’s discussion and analysis” section which discusses
the issuer’s financial results and condition. The purpose of the MD&A is to provide investors with the
information necessary to interpret the issuer’s operating results and financial condition through the eyes of
6
Latham & Watkins – US IPO Guide
management. It is the place where management explains the issuer’s financial statements to investors. A
well-written MD&A will identify the key drivers of the issuer’s results of operations and focus on trends and
uncertainties in the marketplace. It will explain the issuer’s business as management sees it, separately
discussing each operating segment’s performance as well as the business as a whole. It will also identify and
discuss the key performance indicators, or KPIs, that management uses to evaluate the performance and
financial health of the business. In addition, MD&A sections often incorporate a comprehensive analysis of
the issuer’s future prospects, typically presented under a subheading such as “Outlook.” Drafting the MD&A
requires close collaboration among the issuer’s financial team, its accountants, and legal counsel and can be
a time-consuming process.
• Business. The Business section of the prospectus contains a detailed description of the issuer’s business. It
will include the text about the business from the summary box (including competitive strengths and business
strategies) as well as a raft of more granular information about the issuer’s principal products and services,
the location of its primary facilities, the number of its employees, and the like. If the issuer’s business is
regulated, there will be a summary of key regulation. If the issuer is involved in material litigation or is subject
to other material contingent liabilities, those will be described. The Business section is intended to be the full
story about the issuer’s operations.
• Risk Factors. The Risk Factor section gives you a chance to warn investors about risks and challenges
that may result in bad news in the future. It is the place to manage investor expectations. We think of these
cautionary disclosures as insurance. The buy side is rarely put off by risk factor disclosure (they are usually
aware of the risks), but the risk factors often provide important legal protection should risks come to roost after
the closing. Don’t fret. It is typical for the risk factors to go on for several pages and to sound quite negative.
The SEC does not allow you to include mitigating language in the risk factor disclosures.
At the end of the second month, you should be ready to send your document to the SEC. You can do this in
the form of a confidential submission of a draft registration statement or a public filing.
1
Confidential submission
offers a number of advantages: If you decide not to proceed with the IPO past this stage, competitively sensitive
information, such as financial information or key supplier or customer contracts, will not have been made public.
However, you may not commence a road show until at least 15 days after publicly filing the initial confidential
submission and all confidentially submitted amendments.
2
Confidential submissions must be substantially complete when submitted to the SEC for review, just like a publicly
filed registration statement. However, a confidentially submitted draft registration statement need not include the
consent of auditors or other experts and does not need to be signed because a confidential submission does
not constitute a “filing” under the Securities Act.
3
An issuer does not need to name any underwriters in its first
confidential submission, but the SEC Staff typically will not continue reviewing a draft registration statement
unless underwriters are named with the second submission.
The Third Month. After you make your first SEC confidential submission or public filing, you will have 30 days to
get other things done while you are waiting for your first round of SEC comments. Some of the major tasks that
will be on your plate during this period are:
• Testing the Waters. Issuers may meet with certain institutional investors and solicit preliminary indications
of interest in the coming IPO at any time prior to the launch of the formal road show (including before the
first SEC submission). Usually, the testing the waters, or TTW, meetings do not occur prior to the first
SEC submission because the issuer wants to be sure it has its story straight before meeting with potential
investors, given the importance of first impressions. For that reason, you may decide to receive and respond
to the first round of SEC comments before scheduling TTW meetings. The SEC Staff routinely asks to see
copies of the TTW materials used in these meetings, and the TTW materials should tell the same story as the
registration statement. TTW meetings are optional and not part of the program in every deal — work with your
bankers to see if the time and energy it takes to participate in a TTW program are worth the trouble.
7Summary
• Choose a Stock Exchange. You will need to satisfy certain quantitative listing requirements and corporate
governance standards to be eligible for either NYSE or Nasdaq listing, and listed companies are required to
meet certain requirements relating to ongoing shareholder communication and disclosure. Working with your
counsel, you will want to explore the differences between these two exchanges and decide where to list your
stock for post-IPO trading. The exchanges will allow you to confidentially reserve one or more potential ticker
symbols months before going public.
• Management’s Model/Analyst Day. The research analysts at your syndicate banks will want frequent
chances to meet and speak with you to discuss your company, its businesses, and its strategy, and to review
management’s projections for the next several years (typically quarter-by-quarter for the next two years and
then year-by-year for another year or so thereafter). A group meeting with the syndicate analysts typically
will occur around the third month of the process, usually referred to as “analyst day.” Unlike the investment
bankers who have been helping you prepare your registration statement, the research analysts do not work
for you. They are independent and the research they prepare must reflect their personal views, without
influence or pressure from investment banking, issuer management, or other external forces. Your meetings
with research analysts are very important because these analysts are going to help educate the market
about your company once the transaction has launched. You will want to be well prepared for analyst day
and any follow-up meetings with analysts after this first meeting. Management should look to deliver a clear
and concise articulation of the company’s story on analyst day and be ready to answer detailed questions
about the management model. While the investment bankers can help you prepare for the analyst meetings,
regulatory restrictions limit the information that they can share, and the interactions they can have, with
research analysts. The bottom line is that you want to provide the syndicate analysts with the information they
need to formulate a well-informed perspective on your business.
• The Director Slate. This is a good time to finalize the composition of the board of directors, particularly the
identity of the independent directors. You will need a certain number of independent directors at the time you
go public. You may also want to focus on the composition of your various board committees. Finding qualified
directors to serve on your board can take some time, so start the search process early.
• Corporate Governance Decisions. You will need an independent Audit Committee and will want to review a
range of options on other committees and other corporate governance matters. Topics include insider trading
policies, director independence requirements and terms, whistleblower policy, related-party transaction policy,
Regulation FD policy, incentive-based compensation clawback policy, and identification of executive officers
for Section 16 and other reporting purposes.
• Finalize Employee Benet Programs. One of the good things about being public is the ability to award stock
options and restricted stock to key employees and directors. The architecture of employee benefit plans can be
complex, and it makes sense to budget time to design benefit plans that are properly suited to your company.
The board may want to retain a compensation consultant to help guide it through the benefit design process.
• The Underwriting Agreement. The underwriting agreement has a brief moment in the limelight between the
end of the road show when it is signed and the IPO closing three business days later. This document is
probably unlike any other agreement you have seen in any other transaction, and at first glance may strike
you as somewhat one-sided. But don’t let that put you off — most of the pages of the underwriting agreement
exist to assist the underwriters in carrying out their due diligence drill (you can think of the reps and warranties
as a series of questions designed to uncover potential disclosure issues). As a result, there are only a few real
business points in the whole agreement, and negotiating it should not be a particularly adversarial or time-
consuming process.
• The Lock Up. The issuer’s existing shareholders, directors, officers, and option holders will be asked to agree
not to sell any of their shares during the 180-day period following the offering (with a few exceptions). There
is room to negotiate exceptions to the lock up — for estate planning and charitable giving, for example — and
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Latham & Watkins – US IPO Guide
these exceptions will need to be finalized before the start of the road show. The underwriters will require that
the signed lock-up agreements be delivered prior to the launch of the road show, and many request that they
be delivered prior to the initial filing of the registration statement.
The Fourth Month. Once you have received your first round of SEC comments, you will begin to get a glimpse
of the goal line. Responding to those comments will be your main focus when they come in the door (usually on a
Friday afternoon, in our experience) because you will want to show the SEC Staff that you are prepared to move
quickly in order to send the signal that you are hoping they will do the same.
Here are a few other projects that will be taking your time during the fourth month:
• Preparing the Road Show Slides. Ideally, you have been thinking about the content of the road show since
you started drafting the registration statement because the content of the road show must be consistent with,
and should largely be drawn from, the contents of the registration statement. However, distilling your story into
a 30-minute pitch can be challenging. The road show slides will get plenty of attention, as they should, since
the road show is at the center of the marketing process. You may have already started this process when you
prepared for the TTW meetings.
• Finalizing Valuation. Obviously, this is where the action is. All of your SEC submissions and filings to date
will not have included any information about the price at which you hope to sell your stock. You will not fill
in the targeted price range until the day you start your road show, but you will be discussing valuation with
your bankers right up until that moment. Once a valuation is determined, you and the bankers may consider
a stock split to try to get the proposed price within a desirable range. They will be watching the trading prices
of the comps (if there are any publicly traded comps) and discussing the appropriate new issue discount with
each other and with you.
• Finishing Everything Else. You will not have much free time once the road show starts so you will want to
make sure you have all of the loose ends tied down before you hit the road. Anything on the to-do list for the
third month that didn’t actually get done in the third month will need to be completed before you can start the
road show.
The Road Show, Pricing, and Closing. Road shows are both fun and grueling. You may be asked to go to
Europe or Asia and you will certainly be expected to cover both the East and West Coasts of the United States
(and a few places in between). You should anticipate asking your CEO and CFO to give two full weeks to this part
of the process.
The road show begins with a “teach-in” to the sales forces of each of the lead underwriters and continues through
a series of group meetings (typically lunches) with buy-side institutional investors and one-on-one meetings with
the largest institutional investors. Retail investors see a video recording of an early road show meeting, which is
made available on the internet to anyone interested. On the road show, the underwriters are building an order
book of indications of interest from investors, which helps them gauge the level of demand for your stock.
The bookbuilding process will result in a pricing recommendation (how many shares can be sold and at what
price) by the underwriters to the pricing committee of your board. Once the deal has priced, you will sign the
underwriting agreement, and the underwriters will commit to buy all of the shares being offered at a discount to
the “price to public” in the offering. The underwriters will then immediately resell the shares at the price to public
appearing on the front page of the prospectus to the investors who have been allocated shares (referred to as
confirming orders). The difference between the discounted price the underwriters pay for your stock and the public
offering price — the “gross spread” — is the underwriters’ payment for their services. Your stock will open for
trading the next morning.
Three business days later, the offering will close and you will receive the net proceeds from your IPO. Finally, you
will be able to go back to running the business and working hard to meet the growth expectations you signaled
the market to expect.
9Summary
A Note About Research Analysts. The research analyst at each of your lead investment banks will create his
or her own financial model based in part on what he or she learns on analyst day and in subsequent one-on-
one diligence sessions with you. The analysts will have myriad questions about the company, its business, its
strategy, and the management model, and each analyst will produce his or her own proprietary model, which can
be expected to differ in some ways from the management model. You will not share projections with potential
IPO investors during the road show (except in some MLP and REIT deals), but the analysts may verbally discuss
their proprietary models with potential IPO investors once the offering has launched. The analysts’ models may
include growth rates and margin assumptions specific to your business as well as other metrics based on your
industry. It is important to ensure that the analysts are not basing their projections of future growth or profitability
on outdated, inaccurate, or incomplete information, as the information that you provide will be the basis for many
of the assumptions that they make and share with buy-side clients during this investor education process.
Corporate Information
Our principal executive offices do not exist. We have a one-firm approach with no headquarters. Instead, we have
over 2,600 attorneys practicing in 60 international practice groups and industry teams spread out over offices in
14 countries. We have over 450 attorneys in our capital markets practice group. We started our firm the same
year that Congress created the SEC (in 1934) and have been a leading IPO firm since 2010. Given how long we
have been at this, we believe we have seen it all and doubt you have a problem we have not tackled before.
Our website address is www.lw.com. Information contained on, or that can be accessed through, our website is
enthusiastically incorporated by reference into this IPO Guide, and all of it is yours for the taking. We look forward
to working with you on your IPO.
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Latham & Watkins – US IPO Guide
ENDNOTES
1
Issuers that are EGCs and registering with the SEC for the first time may submit draft registration statements for condential review, which
is protected from disclosure under the Freedom of Information Act (FOIA). JOBS Act, Section 106, adding Securities Act Section 6(e)(1).
The confidential submission is automatically exempt from disclosure under the Freedom of Information Act (FOIA). JOBS Act, Section 106,
adding Securities Act Section 6(e)(2).
Issuers that are not EGCs may also submit draft registration statements for nonpublic review, which affords more limited protection from
FOIA. See Staff of the Division of Corporation Finance, Draft Registration Statement Procedures Expanded (June 29, 2017, updated
Aug. 17, 2017) [2017 Procedures]. Nonpublic submissions are not automatically exempt from FOIA, and issuers are advised to request
confidential treatment under SEC Rule 83. 2017 Procedures, at n.1. Making a Rule 83 request does not guarantee that the information
will be protected from public disclosure; the issuer simply puts the SEC on notice that it wants the information kept confidential. The SEC
will resolve whether to honor a confidentiality request only when disclosure of the information is requested under FOIA. See Condential
Treatment Procedures Under the Freedom of Information Act, 17 C.F.R. 200.83.
Prior to the end of the twelfth month following the effective date of the initial registration statement, these issuers may also submit the first
draft of a follow-on registration statement for nonpublic review. See 2017 Procedures.
2
An EGC must publicly file its registration statement and all previous confidential submissions at least 15 days before commencing its
road show or, absent a road show, 15 days prior to effectiveness. FAST Act Section 71001, amending Securities Act Section 6(e)(1);
see also Jumpstart Our Business Startups Act Frequently Asked Questions — Confidential Submission Process for Emerging Growth
Companies (updated Dec. 21, 2015) [JOBS Act FAQs], Questions 8 and 9. A non-EGC must publicly file its registration statement and all
previous nonpublic submissions at least 15 days before commencing any road show or, absent a road show, 15 days prior to effectiveness.
2017 Procedures. In the case of a follow-on offering, the public filing must be made at least 48 hours prior to effectiveness. 2017
Procedures.
3
See SEC Division of Corporation Finance, JOBS Act FAQs: Condential Submission Process for Emerging Growth Companies
(Apr. 10, 2012), Question 7. In addition, a confidential submission does not constitute a filing for purposes of Sarbanes-Oxley.
11The IPO Business
THE IPO BUSINESS
Some Basics
There are a few primary federal statutes that we will be talking a lot about in this guide. Here is a brief summary to
get things started.
Securities Act of 1933 and Securities Exchange Act of 1934
The two Depression-era federal statutes at the center of our discussion are the US Securities Act of 1933 and the
US Securities Exchange Act of 1934. The Securities Act generally governs the initial offer and sale of securities
in the United States. The Exchange Act generally regulates the post-issuance trading of securities, the activities
of public companies, including reporting obligations and M&A transactions, and the activities of other market
participants (such as underwriters).
The US Securities and Exchange Commission, the regulatory body in charge of the Securities Act and the
Exchange Act, has issued a comprehensive body of rules and regulations under those Acts that have the force
of law. The SEC and its Staff have also provided interpretive guidance on a wide range of questions under the
securities laws.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act became law. The JOBS Act made significant changes
to the IPO process and other aspects of the US securities laws. Above all, it created a new category of issuer,
called an emerging growth company, or EGC. EGCs benefit from a transition period, or on-ramp, from private to
public company. During this period — which can last for up to five years — EGCs are exempt from certain costly
requirements of being a public company. EGCs may choose all, some, or none of the on-ramp accommodations
offered by Title I of the JOBS Act.
1
EGC Status
You can take advantage of the JOBS Act accommodations only if you are an EGC. In order to qualify as an EGC,
a company must have annual revenue for its most recently completed fiscal year of less than $1.235 billion.
2
After
the initial determination of EGC status, a company will remain an EGC until the earliest of:
• the last day of any fiscal year in which the company earns $1.235 billion or more in revenue;
• the date when the company qualifies as a “large accelerated filer,” with at least $700 million in public equity
float;
3
• the last day of the fiscal year ending after the fifth anniversary of the IPO pricing date; or
• the date of issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities.
EGC status will ordinarily terminate on the last day of a fiscal year. However, the issuance in any three-year
period of more than $1.0 billion in non-convertible debt securities would cause an issuer to lose its EGC
status immediately. Note however, that EGC status will be extended during the registration process even if the
registrant’s revenues exceed $1.235 billion or the registrant issues in excess of $1.0 billion of debt securities
during the registration process. Any confidential submission or public filing by an EGC will lock in EGC status
through the earlier of (i) the IPO date or (ii) one year after the issuer would have otherwise lost EGC status.
4
Subject to certain limitations, a company that was previously public may be eligible for EGC status.
5
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Latham & Watkins – US IPO Guide
PRACTICE POINT
An EGC that loses status during the registration process will get the benefit of all disclosure-related aspects of
being an EGC (e.g., two years of financials rather than three). But the SEC Staff has taken the position that the
lock-in does not extend to the relaxed rules on research.
6
Elements of the IPO On-Ramp
As long as an issuer continues to qualify as an EGC, it benefits from a temporary transition period, or on-ramp,
during which its regulatory requirements phase in gradually. This phased approach eases the cost of public
company compliance by allowing the EGC additional time to comply with some of the more costly requirements
that apply broadly to the largest public companies. As discussed above, the on-ramp period for any particular
EGC will depend upon its revenue, public float, and issuance of debt securities but will not last beyond the last
day of the fiscal year-ending after the fifth anniversary of its IPO pricing date.
The on-ramp exemptions for EGCs include:
• Section 404(b) of Sarbanes Oxley. EGCs are exempt from the auditor attestation requirements of
Section 404(b) relating to internal controls over financial reporting for as long as they qualify as EGCs.
7
• Executive compensation disclosure. EGCs may use streamlined executive compensation disclosure and are
exempt from the shareholder advisory votes on executive compensation required by the 2010 Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank).
• Extended phase-in for new US GAAP. EGCs are not required to comply with new or revised financial
accounting standards under US GAAP until those standards also apply to private companies.
8
• Certain PCAOB rules. EGCs are exempt from any PCAOB rules that, if adopted, would mandate audit firm
rotation and an expanded narrative, called auditor discussion and analysis, that would appear as part of
any financial statement audit.
9
The PCAOB has adopted a new auditor reporting standard that will alter the
standard form of audit report used in SEC filings. EGCs are exempt from this new standard.
10
EGCs and the IPO Process
Testing the Waters
EGCs and their authorized persons (including underwriters), before or after confidentially submitting or publicly
filing a registration statement, are allowed to meet with large heavyweight investors, called qualified institutional
investors or QIBs, and other institutional accredited investors, or IAIs, to gauge their interest in a contemplated
offering.
11
These testing-the-waters, or TTW, meetings are discussed in more detail below.
Scaled Financial Disclosures
At the time of its IPO, an EGC can provide two, rather than three, years of audited financial statements.
12
After its
IPO, an EGC must phase into full compliance by adding one additional year of financial statements in each future
year until it presents the traditional three years of audited financial statements.
13
An EGC’s MD&A may address
only the years for which it provides audited financial statements and any subsequent interim period.
14
In our
experience, some EGCs choose not to take advantage of the scaled financial disclosure accommodation because
they prefer to show their performance trajectory over a longer period.
Research
The JOBS Act and subsequent FINRA rulemaking have effectively eliminated the quiet periods for pre-IPO and
post-IPO research on EGCs and thus, in theory, would allow participating broker-dealers to publish research
reports on an EGC before or immediately after the IPO pricing date. FINRA also subsequently amended its
rules to reduce the research blackout period for non-EGC IPOs to 10 days following pricing, although other
13
considerations under federal securities laws with respect to the distribution of research around the time of an
offering continue to apply. Accordingly, for both EGC and non-EGC IPOs, a 25-day research quiet period is still
typically imposed on members of the underwriting syndicate. This syndicate-imposed research quiet period
typically begins at the time an underwriter becomes a member of the syndicate and lasts until the 25th calendar
day following the IPO effective date. This approach reflects the view of many industry participants that investors
should be looking to the information provided in the prospectus during the prospectus delivery (or availability)
period set forth in Securities Act Rule 174(d). It also provides the covering analysts with some time to prepare
their first public research reports.
Gun Jumping — Restrictions on Communications During the IPO Process
How It All Works Together — The Gun-Jumping Flowchart
The following flowchart gives an overview of how to think about publicity-related questions as your IPO proceeds:
The IPO Business
Offer?
NO - Pass go
(collect $200)
Not clear
(think harder)
Rule 163A
Information > 30 days prior
to public filing of a
registration statement
Rule 169
Factual information by
non-reporting issuers and
voluntary filers
Rule 134
Post-filing communications
Rule 135
Pre-filing notices of
registered offerings
Red herring
(or other Section
10(b) prospectus)
Safe harbor
available?
Permitted
offer?
Final Section 10(a)
prospectus
Private offers
that are not general
solicitation
Road show
Post-effective free
writing
TTW meetings
with QIBs and IAIs
Free Writing
Prospectus (FWP)
Oral offer
post-filing of
registration statement
14
Latham & Watkins – US IPO Guide
What Is Gun Jumping?
Gun jumping refers generally to violations of the communications restrictions under the Securities Act. Section 5
of the Securities Act divides the registration process into three distinct time periods:
• Pre-ling or “quiet” period. The pre-filing or quiet period begins when a company decides to make a public
offering (usually by retaining an investment bank or banks to undertake the offering) and ends when the
registration statement relating to the offering is first filed publicly with the SEC. During this period, Section 5(c)
of the Securities Act prohibits any person from engaging in activity that could be construed as making an
“offer” of the company’s securities. Accordingly, other than TTW activities permitted by Section 5(d) of and
Rule 163B under the Securities Act (discussed below), or absent an exemption from registration — such as
the private placement exemption of Section 4(a)(2) or an exception from the definition of offer — nothing that
would be considered to be an offer of securities is permitted during the pre-filing period.
• Period between ling and eectiveness (also often called the “waiting period”). The waiting period extends
from the time that the registration statement is led publicly with the SEC until the time that it is declared
effective by the SEC. During this period, offers of the security are permitted by Section 5 if they are made
properly (sales are not allowed until the effectiveness of the registration statement). Under Section 5(b)(1), no
prospectus other than a prospectus meeting the requirements of Section 10 of the Securities Act may be used
to make written offers. Because the term “prospectus” picks up nearly all forms of written offers (and many
forms of oral communication, including TV broadcasts, blast voicemail messages, and the like), only certain
types of oral offers and a carefully limited group of written offers may be made during the waiting period. A
properly designed road show is one form of oral offer that satisfies the intricate requirements of Section 5.
Issuers may also engage in TTW communications with QIBs and other IAIs during the waiting period.
• Post-eective period. After effectiveness of the registration statement (which occurs on the pricing date),
underwriters and other distribution participants may confirm sales of the securities by means of a final
prospectus meeting the requirements of Section 10(a) of the Securities Act. In addition, underwriters will
have an obligation to deliver a final prospectus during a period of time following effectiveness, even in
connection with secondary market resales. Accordingly, until the later of (1) completion of the “distribution”
of the securities (that is, when the securities have been sold to investors) or (2) expiration of the relevant
prospectus-delivery period (25 days in the case of IPOs that will be listed on a national securities exchange),
limitations on publicity by the issuer will remain in place.
Restrictions on Communications During the Quiet Period
During the quiet period, an IPO issuer may not make offers or sales of the securities being registered, although
issuers may participate in TTW meetings. The SEC has construed the term “offer” very broadly to include
communications that do not refer to the proposed offering but which may nevertheless stimulate investor or dealer
interest in the issuer or its securities. General statements about the issuer’s rosy future prospects may well be
considered to be offers. An IPO issuer should generally not release publicly any forecasts, projections, or predictions
relating to revenue, income, or earnings per share or concerning expected valuations, and should put in place
procedures for review of public statements and press releases as soon as the IPO process first gets underway.
PRACTICE POINT
Prior to filing your registration statement, you should review your website to make sure the content is factually
consistent with the statements in your registration statement and will not be considered to be an illegal offer of
securities. Issuer websites are routinely reviewed by the SEC Staff during the registration process and could be
construed to be an ongoing offer of securities. In addition, the Staff is looking to assess whether the issuer is
presenting information about itself that is consistent, regardless of the media used.
15The IPO Business
Although an IPO issuer may continue to advertise its products and services and issue press releases regarding
factual business and financial developments in accordance with past practice,
15
the breadth of the SEC’s definition
of the term offer, coupled with the potentially significant problems flowing from gun jumping, make it advisable
to tone down all public statements (or at least run them by counsel) during and immediately preceding the
IPO process. Meetings with or publications targeted at members of the investment community are particularly
problematic during the quiet period.
As we discuss in more detail below, issuers and their authorized persons (including underwriters) may engage in
oral or written communications with QIBs and other IAIs in TTW sessions that occur during (or before) the quiet
period. In addition, the SEC has provided certain safe harbors from the prohibition on pre-filing offers that apply to
all issuers (even non-EGCs). Under these safe harbors, an IPO issuer may:
• take advantage of the Rule 163A safe harbor for communications that do not refer to the IPO made more than
30 days prior to the filing of the registration statement;
• release a limited notice regarding the planned IPO under Securities Act Rule 135; and
• release certain factual information under Rule 169.
We discuss these safe harbors below.
The 30-Day Bright Line Safe Harbor — Securities Act Rule 163A
Rule 163A provides IPO issuers with a non-exclusive safe harbor from Section 5(c)’s prohibition on pre-filing
offers for certain communications made more than 30 days before the public filing of a registration statement
that might otherwise have been considered to be an offer under Section 2(a)(3). For an EGC that confidentially
submits a draft registration statement for nonpublic review by the SEC, the date of the first public filing of the
registration statement, not the date of the confidential submission, determines the availability of the Rule 163A
safe harbor. Rule 163A is not available to prospective underwriters.
The requirements for Rule 163A include that:
• the communication cannot refer to the securities offering;
• the communication must be made by or on behalf of an issuer — in other words, the issuer will need to
authorize or approve each Rule 163A communication (communications by an underwriter will not come within
the safe harbor); and
• the issuer must take “reasonable steps within its control” to prevent further distribution of the communicated
information during the 30-day period before filing the registration statement (although the SEC has suggested
that the issuer may maintain copies of previously published information on its website, if the information is
appropriately dated, identified as historical material and not referred to as part of the offering activities).
16
Pre-Filing Public Announcements of a Planned Oering — Securities Act Rule 135
Rule 135 provides that an IPO issuer will not be deemed to make an offer of securities under Section 5(c) as a result
of a public announcement of a planned registered offering that includes only the bare-bones information permitted
by the Rule. A Rule 135 notice can be released at any time, including before a registration statement is filed.
Under Rule 135, the announcement must contain a legend, and no more than the limited information enumerated
in the Rule, which includes:
• the name of the issuer;
• the title, amount, and basic terms of the securities offered;
• the anticipated timing of the offering; and
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• a brief statement of the manner and purpose of the offering, without naming the prospective underwriters for
the offering.
Factual Business Communications by Non-Reporting Issuers and Voluntary Filers —
Securities Act Rule 169
Rule 169 provides a non-exclusive safe harbor from both Section 5(c)’s restriction on pre-filing offers and
Section 2(a)(10)’s definition of a prospectus for companies that are not yet public. Under Rule 169, non-reporting
issuers are permitted to continue to release factual business information, but not forward-looking information.
Rule 169 is available only for communications intended for customers, suppliers, and other non-investors. The
SEC has nonetheless made clear that the safe harbor will continue to be available if the information released
happens to be received by a person who is both a customer and an investor.
17
Restrictions on Communications During the Waiting Period
During the waiting period, which extends from the time that the registration statement is filed publicly with the
SEC until the time that it is declared effective by the SEC, oral offers may be made but only certain types of
written offers are permitted. The distinction between oral and written is not intuitive, and many forms of verbal
communication, as well as TV broadcasts, blast voicemail messages, and the like, are considered written for
these purposes. Issuers may continue testing the waters with QIBs and other IAIs during the waiting period
through both written and oral communications.
During the waiting period, an issuer may continue to engage in activity that falls within one of the safe harbors
discussed above. In addition, it may:
• publish a limited notice of its upcoming IPO pursuant to the Securities Act Rule 134 safe harbor;
• circulate a preliminary prospectus (often referred to as a “red herring”) that meets the requirements of
Section 10 of the Securities Act, including a price range for the offering;
• conduct a road show and solicit “buy” orders; and
• under certain circumstances, use a free writing prospectus, or FWP.
Limited Post-Filing Communications — Securities Act Rule 134
Rule 134 provides that certain limited written communications related to a securities offering as to which a
registration statement has been filed will be exempt from the restrictions applicable to written offers (because they
will not be considered to be a prospectus). Rule 134 is only available once a preliminary prospectus that meets the
requirements of Section 10 has been filed. IPO issuers may rely on Rule 134 before filing a price range prospectus,
although the Rule does require a price range prospectus for certain specific statements, as discussed below.
18
The information permitted by Rule 134 includes:
• certain basic factual information about the legal identity and business location of the issuer, including contact
details for the issuer;
• the title and amounts of securities being offered;
• a brief description of the general type of business of the issuer, limited to information such as the general
types of products it sells;
• the price of the security or the method for determining price (in the case of an IPO, this information cannot be
provided until a price range prospectus has been filed);
17The IPO Business
• in the case of a fixed-income security, the final maturity, interest rate, or yield (in the case of an IPO, this
information cannot be provided until a price range prospectus has been filed);
• anticipated use of proceeds, if then disclosed in the prospectus on file;
• the name, address, phone number, and email address of the sender of the communication, and whether or
not it is participating in the offering;
• the names of all underwriters participating in the offering and their additional roles in the underwriting
syndicate;
• the anticipated schedule for the offering and a description of marketing events;
• a description of the procedures by which the underwriters will conduct the offering and information about
procedures for opening accounts and submitting indications of interest, including in connection with directed
share programs;
• in the case of rights offerings, the class of securities the holders of which will be entitled to subscribe, the
subscription ratio, and certain additional information;
• certain additional information, including the names of selling security holders, the exchanges on which the
securities will be listed, and the ticker symbols; and
• a required legend.
It is customary to have a Rule 134 press release on the first day of the road show announcing the launch of the
offering.
PRACTICE POINT
Naturally, you will want to inform employees once your IPO registration statement has been filed, perhaps by
an email blast, a town hall meeting, or an intranet posting. Remember that all communications with employees
should be designed with the restrictions of Rule 134 in mind. If the communication mentions a DSP, it should
be limited to factual information regarding procedures and not attempt to solicit interest in the DSP.
Testing the Waters
Issuers and their authorized persons (including underwriters), before or after confidentially submitting or publicly
filing a registration statement, are allowed to meet with large heavyweight investors, called qualified institutional
buyers or QIBs, and other institutional accredited investors, or IAIs, to gauge their interest in a contemplated
offering.
19
These TTW meetings can include oral and written communications. The decision whether to test the
waters and the timing of these meetings depends on the specific circumstances of each IPO. In our experience,
the majority of TTW meetings take place after confidential submission and before public filing, but we have also
seen deals where TTW meetings occur prior to any submission or during the 15-day period prior to the launch of
the road show.
20
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PRACTICE POINT
Testing the Waters
The deal team should consider how much detail to include in TTW materials, based on when testing the
waters occurs and bearing in mind that the antifraud provisions of the federal securities laws apply to the
content of these communications. As with traditional road show materials, TTW materials should also be
consistent with the information contained in the registration statement. Market participants typically do not
leave written TTW materials behind, although it is common to hand out flip books at these meetings and take
them back when the meeting ends. The SEC Staff routinely asks to see all materials used in TTW meetings
by issuing the following comment:
Please supplementally provide us with copies of all written communications, as
defined in Rule 405 under the Securities Act, that you, or anyone authorized to
do so on your behalf, present to potential investors in reliance on Section 5(d) of
the Securities Act or Securities Act Rule 163B, whether or not they retain copies
of the communications.
These materials are not sent to the SEC Staff through EDGAR but instead are provided in hard copies. The
SEC provides a procedure for requesting that these materials be returned to the issuer.
Preliminary Prospectus (Red Herring)
A “red herring” or “red” is the colloquial term for a certain type of preliminary prospectus permitted by Section 10(b)
of the Securities Act. A red herring can be used to make written offers and solicit customer orders but cannot be
used to satisfy the prospectus delivery obligations that apply when orders are confirmed and securities are sold.
This is because a red herring is a Section 10(b) prospectus but not a Section 10(a) prospectus.
Securities Act Rule 430 provides that, in order to be a Section 10(b) prospectus, a red herring must include
substantially all of the information required in a final prospectus, other than the final offering price and matters that
depend on the offering price, such as offering proceeds and underwriting discounts.
In addition, Regulation S-K Item 501(b)(3) requires a preliminary prospectus used in an IPO to contain a “bona
fide estimate” of the price range. The SEC Staff generally takes the position that a bona fide price range means
a range no larger than $2 (for ranges below $10) or 20% of the high end of the range (for maximum prices
above $10). If a filed prospectus does not yet include a bona fide price range or otherwise does not comply with
Rule 430, it is known in the trade as a “pink herring” — i.e., a filed preliminary prospectus that is not quite a red
because it does not yet meet the requirements of Section 10(b) and cannot be used to solicit customer orders.
PRACTICE POINT
Regulation S-K Item 501(b)(10) specifies the required “subject to completion” legend that must appear on the
front cover of any preliminary prospectus. This legend is traditionally printed in red ink, and gave rise to the
name “red herring.”
Road Shows
Road shows are the duck-billed platypus of the securities world — the evolutionary missing link with traits of
both oral and written offers. Securities Act Rule 433(h)(4) provides a formal definition of “road show” as an offer
(other than a statutory prospectus) that “contains a presentation regarding an offering by one or more members
of an issuer’s management … and includes discussion of one or more of the issuer, such management and the
securities being offered.”
19The IPO Business
You can see why a traditional road show (an intensive series of in-person meetings with key members of the
buy-side community over a multi-day period in multiple cities and, sometimes, in multiple countries) would be an
oral offer. But what about the slide deck that is traditionally handed out and reviewed at road show meetings? And
what if the road show is recorded and broadcast over the internet?
The explanatory note to Rule 433(d)(8) states:
A communication that is provided or transmitted simultaneously with a road show and
is provided or transmitted in a manner designed to make the communication available
only as part of the road show and not separately is deemed to be part of the road
show. Therefore, if the road show is not a written communication, such a simultaneous
communication (even if it would otherwise be a graphic communication or other written
communication) is also deemed not to be written.
As a result, road show slides and video clips are not considered to be written offers as long as copies are not left
behind. Even handouts are not written offers so long as they are collected at the end of the presentation. If they
are left behind, however, they become an FWP, and are subject to a variety of detailed requirements spelled out in
Securities Act Rules 164 and 433, which we discuss further below.
It has become customary to prepare a video recording of the road show meeting for the benefit of retail investors.
The video version will not need to be filed as an FWP so long as it is available on the internet to all comers and
covers the same ground as the live road show.
PRACTICE POINT
It is customary to pass out copies of the slide deck at road show meetings, but all of these flip books are
retrieved at the end of the meeting so the slides do not have to be treated as an FWP.
Free Writing Prospectuses (FWPs)
Overview
Under Securities Act Rule 405, an FWP is any written communication that constitutes an offer to sell or a
solicitation of an offer to buy the securities that are the subject of a registered offering that is used after a
registration statement has been filed. A confidential submission does not trigger the Rule’s definition of an FWP,
nor do TTW communications. A supplement to a statutory prospectus can be an FWP, as can press releases,
emails, blast voicemails, and even press interviews.
The use of FWPs is governed by Securities Act Rules 164 and 433. Rule 164 provides that, once a registration
statement has been filed, an issuer or an underwriter may use an FWP if, among other things, the issuer is an
eligible issuer, the offering is an eligible offering, and the additional conditions of Rule 433 are met.
21
We discuss
the key points of using FWPs below.
Why Are FWPs Permitted? — Securities Act Rule 164(a)
Recall that, under Section 5(b)(1), no prospectus, other than a prospectus meeting the requirements of
Section 10, may be used to make offers. Rule 164(a) provides that an FWP meeting the requirements of Rule 433
will be a Section 10(b) prospectus — that is, a prospectus that may be used to make offers after a registration
statement has been filed. However, an FWP may not be used as a nal prospectus to satisfy the prospectus
delivery requirements associated with the delivery of securities after pricing.
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Use of FWPs — Securities Act Rule 433(b)
For an IPO issuer:
• The prospectus must contain a bona fide price range in order to qualify as a Section 10(b) prospectus that
can be used to solicit customer orders during the road show. An IPO issuer cannot use an FWP until it has
filed a price range prospectus. The requirement to have a price range prospectus does not apply, however,
in the case of a media FWP that was not published in exchange for payment and was filed with a required
legend within four business days of becoming aware of its appearance in the press (more on this below).
• A Section 10 prospectus must accompany or precede the FWP, unless either:
– a statutory prospectus has already been provided and there is no material change from the most recent
prospectus on file with the SEC; or
– the FWP is a media FWP that was not published in exchange for payment and was timely filed with a
legend.
Note that an electronic FWP emailed with the proper hyperlink will obviate the need for physical delivery of a
prospectus.
What Can Be in an FWP? — Securities Act Rule 433(c)
An FWP may include information “the substance of which is not included in the registration statement,” but this
information must not conflict with either:
• information contained in the registration statement; or
• information in any of the issuer’s Exchange Act reports that are incorporated by reference into the registration
statement.
FWPs must also contain a prescribed legend, and may not include disclaimers of responsibility or liability that are
impermissible in a statutory prospectus.
22
These include: disclaimers regarding accuracy, completeness or reliance
by investors; statements requiring investors to read the registration statement; language indicating that the FWP is
not an offer; and, for filed FWPs, statements that the information is confidential.
23
PRACTICE POINT
An FWP is often used when changes are made to an IPO that is already on the road. Typically, these changes
are implemented in an amended registration statement filed with the SEC and a concurrent distribution of
an FWP to prospective purchasers in the IPO. The FWP in this circumstance is typically a short summary of
the changes included in the amended registration statement with the (important) changed pages attached.
Circulating the FWP to prospective purchasers is a less cumbersome way to inform the market of deal changes
than circulating an entire new preliminary prospectus.
Media FWPs — Securities Act Rule 433(f)
Rule 433(f) provides that any written offer that includes information provided, authorized, or approved by the
issuer or any other offering participant that is prepared and disseminated by an unaffiliated media third party will
be deemed to be an issuer FWP. Nevertheless, the requirements for prospectus delivery, legending, and filing on
the date of first use that would otherwise apply to FWPs will not apply if:
• no payment is made or consideration given for the publication by the issuer or other offering participants; and
• the issuer or other offering participant files the media FWP with the required legend within four business days
after the issuer or other offering participant becomes aware of publication or dissemination (but note that the
FWP need not be filed if the substance of the written communication has previously been filed).
21The IPO Business
Any filing of a media FWP in these circumstances may include information that the issuer or offering participant
believes is needed to correct information included in the media FWP. In addition, in lieu of filing the media
communication as actually published, the issuer or offering participant may file a copy of the materials provided to
the media, including transcripts of interviews.
PRACTICE POINT
A media FWP is how the SEC rules deal with an article containing unfortunate quotes from an issuer or other
offering participant that appears at an inopportune point in the offering process. If the article could be construed
to be an “offer,” then treating it as a media FWP is a good compromise solution — the offer will not violate
Section 5, but the issuer will be required to accept Section 12 liability for the article’s contents. It is usually
advisable for issuers to refrain from giving media interviews immediately prior to or during the IPO process.
When Must FWPs Be Filed? — Securities Act Rule 433(d)
The general rule is that an FWP must be filed with the SEC on the day the FWP is first used. If you miss the
SEC’s EDGAR filing cutoff for that day (5:30 p.m. Eastern Standard Time), you should still file the FWP as soon
as you can.
24
Issuers must generally file any issuer FWP, which is defined broadly to include an FWP prepared by or on behalf of
the issuer or an FWP used or referred to by the issuer, as well as a description of the final terms of the securities in a
pricing term sheet (whether contained in an issuer or an underwriter FWP). By contrast, an underwriter only needs to
file an FWP that it distributes in a manner reasonably designed to lead to its “broad unrestricted dissemination.” The
SEC has explained that an FWP prepared by an underwriter that is only made available on a website restricted to
the underwriter’s customers or a subset of its customers will not require filing with the SEC, nor will an email sent by
an underwriter to its customers, regardless of the number of customers involved.
25
There are certain exceptions to the requirement to file an FWP. These include:
• an FWP does not need to be filed if it does not contain substantive “changes from or additions to” a previously
filed FWP;
• an issuer does not need to file issuer information contained in an underwriter FWP if that information is
already included in a previously filed statutory prospectus or FWP relating to the offering; and
• an FWP that is a preliminary term sheet does not need to be filed (recall that an FWP that is a final pricing term
sheet must be filed by the issuer within two days of the later of establishing the terms or the date of first use).
Certain Failures to File and Failures to Include the Required Legend — Securities Act Rule 164
Failure to comply with the conditions of Rule 433 will potentially result in a violation of Section 5(b)(1) of the
Securities Act. This has serious consequences, including a potential right of rescission under Section 12(a)(1).
Rule 164 provides some welcome relief from this harsh result in the case of certain “immaterial or unintentional”
deviations from the requirements of Rule 433. In particular:
• a failure to file or a delay in filing an FWP will not be a violation so long as a good faith and reasonable
effort was made to comply with the filing requirement and the FWP is filed as soon as practicable after the
discovery of the failure to file;
• a failure to include the required legend will not be a violation, so long as: (1) a good faith and reasonable
effort was made to comply with the legending requirement; (2) the FWP is amended to include the required
legend as soon as practicable after the discovery of the omitted or incorrect legend; and (3) if the FWP was
transmitted without the required legend, it is subsequently retransmitted with the legend by substantially the
same means as, and directed to substantially the same purchasers to whom, the original FWP was sent; and
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• a failure to comply with the record retention requirements of Rule 433 will not be a violation so long as a good
faith and reasonable effort is made to comply with these record retention requirements.
Restrictions on Communications After Eectiveness of the Registration Statement;
Prospectus Delivery
Some communications restrictions continue after the IPO. Underwriters (and other dealers) will have an obligation
to deliver (or make available in accordance with the “access equals delivery” protocol) a final prospectus during
a period of time following effectiveness, even in connection with secondary market resales. That period is 25
calendar days in the case of an IPO that will be listed on a US exchange.
26
For a number of reasons, including
that the prospectus being made available needs to continue to be accurate
27
until the expiration of the 25-day
prospectus delivery period, certain limitations on other communications by the issuer during this period will
remain in place. Once the 25-day prospectus delivery period has expired, Securities Act-related limitations on
communications in connection with the offering can generally be eliminated.
PRACTICE POINT
Your CEO or CFO may want to give interviews on television or to the financial press once your stock opens for
trading. If the offer to spar with Jim Cramer is irresistible:
• stick to a script that has been vetted by the legal team for consistency with the prospectus and stripped of
speculation and hyperbole;
• focus on talking about how hard everyone has worked, what a milestone this is in the company’s
development, the company’s mission, and its products and services;
• avoid any discussions about growth or suggestions that the stock is a good investment;
• avoid talking about financial metrics of any sort; and
• above all, stay away from information that is not in the prospectus.
Remember that the prospectus is required to be provided to investors for 25 days following pricing, and
your CEO and CFO will want to avoid saying anything that might require the prospectus to be amended or
supplemented during that period.
Concurrent Private Oerings
Given that the IPO process can take many months, an IPO issuer may want, or need, to pursue a private
offering that is not registered with the SEC on the same schedule as the IPO. Concurrent public and private
offerings are permitted, but need to be properly structured and conducted. There are two main areas of concern:
making sure that activities in the public offering do not cause the private offering to run afoul of Section 4(a)(2)’s
restrictions on general solicitation; and preserving the potential for offerees in the private placement to
participate in the public offering.
There are two ways to avoid tripping over the ban on general solicitation in private offerings. First, if the private
offering purchasers are all QIBs, then it will not matter that the registration statement has been filed. In the Black
Box and Squadron Elleno no-action letters, the SEC Staff laid out a limited policy exception to allow concurrent
private offerings to QIBs and two or three additional large IAIs even though there was an ongoing public offering.
28
We call this the “who” exception. Alternatively, it is possible to structure a good private placement to investors who
are not QIBs if they were attracted to the private offering by a means other than the registration statement, for
example as a result of a substantive pre-existing relationship with the issuer.
29
We call this the “how” exception.
23The IPO Business
The other issue that comes up in the context of concurrent public and private offerings is that potential private
investors may expect information that is not typically part of the IPO disclosure package, particularly projections.
Once a private investor has received projections from the issuer or placement agent in connection with the private
offering, you will have to think carefully whether it will be wise to include that investor in the public offering. In most
cases of concurrent public and private offerings, it can prove difficult to keep both the public and private options
open as to the same institutional investor, unless that investor has received only the information included in the
IPO disclosure. Otherwise, you and your banks will at some point need to decide which investors are exclusively
private side and which are exclusively public side.
PRACTICE POINT
Concurrent public and private offerings are permissible, but you will want to be very thoughtful about who
participates in which offering process, how they are solicited, and what disclosure they are provided.
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ENDNOTES
1
For a detailed discussion of the on-ramp accommodations introduced by Title I of the JOBS Act, see our Client Alerts JOBS Act Establishes
IPO On-Ramp (Mar. 27, 2012) and The JOBS Act After Two Weeks: The 50 Most Frequently Asked Questions (Apr. 23, 2012). For a
comprehensive analysis of trends in the IPO market that emerged during the first two years of the JOBS Act, see our report The JOBS Act,
Two Years Later: an Updated Look at the IPO Landscape (Apr. 5, 2014).
2
See JOBS Act Sections 101(a) and (b) (adding new Securities Act Section 2(a)(19) and Exchange Act Section 3(a)(80)).
3
See Regulation S-K Items 308 (a) and (b). Under Exchange Act Rule 12b-2, a “large accelerated filer” is an issuer that, as of the end of its
fiscal year:
• has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates (market capitalization) of
$700 million or more (measured as of the last business day of the issuer’s most recently completed second fiscal quarter);
• has been subject to SEC reporting under the Exchange Act for a period of at least 12 calendar months;
• has filed at least one annual report under the Exchange Act with the SEC; and
• is not eligible to be a “smaller reporting company” and had annual revenues of less than $100 million in the most recent fiscal year for
which financial statements are available.
In addition, under Exchange Act Rule 12b-2, an “accelerated filer” is an issuer meeting the same conditions, except that it has a market
capitalization of $75 million or more but less than $700 million (measured as of the last business day of its most recently completed second
fiscal quarter). See Final Rule: Accelerated Filer and Large Accelerated Filer Denitions, Release No. 34-88365 (Mar. 12, 2020). See also
Final Rule: Smaller Reporting Company Denition, Release No. 33-10513 (July 10, 2018).
4
Fixing America’s Surface Transportation (FAST) Act, revising Securities Act Section 6(e)(1).
5
Restrictions include that the company was not taken private for the purpose of conducting an IPO as an EGC and did not have registration
of a class of its securities revoked under Exchange Act Section 12(j). See SEC Division of Corporation Finance, Jumpstart Our Business
Startups Act Frequently Asked Questions: Generally Applicable Questions on Title I of the JOBS Act (Sept. 28, 2014) (SEC Title I FAQs),
Question 54.
6
See SEC Title I FAQs, Question 3.
7
See JOBS Act Section 103 (revising Sarbanes-Oxley Section 404(b)).
8
See JOBS Act Section 102(b)(1) (adding new Securities Act Section 7(a)(2)(B)). See also SEC Title I FAQs, Question 13. An EGC wishing
to opt out of the extended phase-in for new or revised financial accounting standards under US GAAP must disclose this election in the
first registration statement that is submitted to the SEC, regardless of whether it is a confidential submission or a public filing.
9
See JOBS Act Section 104 (revising Sarbanes-Oxley Section 103(a)(3)).
10
AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related
Amendment to PCAOB Standards, Note to .05(b).
11
See JOBS Act Section 105(c) (adding new Securities Act Section 5(d)).
12
See JOBS Act Section 102(b)(1) (adding new Securities Act Section 7(a)(2)).
13
See JOBS Act Section 102(b)(2) (modifying Exchange Act Section 13(a)).
14
See JOBS Act Section 102(c) (modifying Regulation S-K, Item 303(a)).
15
See Guidelines for the Release of Information by Issuers Whose Securities are in Registration, Release No. 33-5180 (Aug. 16, 1971).
16
Securities Oering Reform, Release No. 33-8591 (July 19, 2005), pp. 76-77 (Securities Oering Reform Release).
17
Id., n.147.
18
See id., n.185.
19
See JOBS Act Section 105(c) (adding new Securities Act Section 5(d) for EGCs only) and Securities Act Rule 163B (expanding the ability
to engage in TTW to all issuers, including EGCs). EGCs might prefer to conduct TTW under Rule 163B, which — unlike Section 5(d) —
allows the issuer and its representatives to rely on a reasonable belief that an investor is a QIB or IAI without having to verify that status.
20
The application of Exchange Act Rule 15c2-8(e) to TTW activities was clarified by the SEC in FAQs issued by the Division of Trading and
Markets on August 22, 2013. See SEC Division of Trading and Markets, Jumpstart Our Business Startups Act Frequently Asked Questions
About Research Analysts and Underwriters (Research FAQs). As discussed in the response to Question 1 of the Research FAQs, it
should be possible for TTW activities to take place in a manner consistent with the requirements of Rule 15c2-8(e) (which generally has
been interpreted to require the availability of a price range prospectus prior to soliciting orders for the registered securities). In particular,
the answer to Question 1 states that an underwriter should generally be able to seek non-binding indications of interest from prospective
investors (including as to the number of shares they may seek to purchase at various price ranges) so long as the underwriters are not
soliciting actual orders and the investors are not otherwise asked to commit to purchase any particular securities.
21
Ineligible issuers include blank check companies and shell companies, while ineligible offerings include business combinations.
See Rules 164(e), (f), and (g).
22
Securities Oering Reform Release, pp. 111-112.
25The IPO Business
23
Id.
24
See C&DI, Securities Act Rules, Question 232.02.
25
Securities Oering Reform Release, n.267.
26
Securities Act Rule 174(d).
27
See SEC v. Manor Nursing Centers, 458 F.2d 1082, 1095-1096 (2d Cir. 1972).
28
See Division of Corporation Finance no-action letters to Black Box Incorporated (June 26, 1990) and Squadron Elleno, Pleasant & Lehrer
(Feb. 28, 1992). The SEC stated in 2007 guidance that the Black Box and Squadron Elleno no-action letters remain valid. See Revisions
of Limited Oering Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) (2007 Regulation D Release), n.126.
29
See Securities Act Rule 152(a)(1)(ii); See also Final Rule: Facilitating Capital Formation and Expanding Investment Opportunities by
Improving Access to Capital in Private Markets, Release No. 33-10884 (Nov. 2, 2020), at p. 30 “New Rule 152(a)(1)(ii) codifies and
expands the Commission’s 2007 guidance that the existence of a pre-existing substantive relationship between the issuer, or its agent,
and a prospective investor may be one means by which an investor may become interested in, or become aware of, a private placement
conducted while a registration statement for a public offering is on file with the Commission that may be consistent with Section 4(a)(2).”
See 2007 Regulation D Release, pp. 55-56; see also C&DI 139.25 (discussing the SEC’s 2007 guidance).
[THIS PAGE INTENTIONALLY LEFT BLANK]
27IPO Financial Statements
IPO FINANCIAL STATEMENTS
What Financial Statements Must Be Included?
The following tables summarize the scope of the basic financial statement requirements for IPOs.
The Basic Requirements for IPOs
Annual Audited
Financial
Statements
1
• Balance sheets:
– audited balance sheets as of the end of the two most recent fiscal years.
2
– if the issuer has been in existence less than one year, an audited balance sheet as
of a date within 135 days of the date of filing the registration statement will suffice.
3
• Statements of comprehensive income, cash flow, and changes in stockholders’ equity:
– audited statements of comprehensive income, cash flows, and changes in
stockholders’ equity covering:
4
○ EGCs — each of the two most recent fiscal years, although EGCs can choose to
provide three years of audited financial statements;
○ Non-EGCs — each of the three most recent fiscal years, or for the life of the
issuer (and its predecessors), if shorter.
• Under certain circumstances, audited financial statements may cover nine, 10,
or 11 months rather than a full fiscal year for one of the required years.
5
• Audited financial statements for an issuer must be accompanied by an audit report
issued by independent accountants that are registered with the PCAOB under
auditing standards promulgated by the PCAOB.
6
Interim Unaudited
Financial
Statements
• Balance sheet:
– an interim unaudited balance sheet as of the end of the most recent
three-, six-, or nine-month period following the most recent audited balance sheet.
7
• Statements of comprehensive income, cash flows, and changes in stockholders’
equity:
– interim unaudited statements of comprehensive income, cash flows, and changes
in stockholders’ equity for any stub period covered by an interim balance sheet,
together with statements of comprehensive income, cash flows, and changes in
stockholders’ equity for the corresponding three-, six-, or nine-month stub period of
the prior year.
8
Acquired Business
Financial
Information
and Pro forma
Financial
Information –
Regulation S-X
Rule 3-05 and
Regulation S-X
Article 11
9
• Depending on the size of the acquisition and its significance to the issuer (which is
measured in various ways — not all of them intuitive), audited financial statements for
the most recent one or two fiscal years of the acquired business must be included,
plus appropriate unaudited interim financial statements. These requirements are found
in Regulation S-X Rule 3-05.
• Under Regulation S-X Article 11, when acquired business financial statements are
included in a registration statement, pro forma financial information must also be
included, covering the most recently completed fiscal year and the interim period in
the current fiscal year.
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Latham & Watkins – US IPO Guide
What Financial Statements Must Be Included to Begin SEC Review?
Normally, a registration statement must include — as of the date of filing — all of the financial statements listed
in the tables above. However, because issuers may choose to submit draft registration statements for nonpublic
review, financial statements may become “stale” (i.e., are too old and must be updated) during the review
process. Consequently, an issuer that is an EGC may omit from its confidential submissions annual and interim
financial data that it reasonably believes will not be required at the time of the oering.
10
An issuer that is not an
EGC may also omit from its nonpublic submissions the annual and interim financial data it reasonably believes will
not be required at the time the issuer les publicly.
11
In addition, an EGC or non-EGC may omit from its confidential or nonpublic submissions (and, though less
common in practice, from its public filings) the financial statements of an acquired business required by Regulation
S-X Rule 3-05 that the issuer reasonably believes will not be required at the time of the oering.
12
Additional Financial Information That Is Typically Included
In addition to the formal requirements of Regulations S-K and S-X, it is customary to include additional operational
and other metrics in the prospectus to help investors understand the issuer’s business.
PRACTICE POINT
Determining what additional operating and other metrics to include in your prospectus will be a team effort.
The bankers can help you understand what the market would like to see, and your management can help the
bankers understand the key performance indicators that they think are important. Also, it’s always good to look
at the comps to see what metrics competitors are disclosing.
Summary Financial Data
A page of summary financial data is always included in the summary box at the front of the prospectus. This
key marketing page often supplements the financial data with additional operational and other metrics. These
additional metrics will vary with the type of issuer and its industry and are selected based on the criteria that
management and the investment community monitor to evaluate performance or liquidity. Typical examples
include comparable store sales data for a retailer, capital expenditures for a manufacturer, and subscriber
numbers for a cable television company.
Recent Financial Results
If a significant amount of time has passed since the most recent financial statements included in the prospectus,
it may be appropriate to include a summary of the quarter in progress (or recently ended) in the summary box,
even before full financial statements for that quarter are required. Examples of “recent results” disclosures are
most common after a quarter is completed but before financial statements for that quarter have become available.
The issuer and the underwriters will want to tell investors about any positive improvement in operating trends,
while if the recent results are negative, on the other hand, recent results disclosure may be advisable to avoid any
negative surprises for investors when the full quarterly numbers become available.
Recent Developments
To the extent material, the likely consequences of material recent developments may also be disclosed in the
summary box or the MD&A section of the disclosure. For example, it is customary to discuss a material recent or
pending and probable acquisition, whether or not audited financial statements of the acquired or to-be-acquired
business are required to be presented. This practice will often result in a “Recent Developments” paragraph in
the summary and a discussion of the impact of the pending or recently completed transaction on margins, debt
levels, etc., in a section of the MD&A labeled “Overview,” “Impact of the Acquisition” or a similar title. The textual
disclosure may also include a discussion of any special charges or anticipated synergies expected to result from
the acquisition or other pending event.
29IPO Financial Statements
Non-GAAP Financial Measures
Many IPO issuers choose to disclose measures of financial performance or liquidity that, while derived from GAAP
figures presented in a company’s financial statements, are not themselves calculated in accordance with GAAP.
Adjusted EBITDA is perhaps the best-known (and most widely used) non-GAAP financial measure. All non-GAAP
financial measures included in an IPO registration statement must comply with Item 10(e) of Regulation S-K.
Among other things, this means that the non-GAAP financial measure must be reconciled to the most directly
comparable GAAP financial measure so that investors get a clear picture of how the GAAP measure was adjusted.
Selected IPO Financial Statement Issues
Cheap Stock
IPO candidates seeking to grant equity awards to their employees during the 12-month window preceding the
filing of an IPO registration statement should proceed with caution.
13
When a company makes pre-IPO equity awards at valuations substantially lower than the IPO price, questions
arise under accounting and tax rules that apply to equity awards. Under these rules, the value of an equity award
on the grant date is considered compensation expense on the company’s statement of comprehensive income
for purposes of US GAAP and may constitute taxable income to the employee for US income tax purposes. This
collection of issues is known as the “cheap stock” problem.
In the review of a company’s IPO registration statement, the SEC Staff will focus on the valuation methodology
employed by the company in connection with its equity award process, the compensation expense associated
with those awards, and the related disclosure.
The best way to avoid trouble with cheap stock issues is to avoid equity awards entirely during the 12-month
period before the filing of your IPO. That is not a realistic possibility for many pre-IPO companies, though, and the
second-best solution is to plan ahead:
• Obtain contemporaneous independent valuations that follow the valuation guidance in the AICPA’s VPES
Practice Aid
14
with respect to all equity awards made during at least the 12-month period before you begin the
SEC registration process.
• Keep the valuation firm updated on your progress with the SEC during the registration process.
• Be ready to provide the SEC Staff with a detailed analysis regarding the process and substance behind your
valuation determinations. If you obtained contemporaneous independent valuations on each of the targeted
grant dates, you will be well armed to discuss the key drivers in these earlier valuation determinations.
• In some cases, it will be advisable to prepare for the SEC Staff’s review of your equity award valuations by
drafting a detailed narrative to share supplementally with the Staff, upon their request, in which you describe
the process and substance underlying the valuation of your equity awards.
• As you get closer to completing your IPO, consider granting options with a strike price equal to the IPO public
offer price and subject to the IPO closing successfully.
Segment Reporting
In addition to all the consolidated financial information required to be included in a registration statement,
companies that are engaged in more than one line of business or operate in more than one geographic area may
also be required to include separate revenue and operating data for each of their business lines or geographic
areas. This requirement is triggered if the company’s business comprises more than one operating “segment,”
as defined by US GAAP. Regulation S-K Item 303 requires certain financial reporting and narrative disclosure
in the MD&A for each relevant reporting segment or other subdivision of the business if the discussion would be
appropriate to understanding the business.
15
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Latham & Watkins – US IPO Guide
FASB Accounting Standards Codification 280, “Segment Reporting” (ASC 280), provides detailed guidance
for when a component of a larger enterprise constitutes an operating segment and how its discrete financial
information must be reported. Because the guidance of ASC 280 is complex and its application very fact-specific,
it is important to begin an early dialogue with the independent auditors when there may be segment reporting
issues. The identification and reporting of financial information for operating segments may be critical in the IPO
process, as the time to prepare such information, the effect on narrative disclosure, and the impact on enterprise
valuation may all be significant.
Generally, an operating segment is a component of a larger enterprise:
• that engages in business activities from which it may earn revenues and incur expenses (including revenues
and expenses relating to transactions with other components of the same enterprise);
• whose operating results are regularly reviewed by the enterprise’s chief operating decision maker
16
to make
decisions about resources to be allocated to the segment and assess its performance; and
• for which discrete financial information is available.
Segment reporting is a frequent topic of SEC comments. A company’s operating and reportable segments may or
may not be the same, depending on whether multiple operating segments are aggregated into fewer reportable
segments, but the Staff generally presumes that companies should report operating segments separately unless
more detailed information is not useful to investors. In the comment process, you can expect the Staff to review
other disclosures about your business for consistency with your segment disclosures. For example, the Staff
will look at your business section and MD&A disclosure, as well as information on your website, to see how you
describe different geographic or product-based components of your business. The Staff may also ask to see
copies of the internal segment reporting package your “chief operating decision maker(s)” receive to understand
how they identify and aggregate your operating segments and to review that information for consistency with the
way you report your segments in the registration statement. Significant operating segments generally cannot be
aggregated for disclosure purposes unless they share similar economic characteristics, and the Staff tends to
have an exacting standard of economic similarity for purposes of segment reporting. Given the complexities of
most businesses and the highly fact-specific nature of the issues, segment accounting comments can involve
challenging issues that will require thoughtful and robust analysis.
Internal Control Over Financial Reporting
Section 404(a) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) requires public companies to provide
investors in their Exchange Act reports with an assessment by management of the effectiveness of the issuer’s
internal control over financial reporting, and Section 404(b) requires the issuer’s independent auditors to provide
an attestation report on management’s assessment. Compliance with Section 404 can be a major undertaking for
a newly public company.
Fortunately, all IPO issuers are permitted to omit both the Section 404(a) management’s assessment and the
Section 404(b) auditor’s attestation report in their first annual reports on Form 10-K filed with the SEC.
17
In
addition, an EGC is not required to provide the Section 404(b) auditor’s attestation report for as long as it qualifies
as an EGC.
18
The underwriters will nonetheless focus on internal controls in the IPO registration statement and their due
diligence process so as to avoid any surprises when the issuer ultimately becomes subject to full compliance with
Section 404. Issuers typically disclose in their IPO prospectus any material weaknesses they had as of the most
recent audit, even if they have been remediated since the audit date.
31IPO Financial Statements
ENDNOTES
1
The requirements of Regulation S-X Rule 3-01 are imported into Form S-1. See Form S-1, Item 11(e) (noting financial statements must be
included meeting the requirements of Regulation S-X generally).
2
See Regulation S-X Rule 3-01(a). If the filing is made on or before February 14 (i.e., within 45 days after the end of the prior fiscal year),
and audited financial statements for the most recent year are not available, the balance sheet may be as of the end of the two preceding
fiscal years. See Regulation S-X Rule 3-01(b). In this case, the filing must include an additional balance sheet as of an interim date at least
as current as the end of the issuer’s third fiscal quarter of its most recently completed fiscal year. Id. Interim balance sheets need not be
audited. See Regulation S-X Rule 3-01(f).
3
See Regulation S-X Rule 3-01(a). Financial information of a registrant’s predecessor is required for all periods prior to the registrant’s
existence, with no lapse in audited periods or omission of other information required about the registrant. Financial Reporting Manual,
Section 1170. The term “predecessor” is defined broadly. See Securities Act Rule 405.
4
See JOBS Act Section 102(b)(1) (adding new Securities Act Section 7(a)(2)); Regulation S-X Rule 3-02(a) (statements of comprehensive
income and cash flow); Regulation S-X Rule 3-04 (changes in stockholders’ equity).
5
See Regulation S-X Rule 3-06. Under this rule, the SEC will accept financial statements for periods of not less than nine, 21 and
33 consecutive months as substantial compliance with the requirement to provide financial statements for one, two, and three years,
respectively. In particular, whenever audited financial statements are required for a period of one, two, or three years, a single audited
period of nine to 12 months may count as a year if:
• the issuer has changed its fiscal year during the period;
• the issuer has made a significant business acquisition for which financial statements are required under Regulation S-X Rule 3-05 and
the financial statements covering the interim period pertain to the business being acquired; or
• the SEC grants permission to do so under Regulation S-X Rule 3-13, provided that financial statements are filed that cover the full fiscal
year or years for all other years in the time period.
See id. Note that historically the SEC Staff has been reluctant to grant this relief. See Financial Reporting Manual, Note to Section 1140.8
(issuer must show unusual circumstances). More recently, however, the SEC Staff has signaled that it might be willing to grant permission
if an issuer is able to argue that the information is not necessary for investor protection. See 2017 Procedures:
While an issuer should take all steps to ensure that a draft registration statement is substantially complete when
submitted, we will not delay processing if an issuer reasonably believes omitted financial information will not be
required at the time the registration statement is publicly filed. In addition, we will consider an issuer’s specific facts
and circumstances in connection with any request made under Rule 3-13 of Regulation S-X.
6
See Financial Reporting Manual, Section 4110.5 (accounting firm must be PCAOB registered and auditor’s report must refer to PCAOB
standards); Section 4110.1 (citing PCAOB Rule 2100, which requires each firm to register with the PCAOB that prepares or issues any
audit report with respect to any issuer, or plays a substantial role in the preparation or furnishing of an audit report with respect to any
issuer).
7
See Regulation S-X Rules 3-01(c), 3-01(e) and 3-01(f). If the filing is made on or before February 14 (i.e., within 45 days after the end of
the prior fiscal year) and audited financial statements for the most recent year are not available, then an interim unaudited balance sheet
must be included as of the previous September 30 (i.e., as of the end of the most recently completed third quarter). See Regulation S-X
Rule 3-01(b).
8
See Regulation S-X Rules 3-02(b) and 3-04. Note that the statement of stockholders’ equity may be provided in the notes to the financial
statements. See Financial Reporting Manual, Section 1120.
9
See Form S-1 Item 11(e) (financial statements must be included meeting the requirements of Regulation S-X generally).
10
FAST Act Section 71003, adding new JOBS Act Sections 102(d)(1) and (2); FAST Act Compliance and Disclosure Interpretations (CDIs),
Question 1. See also Securities Act Forms CDIs, Question 101.04 (Aug. 17, 2017).
11
See 2017 Procedures; SEC Division of Corporation Finance, Voluntary Submission of Draft Registration Statements - FAQs (June 30,
2017), Question 7. See also Securities Act Forms CDIs, Question 101.05 (Aug. 17, 2017). A non-EGC must publicly file its registration
statement and all previous nonpublic submissions at least 15 days before commencing any road show or, absent a road show, 15 days
prior to effectiveness. 2017 Procedures. In the case of a follow-on offering, the public filing must be made at least 48 hours prior to
effectiveness. 2017 Procedures.
12
Fast Act CDIs, Question 2 (Dec. 15, 2015). The SEC Staff has signaled a more flexible approach in reviewing requests to omit financial
information under Rule 3-13 of Regulation S-X, based on an issuer’s specific circumstances. See 2017 Procedures.
13
We discuss the issue of cheap stock in more detail in our client alert Cheap Stock: An IPO Survival Guide (Aug. 12, 2010).
14
A 2004 publication by the American Institute of CPAs, Valuation of Privately-Held-Company Equity Securities (VPES) Issued as
Compensation. Note that the VPES Practice Aid is being updated by a Task Force of the AICPA primarily to reflect guidance in Statement
of Financial Accounting Standards No. 157, Fair Value Measurements, issued in 2006 and codified in ASC 820.
15
See Regulation S-K Item 303(b).
16
ASC 280 uses the term “chief operating decision maker” to identify a function rather than a specific person; the “chief operating decision
maker” could be the CEO, CFO, or a group of senior managers, depending upon the circumstances.
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17
See Regulation S-K Items 308 (a) and (b). Under Exchange Act Rule 12b-2, a “large accelerated filer” is an issuer that, as of the end of its
fiscal year:
• has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates (market capitalization) of
$700 million or more (measured as of the last business day of the issuer’s most recently completed second fiscal quarter);
• has been subject to SEC reporting under the Exchange Act for a period of at least 12 calendar months;
• has filed at least one annual report under the Exchange Act with the SEC; and
• is not eligible to be a “smaller reporting company” and had annual revenues of less than $100 million in the most recent fiscal year for
which financial statements are available.
In addition, under Exchange Act Rule 12b-2, an “accelerated filer” is an issuer meeting the same conditions, except that it has a market
capitalization of $75 million or more but less than $700 million (measured as of the last business day of its most recently completed second
fiscal quarter). See Final Rule: Accelerated Filer and Large Accelerated Filer Denitions, Release No. 34-88365 (Mar. 12, 2020). See also
Final Rule: Smaller Reporting Company Denition, Release No. 33-10513 (July 10, 2018).
18
JOBS Act Section 103 (revising Sarbanes-Oxley Section 404(b)); JOBS Act Section 101(a) and (b) (adding new Securities Act
Section 2(a)(19) and Exchange Act Section 3(a)(80)).
33Upsizing and Downsizing an IPO
UPSIZING AND DOWNSIZING AN IPO
The preliminary prospectus circulated to potential IPO investors will show the number of shares expected to be
sold and a bona fide estimate of the price range per share, as required by Regulation S-K Item 501(b)(3). The
SEC Staff generally takes the position that a bona fide price range means a range no larger than $2 (for ranges
below $10) or 20% of the high end of the range (for maximum prices above $10).
Until an IPO registration statement has been declared effective by the SEC, it is possible to file a pre-effective
amendment with a new price range and/or a new number of shares to be sold. However, using a pre-effective
amendment to upsize or downsize a deal after the price range prospectus has been distributed to investors, i.e.,
during the road show, can have unwelcome timing implications (for example, the need to obtain a new auditor’s
consent and updated signature pages and clear any comments from the SEC Staff on the new disclosure). In
addition, the new filing containing the amended price range could send a signal to the market about pricing that
may be premature.
A key question, hence, is how far can the deal be upsized or downsized at pricing and after effectiveness without
having to go back to the SEC for permission?
PRACTICE POINT
Pre-effective Amendment
There are situations in which you may conclude that filing a pre-effective amendment is unavoidable. One
example would be where you are certain before effectiveness that your deal is going to be dramatically
downsized or upsized. Note that Regulation S-K Item 501(b)(3) requires that you include a bona fide estimate
of the price range. In the ordinary course, you would seek to go effective at some point prior to the close of the
stock market — 2:00 p.m. Eastern Standard Time is often chosen. Because the market has not yet closed, you
would typically not be in a position to know with certainty that you will be pricing outside the range set forth in
the prospectus at that time, which allows you to avoid changing the range on the cover of the red herring at the
time you refile.
Rule 430A
Securities Act Rule 430A permits a registration statement to be declared effective without containing final pricing
information. Instead, it allows you to insert information retroactively into a registration statement and have it
be treated as if it were there as of its effective date. Rule 430A provides that pricing-related information (which
includes the price per share and the number of shares offered) that is contained in a prospectus filed pursuant to
Rule 424(b) after effectiveness of the registration statement will be deemed to have been part of the registration
statement as of the effective date.
1
34
Latham & Watkins – US IPO Guide
Here is a summary of how Rule 430A works:
If you are… Then you should use… And you can… But you would need to…
Upsizing your deal Instruction to
Rule 430A(a)
Increase the price per
share and/or number
of shares, so long as
the aggregate size of
the revised deal does
not exceed 120% of the
amount shown in the fee
table in the registration
statement at the time of
effectiveness
File an immediately effective
registration statement under
Rule 462(b) to register any
increase in shares or deal size
not already provided for
Consider whether additional
disclosure about the revised
deal (a new use of proceeds,
for example) needs to be
delivered to purchasers (orally
or by means of an FWP) prior
to confirmation of sale
Downsizing your deal SEC Staff Compliance
and Disclosure
Interpretation (C&DI)
627.01
Decrease the price per
share and/or decrease
the number of shares
sold, so long as the size
of the revised deal is not
less than the lower end
of the deal size reflected
in the price range
prospectus, minus 20%
of the maximum deal
size reflected in the price
range prospectus
Consider whether additional
disclosure about the revised
deal (liquidity issues, for
example) needs to be
delivered to purchasers (orally
or by means of an FWP) prior
to confirmation of sale
Instruction to Rule 430A(a)
Rule 430A’s most important contribution to pricing outside the range is found in the instruction to paragraph (a),
which provides that, where the 20% safe harbor threshold is not exceeded, changes in price and deal size can be
poured backwards in time into the registration statement using a Rule 424(b) filing of the final prospectus after the
effectiveness of the registration statement, and this pricing information will be deemed to have been part of the
registration statement at the time it became effective. This is a very useful device indeed. It allows you to change
the size of your deal by 20% in either direction without having to go back to the SEC.
C&DI 227.03
C&DI 227.03 establishes two important points:
• for purposes of Rule 430A, retroactive changes in price and/or deal size within the 20% threshold can be
made after the fact by way of a Rule 424(b) prospectus, even if the effects of those changes are material; and
• even deal size changes outside the 20% threshold can be made using a Rule 424(b) prospectus if the size
changes do not materially change the disclosure.
Rule 430A effectively lets you make pricing-related changes to your registration statement without SEC review
(i.e., without filing a post-effective amendment), even if those changes are material. This special privilege is
limited to pricing information as contemplated by Rule 430A, but it is a very special privilege nevertheless. The
second point is equally important — changes in excess of 20% may not be material.
35Upsizing and Downsizing an IPO
PRACTICE POINT
When Is a Greater Than 20% Change Not Material?
Consider a $1 billion offering that is half primary and half secondary shares. If the secondary shares are
reduced to $250 million, but the primary shares stay at $500 million, the offering has been reduced by 25%
but the reduction may well not be material. There will still be a very substantial public “float” after the offering
and the proceeds to the issuer (and hence the use of proceeds), the pro forma number of shares outstanding,
and the pro forma earnings per share will not change at all. This sort of fact pattern is right in the center of
C&DI 227.03’s fairway.
C&DI 627.01
What does Rule 430A have to say about the deal size actually reflected in the prospectus circulated to investors,
as opposed to the maximum deal size reflected in the fee table on the cover of the registration statement? What if
(as is often the case) these two amounts are not aligned?
This is where C&DI 627.01 comes into play. C&DI 627.01 permits you to calculate the 20% amount for purposes
of downsizing your deal in a very favorable way. As an alternative to the 20% of the amount-in-the-fee-table
approach contemplated by the instruction to paragraph (a) of Rule 430A, C&DI 627.01 allows you to derive your
20% amount by multiplying the upper end of the range in the price range prospectus by 20%.
2
You can then add that amount to the upper end of the range in the price range prospectus if you are upsizing, or
subtract that amount from the bottom of the range if you are downsizing, to figure out what share count and price
per share will be within the safe harbor. Since 20% of the upper end of the price range is by definition greater
than 20% of the lower end of the price range, C&DI 627.01 effectively broadens the scope of the Rule 430A safe
harbor for troubled deals.
The approach in C&DI 627.01 represents an alternative to the approach in the instruction to paragraph (a) of Rule
430A, and the SEC Staff takes the position that you cannot “mix and match” between the C&DI and the instruction
to paragraph (a). As a result, if you are following C&DI 627.01, you may not take 20% of the amount reflected in
the fee table and subtract that from the lower end of the price range, even though that might yield a lower floor on
your transaction than 20% of the upper end of the range (since the fee table often registers a larger transaction
than the upper end of the range). Either you calculate using the fee table or you calculate using the range in the
price range prospectus, but you can’t have it both ways. In practice, this means that you will want to use C&DI
627.01 when downsizing and the instruction to paragraph (a) of Rule 430A when upsizing.
Those who qualify for the special treatment offered by Rule 430A and the related rules will find it much more
attractive to make the necessary changes to the terms of the deal after effectiveness, in almost all cases.
Therefore, the key question for the deal team will be whether the proposed changes to the number of shares to be
sold and the price per share qualify for Rule 430A’s special magic.
Section 11 and Section 12
Section 11(a) of the Securities Act imposes liability if any part of a registration statement, at the time it became
effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.” Section 11 liability only covers
misstatements or omissions in the registration statement at eectiveness. We think of the registration statement
at the magic moment of effectiveness as the “Section 11 file.” This is a helpful way to remember that Section 11
is a highly technical provision, in the sense that it looks only at (a) what is or is deemed to be in the registration
statement (b) at the time it became effective.
3
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Latham & Watkins – US IPO Guide
By contrast, Section 12(a)(2) of the Securities Act is not limited to the registration statement and is not linked
to the moment of effectiveness. It imposes liability on any person who offers or sells a security in a registered
offering by means of a prospectus, or any oral communication, which contains “an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.” Section 12(a)(2) is less technical and more holistic than Section
11. Section 12(a)(2) takes into account all oral statements, FWPs, and statements in the price range prospectus
rather than focusing exclusively on the registration statement.
Because Rule 430A relates only to the registration statement at the time of effectiveness, it only serves to update
disclosure for purposes of Section 11 of the Securities Act. Section 12, on the other hand, looks to the sum of
what investors have been told at or before the time the underwriters conrm orders. Section 12’s focus, therefore,
is the price range prospectus sent to investors and any additional information that may have been conveyed to
investors (orally or in writing) on or before the time of pricing. We think of this collection of information as the
“Section 12 file.”
In order to deal with all of the issues that arise in the context of changing the size and price of an IPO after the
registration statement has been declared effective, you will need to keep in mind both your “Section 11 file” and
your “Section 12 file.”
The Section 12 File
Securities Act Rule 159; FWPs; Exchange Act Rule 15c2-8(b)
Rule 159 makes clear that, for purposes of Section 12, information conveyed to a securities purchaser after
the time of sale does not count for purposes of determining whether the Section 12 file was complete at the
moment that liability attaches. In other words, Section 12 liability is a function of what you actually gave or told the
purchaser prior to confirming the order — anything delivered after the Rule 159 “moment of truth” does not count.
This means that those material pricing changes that can be retroactively poured into the Section 11 file after the
fact under Rule 430A must actually be conveyed to purchasers in real time prior to confirming orders in order for
the Section 12 file to be up to snuff. There are a number of ways to transmit the required information — the rules
are agnostic as to the actual method of conveyance — but the key point is that the conveyance must be made,
and it must be made prior to confirming orders.
Market practice is that simple information that can be effectively reduced to sound bites is conveyed orally. It is
customary in deals pricing within the range, for example, to convey the final pricing information orally.
Oral conveyance is also used in many upsizing and downsizing scenarios. The easiest example of this would be a
20% decrease in deal size in an all-secondary offering by a selling stockholder. All the investor needs to know in that
case is how many shares are being sold and at what price — there are no collateral disclosure implications to the
change in deal size in that example.
4
The disclosure in the price range prospectus will not otherwise change at all.
More complicated deal changes may require that an FWP summarizing the changes be circulated to accounts
in writing as permitted by Rule 433. The decision whether to convey the new information orally or in writing will,
in part, depend on whether the price range prospectus circulated to investors contained “sensitivity analysis”
explaining how the company’s plans would change if the actual proceeds turned out to be more or less than
the amount assumed in the price range prospectus. The more sensitivity analysis is included in the price range
prospectus, the more likely it will be possible to convey the missing information orally at the time of pricing. This is
a key point to keep in mind in the early drafting sessions.
37Upsizing and Downsizing an IPO
PRACTICE POINT
Sensitivity Analysis
There is no hard-and-fast rule about how much sensitivity analysis will suffice and what topics need to be
covered. The only certainty is that more is better when you are trying to make significant deal changes at
the end of the road show. Here are some of the places where we have found sensitivity disclosure to be
particularly useful:
• use of proceeds, particularly where stated uses would need to be changed or new uses added. It’s always
best to disclose multiple uses of proceeds in the order of their priority so that it’s clear which uses will be
skipped or skinnied if the deal is downsized;
• pro forma earnings per share, balance sheet, and capitalization;
• the size of the “float” after the offering;
• the company’s liquidity position (or burn rate) after the offering;
• the level of beneficial ownership by members of senior management or other significant stockholders; and
• dilution.
The goal is to have disclosure that allows investors to see how changes in share price or deal size ripple
through critical elements of the disclosure. Ideally, the price range prospectus will present all deal-size related
disclosures in an “if/then” format (“We will apply the net proceeds from this offering first to repay all borrowings
under our credit facility and then, to the extent of any proceeds remaining, to general corporate purposes,”
for example).
Finally, where the changes are so fundamental that the original price range prospectus must be completely
rewritten, the question may arise whether to recirculate a completely new price range prospectus. In practice, the
FWP concept introduced by Rule 433 in the 2005 securities offering reforms has all but eliminated the need for full
recirculation of a completely new price range prospectus.
One issue that has sometimes arisen in this context, especially in the old days before FWPs became a trusty
part of the pricing toolkit, is compliance with Exchange Act Rule 15c2-8(b). Rule 15c2-8(b) requires that brokers
and dealers participating in an IPO deliver a preliminary prospectus “to any person who is expected to receive a
confirmation of sale at least 48 hours prior to the sending of such confirmation.”
In present-day IPO practice, Rule 15c2-8(b) will rarely, if ever, create a speedbump in the offering process. This
is thanks largely to the availability of FWPs, which have proven to be a reliable and effective means of updating
investors to new information in the disclosure package. The Rule 15c2-8(b) requirement “is satisfied by delivering a
preliminary prospectus that is current at the time of its delivery,” which typically occurs with the commencement of
the road show process and therefore does not require further delivery of later updates to the preliminary prospectus.
5
An FWP summarizing late-breaking disclosure raises an issue of timing. Deal teams often conclude that investors
need only a few hours (or even minutes) to digest the new disclosure. The SEC Staff has, to date, refrained from
offering any guidance on the question “How long is long enough?” as it relates to delivery of new information for
purposes of Rule 159 and Section 12. We believe most information can be digested upon receipt, and only very
complicated changes would need more time to be absorbed. Somewhat complicated changes may need more
than a few minutes to be digested but considerably less than a full business day.
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PRACTICE POINT
FWPs Have Largely Supplanted Recirculation
An FWP that summarizes new changes in disclosure, and attaches or highlights key changed pages, is
almost always sufficient in lieu of a full recirculation of the preliminary prospectus. This practice has essentially
supplanted the more cumbersome historical practice of recirculating a new price range prospectus where
late-breaking changes were deemed material to the disclosure.
Filing Fee Issues — Securities Act Rules 457 and 462(b)
Rule 457
Although Rule 457 deals with the seemingly mundane issue of the calculation of the registration fee, the choice
you make under Rule 457 will have a significant impact on your options if your deal is upsized or downsized at the
end of the road show after you have gone effective under Rule 430A.
Remember that you initially filed your registration statement with a fee table, calculated either:
• under Rule 457(o) on the basis of the amount of proceeds the issuer wanted to raise; or
• under Rule 457(a) on the basis of the number of shares to be sold and a bona de estimate of the sale price
per share.
Chances are, you opted to calculate the registration fee for purposes of the fee table under Rule 457(o).
You could have used Rule 457(a) instead, but since doing so would let the market know the likely per share price
(i.e., maximum deal size divided by the number of shares registered), most deal teams opt to use Rule 457(o) for
the initial filing.
6
When the time comes to file your price range prospectus, however, you have a choice: either keep using
Rule 457(o) or refile your fee table under Rule 457(a).
If you choose to refile under Rule 457(a), you will not have to pay more filing fees if your offering price per share
later increases — that’s baked right into the text of the rule. You will, however, be required to pay additional filing
fees if you later increase the number of shares to be offered, even if the total offering size (number of shares
sold times sale price) does not go above the original estimate used to calculate the original filing fee. The added
shares will need to be registered on an immediately effective registration statement under Rule 462(b). We
discuss below how that is done.
If you stick with Rule 457(o), you will not have to file a new registration statement and pay additional filing fees
if your per share price goes down and you increase the number of shares offered so as to maintain the original
aggregate offering price.
7
You will, however, be required to pay additional filing fees if you keep the same number
of shares and increase the per share price (thereby increasing the aggregate deal size).
PRACTICE POINT
Rule 457(a) Versus Rule 457(o)
Which route is preferable? Refiling under Rule 457(a) allows you to increase the price per share (but not the
number of shares) without filing an additional registration statement. By contrast, staying with Rule 457(o)
allows you to increase the number of shares and decrease the price per share so as to maintain overall
deal size without filing an additional registration statement. So, it all boils down to whether you think you will
be upsizing price only (and leaving the number of shares unchanged) or will be playing with both price and
number of shares in order to keep the same total aggregate deal size. Many deal teams elect to switch to
Rule 457(a) at the time of printing the price range prospectus because increasing the price per share at pricing
is a more likely outcome than increasing the number of shares and decreasing the price.
39Upsizing and Downsizing an IPO
Rule 462(b)
How do you go about adding additional shares (if you are using Rule 457(a)) or increasing the deal size (if you
are using Rule 457(o))? Before effectiveness, you can refile with a new fee table on the cover. After effectiveness,
you need to file an immediately effective registration statement under Rule 462(b).
8
Rule 462(b) is available if:
• you file the new registration statement prior to the time confirmations are sent; and
• the increase in price and share count together represent an increase of no more than 20% of the previous
maximum aggregate offering price, as set forth in the fee table (not the cover of the price range prospectus)
at effectiveness.
There is a curious wrinkle to how the 20% amount is calculated for purposes of Rule 462(b), again depending
on whether you refiled your fee table under Rule 457(a) or stayed with Rule 457(o). If you are using Rule 457(a),
you multiply the number of additional shares by the new offering price and then look to see whether the increase
in deal size associated with the added shares is more or less than 20% of the deal size in the fee table at
effectiveness, even though that fee table was calculated at the old price per share.
9
To take an example, imagine
that your fee table at effectiveness reflected 11.5 million shares and a price range of $8-$10 per share, for a
maximum aggregate deal size of $115 million. At pricing, the number of shares is increased by 1.5 million and the
price is increased to $12 per share. The number of additional shares times the price equals $18 million. Since this
is less than 20% of $115 million (i.e., less than $23 million), you can use Rule 462(b) to register the new shares.
The fact that the entire deal is actually being upsized by more than 20% (since $115 million plus 20% equals
$138 million, and 13 million shares times $12 per share equals $156 million) is disregarded if you are using
Rule 457(a).
The calculation is done differently if you stayed with Rule 457(o). In that case, you multiply all of the shares being
offered (including the additional shares) by the new price per share and then look to see if you have increased
total deal size by more than 20%.
10
This makes sense, since Rule 457(o) looks to total deal size. To use our
example above, 20% of the original maximum deal size equals $23 million. Because 13 million shares are being
offered at a new price per share of $12, total deal size would be $156 million, which is more than the original deal
size plus 20% ($115 million plus $23 million equals $138 million). As a result, you could not use Rule 462(b) to
register the full amount of the additional deal size.
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ENDNOTES
1
Rule 430A defines pricing information as: “information with respect to the public offering price, underwriting syndicate (including any
material relationships between the registrant and underwriters not named therein), underwriting discounts or commissions, discounts or
commissions to dealers, amount of proceeds, conversion rates, call prices and other items dependent upon the offering price, delivery
dates, and terms of the securities dependent upon the offering date.”
2
We’re assuming that the prospectus at effectiveness is the same price range prospectus circulated to investors — in other words, that you
have not refiled with a different range.
3
The time of “effectiveness” is a key moment in the IPO. Among other things, securities cannot be sold until the registration statement is
declared effective. Rule 430A allows an IPO to price as many as 15 business days after effectiveness, but it is most common to price on
the day of effectiveness (which is also the time the underwriters will begin confirming orders). The actual closing of the transaction happens
some number of days later.
4
Note, however, that one consequence might be a material change to the ownership structure (for example, if the change resulted in a
control group’s retention (or loss) of control over the company).
5
Final Rule: Prospectus Delivery; Securities Transactions Settlement, Release No. 33-7168 (May 11, 1995) at n.79 (explaining that the
Rule 15c2-8(b) requirement to deliver a preliminary prospectus to any person expected to receive a confirmation of sale at least 48 hours
prior to sending such confirmation “is satisfied by delivering a preliminary prospectus that is current at the time of its delivery” (emphasis
added)). Moreover, two full business days is generally understood to satisfy the 48-hour requirement. In other words, if prospective
investors received a preliminary prospectus at 9:00 a.m. on Monday morning, it would be appropriate to price on Tuesday after the
market closes.
6
There is a technical reason why it is generally preferable to choose Rule 457(o) at the outset. The SEC Staff informally takes the position
that if you raise your price range in a preliminary prospectus contained in a pre-effective amendment from the range used to calculate the
filing fee and you originally elected to proceed under Rule 457(a), then the 20% safe harbor contemplated by the instruction to paragraph
(a) of Rule 430A is calculated on the basis of the original maximum aggregate offering price and not the offering price range contained in
the price range prospectus distributed to investors. This qualification can be eliminated if you “voluntarily” pay an additional filing fee when
you increase your offering range, but doing so defeats the primary benefit of Rule 457(a) (i.e., you do not need to go back to the SEC if
you increase your estimated price per share). This SEC Staff position can be a trap for the unwary issuer who elected to use Rule 457(a)
originally to calculate the filing fee and later seeks to upsize. There is no such hidden problem for users of Rule 457(o), as they are
required to pay additional filing fees at the time they upsize their deal, and they know it.
7
See C&DI 640.05.
8
You will also need to remember to include a new Exhibit 5.1 opinion on the legality of the additional securities being registered. This can
be done by means of an immediately effective post-effective amendment under Rule 462(d). Note, by the way, that Rule 462(b) works for
an increase in transaction size in a Rule 457(o) deal, even though the text of Rule 462(b) speaks only of “registering additional securities.”
See C&DI 640.04.
9
See C&DI 640.03.
10
See C&DI 640.04.
41Specic Issuers and Industries
SPECIFIC ISSUERS AND INDUSTRIES
Foreign Private Issuers
A foreign private issuer, or FPI, is an entity (other than a foreign government) incorporated or organized under the
laws of a jurisdiction outside of the US unless:
1
• more than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents;
and
• any of the following applies:
– the majority of its executive officers or directors are US citizens or residents;
– more than 50% of its assets are located in the United States; or
– its business is administered principally in the United States.
PRACTICE POINT
An issuer that has more than 50% US ownership can still be a foreign private issuer. In order to fail to qualify
as a foreign private issuer, a company needs to be both majority owned by US residents and meet any one of
the three additional tests noted above.
An FPI may conduct an IPO in the United States, whether or not it is listed in its home country or another
jurisdiction. FPIs enjoy a number of key benefits not available to domestic US issuers. These include:
2
• FPIs may file financial statements in US GAAP, the English-language version of IFRS as issued by the
International Accounting Standards Board, or local GAAP;
• FPIs are not required to file quarterly reports on Form 10-Q or current reports on Form 8-K;
• the financial information of FPIs goes stale more slowly;
• FPIs are exempt from the US proxy rules;
• FPIs are exempt from Regulation FD;
• FPIs are exempt from Section 16 reporting;
• annual reports of FPIs on Form 20-F are not due until 120 days after fiscal year end;
• FPIs can follow home-country governance practices as long as the differences between those and US
practices are disclosed to investors; and
• FPIs enjoy exemptions from certain aspects of Sarbanes-Oxley.
Master Limited Partnerships
What Is an MLP?
A master limited partnership, or MLP, is an entity that meets three criteria:
• It is a state law entity that can be treated as a pass-through entity for federal income tax purposes. MLPs are
most commonly formed as Delaware limited partnerships, but they also can be limited liability companies.
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• It is publicly traded. That is, owners of MLP units have the ability to buy and sell interests in the MLP.
• It is listed on one of the major stock exchanges, such as the NYSE or Nasdaq.
PRACTICE POINT
For an MLP to be treated as a pass-through entity for federal income tax purposes, at least 90% of its gross
income for each taxable year must be income that is considered “qualifying income” under the Internal
Revenue Code of 1986, as amended. If an MLP fails to satisfy this test, the MLP will be taxed as a corporation
for federal income tax purposes, thereby eliminating any advantage from operating as an MLP rather than a
corporation. “Qualifying income” includes, among other things, income and gains derived from the exploration,
development, mining or production, processing, refining, transportation (including pipelines transporting gas,
oil, or products thereof), or the marketing of any mineral or natural resource, as well as certain passive-type
income, including interest, dividends, and real property rents.
Cash Distributions and Equity Structure
An MLP is typically required by its partnership agreement to distribute all of its “available cash” to its unitholders
on a quarterly basis; importantly, this distribution requirement is not driven by tax or securities laws. “Available
cash” for these purposes is commonly defined as all cash on hand at the end of a quarter, plus working capital
borrowings made after the end of the quarter, less (a) reserves established by the general partner to provide for
the proper operation of the business or to comply with law and (b) reserves necessary to fund distributions for
any of the next four quarters. This definition gives the MLP wide discretion in determining the amount of available
cash. Most MLPs, nonetheless, offer public investors additional support for the cash distribution by issuing to the
sponsor a class of equity interests called “subordinated units” that are subordinated to the public’s right to receive
cash distributions. In other words, public investors will get their cash distributions first before the sponsor receives
cash distributions on its subordinated units. To compensate the sponsor for receiving subordinated units, the MLP
typically also issues to the sponsor incentive distribution rights, or IDRs, as a form of carried interest. The IDRs
allow the sponsor to receive an increasing share of cash distributions as certain distribution benchmarks for the
limited partners are achieved. The IDRs provide a meaningful incentive for the sponsor to run the MLP’s business
in a manner that increases cash distributions to the limited partners, so that the sponsor can enjoy an increasing
share of those distributions.
Securities Law Considerations
The SEC has implemented a number of unique disclosure requirements for MLPs. In the prospectus relating to
its IPO, the typical MLP will state its intention to distribute a specified minimum level of cash distributions to its
unitholders each quarter. This amount is referred to as the minimum quarterly distribution, or MQD. Because the
MLP expresses its intention to make specified levels of cash distributions, the SEC requires MLPs to provide a
forecast of the amount of cash they will have available for distribution over the 12-month period following the IPO
and explain in some detail the basis for that forecast. An MLP also must present its available cash on a pro forma
basis for each of the most recently completed fiscal-year and four-quarter period and, if this amount of available
cash would have been insufficient to pay the target MQD, the MLP must prominently disclose (including on the
prospectus cover) the fact that there would have been a shortfall in distributions relative to the MQD during the
pro forma period.
Governance Considerations
Because it is typically structured as a state law limited partnership, an MLP is controlled by its general partner, so
the “public company” board of directors sits at the general partner (or higher) level in the organizational structure.
MLPs are exempt from many of the requirements of the stock exchanges, including the requirement to have an
annual meeting of unitholders and the requirement that a majority of the board of directors be independent.
43Specic Issuers and Industries
As is permitted under Delaware law, most MLPs provide in their partnership agreements that all common-law
fiduciary duties of the general partner, the board of directors, and the officers are eliminated and are replaced
with the requirement that the board or officers act in good faith. The MLP partnership agreement typically defines
good faith to mean a subjective belief that the action being taken is in the best interests of the partnership. In the
event that a proposed transaction presents a conflict between the MLP and its sponsor, the partnership agreement
provides that the conflict may be resolved through, among other means, approval of the unitholders or approval of a
conflicts committee consisting solely of independent directors.
REITs
A real estate investment trust, or REIT, is a company that owns or finances income-producing real estate. REITs
can be corporations, limited liability companies, or business trusts (some states have statutes creating real estate
investment trust entities). Although REITs routinely have institutional investor owners, REITs were created to
facilitate investments by individuals collectively in institutional-quality real estate assets without the individuals
having to directly acquire and manage the real estate assets. REITs typically pay out all of their earnings to their
shareholders in the form of dividends and benefit from being able to deduct those dividends from their federal
corporate income taxes, although the REIT’s shareholders do pay tax on the dividends received.
REITs can be categorized in a number of different ways. Equity REITs own the properties and charge rent to
tenants; mortgage REITs loan money to borrowers against the collateral of real estate; hybrid REITs do both. Most
REITs are public companies whose stocks trade on exchanges, typically the NYSE. A number of REITs, known as
non-traded REITs or NTRs, conduct registered public offerings but do not list the shares for trading. There are also
many different forms of private REITs. Internally managed REITs have traditional board-supervised management
teams dedicated to the company’s business. Externally managed REITs also have a board of directors but contract
with the REIT’s sponsor for day-to-day management. Listed equity REITs are almost always internally managed,
while mortgage REITs and NTRs are routinely externally managed.
REITs invest in many types of real estate ranging from the traditional (such as office, industrial, hotel, health care,
self-storage, multi-family, and retail properties) to the more recent, and sometimes esoteric (such as single family
homes, data and document storage, farmlands, vineyards, timber lands, cell towers, and power transmission lines).
Even prison properties have been held by REITs (the government is the tenant).
To be and remain a REIT, the company is obliged to meet a number of asset, income, and shareholder holdings
tests. For example, a REIT must:
• invest at least 75% of its total assets in real estate;
• obtain at least 75% of its gross income from rents on real estate, interest on mortgages, or the sale of real
estate assets;
• pay at least 90% of its taxable income out as dividends (although REITs normally pay out all taxable income
to avoid tax on the amounts between 90% and 100%);
• be an entity taxable as a corporation;
• have at least 100 shareholders; and
• have no more than 50% of its shares held by five or fewer persons.
PRACTICE POINT
From a securities law standpoint, REITs are subject to virtually all of the same rules as other public companies,
although there is a special form, Form S-11, and additional disclosure requirements for REIT IPOs (mainly
contained in Industry Guide 5).
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Latham & Watkins – US IPO Guide
The complex contractual relationships between a YieldCo and its sponsor(s) are the subject of significant
additional disclosures as these contracts are all related party transactions and subject to the heightened
disclosure rules in Regulation S-K applicable to related party dealings. The ongoing corporate governance
mechanisms needed to manage the conflicts that will arise between the YieldCo and its sponsor(s) going forward
also call for significant additional disclosures.
Life Sciences
Crossover Investors
There has also been an emerging and growing trend in the life science industry where traditional public equity
investors, including established mutual fund investors, cross over and invest in middle- to late-stage private life
science deals in private placement transactions in advance of an IPO. Several factors have been the catalyst
for this trend. First, the clinical development process for life science companies is capital intensive, and it is
assumed that companies in this industry will eventually need to access the capital markets in order to continue
to fund clinical development prior to receiving regulatory approval and becoming commercial companies. These
private placement transactions provide necessary capital and flexibility to allow private companies to access the
capital markets during favorable windows rather than as required to fund particular programs. In addition, for
“hot companies,” public investors are not always able to get a meaningful allocation in an IPO, in light of the time
commitment necessary to understand a potentially complex scientific story. By investing in advance of an IPO,
these crossover investors may be able to invest at a discount to the IPO price, thus enabling them to cost-average
their investment while building an equity position so they are not entirely dependent on IPO allocations or after-
market purchases to build their desired equity position in the public company. Further, these investors provide
the company with an independent validation of the company’s potential upon which the underwriters and other
potential public investors may rely.
PRACTICE POINT
Often, with crossover investors, you will want to negotiate the lock-up agreement as early as possible, ideally
as part of their initial investment. As traditionally public investors, they take a much more restrictive view of
what they are willing to agree to in an underwriter lock-up and negotiating these up front will help ensure a
smoother IPO process. Sensitive provisions include how to treat shares purchased in the IPO or whether they
are promised most-favored nation treatment. In addition, these crossover investors may have a different level
of sensitivity with respect to confidential information that they receive. Consideration should be given to what
information will be shared with them in connection with their early investments versus what information is
intended to be provided in the public offering setting.
Testing the Waters
TTW is especially popular in the life sciences industry where issuers tend to be pre-revenue companies with
shorter operating histories. There is also a need to communicate highly scientific information to potential investors
in this space, and TTW meetings can be used for that purpose.
PRACTICE POINT
Combining TTW and Confidential Submission
Where valuation is uncertain and the timing of the IPO depends on regulatory approval, such as biotech
companies awaiting FDA approval of a new drug candidate, the ability of an EGC to submit confidentially and
test the waters with prospective investors can provide additional flexibility. EGCs and their underwriters may
gain useful feedback from prospective investors while maintaining confidentiality as they await both clearance
from the FDA and market conditions that are favorable to the offering.
45Specic Issuers and Industries
ENDNOTES
1
Securities Act Rule 405; Exchange Act Rule 3b-4.
2
For a comprehensive discussion of legal and practical issues facing FPIs when accessing the US capital markets, see our book,
The Latham FPI Guide: Accessing the US Capital Markets from Outside the United States.
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47The FINRA Review Process
THE FINRA REVIEW PROCESS
FINRA’s Corporate Financing Rule and Related Requirements
IPOs conducted, in whole or in part, in the United States in which a FINRA member firm participates as an
underwriter, dealer, distributor, or in a similar capacity (the “Participating Member”
1
), are subject to FINRA Rule
5110 (also commonly referred to as the Corporate Financing Rule).
2
The purpose of Rule 5110 is to ensure that
FINRA members do not participate in a public offering of securities in which the underwriting or other terms and
arrangements relating to the distribution of securities are “unfair or unreasonable.” In determining whether the
compensation to be received by the Participating Members for the offering is “unfair or unreasonable,” FINRA will
look not only at the “spread” or underwriting discount to be received by the underwriters, but also at any other
fees and arrangements or securities of the issuer that could be deemed to be “Underwriting Compensation”
3
received by (or payable to) the Participating Member within the period beginning 180 days prior to the date of
the initial SEC confidential submission or public filing for a registered offering through the 60th day following the
effectiveness date of the offering (this period is known as the “Review Period”).
In the case of an IPO in the United States, as well as in respect of certain other public offerings, Rule 5110
requires that the underwriters for the offering file certain information with FINRA for review. With respect to
documents FINRA allows registration statement or other documents that have been filed with the SEC to be
filed with FINRA, solely by providing the relevant EDGAR identification or “accession” number, and provides
that amendments to previously filed offering documents need to be filed only if they include changes that impact
the underwriting terms and arrangements. The filing of industry-standard master forms of agreement is not
required unless such forms are specifically requested by FINRA. Public offering filings will also need to include a
representation as to whether any officer or director of the issuer, or any beneficial owner of 10% or more of any
class of the issuer’s equity and “equity-linked securities,”
4
is an associated person or an affiliate of a Participating
Member. The FINRA filing must be made no later than three business days after the SEC filing or confidential
submission, as applicable. In addition, IPOs and other offerings that are not otherwise exempt from FINRA’s filing
requirements must receive FINRA’s approval (in the form of a “no objections letter”) before any securities may
be sold to investors.
5
This is the case even if the SEC has indicated it has no further comments and is ready to
declare the registration statement effective.
6
As a result, it is of critical importance to incorporate FINRA’s filing and
other requirements into the anticipated timeline for the IPO.
If a participating FINRA member has a “conflict of interest” in connection with the offering (which may be the case,
for example, if the member is an affiliate of the issuer or the member or its affiliates will be receiving 5% or more
of the net proceeds from the offering to reduce or retire an outstanding credit facility or to redeem outstanding
bonds or for any other purpose), FINRA Rule 5121
7
will also apply and may, in certain circumstances, require
the participation in the offering of a “qualified independent underwriter,” or QIU. Again, early identification of the
potential application of this rule and the possible need to appoint a QIU will be key to ensuring that the offering is
not unnecessarily delayed.
To assist in the determination of whether, and which, FINRA rules and requirements will be applicable to a particular
offering, underwriters’ counsel (typically in coordination with issuer’s counsel) will send to the issuer, its officers,
directors, and the beneficial holders of 10% or more of the issuer’s equity and equity-linked securities a detailed
questionnaire designed to elicit the required information. The issuer will also be asked to identify, and similar
questionnaires will be sent to, the beneficial holders of any unregistered equity securities of the issuer that were
acquired during the Review Period. In particular, the questionnaires are designed to identify (i) any Underwriting
Compensation received or to be received by any of the Participating Members in connection with the public offering
during the Review Period; and (ii) any association or affiliation of the issuer or any officer, director, 10% beneficial
holder, or beneficial holder of recently acquired unregistered equity securities with any Participating Member in the
offering. The information gathered in this process will be used to satisfy the requirements of Rules 5110 and 5121
and to make the associated FINRA filings, but the questionnaires themselves are not submitted to FINRA.
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Although FINRA will accord confidential treatment to all documents and other information submitted to it for review
under the Corporate Financing Rule,
8
note that certain information regarding items of underwriting compensation
and other material relationships between the Participating Members and the issuer will, nonetheless, require
disclosure in the prospectus pursuant to the provisions of the FINRA rules, as well as Regulation S-K.
49The FINRA Review Process
ENDNOTES
1
The term “Participating Member” means any FINRA member that is participating in a public offering, any affiliate or associated person
of the member and their immediate family members, but does not include the issuer itself. The terms “participate,” “participation” or
“participating” for this purpose means involvement in the preparation of the offering document or other documents, involvement in the
distribution of the offering, furnishing of customer or broker lists for solicitation, or providing advisory or consulting services to the issuer
related to the offering. A broker dealer solely providing advisory or consulting services to the issuer as an independent financial adviser are
excluded from the definition of “participating member.”
2
Rule 5110 was substantially amended in September 2020. Issuers categorized as “direct participation programs” (those issuers whose
primary equity securities have flow-through tax consequences, such as limited partnerships or royalty trusts, as well as non-listed real
estate investment trusts) must meet the requirements of Rule 2310 as well as the filing requirements of Rule 5110.
3
“Underwriting Compensation” is defined as any payment, right, interest, or benefit received or to be received by a participating member
from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public
offering. In addition, underwriting compensation shall include finder’s fees, underwriter’s counsel fees, and securities. Amended Rule 5110
also includes expansive Supplementary Materials, which provide additional context and guidance as to what the term underwriting
compensation is intended to encompass.
4
The term “equity-linked securities” means any security that are convertible or exchangeable into an equity security.
5
Rule 5110 provides exemptions from the FINRA filing requirements for certain public offerings. Such exemptions are not available
for companies during the IPO process. However, the participating FINRA members must, nonetheless, comply with the underwriting
compensation limitations and other requirements of Rule 5110.
6
Typically, the SEC will not declare the registration statement effective until it has received an indication from FINRA that FINRA has no
objection to the underwriting terms for the offering.
7
Direct participation programs and real estate investment trusts are not “entities” for the purposes of Rule 5121. Therefore, the underwriters
cannot have a “conflict of interest” in connection with an offering by such an issuer.
8
See FINRA Rule 5110(a)(4)(D).
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51Beginning Life as a Public Company
BEGINNING LIFE AS A PUBLIC COMPANY
Overview
As you prepare to begin life as a public company, you will need to ensure that you have appropriate policies and
processes to comply with your reporting and compliance obligations.
• Insider trading. Long before your first day as a public company, you should inform all of your personnel, and
formally train more senior employees, about insider trading laws. Public companies ordinarily have a written
policy that governs the ability of employees, directors, contractors, and other related persons to trade in the
company’s securities. The terms of these policies vary depending on factors such as the size of the company
and the likely flow of financial and other sensitive information within the enterprise.
• Regulation FD. As soon as your stock begins trading publicly, you will become subject to Regulation Fair
Disclosure. Regulation FD requires broad dissemination, via public disclosure in a press release, Form 8-K
filing, pre-announced webcast, or other acceptable means, of any material nonpublic information selectively
disclosed to a stockholder, investment analyst, or other types of securities professionals. The public
disclosure must occur either simultaneously with an intentional selective disclosure or promptly after an
inadvertent selective disclosure. Your senior management and others must understand Regulation FD and
know that a violation of Regulation FD can result in significant personal liability.
• Quarterly close process. Virtually all companies that prepare to go public have thought about the importance
of a timely and well-organized quarterly close process. Many pre-IPO companies spend a year or more going
through a mock reporting process to test their readiness for the real thing. That’s always a good practice, but
it’s also only part of the drill.
• Disclosure controls and procedures. The SEC requires public companies to have a reporting system that
provides reasonable assurance that all required information is timely reported. This is known as disclosure
controls and procedures, or DC&P. Each time you file a periodic report, you must include the conclusion of
your CEO and CFO regarding the effectiveness of your DC&P.
• Internal control over nancial reporting. Public companies must have a system of financial controls that
provide reasonable assurance that the financial statements are accurate in all material respects. Each
periodic report must disclose material changes in internal control over financial reporting, or ICFR, and every
annual report must include management’s conclusion on the effectiveness of ICFR. After an initial phase-in
period, most public companies (i.e., those with a public float of more than $75 million) must also obtain an
audit opinion attesting to the effectiveness of their ICFR. For EGCs, the phase-in period lasts until they lose
EGC status (up to the first year-end after the fifth anniversary of their IPO). For other companies, the ICFR
audit is required with their second annual report.
• CEO and CFO certications. The CEO and CFO must file personal certifications with each periodic report
attesting to the accuracy of the report as a whole and other matters, including their DC&P conclusion, and
that they have designed DC&P to ensure accurate and timely reporting. The certifications also cover the
design and evaluation of effectiveness of ICFR. Your CEO and CFO will want to establish a process to enable
them to make their personal certifications. Often, companies use sub-certifications by direct reports and
lower-level personnel for this purpose.
• Disclosure committee. Many public companies use a disclosure committee to help design, maintain, and
implement their DC&P.
• Periodic reporting. An obvious consequence of going public is the need to file quarterly reports on Form 10-Q
and annual reports on Form 10-K. Public companies nearly always file their periodic reports on or before the
deadline, and timely reporting is important to show that you have your act together. Moreover, a late filing
affects your eligibility to use a more streamlined SEC registration process known as short-form registration on
Form S-3.
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Latham & Watkins – US IPO Guide
• Current reporting. About two dozen types of events that the SEC considers “presumptively and
unquestionably material” will trigger a requirement to file within four business days a current report on
Form 8-K to provide investors with information about the recent event. That said, about 15 of the triggering
events are more significant than the others because a late report will affect Form S-3 eligibility. For those
Form 8-K filings, a late filing is like a late periodic report. Other late filings, however, do not affect short-form
eligibility. You should pay close attention to the distinction in designing your reporting systems.
• Giving guidance. Chances are, your company will be among the nearly nine out of 10 companies that give
some form of financial guidance. If so, you will need to sort out a number of issues that arise in that context,
including the occasions that may warrant updating your guidance and how to do so.
• Section 16 reporting. This involves real-time reporting of sometimes highly complex issues. As a result, you
will need coordination, communication, and advance planning to do it right. Section 16 reporting persons
(discussed below) must file deceptively simple two-page reports that disclose, initially, their securities
ownership and, on an ongoing basis, each change in ownership. Most of these reports are due within two
business days, and securities ownership depends on a complex set of rules and SEC guidance that define
the “beneficial ownership” that these reports cover.
• Schedule 13D and Schedule 13G reporting. Persons, or members of a group, must file Section 13 reports
after acquiring beneficial ownership of more than 5% of a class of equity securities of an SEC-reporting
company. Public companies should know how these reports work to understand filings by significant
stockholders and groups and, on occasion, to manage their own reporting obligations if they have significant
holdings in another company.
Exchange Act Reporting
After your IPO, you will be required to begin SEC reporting under the Exchange Act with the SEC. This includes
filing current reports on Form 8-K, quarterly reports on Form 10-Q, annual reports on Form 10-K, and proxy
statements on Schedule 14A.
When Are Exchange Act Reports Due?
During the first fiscal year that an IPO company is public:
• Current reports on Form 8-K must generally be filed within four business days of the event that triggers the 8-K.
• Quarterly reports on Form 10-Q must be filed with the SEC within 45 days after the end of each of the first
three fiscal quarters. Reports on Form 10-Q are not required for the fourth quarter of a fiscal year since the
fourth quarter results are covered by the financial statements included in the Form 10-K.
• Annual reports on Form 10-K must be filed within 90 days after the end of the first fiscal year.
• Proxy statements on Schedule 14A must generally be filed within 120 days after the end of the fiscal year.
1
After an IPO company has been a reporting issuer for a full year, the 10-Q and 10-K deadlines can accelerate
depending on the size of the company’s public float.
Current Reports on Form 8-K
Current reports on Form 8-K are generally required to be filed with the SEC within four business days after the
occurrence of a reportable event.
2
Reports furnished to satisfy Regulation FD obligations, however, must be filed
simultaneously with the Regulation FD disclosure (for intentional disclosures) or promptly (for non-intentional
disclosures). “Promptly,” for these purposes, means as soon as reasonably practicable but in no event after the
later of 24 hours or the commencement of the next day’s trading on the NYSE.
3
We summarize the required Form 8-K disclosure items in Annex D.
53
Quarterly Reports on Form 10-Q
Under Exchange Act Rule 13a-13(a):
• Quarterly reporting starts with the first fiscal quarter following the most recent fiscal year for which full financial
statements were included in the registration statement, or, if the registration statement included interim
financial statements subsequent to the most recent fiscal year-end, for the first fiscal quarter subsequent to
the quarter reported on in the registration statement.
• The first quarterly report is due within the later of:
– 45 days following the effective date of the registration statement; or
– the due date for the report that would otherwise have applied had the company been public.
For example, if a calendar year-end company’s S-1 goes effective on October 15 on the basis of June 30 interim
numbers, the first 10-Q would cover the third quarter, ending September 30. That filing would normally be due by
November 14 (i.e., 45 days after September 30). But, under Rule 13a-13(a), you can postpone the first filing to
November 29 (i.e., 45 days after October 15).
We summarize the requirements of Form 10-Q in Annex D.
Annual Reports on Form 10-K
An IPO company’s first annual report on Form 10-K must be filed with the SEC within 90 days after the end of
its fiscal year. If the 90th day falls on a holiday or a non-business day, then the report should be filed the next
business day.
We summarize the requirements of Form 10-K in Annex D.
Proxy Statements
All public companies must provide stockholders with a proxy statement in connection with their annual meeting.
Proxy statements must comply with Sections 14 and 14A of the Exchange Act and the SEC rules governing the
solicitation of stockholders’ proxies. Generally, a company’s proxy statement is due within 120 days after the end
of its fiscal year.
4
MLPs are subject to the requirements of the Exchange Act, but this typically will not include an
annual proxy statement, as there is no need to conduct an annual meeting to elect directors because the directors
are appointed by the sponsor.
We summarize the requirements of Schedule 14A in Annex D.
Pending Material M&A Transactions
Material merger negotiations or major corporate acquisitions can pose particularly difficult Exchange Act reporting
questions. There is no general duty under the securities laws to disclose merger or other similar transaction
negotiations until there is a material definitive agreement.
5
However, if a public company is selling or buying
securities, this may give rise to an obligation to disclose a pending material transaction even if not completed, for
example under Exchange Act Rule 10b-5. In addition, Regulation S-X Rule 3-05 may require financial statement
disclosures about material acquisitions that are probable.
Absent some other duty to disclose, once public, an IPO issuer that is holding merger negotiations need
not disclose the existence of those negotiations, or it may choose to respond to press inquiries by stating
“no comment.”
Beginning Life as a Public Company
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Latham & Watkins – US IPO Guide
PSLRA Safe Harbor
6
The Private Securities Litigation Reform Act of 1995 (PSLRA) provides a safe harbor for SEC reporting issuers for
certain types of written or oral forward-looking statements,
7
including:
8
• projections of revenues, income, losses, earnings, and other financial items;
• statements of the plans and objectives of management for future operations; and
• statements of future economic performance.
The PSLRA does not, however, protect forward-looking statements made in connection with IPOs or those
statements that are included in financial statements prepared in accordance with GAAP.
9
In order to take advantage of the PSLRA safe harbor, among other things, the forward-looking statement must be
identified as such, and it must be accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those in the forward-looking statement.
10
As a practical
matter, issuers try to bring themselves within the safe harbor with respect to written forward-looking statements
by inserting cautionary language, noting that the relevant document contains forward-looking statements and by
keeping current, in a widely available public document such as a periodic SEC filing, the key market variables and
risk factors affecting the issuer’s business. This is the reason many earnings announcements and other press
releases routinely include long disclaimers. As for forward-looking oral statements, a spokesperson will often
make a formal statement to the following (rather stilted) effect:
The statements I am about to make include statements about our plans and future
prospects for the company and our industry that are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Our actual performance
may differ materially from performance suggested by those statements. I encourage you
to review the ‘Cautionary Statement’ section of our annual report on Form 10-K filed with
the SEC for additional information concerning factors that could cause those differences.
We suggest that this statement be made at the beginning of each conference call with investors or analysts.
Some issuers have the statement made by the moderator of the call, rather than by an officer.
Regulation FD
All public companies must comply with Regulation FD. Regulation FD broadly requires that when a public company,
or any person acting on its behalf, discloses “material nonpublic information” regarding the company or its securities
to certain enumerated persons, the company must concurrently make public disclosure of the same information.
Disclosure to Securities Market Professionals or Securityholders
Regulation FD’s disclosure requirement applies if material nonpublic information is provided to certain people,
including:
• securities analysts;
• investment advisers;
• institutional money managers;
• hedge funds;
• private equity funds; and
• holders of the company’s securities, if it would be “reasonably foreseeable” that the holders will trade on the
basis of the information.
55Beginning Life as a Public Company
Certain communications to these persons are exempt from this disclosure requirement, including disclosures
to persons who owe a duty of trust or confidence to the company, such as the company’s lawyers, bankers and
accountants, disclosures to persons who expressly agree to maintain the disclosed information in confidence, and
disclosures made in connection with most securities offerings.
Material Nonpublic Information
What constitutes material nonpublic information is not defined in Regulation FD and is not amenable to a precise
answer. In general, an IPO issuer should assume that information is material if a reasonable investor would
consider the information to be important in deciding whether to buy, sell, or hold securities of the company. You
should also bear in mind that regulators and plaintiffs will assess materiality using the 20/20 vision of hindsight.
Timing of Disclosure
The timing of the required public disclosure depends on whether the selective disclosure was intentional
or unintentional.
• Intentional. For intentional selective disclosure, the company must make public disclosure simultaneously
with the selective disclosure. In this context, a selective disclosure is intentional when the person making
the disclosure either knows, or is reckless in not knowing, that the information he or she is disclosing is both
material and nonpublic.
• Unintentional. For unintentional selective disclosure, the company must make public disclosure as soon as
reasonably practicable (but no later than the later of 24 hours or the commencement of the next day’s trading
on the NYSE) after a senior executive of the company learns that there has been a non-intentional disclosure
of material nonpublic information.
Form of Disclosure
Public disclosure can be made by filing a Form 8-K with the SEC, furnishing a Form 8-K to the SEC, or by
disseminating the information through another method (or combination of methods) of disclosure that is
reasonably designed to provide broad, non-exclusionary distribution to the public. The company should consider
disclosing the information in a press release, providing notice through a press release and/or website posting of
a conference call or webcast regarding the information, and then holding the conference call in an open manner,
permitting investors to listen in either by dialing in to a toll-free number or by logging on to a webcast.
It is unclear what constitutes sufficient dissemination of information to satisfy public disclosure by means other than
filing or furnishing a report on Form 8-K. Although the SEC has issued guidance regarding the factors relevant
to determining if posting information to a company’s website makes it “public” for purposes of Regulation FD, a
company’s website generally is not yet viewed as a primary means for Regulation FD-compliant public disclosure.
Non-GAAP Financial Measures
Many issuers choose to disclose measures of financial performance or liquidity that, while derived from GAAP
figures presented in a company’s financial statements, are not themselves calculated in accordance with GAAP.
EBITDA is perhaps the best-known (and most widely used) non-GAAP financial measure.
The SEC’s rules (adopted in response to Section 401(b) of Sarbanes-Oxley) limit the use of non-GAAP financial
measures in various ways. First, Regulation G applies to any public disclosure of non-GAAP financial measures.
11
Second, Item 10(e) of S-K layers on additional requirements for disclosures in Securities Act and Exchange Act
filings (and earnings releases furnished to the SEC under Item 2.02 of Form 8-K).
12
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Latham & Watkins – US IPO Guide
Regulation G
A non-GAAP financial measure under Regulation G is defined broadly as a numerical measure of financial
performance that excludes (or includes) amounts that are otherwise included in (or excluded from) the
comparable measure calculated and presented in the financial statements under GAAP.
13
The term “non-GAAP financial measure” carves out certain items including:
• operating measures and ratios or statistical measures calculated using financial measures determined in
accordance with (1) GAAP (e.g., GAAP sales per square foot and operating margin calculated by dividing
GAAP revenues into GAAP operating income) or (2) measures that are not themselves non-GAAP financial
measures;
14
or
• financial measures required to be disclosed by GAAP, SEC rules or an applicable system of regulation of a
government, governmental authority, or a self-regulatory organization (e.g., segment measures required by
ASC 280).
15
Under Regulation G, if a public company discloses a non-GAAP financial measure, it must:
16
• present the most directly comparable financial measure calculated in accordance with GAAP; and
• quantitatively reconcile the differences between the non-GAAP financial measure and the most directly
comparable GAAP financial measure.
17
In addition, Regulation G contains an antifraud prohibition — that is, an issuer may not make any non-GAAP
financial measure public if the measure contains a material misstatement or omission.
18
Regulation S-K Item 10(e)
For purposes of Item 10(e), the term “non-GAAP financial measures” has the same meaning as under
Regulation G.
19
Under Item 10(e), if a public company includes a non-GAAP financial measure in an SEC filing
(or an earnings release furnished under Form 8-K Item 2.02) it must also include:
20
• a presentation, with equal or greater prominence, of the most directly comparable GAAP financial measure;
• a quantitative reconciliation of the differences between the non-GAAP financial measure and the most directly
comparable GAAP financial measure;
21
• a statement why management believes the non-GAAP financial measure provides useful information for
investors; and
• to the extent material, a statement of the additional purposes for which management uses the non-GAAP
financial measure.
22
Furthermore, Item 10(e) prohibits in SEC filings (but not in an earnings release furnished under Form 8-K
Item 2.02), among other things:
23
• non-GAAP measures of liquidity that exclude items requiring cash settlement, other than EBIT and EBITDA;
• non-GAAP measures of performance that eliminate or smooth items characterized as non-recurring, unusual,
or infrequent when it is reasonably likely that a similar charge or gain will recur within two years, or there was
a similar charge or gain within the prior two years;
• the presentation of non-GAAP financial measures on the face of the financial statements, in the
accompanying notes, or on the face of any pro forma financial information required to be disclosed by
Article 11 of Regulation S-X; and
• using a name for non-GAAP financial measures that is the same as, or confusingly similar to, titles or
descriptions used for GAAP financial measures.
57Beginning Life as a Public Company
The SEC Staff monitors the use of non-GAAP financial measures and has issued several interpretations of SEC
rules. The guidance covers various areas, such as ensuring equal or greater prominence for GAAP measures,
appropriate presentation of per-share measures, handling of forward-looking non-GAAP financial measures
without reconciliation, exclusion of recurring items, consistency in the inclusion or exclusion of gains or charges
in non-GAAP financial measures over time, tailored recognition and measurement methods for specific financial
statement line items (e.g., revenue), accurate labeling and clear descriptions of non-GAAP measures, and the
recognition that disclosure alone may not be sufficient to address misleading non-GAAP measures.
24
Earnings Guidance
Every IPO company must decide whether, and to what extent, to give the market guidance about future operating
results. Questions from the buy side will begin at the IPO road show and will likely continue on every quarterly
earnings call, and at investor meetings and conferences between earnings calls. The decision whether to give
guidance, and how much guidance to give, is an intensely individual one. There is no one-size-fits-all approach in
this area. The only universal truths are (1) an IPO company should have a policy on guidance, and (2) the policy
should be the subject of careful thought.
25
A Review of the Basics
Public companies are not required by stock exchange rules or the SEC’s rules to provide investors with
projections of future operating results.
26
However, investors and analysts can be demanding, and many public
companies elect to provide the market with guidance about their expectations for the future. The decision to give
guidance can spring from a desire to share good news with investors in order to help the market get to a higher
valuation for the company’s stock, or it can spring from a desire to correct analysts’ overly optimistic earnings
expectations. Whatever the motivation, the legal landscape should be carefully understood before management
takes the plunge. It is possible to give guidance in a deliberate and careful way without incurring undue liability.
It is also possible to make critical mistakes that can have significant economic consequences under the federal
securities laws and in the financial markets.
How Far to Go
The most basic decision is whether to give guidance on a quarter-by-quarter basis or on a year-by-year
basis. The next question is how far forward to project results. There is no one-size-fits-all answer here. Some
businesses are stable and predictable. For them, predicting earnings on a quarter-by-quarter basis may be
an option. Many energy companies, for example, have pre-sold the majority of their output multiple years into
the future. A company with a predictable earnings stream is in a very different position than a company with
unpredictable operating results.
Businesses with lumpy revenue streams or that experience seasonality or weather issues may not feel they can
make quarterly projections prudently. A September 2012 survey performed by the National Investor Relations
Institute (NIRI) found that guidance-giving companies most often communicate annual estimates only. The most
common frequency for communicating those estimates is on a quarterly basis.
27
Even the most stable businesses
typically elect not to provide earnings guidance beyond the year in progress, although some businesses will
provide long-term estimates or goals for longer periods.
What to Say
Directly related to the decision of how far forward to look when guiding investors is the decision of what to say
about the periods in question. Guidance takes many forms, not just earnings per share for the year. Some
companies will guide investor expectations by giving a range of anticipated earnings per share or simply by
saying that they are “comfortable with the Wall Street analysts’ consensus” regarding earnings per share for the
year. However, explicitly blessing a specific analyst’s estimate can be viewed under the case law as “adopting” it,
which has the same liability considerations as issuing guidance directly. This casual approach to guidance usually
does not offer an opportunity to include appropriate cautionary disclosure and should generally be avoided.
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Latham & Watkins – US IPO Guide
Many companies prefer to provide the market with forecasts of an Adjusted Net Income or Adjusted EBITDA
metric that excludes the impact of expected (or unexpected) non-recurring, non-cash and/or unusual items.
Adjusted measures of operating performance are easier to predict accurately since they are unaffected by many
of the statement of comprehensive income items that impact earnings per share. Of course, public release of
these non-GAAP financial measures will need to comply with Regulation G.
28
Other companies stop their numerical guidance at the revenue line, projecting only a targeted revenue growth
in percentage terms. Revenue-only guidance may be supplemented with a comment about profit margins —
“We expect to see an improvement in profit margins as we do not expect anticipated revenue increases to be
accompanied by a corresponding increase in our fixed costs” — or not. Still another form of guidance involves
non-financial measures — “We expect to open 25 new company-owned stores this year” or “We currently expect
to complete construction of our new manufacturing facility in the fourth quarter of 2024.”
29
There is no limit to the
forms that guidance can take. What is appropriate for one company in one industry may be totally inappropriate
for another company, even one in the same industry.
Guidance Guidelines
Scope
Each IPO company’s decision of what to say and how far to go needs to be made in light of the nature of its
industry and the circumstances of its business. Careful thought should be given to the trade-off that going further
down the statement of comprehensive income presents. More precise information will please analysts in the
short run, but it can create sharper liability issues in the long run. Much more agility is needed to predict earnings
per share successfully than to predict revenue, Adjusted Net Income, Adjusted EBITDA, or another “normalized”
measure of performance that is less likely to be affected by surprises on the business front or in the accounting
literature. We recommend that companies only give guidance on a metric that they feel comfortable they can
accurately predict.
Cautionary Statements
All good guidance should be accompanied by dynamic, carefully tailored, cautionary statements. These
disclaimers should temper the predictions of a rosy future with a balanced discussion of what could go wrong.
Risk factor disclosure should also be appropriately updated with each publication. Do not just use the same old
boilerplate from prior years. It is also helpful if some of the material assumptions on which the guidance is based
are disclosed and if the company’s risk factors tie to the achievement of those assumptions. A 10% increase
in earnings that is premised on cutting redundant overhead costs is not the same as a 10% increase that is
premised on a substantial increase in market share. The point of cautionary language is to explain what goes into
the sausage so investors can make their own informed decisions about the likelihood of the projected outcome
actually being realized. Good cautionary disclosure can be an effective insurance policy against future liability if
the guidance turns out to be incorrect.
The Delivery
It is best if guidance and the related cautionary disclosures are given in a controlled environment. The most
popular forums are the year-end or quarter-end earnings release and the related quarterly earnings calls. The
press release and the script for an earnings call are usually the subject of a greater degree of oversight than any
casual encounter, and earnings calls are always Regulation FD-driven events since the public is invited to listen in
and a recording is typically available on the company’s website for a period of time after the call. Many companies
prefer to give guidance orally on their earnings calls and do not produce a written version of their statements for the
related earnings press release. For a CFO who is comfortable sticking tightly to a prepared script, this is a perfectly
acceptable choice. For others, putting it down in writing in the earnings release may be a wise precaution.
59Beginning Life as a Public Company
The earnings release or call should include carefully tailored disclaimer language, and the actual guidance
statements should be carefully vetted and scripted. Oral forward-looking statements should be accompanied by
an oral statement that cautionary disclosures are contained in a readily available written document. Similarly,
statements regarding non-GAAP financial measures should identify where the required reconciliations can be found.
Anticipating Questions
There are at least three good reasons to anticipate the questions about guidance that analysts are likely to ask
on an earnings call. First, there are some questions the company will want to answer. If the answer has not
been scripted, it may not come out with all of the nuance that is appropriate. Second, there are some questions
the company will not want to answer. It helps to have worked out in advance which questions the company is
prepared to answer and which questions merit only a “no comment” response. Finally, Regulation FD frowns on
answering follow-up questions in private calls or meetings where the public does not have access, so what is
said on the earnings call will set the boundaries of what can be discussed in private meetings between earnings
calls. Answering questions that were asked on the earnings call, or providing additional detail on topics that have
been covered at an appropriate level of materiality on the earnings call, will generally be acceptable in follow-up,
one-on-one investor meetings. Venturing into territories that were not covered on the earnings call in subsequent
private meetings can raise selective disclosure issues under Regulation FD.
Updating or Conrming Prior Guidance
When management begins to doubt whether the company’s actual results will be in line with prior guidance,
the decision whether to make a public statement to that effect depends entirely on context — all facts and
circumstances must be considered. As always, the analysis should start with a review of what was said in the
first place. Did the company say that it would confirm annual guidance every quarter? Did the company say
that it would not? Is it obvious from the facts that the prior guidance is no longer reliable (due to an important
acquisition, disposition, or industry development)?
If a company expects to exceed its prior guidance by a modest amount, it is probably safe to keep that information
confidential and pleasantly surprise the investment community. On the other hand, if a company is reasonably
sure that it will miss the mark by a material amount, intervening events or market pressures may force an out-of-
sequence guidance update. Context is everything. For a company repurchasing its own shares or one involved
in a going-private transaction, the fact that current guidance is materially low may be problematic. In the context
of a securities offering, the opposite is true — materially high guidance is the concern. Managing expectations to
maintain credibility, provide transparency, and avoid unpleasant surprises is always the goal.
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PRACTICE POINT
Ten Rules for Giving Good Guidance
1. Designate a limited number of company
personnel to communicate with analysts and
investors about future plans and prospects.
2. Adopt an appropriate guidance policy early and
follow it.
3. Do not rely on boilerplate. Explain the
assumptions underlying each forward-looking
statement and disclose the risks that may cause
anticipated results not to be realized — the
cautionary statements should be tailored to fit
the guidance.
4. Have prepared remarks reviewed by counsel
and stick to the script.
5. Remember Regulation FD: Disclose guidance
and other material information only in an
FD-compliant manner.
6. Do not be afraid to say “no comment” in
response to questions or deflect uncomfortable
questions by restating the company’s
guidance policy.
7. Do not comment on or redistribute analysts’
reports, and only review advance copies of
analysts’ reports (or selected excerpts) for
factual errors.
8. Remember Regulation G: Include appropriate
disclosure for non-GAAP financial measures
where required.
9. Continually evaluate whether changed
circumstances argue in favor of an update of
prior disclosures.
10. Be particularly sensitive to Rules 1 through 9
in the context of an intervening event between
quarterly earnings releases and calls, such
as an offering of securities, share repurchase
program, or acquisition, or when insiders are
buying or selling company securities.
The Sarbanes-Oxley Act of 2002
The US Congress enacted Sarbanes-Oxley in response to several high-profile, accounting-related scandals at US
companies. Sarbanes-Oxley instituted a number of significant changes for public companies in the United States
that were designed to enhance the reliability of financial information published by public companies and promote
investor confidence in US markets.
Sarbanes-Oxley applies to IPO companies once they have filed their IPO registration statement.
30
We highlight
below some key aspects of Sarbanes-Oxley.
Internal Control Over Financial Reporting — Section 404
Section 404 of Sarbanes-Oxley contains two related requirements. Section 404(a) requires an assessment by
management of effectiveness of the issuer’s ICFR, while Section 404(b) requires an attestation report of the issuer’s
independent auditors on management’s assessment. Compliance with Section 404 can be a major undertaking for a
newly public company. The SEC has adopted rules to allow an IPO company to wait until its second annual report to
provide management’s Section 404(a) assessment and its auditor’s Section 404(b) attestation.
31
Issuers that are “large accelerated filers” or “accelerated filers” must comply with both Sections 404(a) and 404(b),
starting with the second annual report on Form 10-K following the IPO.
32
By contrast, issuers that are neither large
accelerated filers nor accelerated filers, and those that are EGCs, are required only to provide management’s
assessment of ICFR under Section 404(a).
33
Management may not determine that an issuer’s ICFR is effective if it identifies one or more material weaknesses
in the issuer’s ICFR.
34
The SEC has adopted a definition of the term material weakness in Exchange Act
Rule 12b-2 and Rule 102 of Regulation S-X. A “material weakness” is a deficiency, or a combination of
61Beginning Life as a Public Company
deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the company’s
annual or interim financial statements will not be prevented or detected on a timely basis.
Disclosure Controls and Procedures
In addition to ICFR, an issuer must maintain and evaluate the effectiveness of its “disclosure controls and
procedures.”
35
There is, however, no required auditor’s attestation with respect to disclosure controls and
procedures.
Disclosure controls and procedures mean controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange
Act is: (i) timely recorded, processed, summarized, and reported; and (ii) accumulated and communicated to
the issuer’s management to allow for timely decisions about disclosure.
36
There is substantial overlap between
the concepts of disclosure controls and procedures and ICFR, although there are some elements of each term
that are not subsumed within the other. In particular, “disclosure controls and procedures will include those
components of internal control over financial reporting that provide reasonable assurances that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles.”
37
By contrast, disclosure controls and procedures would not necessarily include accurate
recording of transactions and disposition or safeguarding of assets, which would remain components of internal
control.
38
The existence of a material weakness in ICFR may not prevent management from concluding that an
issuer’s disclosure controls and procedures are effective, but, in practice, this can be a challenging determination.
Certication Requirements — Sections 302 and 906
Sarbanes-Oxley contains two overlapping certifications that must be provided by an issuer’s CEO and CFO (or
persons performing similar functions): the Section 302 certification and the Section 906 certification. Section 302
amends the Exchange Act, whereas Section 906 amends the US federal criminal code. Under the rules adopted
by the SEC, both certifications must be included with an IPO issuer’s annual report on Form 10-K and its quarterly
reports on Form 10-Q.
39
Neither certification is required, however, for current reports on Form 8-K.
40
Listed Company Audit Committees — Rule 10A-3
Exchange Act Rule 10A-3 (which implements Section 301 of Sarbanes-Oxley) requires that each audit committee
member has to be a member of the board of directors and meet certain independence requirements. To be
“independent,” an audit committee member is barred from accepting any compensatory fees from the issuer or
any subsidiary, other than in his or her capacity as a member of the board, and may not be an “affiliated person”
of the issuer. The definition of affiliated person includes a person who, directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with the specified person. There is,
however, a safe harbor for certain non-executive officers and other persons who are 10% or less shareholders of
the issuer.
Rule 10A-3 also requires that:
• the audit committee must be “directly responsible” for the appointment, compensation, oversight, and
retention of the external auditors, who must report directly to the audit committee;
• the audit committee must establish procedures for the receipt, retention and treatment of complaints
regarding accounting, internal controls, or auditing matters, and the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing matters;
• the audit committee must have the authority to engage independent counsel and other advisers as it deems
necessary to carry out its duties; and
• the issuer must provide the audit committee with appropriate funding for payment of external auditors,
advisers employed by the audit committee, and ordinary administrative expenses of the audit committee.
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Under the NYSE and Nasdaq rules, IPO issuers are entitled to certain exemptions during a transitional period
following their public offering:
41
• For the rst 90 days from the date of listing (under Nasdaq rules) or the date of effectiveness of the IPO
registration statement (under NYSE rules), all but one of the members of the audit committee may be exempt
from the independence requirements.
• For the rst year after the date of listing (under Nasdaq rules) or the date of effectiveness of the IPO
registration statement (under the NYSE rules), a minority of the members of the audit committee are exempt
from the independence requirement (so, for example, only two out of three members need to be independent
for days 91 through 365).
These transitional rules effectively apply in the same manner to EGCs, controlled companies, and all other
IPO issuers.
An IPO issuer will have to disclose in any proxy or information statement filed with the SEC and in its annual
report that it has relied on one of these exemptions, and the company’s assessment of whether, and if so,
how, such reliance on an exemption would materially adversely affect the ability of the audit committee to act
independently.
Audit Committee Financial Expert
Sarbanes-Oxley requires that at least one member of a public company’s audit committee have accounting or
financial management expertise that would qualify that person as an audit committee financial expert.
42
The
SEC defines an audit committee financial expert as someone who has: (i) education and experience as a public
accountant, auditor, principal financial officer, principal accounting officer, or controller, or experience in one or more
positions that involve performance of similar functions; (ii) experience actively supervising persons in the positions
above; (iii) experience overseeing or assessing the performance of companies or public accountants with respect to
the preparation, auditing, or evaluation of financial statements; or (iv) other relevant experience, and who has:
43
• an understanding of GAAP and financial statements;
• the ability to assess the general application of such principles in connection with the accounting for estimates,
accruals, and reserves;
• experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level
of complexity of accounting issues that are generally comparable to the breadth and complexity of issues
that can reasonably be expected to be raised by the company’s financial statements, or experience actively
supervising one or more persons engaged in such activities;
• an understanding of internal controls and procedures for financial reporting; and
• an understanding of audit committee functions.
A public company must disclose in its Form 10-K the name of at least one audit committee financial expert on
the company’s audit committee and, if there is not an audit committee financial expert on the audit committee, an
explanation of why there is not an audit committee financial expert.
Loans to Executives — Section 402
Under Section 402 of Sarbanes-Oxley (which added Section 13(k) to the Exchange Act), it is illegal for an issuer
to “extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form
of a personal loan to or for any director or executive officer (or equivalent thereof)” of that issuer. Section 402
covers both direct extensions and indirect extensions of credit, including through subsidiaries.
63Beginning Life as a Public Company
Section 402 contains certain exemptions, including:
• any loan existing on July 30, 2002, unless its terms are materially modified or the loan is renewed;
• consumer credit and extensions of credit under a charge card; and
• certain bank loans.
The broad sweep of Section 402, coupled with the absence of SEC guidance, has raised a number of thorny
questions for issuers. In response, Latham & Watkins (together with 24 other law firms) issued a paper concluding
that the following should generally be regarded as permissible under Section 402:
44
• cash advances to reimburse travel and similar expenses while performing executive duties;
• personal usage of a company credit card and company car, and relocation expenses required to be
reimbursed;
• “stay” and “retention” bonuses subject to repayment if an employee terminates employment before a
designated date;
• indemnification advances for litigation;
• tax indemnity payments to overseas-based executive officers;
• loans by a parent or shareholder that is a foreign private issuer, but not subject to Sarbanes-Oxley, to the
executive officer of a wholly owned subsidiary that is subject to Sarbanes-Oxley, if the subsidiary has not
“arranged” the loan and the loan is made by reason of service to the parent, not the subsidiary; and
• most “cashless” option exercises.
Forfeiture of Bonuses — Section 304
Section 304 of Sarbanes-Oxley provides that if an issuer is required to “prepare an accounting restatement due
to the material non-compliance of the issuer as a result of misconduct” with any financial reporting requirements
under the securities laws, the CEO and CFO must reimburse the issuer for:
• all bonuses or other incentive-based or equity-based compensation received from the issuer during the
12-month period following the first public issuance or filing with the SEC (whichever is first) of the financial
document embodying the financial reporting requirement; and
• any profits received from the sale of the issuer’s securities during that 12-month period.
Incentive-Based Compensation Clawbacks
Listing standards adopted by Nasdaq and the NYSE require listed issuers (including FPIs) to adopt and implement
incentive-based compensation clawback policies and to make applicable disclosures in their SEC filings.
45
The clawback policy must be in writing and provide that a listed issuer that is required to prepare an accounting
restatement must recover from any current or former executive officer incentive-based compensation erroneously
paid based on the misstated financial measure during the three most recently completed fiscal years prior to the
restatement.
46
Recovery must be made “reasonably promptly” and without regard to misconduct by any executive
officer from whom recovery is sought.
47
The exchanges were directed to impose these requirements by – and the listing standards track the language
of – Exchange Act Rule 10D-1, adopted in 2022 by the SEC to implement the original requirement under
Dodd-Frank.
48
Exchange Act Rule 10D-1 broadens the statutory mandate in two respects:
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Latham & Watkins – US IPO Guide
• First, the rule requires compensation recovery not only upon so-called “Big R” restatements, which correct
errors that are material to previously issued financial statements, but also upon “little r” restatements, which
correct only immaterial prior-period errors that (despite their immateriality to previously issued financial
statements) would result in a material misstatement of an as-yet unreported current period if the historical
errors were left uncorrected in the current period or if the error correction were made in the current period.
49
As a result, compensation will be subject to clawback after correction of exclusively immaterial errors even
though the statutory prerequisite for a clawback event is “an accounting restatement due to the material
noncompliance of the issuer with any financial reporting requirement under the securities laws.”
• Second, the listing standards requires compensation recovery for a broader group of persons than “executive
officers” as generally defined under the Exchange Act. Instead, the rule introduces a new definition of
“executive officer” that tracks the Section 16 “officer” definition, which includes the principal accounting officer
(or, if there is no such accounting officer, the controller) even if that person is not an executive officer for
Exchange Act purposes and not publicly reported as an executive officer.
50
As a result, the compensation of
some persons who are not executive officers for Exchange Act purposes will be subject to clawback even
though the statute refers to “any current or former executive officer.”
The listing standards require a listed issuer to make all required disclosures,
51
including filing its clawback policy
as an exhibit to its Form 10-K
52
and disclosing how it has applied the policy, including, as relevant:
• the date the issuer was required to prepare an accounting restatement;
• the aggregate dollar amount of erroneously awarded compensation; and
• the aggregate amount that remains outstanding and any outstanding amounts due from any current or former
named executive officer for 180 days or more.
53
NYSE and Nasdaq Corporate Governance and Board Composition Requirements
Nasdaq and NYSE impose corporate governance and board composition requirements as part of their respective
listing standards. Foreign private issuers and controlled companies are exempt from some of these standards. (A
“controlled company” is one in which more than 50% of the voting power for the election of directors is held by an
individual, a group, or another company.)
We summarize these in detail in Annexes B and C, and highlight the NYSE and Nasdaq board composition
requirements below:
Nasdaq/NYSE Requirement
Foreign Private
Issuers
Controlled
Companies
All Others
(e.g., EGCs,
non-EGCs)
• Majority of independent directors May follow home-
country practice
Not required Yes, within 12
months of listing
• Nominating/corporate governance committee Same Same Yes
†
• Compensation committee Same Same Yes
†
• Audit committee
– Must meet requirements of Rule 10A-3
‡
– Must have at least three members
Yes
May follow home-
country practice
Yes
Yes
Yes
Yes
65Beginning Life as a Public Company
†
The requirements for these committees are:
• one independent director on each committee at the time of listing (under Nasdaq rules) or by the earlier of
the date the IPO closes, or five business days from the listing date (under NYSE rules);
• a majority of independent directors within 90 days thereafter (under both Nasdaq and NYSE rules); and
• fully independent committees within one year (under both Nasdaq and NYSE rules).
‡
The following transition periods apply to all IPO companies:
• for the rst 90 days after an IPO all but one of the members of the audit committee are exempt from
Rules 10A-3’s independence requirement; and
• for the rst year after an IPO a minority of the members of the audit committee are exempt from Rule
10A-3’s independence requirements (since most audit committees have three members, this means that
only two need to be independent for the days 91 through 365 following the IPO).
Schedule 13D and 13G Reporting
In October 2023, the SEC adopted amendments to Regulation 13D-G, which accelerated filing deadlines for initial
reports and amendments on Schedules 13D and 13G. The discussion below reflects the new deadlines that have
already taken effect for Schedule 13D filers, the current deadlines for Schedule 13G filers, and the new deadlines
that will take effect for Schedule 13G filers on September 30, 2024.
54
Schedule 13D
Under Section 13(d)(1) of the Exchange Act, any person who acquires, directly or indirectly, beneficial ownership
55
of
more than 5% of a voting class of equity securities registered under Section 12 of the Exchange Act must, within five
business days after the acquisition, file with the SEC a statement on Schedule 13D (eligible investors may instead
file a short-form Schedule 13G within the applicable deadlines discussed below).
Reports on Schedule 13D must be amended to reflect any material change in the facts set forth in the report, such
as an increase or decrease in the percentage of stock beneficially owned by the reporting stockholder or any change
in the reporting person’s intentions with regard to the acquisition, disposition, voting, or holding of the securities of
the company. These amendments must be filed within two business days following any such change.
Schedule 13G
Rule 13d-1 under the Exchange Act allows certain stockholders who would otherwise be obligated to file a
Schedule 13D to file a short-form Schedule 13G if they meet eligibility criteria. Eligible categories of investors
comprise certain qualified institutional investors (QIIs) (pursuant to Rule 13d-1(b)); investors that own less than
20% with neither the effect nor purpose of changing or influencing control of the company (Passive Investors)
(pursuant to Rule 13d-1(c)); and stockholders who acquired shares prior to the registration of shares under
Section 12, such as pre-IPO investors (Exempt Investors) (pursuant to Rule 13d-1(d)). The ownership thresholds
and amendments that trigger a Schedule 13G filing for each investor category and the associated deadline under
the current and amended frameworks are set out in the following table.
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Current Schedule 13G Amended Schedule 13G
(effective September 30, 2024)
Initial Filing
Deadline
QIIs & Exempt Investors: 45 days after
calendar year-end in which beneficial
ownership exceeds 5%.
QIIs: 10 days after month-end in which
beneficial ownership exceeds 10%.
Passive Investors: Within 10 days after
acquiring beneficial ownership of more
than 5%.
QIIs & Exempt Investors: 45 days after
calendar quarter-end in which beneficial
ownership exceeds 5%.
QIIs: Five business days after month-end in
which beneficial ownership exceeds 10%.
Passive Investors: Within five business
days after acquiring beneficial ownership
of more than 5%.
Amendment
Triggering Event
All Schedule 13G Filers: Any change
in the information previously reported on
Schedule 13G.
QIIs & Passive Investors: Upon
exceeding 10% beneficial ownership or
a 5% increase or decrease in beneficial
ownership.
All Schedule 13G Filers: Material change
in the information previously reported on
Schedule 13G.
QIIs & Passive Investors: No change
from current deadline; i.e., upon
exceeding 10% beneficial ownership or
a 5% increase or decrease in beneficial
ownership.
Amendment Filing
Deadline
All Schedule 13G Filers: 45 days after
calendar year-end in which any change
occurred.
QIIs: 10 days after month-end in which
beneficial ownership exceeded 10%
or there was, as of the month-end, a
5% increase or decrease in beneficial
ownership.
Passive Investors: Promptly after
exceeding 10% beneficial ownership or
a 5% increase or decrease in beneficial
ownership; i.e., no specific deadline.
All Schedule 13G Filers: 45 days after
calendar quarter-end in which a material
change occurred.
QIIs: Five business days after month-end
in which beneficial ownership exceeds
10% or a 5% increase or decrease in
beneficial ownership.
Passive Investors: Two business days
after exceeding 10% beneficial ownership
or a 5% increase or decrease in beneficial
ownership.
Latest Time to file
on EDGAR
5:30 p.m. ET 10:00 p.m. ET
Once a reporting person files an amendment reflecting ownership of 5% or less of the company’s securities, no
additional filings are required.
Section 16 of the Exchange Act
An IPO company’s 10% stockholders, directors, and certain designated officers (collectively “Section 16 reporting
persons”) are subject to the reporting requirements of Section 16(a) of the Exchange Act, to civil liability for short-
term profits under Section 16(b) of the Exchange Act and to criminal liability for “short sales” under Section 16(c)
of the Exchange Act.
67Beginning Life as a Public Company
Who Is a Section 16 Reporting Person?
Section 16 reporting persons include the following:
• Directors: All members of the IPO company’s board of directors.
• Ocers: Each person who is designated as an Executive Officer of the company (as defined in Rule 3b-7)
and, if there is no principal accounting officer, the controller.
• Principal Stockholders: Any person who is, directly or indirectly, the beneficial owner of more than 10% of the
company’s securities. To determine whether a person beneficially owns more than 10% of an IPO company’s
securities and is, thus, subject to Section 16, the SEC applies the same definition of beneficial ownership as
that specified in Rule 13d-3. Consequently, a person who controls the voting or disposition of more than 10%
of the company’s securities will be considered a reporting person subject to the provisions of Section 16.
56
Section 16(a) Reports
Under Section 16(a) of the Exchange Act, each Section 16 reporting person of an IPO company is required to file
with the SEC an “Initial Statement of Beneficial Ownership of Securities” on Form 3, listing all of the company’s
equity securities that he or she beneficially owns. The report is due by 10:00 p.m. Eastern Standard Time on the
day that the IPO company’s Exchange Act registration statement becomes effective. In addition, each person who
becomes an officer, director or beneficial owner of more than 10% of the company’s securities after the IPO is
required to file a statement on Form 3 within 10 calendar days of that event.
What Is Benecial Ownership?
The definition of beneficial ownership for purposes of Section 16(a) reporting (which differs from the Rule 13d-3
concept of beneficial ownership used to determine whether a person constitutes a 10% holder) focuses on whether
the director, officer, or principal stockholder has any “pecuniary interest” in the stock. Pecuniary interest is defined
as “the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in” the stock. SEC
rules provide the following guidelines in determining whether a person has a pecuniary interest in the stock.
• Family holdings: There is a rebuttable presumption that a reporting person has a pecuniary interest in stock
held by members of his or her immediate family if they share the same household. A reporting person who is
a trustee of a family trust may have a pecuniary interest in the trust holdings of immediate family members
whether or not they share the same household.
• Partnership holdings: General partners of both general and limited partnerships are considered the beneficial
owners of the portfolio securities held by the partnership in proportion to the greater of (i) their share of
the partnership capital account or (ii) their share of the partnership’s profits.
• Derivative securities: A person’s right to acquire equity securities through the exercise or conversion of
options and other derivative securities, whether or not currently exercisable, creates a pecuniary interest
in the underlying security, which interest must be reported. (The requirement to report derivative securities,
whether or not exercisable, differs from the Rule 13d-3 analysis, which excludes from the “beneficial
ownership” definition those derivative securities not exercisable within 60 days.)
• Trust interests: A person’s interest as trustee, beneficiary, or settlor in the shares of stock held by a trust may
be regarded as beneficial ownership of those shares pursuant to certain rules governing trust holdings and
transactions.
The above examples of “pecuniary interests” are not exclusive. The rules governing the determination of
beneficial ownership for Section 16(a) reporting purposes (and for purposes of determining Section 16(b) liability)
are complex, and we suggest you seek the assistance of counsel in making any such determination in cases not
involving direct ownership.
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Form 4 Filings
Following the initial filing on Form 3, changes in the beneficial ownership of the company’s securities, with certain
limited exceptions, must be reported on Form 4 within two business days of the date on which the change occurs.
Specific SEC rules apply to determine what constitutes a change in beneficial ownership, and counsel should be
consulted if there is a question as to whether a given transaction should be reported. It should be noted, however,
that Form 4 must be filed even if, as a result of offsetting transactions, there has been no net change in holdings.
In deciding the day on which a purchase or sale on the open market occurs for purposes of filing Form 4, the date
of the broker’s or dealer’s confirmation would ordinarily be determinative, except as set forth in the next paragraph
below. Special rules governing the filing of Form 4 reports may apply in certain situations. For example, if any
officer or director purchases or sells any of the company’s securities within six months after his or her termination
as an officer or director of the company, he or she must report the transaction on Form 4 if he or she made any
purchase or sale within the preceding six months and prior to termination.
In two situations, the date of execution in calculating the two-business-day deadline for filing a Form 4 will not
be determined by the actual date of the transaction, but rather by the date that the reporting person is notified,
so long as the notification is not more than three business days after such purchase or sale of the company’s
securities. This allowance for “extra time” applies in the following instances:
• For a transaction that complies with the affirmative defense set forth in Exchange Act Rule 10b5-1(c),
which exempts a sale or purchase of the company’s equity securities pursuant to a contract, instruction, or
written plan from being considered made on the basis of material nonpublic information. In this instance,
the reporting person does not select the date of the transaction, and, therefore, the date of execution will be
deemed the date that the person who makes the trade notifies the reporting person of the transaction, so long
as the notification date is not later than the third business day following the actual trade date;
57
and
• For discretionary transactions pursuant to an employee benefit plan where the reporting person does not
select the date of execution. In this instance, the date of execution would be the date on which the reporting
person is notified by the plan administrator, so long as the date of notification is not later than the third
business day following the actual trade date.
Form 5 Filings
In addition to the Form 3 and Form 4 reporting requirements, every reporting person is required to file a
Form 5 within 45 days after the end of the company’s fiscal year, unless he or she has previously reported all
changes in beneficial ownership, including those transactions exempt from Section 16(b) liability, on Form 4.
Form 5 reconciles the reporting person’s Section 16 reports by requiring disclosure of the reporting person’s
total beneficial ownership of the company’s securities at year-end and, with certain exceptions, all transactions
affecting the reporting person’s beneficial ownership not disclosed on Form 4. Form 5 must also identify any
required reports that the reporting person failed to file during the previous year.
Filing Issues
All reports on Forms 3, 4, and 5 are required to be filed electronically with the SEC by 10:00 p.m. Eastern
Standard Time on the appropriate date as set forth above. Such reports must be posted on the company’s
website no later than the first business day after the date of filing such report.
An IPO company should ensure that it has procedures in place to assist its reporting persons to timely file their
required reports. The SEC mandates public disclosure by the company in its annual proxy statement and its
Form 10-K of any Section 16 reporting persons who have filed late reports or failed to make the requisite filings
and to identify the number of transactions not timely reported. This mandated disclosure system is designed,
through the threat of public embarrassment and the risk of adverse SEC enforcement action, to cause reporting of
persons to be timely in their filings and to encourage issuers, such as the company, to monitor compliance by its
reporting persons.
69Beginning Life as a Public Company
Some Additional Issues
Rule 144 Resales
After a company’s IPO, certain public sales of the company’s shares will be subject to restrictions. Pursuant to
Securities Act Rule 144, persons who acquired their securities prior to the IPO and persons who are deemed
“affiliates” of the company must comply with the following provisions in order to sell freely their shares to the
public without registration. Affiliates must comply with Rule 144 even if their securities were purchased after the
public offering in the open market.
Aliates
An affiliate of an issuer is defined by Rule 144 as “a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with, such issuer.” Thus, a determination of
whether a person is an affiliate for purposes of Rule 144 depends principally on the meaning of the term “control.”
The SEC has defined “control” to mean “the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of the company whether through the ownership of voting securities, by
contract, or otherwise.” Applying this definition, the courts and the SEC have consistently held that the existence of
control of a company is a question of fact to be determined by the specific circumstances in each case.
Affiliates of an issuer may periodically sell a small amount of securities under Rule 144, subject to certain volume
and manner restrictions (and any applicable lock-up agreement with the underwriters). Specifically, (a) the amount
of securities sold in any three-month period (including certain sales required to be aggregated as described
below) may not exceed the greater of: (i) 1% of the outstanding securities of the class or (ii) the average weekly
reported volume of trading in the shares of securities during the four calendar weeks preceding the filing of a
Form 144 notice; and (b) the shares must be sold in a broker’s transaction, directly to a market maker or through
a riskless principal transaction.
58
In addition, adequate current public information about the company must be
available, and the following holding periods apply:
• Six months: If the company is a reporting issuer,
59
affiliates (including anyone who was an affiliate within 90
days prior to the proposed sale) must satisfy a holding period of six months from the date of purchase before
they can resell their securities.
• One year: If the company is not a reporting issuer, affiliates who acquired their securities in a nonpublic
transaction must satisfy a holding period of one year from the date of acquisition before they can resell their
securities.
If an affiliate acts in concert with other persons in selling securities of the company during a three-month period,
the sales of all of these persons will be combined to determine the quantity which may be sold. Securities sold
(i) pursuant to an effective registration statement or (ii) pursuant to an exemption under Section 4 of the Securities
Act and not involving a public offering, need not be included in determining applicable volume limitations.
Non-Aliates
Subject to any lock-up agreements with the underwriters, non-affiliates
60
who acquired their shares in the IPO or in
the market after the IPO may generally resell their securities in the open market immediately without restriction as
to volume, manner of sale, or holding periods.
Non-affiliates who acquired their securities prior to the IPO are generally not subject to the volume limitations
and manner of sale requirements discussed above; however, certain holding periods and other requirements do
apply. If the company is a reporting issuer, any non-affiliate who acquired his or her securities prior to the IPO is
restricted from reselling such securities into the open market for six months from the date of the acquisition of the
securities. Between six months and one year from the acquisition of the securities, the current public information
requirement applies. If the company is not a reporting issuer, any non-affiliate who acquired his or her securities
prior to the IPO is restricted from reselling such securities into the public market for one year from the date of the
acquisition of the securities. After one year, non-affiliates may make unlimited public resales without complying
with any Rule 144 requirements.
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Latham & Watkins – US IPO Guide
Conict Minerals
Section 1502 of Dodd-Frank added Section 13(p) to the Exchange Act, and broadly mandates SEC reporting
companies to make disclosures and undertake due diligence if they are involved in manufacturing products
containing “conflict minerals.” In 2012, the SEC adopted new Exchange Act Rule 13p-1 and Form SD to
implement Section 1502.
Rule 13p-1 is deceptively simple — it provides that all SEC registrants “having conflict minerals that are
necessary to the functionality or production of a product manufactured or contracted by that registrant to be
manufactured” must file Form SD, which, depending on the circumstances, can entail short-form reporting or
long-form audited disclosure. Rule 13p-1 applies to all SEC reporting companies.
An IPO company’s initial Form SD is not due until May 31 after the end of the company’s first fiscal year that
begins no sooner than eight months after the effective date of its IPO registration statement.
61
In other words:
• if an IPO company with a calendar year fiscal year end goes public on March 15 of 2024, its first Form SD would
be in respect of the fiscal year ending December 31, 2025 and would be due by May 31, 2026; and
• if the same company goes public on May 15, 2024, its first Form SD would be in respect of the fiscal year
ending December 31, 2026 and would be due by May 31, 2027.
71Beginning Life as a Public Company
ENDNOTES
1
Many companies choose to incorporate by reference into Part III of their 10-K certain information that is contained in the definitive proxy
statement. If initially omitted from the 10-K filing, this Part III information must be provided − either in the definitive proxy statement or on a
Form 10-K/A — no later than 120 days after the end of the company’s fiscal year. See Form 10-K, General Instruction G(3).
2
For a summary of the events that require a company to file an 8-K, see our Desktop Reference of 8-K Filing Events.
3
See Form 8-K, General Instruction B.1 (reports filed or furnished to satisfy Regulation FD obligations must be filed or furnished within the
deadlines imposed by Rule 100(a) of Regulation FD); Regulation FD Rule 100(a) (disclosures must be made simultaneously, in the case of
intentional disclosure, and promptly, in the case of non-intentional disclosure); Regulation FD Rule 101(d) (defining promptly).
4
Many companies choose to incorporate by reference into Part III of their 10-K certain information that is contained in the definitive proxy
statement. If initially omitted from the 10-K filing, this Part III information must be provided − either in the definitive proxy statement or on a
Form 10-K/A — no later than 120 days after the end of the company’s fiscal year. See Form 10-K, General Instruction G(3).
5
See Basic v. Levinson, 485 U.S. 224, 239 n. 17; Levie v. Sears Roebuck & Co., 676 F.Supp.2d 680, 686 (N.D. Ill. 2009); Vladimir v.
Bioenvision Inc., 606 F. Supp.2d 473, 485 (S.D.N.Y. 2009), ad Case No. 09-3487-CV (2nd Cir. Apr. 7, 2010).
6
See generally Federal Securities Litigation, pp. 2-1 to 2-31 (discussing the PSLRA).
7
Securities Act Section 27A(c)(1).
8
Securities Act Section 27A(i)(1).
9
Securities Act Section 27A(b)(2).
10
Securities Act Section 27A(c)(1)(A)(i).
11
See Regulation G, Rule 100(a).
12
See Form 8-K, Item 2.02, Instruction 2 (requirements of Regulation S-K Item 10(e)(1)(i) apply to Item 2.02 disclosures).
13
See Regulation G, Rule 101(a)(1).
14
See id. at Rule 101(a)(2).
15
See id. at Rule 101(a)(3).
16
See id. Rule 100(a).
17
See id. at Rule 100(a)(2). In the case of forward-looking non-GAAP measures, a quantitative reconciliation need only be provided to the
extent available without unreasonable efforts. Id.
18
See id. at Rule 100(b).
19
See Regulation S-K, Items 10(e)(2), 10(e)(4), and 10(e)(5).
20
See id. at Item 10(e)(1)(i).
21
See id. at Item 10(e)(1)(i)(B).
22
See id. at Item 10(e)(1)(i).
23
See id. at Item 10(e)(1)(ii).
24
See generally Non-GAAP Financial Measures C&DIs (last updated Dec. 22, 2022).
25
See Latham & Watkins Client Alert, Giving Good Guidance (Oct. 18, 2012).
26
Cf. Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release
No. 33-8056 (Jan. 22, 2002), n.8 (“Disclosure is mandatory where there is a known trend or uncertainty that is reasonably likely to have a
material effect on the registrant’s financial condition or results of operations.”). In our experience, MD&A does not typically include earnings
guidance, although more and more public companies include some kind of forward-looking statements in their MD&A under a caption
entitled “Outlook” or something similar.
27
National Investor Relations Institute, Guidance Practices and Preferences, 2012 Survey Report (Sept. 5, 2012) (NIRI Guidance Survey
Report) (survey results received from approximately 360 NIRI corporate members).
28
Regulation G requires SEC-reporting companies that publicly disclose non-GAAP financial measures to provide an accompanying
presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure
to the most directly comparable GAAP financial measure. See Regulation G Rule 100(a). The GAAP reconciliation is only required for
forward-looking financial measures “to the extent available without unreasonable efforts.” Id., Rule 100(a)(2). For further information on
Regulation G and the use of non-GAAP financial measures, see our Client Alert Adjusted EBITDA Is Out of the Shadows as Sta Updates
Non-GAAP Interpretations (Feb. 22, 2010).
29
Nearly half of guidance-giving companies provide non-financial guidance, such as statements about market conditions or industry
information. However, the number of companies providing non-financial guidance has been decreasing over the past several years.
See NIRI Guidance Survey Report.
30
See Sarbanes-Oxley Section 2(a)(7).
31
See Instructions to Regulation S-K Item 308.
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32
Under Exchange Act Rule 12b-2, a “large accelerated filer” is an issuer that, as of the end of its fiscal year:
• has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates (market capitalization) of
$700 million or more (measured as of the last business day of the issuer’s most recently completed second fiscal quarter);
• has been subject to SEC reporting under the Exchange Act for a period of at least 12 calendar months;
• has filed at least one annual report under the Exchange Act with the SEC; and
• is not eligible to be a “smaller reporting company” and had annual revenues of less than $100 million in the most recent fiscal year for
which financial statements are available.
In addition, under Exchange Act Rule 12b-2, an “accelerated filer” is an issuer meeting the same conditions, except that it has a market
capitalization of $75 million or more but less than $700 million (measured as of the last business day of its most recently completed
second fiscal quarter). See Final Rule: Accelerated Filer and Large Accelerated Filer Denitions, Release No. 34-88365 (Mar. 12, 2020).
See also Final Rule: Smaller Reporting Company Denition, Release No. 33-10513 (July 10, 2018).
33
See Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, Release No. 33-9142
(Sept. 21, 2010). This rule implemented Section 989G of Dodd-Frank, which added Section 404(c) to Sarbanes-Oxley. Under
Section 404(c), the requirements of Section 404(b) do not apply to any audit report prepared for an issuer that is neither an accelerated
filer nor a large accelerated filer. See also Section 103 of the JOBS Act, which modified Section 404(b) to exempt EGCs from the auditor
attestation requirement.
34
See Office of the Chief Accountant, Division of Corporation Finance, Management’s Report on Internal Control Over Financial Reporting
and Certication of Disclosure in Exchange Act Periodic Reports, Question 5 (Oct. 6, 2004).
35
See Exchange Act Rules 13a-15, 15d-15.
36
See Exchange Act Rules 13a-15(e), 15d-15(e).
37
See Management’s Reports on Internal Control Over Financial Reporting and Certication of Disclosure in Exchange Act Periodic Reports,
Release No. 33-8238, II.D (June 5, 2003).
38
See id.
39
See Exchange Act Rules 13a-14, 15d-14.
40
See Certication Adopting Release, n.50 (Section 302); see Additional Form 8-K Disclosure Adopting Release, n.142 (Section 906).
41
See NYSE Listed Company Manual, Section 303A.00; Nasdaq Stock Market Rules, IM-5615-4(b)(1).
42
See Sarbanes-Oxley Section 407(a).
43
Regulation S-K Item 407(d)(5).
44
See Sarbanes-Oxley Act: Interpretive Issues under Section 402 — Prohibition of Certain Insider Loans (Oct. 15, 2002).
45
Nasdaq Rule 5608; NYSE Listed Company Manual § 303A.14.
46
Nasdaq Rule 5608(b)(1); NYSE Listed Company Manual § 303A.14(c)(1).
47
Id. See also Final Rule: Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 (Oct. 26, 2022)
[Recovery of Erroneously Awarded Compensation Release], at 5 (“recovery policy mandated by Section 10D ‘does not require adjudication
of misconduct in connection with the problematic accounting that required restatement.’” (quoting Report of the Senate Committee on
Banking, Housing, and Urban Affairs, S.3217, Report No. 111.176, at 135-6 (Apr. 30, 2010))).
48
Dodd-Frank Section 954 (adding Exchange Act Section 10D Recovery of Erroneously Awarded Compensation Policy). See also Recovery
of Erroneously Awarded Compensation Release.
49
Exchange Act Rule 10D-1(b)(1); Nasdaq Rule 5608(b)(1); NYSE Listed Company Manual § 303A.14(c)(1).
50
Nasdaq Rule 5608(d); NYSE Listed Company Manual § 303A.14(e).
51
Nasdaq Rule 5608(b)(2); NYSE Listed Company Manual § 303A.14(c)(2).
52
Regulation S-K Item 601(b).
53
Regulation S-K Item 402(w).
54
See Final Rule: Modernization of Benecial Ownership Reporting, Release No. 33-11253 (Oct. 10, 2023).
55
Pursuant to Rule 13d-3 under the Exchange Act, a stockholder is deemed to be the beneficial owner of a company’s securities if the
stockholder, directly or indirectly, has or shares the power to vote or the power to dispose of those securities. Schedule 13D requires
disclosure of the identity, address, occupation, citizenship, and nature of the beneficial ownership of the stockholder making the report and
of all persons on whose behalf the purchases have been made. Schedule 13D also requires disclosure of the source and amount of funds
used in making the purchases and the purpose of the purchases.
56
Rule 16a-1(a)(1) lists several exceptions to this 10% beneficial ownership rule, which in certain circumstances exempt entities such as
banks, brokers, dealers, investment companies, and employee benefit plans, to the extent such entities hold shares in fiduciary accounts,
from Section 16 liability.
57
See Exchange Act Rule 16a-3(g)(3). Note that this accommodation does not reply to a disposition by gift, which must be reported on
Form 4 within two business days of execution of the gift. Exchange Act Rule 16a-3(g)(1).
73Beginning Life as a Public Company
58
A “riskless principal transaction” is defined as a principal transaction where, after having received from a customer an order to buy, a
broker or dealer purchases the security as principal in the market to satisfy the order to buy or, having received from a customer an order
to sell, sells the security as principal to the market to satisfy the order to sell.
59
A reporting issuer is an issuer that has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for at least
90 days prior to the sale of the security.
60
A non-affiliate is a person who is not an affiliate of the company at the time of sale of securities and has not been an affiliate of the
company at any time during the three months preceding such sale.
61
See Form SD, General Instruction B; Division of Corporation Finance Dodd-Frank Wall Street Reform and Consumer Protection Act
Frequently Asked Questions: Conict Minerals, Question 11.
[THIS PAGE INTENTIONALLY LEFT BLANK]
75Liability Under the US Federal Securities Laws
LIABILITY UNDER THE US FEDERAL SECURITIES LAWS
A public company is exposed to liability under the federal securities laws in a variety of ways as a result of offering
or listing its securities in the United States. This liability can be civil or, in certain circumstances, criminal. Although
litigation by private plaintiffs is more common, the SEC frequently initiates civil enforcement actions against
issuers and persons associated with them. In cases involving serious securities fraud, the US Department of
Justice (DOJ) sometimes brings criminal proceedings, often in parallel with an SEC civil action.
We summarize below the key areas of federal securities law liability.
Registration — Section 5 of the Securities Act
Section 5 of the Securities Act effectively requires every offer and sale of securities to be either registered with the
SEC or made pursuant to an available exemption from registration. The terms “offer” and “sale” in the Securities
Act are broadly construed. For example, an offer includes any attempt to dispose of a security for value.
1
As
a result, publicity in the United States about an impending offering, website disclosure of the offering, or even
an email communication to “friends and family” announcing an offering can constitute an unregistered offer in
violation of Section 5.
Violations of Section 5 can give rise to liability in SEC enforcement actions and also in actions brought by
investors under Section 12(a)(1) of the Securities Act, as discussed below. They can also lead to the delay (or
even abandonment) of a securities offering if the SEC imposes a cooling-off period. As a result of these onerous
remedies, it is critical to control publicity and comply carefully with the requirements for any applicable exemptions
from Section 5 registration.
Under Section 12(a)(1), an investor who buys securities issued in transactions violating Section 5 can rescind
the sale and recover his or her purchase price (plus interest, less any amount received on the securities). If
the investor no longer owns the securities, he or she can recover damages equal to the difference between the
purchase and the sale price of the securities (again, plus interest, less any amount received on the securities).
2
Section 12(a)(1) imposes strict liability, and an investor is not required to demonstrate any causal link between
his or her damages and the violation of Section 5.
3
However, in order to be liable, a defendant must be a seller —
that is, a person who successfully solicits the purchase, motivated at least in part by financial interest — and the
plaintiff must actually have bought the securities from that defendant.
4
Antifraud
As a general matter, there is no duty under the US federal securities laws to disclose material information
unless an applicable rule or regulation specifically requires disclosure.
5
An issuer’s duty to disclose may arise in
situations such as:
• purchasing or selling securities;
• filing a registration statement;
• filing an annual report on Form 10-K or a quarterly report on Form 10-Q;
• submitting information on Form 8-K;
• issuing a press release; and
• NYSE or Nasdaq requirements.
Once an issuer chooses to disclose information to investors or the public, it must do so completely and
accurately.
6
If a statement is believed by the issuer to be true when made, but the issuer subsequently learns that
it was not true, the issuer generally has a duty to correct that statement.
7
If, on the other hand, a statement by
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an issuer was reasonable when made, but it becomes misleading in light of subsequent events, the issuer might
or might not have a “duty to update” the statement, depending on a number of factors.
8
This is one reason why
projections of future results require careful thought.
What Is Material?
The various antifraud provisions of the Securities Act and the Exchange Act impose liability for material
misstatements or omissions in the offer or sale, or in connection with the purchase or sale, of securities. The
fundamental test for “materiality” is whether there is a substantial likelihood that a reasonable investor would
consider the misstatement or omission important in deciding whether or not to purchase or sell a security.
9
As the
US Supreme Court has explained, “there must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information
made available.”
10
The determination of materiality is a mixed question of law and fact,
11
and there is no bright-line quantitative test
for materiality.
12
In adopting Regulation FD, for example, the SEC indicated that the following subjects should be
carefully reviewed to determine whether they are material:
13
• earnings information;
• mergers, acquisitions, tender offers, joint ventures, or changes in assets;
• new products or discoveries, or developments regarding customers or suppliers (for example, the acquisition
or loss of a contract);
• changes in control or in management;
• change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report;
• events regarding the issuer’s securities — for example, defaults on senior securities, calls of securities for
redemption, repurchase plans, stock splits, or changes in dividends, changes to the rights of security holders,
public or private sales of additional securities; and
• bankruptcies or receiverships.
In addition, in Sta Accounting Bulletin No. 99, the SEC Staff pointed to several qualitative factors that may need
to be considered in assessing materiality and that could render a quantitatively minor misstatement material,
including whether the misstatement:
• arises from an item capable of precise measurement or from an estimate and, if so, the degree of imprecision
inherent in the estimate;
• masks a change in earnings or other trends;
• hides a failure to meet analysts’ consensus expectations;
• changes a loss into income or vice versa;
• concerns a segment or other portion of the issuer’s business that has been identified as playing a significant
role in the issuer’s operations or profitability;
• affects the issuer’s compliance with regulatory requirements;
• affects the issuer’s compliance with loan covenants or other contractual requirements;
• has the effect of increasing management’s compensation — for example, by satisfying requirements for the
award of bonuses or other forms of incentive compensation; or
• involves concealment of an unlawful transaction.
77Liability Under the US Federal Securities Laws
Fraud in Connection With the Purchase or Sale of Securities — Rule 10b-5
Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 provide a broad (and heavily litigated) basis for
both civil and criminal liability in securities transactions. Such claims can be brought by parties to the transaction
as well as by the SEC, the DOJ, and investors who were effecting transactions in the subject securities during the
period of improper disclosure. Rule 10b-5 prohibits, in connection with the purchase or sale of securities:
• employing “any device, scheme, or artifice to defraud;”
• making “any untrue statement of material fact” or omitting “to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which they were made, not misleading;” or
• engaging in any “act, practice, or course of business which operates or would operate as a fraud or deceit.”
Elements of a Claim Under Rule 10b-5
The elements of a claim under Rule 10b-5 by a private plaintiff
14
are:
• a misrepresentation or omission of a material fact;
15
• made with scienter — that is, an intent to deceive, manipulate, or defraud,
16
meaning intentionally or
recklessly (beyond mere negligence);
17
• in connection with the purchase or sale of a security;
• upon which the plaintiff relied; and
• which caused the injury.
18
In government enforcement actions under Rule 10b-5, only the first three elements apply.
The requirement that the alleged fraud must have been “in connection with” the purchase or sale of securities
is flexibly construed to effectuate the remedial purposes of the Exchange Act, particularly when the SEC is
the plaintiff.
19
A private plaintiff, by contrast, must show that he or she actually purchased or sold stock,
20
but
Rule 10b-5 does not require privity between the defendant and the plaintiff,
21
and accordingly a plaintiff need not
show that he or she actually bought securities from the person who made the misleading statements.
Scope of Rule 10b-5
Rule 10b-5 is not limited to public offerings of securities, and applies to unregistered transactions and secondary
market trading. In addition, Rule 10b-5 covers oral and written statements, whether or not relating to a registration
statement or prospectus.
22
These would potentially include statements made:
• in an offering memorandum for a Rule 144A offering or other private placement;
• during a press conference or an interview, or in a press release;
• in an annual report on Form 10-K or quarterly report on Form 10-Q; and
• in a document submitted on Form 8-K.
In addition, while an issuer is generally not liable for the statements of others, there may be exceptions. For
example, the issuer could be liable for misstatements in an analyst’s report if a corporate insider participates
sufficiently in the preparation of the report or circulates the report to prospective investors.
23
Insider Trading
Insider trading is also prosecuted under Rule 10b-5, civilly by the SEC and criminally by the DOJ. As interpreted
by the SEC and the US federal courts, Rule 10b-5 prohibits a person from buying or selling securities on the basis
of material nonpublic information, or providing such information to another person who trades, in violation of a
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fiduciary duty or similar duty of trust and confidence.
24
Rule 10b-5 imposes an obligation to either disclose material
nonpublic information or abstain from trading on:
• corporate insiders, such as directors, officers, and controlling shareholders, who owe a fiduciary duty to the
issuer’s shareholders;
25
• temporary insiders, such as lawyers, accountants or investment bankers;
26
and
• outsiders who “misappropriate” material nonpublic information for trading purposes in breach of a duty owed
to the source of the information.
27
PRACTICE POINT
Bear in mind that a person can be liable under Rule 10b-5 even if he or she did not actually trade on the
material nonpublic information, but instead passed it directly or indirectly to a third party — a practice known as
“tipping” — to get some “personal benefit.”
28
The personal benefit could be pecuniary gain (such as a kickback
or a “reputational benefit that will translate into future earnings”) or even the benefit one gets from making “a
gift of confidential information to a trading relative or friend.”
29
In addition to the tipper, the “tippee” (the person
to whom the information is disclosed) may also be liable under Rule 10b-5 if he or she trades on the basis of
the tipped information and had reason to know the information came from a person who violated a duty of trust
and confidence.
30
Damages Under Rule 10b-5
In private actions, violations of Rule 10b-5 can lead to rescission or damages.
31
Damages comprise a purchaser’s
out-of-pocket loss, which cannot exceed the difference between the purchase or sale price the plaintiff paid or
received and the mean trading price of the security during the 90-day period beginning on the date on which the
information correcting the misstatement or omission that is the basis for the action is disseminated to the market.
32
Punitive damages are, however, not available in private actions under Rule 10b-5.
33
In civil or administrative actions, the SEC can obtain money penalties, disgorgement, and injunctions, or cease-
and-desist orders. In criminal prosecutions, the DOJ can obtain penalties that include imprisonment, fines, and
disgorgement.
Registered Oerings — Section 11 of the Securities Act
Section 11(a) of the Securities Act imposes liability if any part of a registration statement, at the time it became
effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.” Section 11 liability only covers
statements made in a registration statement. It does not reach other documents that are not considered part
of a registration statement (such as road show materials, FWPs, or research reports).
34
In addition, Section 11
does not extend to unregistered transactions, since these do not involve a “registration statement.”
35
A Section 11 claim can be brought by a purchaser (and not by the government) against:
• each person who signed the registration statement, including the issuer and members of management;
36
• each member of the issuer’s board of directors, or similar governing body, regardless of whether he or she
signed the registration statement;
37
• any expert named as responsible for a portion of the registration statement, such as an issuer’s auditors;
and
• each underwriter participating in the offering.
79Liability Under the US Federal Securities Laws
Issuers are strictly liable under Section 11. Potential defendants other than the issuer
38
have the following statutory
defenses to Section 11 liability, by virtue of Section 11(b)(3):
• Due diligence defense: in the case of a non-expert with respect to the non-expertized portions of the
registration statement, or in the case of an expert with respect to the expertized portions (for example, the
financial statements that include the auditors’ opinion), a defendant must show that he or she had, after
reasonable investigation, reasonable grounds to believe — and did believe — that the included information
was true and that no material facts were omitted;
39
and
• Reliance defense: in the case of a non-expert with respect to expertized portions of the registration statement,
a defendant must show he or she had no reasonable ground to believe, and did not believe, that the
registration statement contained a material misstatement or omission.
40
Damages for violation of Section 11 are generally limited to:
41
• the difference between the price paid for a security and its value at the time a plaintiff brings a lawsuit;
• if the security has already been sold at the time a lawsuit is brought, the amount paid for the security, less the
price at which the security was sold in the market; or
• if the security was sold after the lawsuit was brought but before judgment, the lesser of (1) the amount the
plaintiff paid for the security, less the price at which the security was sold in the market, or (2) the amount
the plaintiff paid for the security, less the value of the security as of the time the suit was brought. Punitive
damages are not available under Section 11.
42
Registered Oerings — Section 12(a)(2) of the Securities Act
Section 12(a)(2) of the Securities Act imposes liability on any person who offers or sells a security by means of a
prospectus, or any oral communication, which contains “an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements, in the light of the circumstances under which they were
made, not misleading.”
Section 12(a)(2) overlaps with Section 11, but covers oral statements, FWPs, and statements in a prospectus,
rather than the registration statement alone (of which the prospectus is a part). Actions under Sections 11 and
12(a)(2) are brought by purchasers in private litigation. As for enforcement by the US government, civil and
criminal actions involving material misstatement or omissions in sales of securities may be brought, respectively,
by the SEC and the DOJ under Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and
Exchange Act Rule 10b-5.
The Supreme Court has construed the term “prospectus” in Section 12(a)(2) to mean a prospectus in connection
with a public offering under the Securities Act. As a result, it ruled that Section 12(a)(2) does not apply to
unregistered offerings or secondary market trading.
43
Section 12(a)(2) provides a statutory due diligence defense if the seller can show he or she “did not know, and in
the exercise of reasonable care could not have known,” of the material misstatements or omissions.
Under Section 12(a)(2), a person who buys securities on the basis of a prospectus that contains a material
misstatement or omission — such as a person who buys securities issued in violation of Section 5 of the
Securities Act — can rescind the sale and recover his or her purchase price (plus interest, less any amount
received on the securities). If the investor no longer owns the securities, he or she can recover damages equal
to the difference between the purchase and the sale price of the securities (again, plus interest, less any amount
received on the securities).
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Timing of the Investment Decision Under Section 12(a)(2) — Rule 159
Rule 159 provides that, for purposes of determining whether a prospectus or oral statement included a material
misstatement or omission at the time of the contract of sale under Section 12(a)(2), “any information conveyed to
the purchaser only after such time of sale” will not be taken into account.
The key implication of Rule 159 is that Section 12(a)(2) liability is determined by reference to the total package
of information conveyed to the purchaser at or before the time of sale. Accordingly, a preliminary prospectus, an
FWP or an oral communication at a road show may give rise to liability under Section 12(a)(2) (in suits by private
plaintiffs), even if later corrected or supplemented in a final prospectus that is filed or delivered after pricing.
Controlling Person Liability
Liability under the US federal securities laws potentially extends beyond issuers, underwriters, and other direct
participants in securities offerings to the persons who control those participants. In particular, Section 15 of the
Securities Act and Section 20 of the Exchange Act provide that controlling persons may be jointly and severally
liable with the persons they control. As a result, an issuer’s significant shareholders, its board of directors, and
members of its management may be liable along with the issuer for violations of Section 11, Section 12, or
Rule 10b-5.
The term “control” generally means the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person, whether through the ownership of voting securities, by
contract, or otherwise.
44
This is not a bright-line test, and instead depends on the facts and circumstances of any
particular case. A defendant generally will be found to have controlled an issuer if he or she actually participated
in (that is, exercised control over) the operations of the issuer and possessed the power to control the specific
transaction or activity from which the issuer’s primary liability derives.
45
Some courts have held that the defendant
must be a “culpable participant” in the issuer’s wrongful conduct in order to trigger liability.
46
The controlling person has a defense to liability under Section 15 if he or she “had no knowledge of or
reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled
person is alleged to exist,” and a defense under Section 20 if he or she “acted in good faith and did not directly
or indirectly induce the act or acts constituting the violation or cause of action.” This analysis is obviously quite
fact-specific
47
and may depend on such factors as whether the defendant is an independent director.
PRACTICE POINT
Potential controlling persons such as controlling shareholders and members of an issuer’s board of directors
should familiarize themselves generally with the disclosure used in connection with an offering and should pay
particular attention to any high-level statements about an issuer’s strategy, business, or financial performance.
They should also review carefully any statements about themselves (for example, disclosure about a
controlling shareholder).
Enforcement
Background
The SEC prosecutes civil violations of the US federal securities laws.
48
It has wide-ranging powers to investigate
any conduct that could constitute a violation of those laws.
49
SEC investigations are conducted by the Division of
Enforcement, which reports to the five members appointed by the President of the United States who constitute
the Commission itself. If, after investigating, the Division of Enforcement believes it has found a violation, it
typically recommends to the Commission that enforcement action be taken. The Commission then decides by
majority vote whether to take action or not and what action to take. Charges may be brought administratively
within the SEC, or in a US federal district court. In either venue, the preponderance-of-the-evidence standard of
proof applies, meaning that the finder of fact needs only to find that it is more likely than not that the Division of
81Liability Under the US Federal Securities Laws
Enforcement has proved the elements of the offense. The proof need not be “clear and convincing” or “beyond
a reasonable doubt” (the latter being the standard of proof in criminal cases).
50
An adverse decision in an SEC
administrative or civil trial can be appealed to a US federal appellate court, and some appeals are eventually
heard by the US Supreme Court.
While the SEC has civil enforcement authority only, Section 24 of the Securities Act and Section 32(a) of the
Exchange Act make it a federal crime for any person to willfully violate any provision of those acts or a rule
promulgated under the acts. “Willfully” is not defined uniformly by all US federal courts, but in most courts
it means that the defendant knew his conduct was wrongful but did not necessarily know it was unlawful
(whereas in the SEC civil context “willfully” simply means that the actor was conscious of taking the action and
not sleepwalking or the like). Consequently, the SEC works closely with criminal law enforcement agencies
throughout the US to develop and bring criminal cases when the misconduct warrants more severe action and
can be proved beyond a reasonable doubt.
Criminal penalties under the federal securities laws can be severe. Under Securities Act Section 24, conviction for
each violation can result in a fine of up to $10,000 and/or imprisonment for up to five years. Under Exchange Act
Section 32, for individuals, conviction can result in a fine of up to $5 million and/or imprisonment for up to 20 years
per violation; however, no one can be imprisoned for violating an Exchange Act rule or regulation if he or she proves
that he or she had no knowledge of the rule or regulation. Fines against entities can reach $25 million per violation.
Civil Liability for Short-Term Transactions Under Exchange Act Section 16
Recovery of Prots Under Section 16(b)
For the purpose of preventing the unfair use of information which may have been obtained by a Section 16
reporting person, any profits realized by a Section 16 reporting person from any “purchase” and “sale” of
securities (or sale followed by a purchase) within any period of less than six months may be recovered by the
company. Liability is absolute even if the purchase or sale took place after full disclosure and without the use of
any inside information. When “opposite” transactions (i.e., a purchase and a sale) occur within a six-month period,
the good faith of the Section 16 reporting person is no defense to liability. The Section 16 reporting person would
be liable even if compelled to sell for personal reasons. The operation of Section 16(b) is quite complex, and
if there is any question at all concerning possible Section 16 liability, counsel should be consulted prior to any
purchase or sale of the company’s securities or derivative securities by a Section 16 reporting person.
The liability of a reporting person under Section 16(b) is only to the company itself. The company, however,
cannot waive its right to recover the short-swing profits, and any stockholder of the company can bring suit in the
name of the company to recover short-swing profits on behalf of the company. Note that Section 16 violations
do not go unnoticed by lawyers whose entire practices are based on filing these types of suits (since they are
entitled to have the company pay their fees if they are the first to identify a Section 16 violation by the company).
Remember that reports of changes in ownership filed pursuant to Section 16(a) are readily available to the public,
and that liabilities under Section 16(b) may require disclosure in the company’s Form 10-K or its proxy statement
for its annual meeting of stockholders.
No suit under Section 16(b) may be brought more than two years after the date the profit was realized. If the
reporting person fails to file a report of the transaction under Section 16(a) as required, however, the two-year
limitation period does not begin to run until after the transactions giving rise to the profit have been disclosed.
Purchase and Sale
A purchase and a sale will be matched even though different blocks of stock are purchased and sold. Where, for
example, securities held for two years are sold one month after or before acquisition of other shares of the same
class, there has been a purchase and sale of securities of the company within a six-month period. Moreover,
acquisitions and dispositions of derivative securities, including stock options, warrants, and convertible securities,
unless exempt from Section 16(b) liability, may be matched with purchases and sales of the underlying security
82
Latham & Watkins – US IPO Guide
or of other derivative securities. However, under Exchange Act Rule 16b-6, the exercise or conversion of a
derivative security, and the acquisition of the underlying security upon such exercise or conversion, is exempt
from Section 16(b) liability provided such derivative security was not “out of the money” at the time of exercise.
A sale (or purchase) by a Section 16 reporting person may be matched with a purchase (or sale) by such
reporting person’s spouse or other members of his/her immediate family or other individuals sharing the same
household unless the reporting person can rebut the presumption that he or she is the beneficial owner of the
securities held by such other persons.
Calculation of Prots
The profits recoverable by the company often bear no relationship to the actual overall profit, if any, realized by
the reporting person. As noted above, it is not necessary for recovery that the purchase and the sale be of the
same block of stock. Nor is it necessary that the purchase precede the sale. In determining the profits recoverable
by the company, all purchases made within any period of less than six months are listed in one column. All sales
made during such period are listed in another column. Then the securities purchased at the lowest price are
matched against an equal number of securities sold at the highest price during such period, and the profit is
computed. After that, securities purchased at the next lowest price are matched against securities sold at the next
highest price and the profit computed. The process is repeated until all securities in the purchase column which
may be matched against securities sold for higher prices in the sales column have been matched off. The total
profit on each “match” so computed is recoverable by the company. For example, if a reporting person buys 100
shares at $50 on January l, sells 100 shares at $40 on February 1, buys 100 shares at $30 on March 1, and sells
100 shares at $20 on April 1, the reporting person actually lost $2,000. For purposes of Section 16(b), however,
the sale at $40 may be matched against the purchase at $30 and “profits” of $1,000 may be recovered from the
reporting person by the company, with no offset for the $3,000 “loss” on the other match.
The amount of recoverable profits may include dividends declared and received by the reporting person as a
result of short-swing transactions. The profits recoverable upon matchable transactions involving options or other
derivative securities are calculable pursuant to certain formulas set forth in the Section 16(b) rules.
Criminal Liability for “Short Sales” Under Section 16(c)
In contrast to Section 16(b), which creates civil liability for recovery of profits, Section 16(c) is an absolute
prohibition on certain sales. It prohibits a Section 16 reporting person from making short sales of the company’s
securities (i.e., any sale made by him of securities which he does not own at the time of the sale) or sales of
securities against the box (i.e., any sale of securities not delivered within 20 days after the sale). Willful violations
by any person of any provision of the Exchange Act, including Section 16, or any rules or regulations thereunder
can result in criminal prosecution with maximum penalties of a $5 million fine or 20 years imprisonment, or both.
83Liability Under the US Federal Securities Laws
ENDNOTES
1.
Securities Act Section 2(a)(3).
2.
David M. Brodsky & Daniel J. Kramer, Federal Securities Litigation, pp. 4-16 to 4-17 (1st ed. 1997) (Federal Securities Litigation).
3.
Id., pp. 4-2 to 4-3.
4.
Id., p. 5-20 (citing Pinter v. Dahl, 486 U.S. 622, 641-54 (1988)).
5.
Federal Securities Litigation, p. 6-4.
6.
Id., pp. 6-4 to 6-5.
7.
See, e.g., Stansky v. Cummins Engine Co., Inc., 51 F.3d 1329 (7th Cir. 1995) (distinguishing duty to correct from duty to update).
8
See, e.g., In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997).
9.
See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Securities Act Rule 405 (“material” information is “matters to
which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security
registered”). TSC involved the interpretation of Section 14(a) of the Exchange Act and Rule 14a-9. The Supreme Court has, however,
explicitly extended TSC’s definition of materiality to Rule 10b-5, Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988), and the lower US
federal courts have generally used the TSC standard in all contexts involving the antifraud provisions of the US federal securities laws.
See Louis Loss, Joel Seligman & Troy Paredes, Securities Regulation, Chapter 6.C.5 (Registration and Post Registration Provisions of the
1934 Act; Proxies, False or Misleading Statements (Rule 14a-9)), (5th ed. 2014) (Loss, Seligman & Paredes).
10.
TSC Indus., Inc., 426 U.S. 438, 449.
11.
Id., p. 450.
12.
See Staff Accounting Bulletin 99.
13.
Selective Disclosure and Insider Trading, Release No. 33-7881, n.47 (Aug. 15, 2000) (Regulation FD Release).
14.
Many securities suits are brought as class actions, which are subject to the Private Securities Litigation Reform Act of 1995 (PSLRA).
Congress passed the PSLRA in 1995 to address the filing of frivolous or unwarranted securities lawsuits. Among other things, the PSLRA
imposes heightened pleading requirements in order to withstand a motion to dismiss, each of which applies to the elements of a fraud
claim, as discussed below.
15.
In the case of an omission, a plaintiff must show that there was a duty to disclose the material facts; merely being in possession of
material nonpublic information does not, of itself, create a duty to disclose. Federal Securities Litigation, p. 6-4. Under the PSLRA,
the complaint must identify each specific statement or omission alleged to be false or misleading and explain why it is misleading.
15 U.S.C. § 78u-4(b)(1).
16.
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The PSLRA requires the plaintiff to state particular facts giving rise to a strong
inference that the defendant made the allegedly false or misleading statement or omissions with the requisite state of mind, i.e., the intent
to manipulate, deceive or defraud. 15 U.S.C. § 78u-4(b)(2).
17.
Federal Securities Litigation, pp. 6-13 to 6-14. Recklessness is typically defined by courts as conduct demonstrating an extreme departure
from the standard of ordinary care.
18.
Under the PSLRA, the plaintiff has the burden to prove that the false, misleading, or omitted information was the cause of the actual loss
the plaintiff suffered. 15 U.S.C. § 78u-4(b)(4).
19.
Cf., e.g., SEC v. Zandford, 535 U.S. 813, 822 (2002).
20.
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754-55 (1975).
21.
Loss, Seligman & Paredes, Chapter 9.B.7 (Fraud; Issuers and Insiders; Scope of Rule 10b-5), n.678.
22.
See id. (explaining that “[t]he Rule may be violated by feeding misinformation into the marketplace, or even withholding information too
long,” regardless of whether the defendants themselves bought or sold securities) (citation omitted).
23.
Federal Securities Litigation, pp. 6-30 to 6-31. The SEC has stated that an issuer may be “fully liable” if it disseminates and adopts false
third-party reports “even if it had no role whatsoever in the preparation of the report.” Use of Electronic Media Release, n.54 (citing In the
Matter of Presstek, Inc., Release 34-39472 (Dec. 22, 1997)).
24.
Federal Securities Litigation, p. 6-32.
25.
Federal Securities Litigation, pp. 6-32 to 6-33.
26.
Id., p. 6-34; see also Regulation FD Release, n.28 (referring to a temporary insider as “a person who owes a duty of trust or confidence to
the issuer,” such as an attorney, investment banker, or accountant).
27.
Id., pp. 6-34 to 6-35 (citing United States v. O’Hagan, 521 U.S. 642 (1997)). The SEC has added two rules to clarify issues that have
arisen in insider trading cases. First, Rule 10b5-1 provides that trading “on the basis of” material nonpublic information includes all trading
while in possession of that information, except certain trades previously contracted for in good faith and not as part of a plan or scheme to
evade the prohibitions of Rule 10b5-1. Second, Rule 10b5-2 fleshes out the meaning of a “duty of trust or confidence” for purposes of the
misappropriation theory.
28.
SEC v. Dirks, 463 U.S. 646 (1983).
84
Latham & Watkins – US IPO Guide
29.
Id.; see also SEC v. Yun, 327 F.3d 1263 (11th Cir. 2003) (applying the Dirks personal benefit rule to misappropriation case).
30.
Federal Securities Litigation, p. 6-34.
31.
Id., p. 6-42.
32.
Exchange Act Section 21D(e)(1); see also Exchange Act Sections 21(d)(3) (providing for money penalties in SEC civil actions) and 32(a)
(providing for criminal penalties for willful violations of the Exchange Act); Federal Securities Litigation, pp. 6-43 to 6-45 (discussing
damages under Exchange Act Section 10(b)).
33.
Federal Securities Litigation, p. 6-42; see also Exchange Act Section 28(a) (limiting recovery for damages in actions under the Exchange
Act to actual damages).
34.
Federal Securities Litigation, p. 3-1.
35.
See Loss, Seligman & Paredes, Chapter 11.C.2.d (Civil Liability; SEC Statutes; Securities Act of 1933; Section 11: Misstatements or
Omissions in Registration Statement).
36.
Id., p. 3-11 (citing Securities Act Section 6(a)).
37.
Id., p. 3-12.
38.
Id., p. 3-14.
39.
Securities Act Sections 11(b)(3)(A) and (B).
40.
Securities Act Section 11(b)(3)(C).
41.
Securities Act Section 11(e). Note that, under Section 11(e), an underwriter is not liable for Section 11 damages “in excess of the total
price at which the securities underwritten by him and distributed to the public were offered to the public” unless that underwriter “shall have
knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly
situated did not share in proportion to their respective interests in the underwriting.”
42.
Federal Securities Litigation, pp. 3-19 to 3-20.
43.
Gustafson v. Alloyd Co., 513 U.S. 561, 564, 584 (1995).
44.
Securities Act Rule 405; see also Exchange Act Rule 12b-2.
45.
Federal Securities Litigation, p. 11-5.
46.
Id., pp. 11-5 to 11-7.
47.
See generally id., pp. 11-7 to 11-10 (discussing the defense).
48.
For a comprehensive discussion of SEC Enforcement practice, see, e.g., The Securities Enforcement Manual: Tactics and Strategies
(Richard M. Phillips, ed. 1997); William R. McLucas, J. Lynn Taylor & Susan A. Mathews, A Practitioner’s Guide to the SEC’s Investigative
and Enforcement Process, 70 Temp. L. Rev. 53 (1997).
49.
See SEC v. Murphy, [1983-1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,688 (C.D. Cal. 1983).
50.
Steadman v. SEC, 450 U.S. 91 (1981).
85
LEGAL MATTERS
A cast of outstanding lawyers too numerous to name have passed upon the contents of this IPO Guide on behalf
of Latham & Watkins LLP. Go Team!
WHERE YOU CAN FIND MORE INFORMATION
We maintain extensive thought leadership resources on our website at www.lw.com and our capital markets
online reference library at www.wowlw.com. We list below some materials that you may find useful for your IPO
and as you begin life as a public company.
• The Latham FPI Guide: Accessing the US Capital Markets from Outside the United States (2023)
• Guide to Financial Statement Requirements in US Securities Oerings by US Issuers (2024)
• Guide to Financial Statement Requirements in US Securities Oerings by Non-US Issuers (2024)
• SEC Staleness Calculator for US Issuers
• Desktop Staleness Calendar for 2024 Offerings (2023)
• Desktop Reference of 8-K Filing Events (2024)
• Amended Rule 10b5-1 and New Insider Trading Disclosure: Frequently Asked Questions (2023)
• Guide to Acquired Business Financial Statements (2021)
• The Last Days of Disco Ops (2014)
• The Good, the Bad and the Oer: Law, Lore and FAQs (2014)
• What’s the Deal with Regulation M? (2013)
• “You Talkin’ to Me?” FAQs About the SEC’s New General Solicitation, Regulation D and “Bad Actor” Rules
(2013)
• Giving Good Guidance: What Every Public Company Should Know (2012)
• The JOBS Act, Part Deux: Frequently Asked Questions About Title II of the JOBS Act (2012)
• The JOBS Act After Two Weeks: The 50 Most Frequently Asked Questions (2012)
• The JOBS Act Establishes IPO On-Ramp (2012)
• The Bought Deal Bible (2012)
• Recent Developments In Recent Developments — Using “Flash” Numbers in Securities Oerings (2011)
• Cheap Stock: An IPO Survival Guide (2010)
• Upsizing and Downsizing Your IPO (2010)
• Adjusted EBITDA is Out of the Shadows as Sta Updates Non-GAAP Interpretations (2010)
Legal Matters
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-1
REPORT OF NON-INDEPENDENT EDITORS
The Readers of the Latham & Watkins US IPO Guide:
We have edited the accompanying US IPO Guide as of June 15, 2024. The US IPO Guide reflects the
accumulated wisdom of the lawyers at Latham & Watkins LLP. Our responsibility is to express an opinion on the
US IPO Guide based on our role as non-independent editors.
We conducted our edits in accordance with our standards for top-quality thought leadership. Those standards
require lively, plain-English explanations to demystify complicated concepts. They strive for the highest possible
level of technical accuracy with the least amount of mind-numbing gobbledygook. We believe that our edits
provide a reasonable basis for our opinion.
In our opinion, the US IPO Guide referred to above presents fairly, in all material respects, what you need to know
to plan and execute a successful IPO.
/s/ Anderson, Cohen, Dudek & Trotter, LLC
Washington, D.C.
June 15, 2024
Report of Non-Independent Editors
[THIS PAGE INTENTIONALLY LEFT BLANK]
A-1Annex A: Sample IPO Checklist
ANNEX A: SAMPLE IPO CHECKLIST
Initial Public Oering
Annex A: Draft Time and Responsibility Checklist for Legal Issues
Task
No.
Description Responsible
Party
Notes/Status Completed
Pre-Filing Items:
Planning / Structuring Items
1. Issuer and L&W to begin preparation of
registration statement
Issuer /
Issuer’s
Counsel —
Latham &
Watkins (of
course)
It’s better to have a draft of
the registration statement
well underway before the
organizational meeting
□
2. Commence preparation of required
financial statements
Issuer /
Accountants /
L&W
Preparation of required audits
and SAS 100 reviews are
often the longest lead-time
item, particularly if new or
revised audits are required
(as is the case where there
is a new auditor or a recent
material acquisition)
□
3. Select underwriters and underwriters’
counsel
Issuer
□
4. Determine whether issuer is an EGC
under the JOBS Act
Issuer / L&W
□
5. Schedule organizational meeting
with working group — attendees
typically include senior management,
underwriters, lawyers and accountants
Issuer /
Underwriters
Organizational meeting
typically includes
comprehensive management
presentations
□
6. Discuss “gun jumping” considerations
(prohibited “offers” of securities prior
to filing a registration statement and
during the registration process; 30-day
bright-line test pre-initial S-1 filing
regarding publicity)
Issuer / L&W The JOBS Act has made gun
jumping less of an issue, but
it has not gone away
□
7. Determine structure of IPO: primary
offering or primary/secondary offering
Issuer /
Underwriters
It is possible to add
selling stockholders in an
amendment to the S-1 if
determination cannot be
made by time of initial filing
L&W can help determine
whether any existing
stockholders have the right
to participate in (or get
notice of) an IPO pursuant to
registration rights agreement
□
A-2
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
8. Determine whether company or selling
stockholders will provide shares for
over-allotment option
Issuer /
Selling
Stockholders
Known as the “Green Shoe,”
the over-allotment option may
be exercised at any time by
underwriters within 30 days of
IPO; amount is always fixed
at 15% of the base offering
□
9. Consider pre-filing TTW meetings with
institutional investors
Issuer / L&W /
Underwriters
Information presented in
TTW meetings must be
consistent with registration
statement and will be required
to be given to the SEC on a
nonpublic basis
□
10. ONLY IF issuer is an EGC, discuss which
EGC accommodations, if any, issuer
would like to take advantage of
Issuer / L&W /
Underwriters
Most EGCs take advantage of
several of the following JOBS
Act accommodations:
• scaled financial disclosure;
• relief from SOX 404(b);
• reduced executive
compensation disclosure;
or
• delayed requirement to
comply with new/revised
GAAP (or irrevocable
opt-out)
11. Consider whether a stock split will be
necessary
Issuer /
Underwriters
Stock splits are typically
determined prior to printing
red herring and commencing
the road show; financial
statements may need to be
revised to give retroactive
effect to the stock split and
auditor’s report will likely be
legended to reflect the stock
split and re-dated
□
12. Consider whether offering will include a
directed share program for “friends and
family”
Issuer / L&W This determination does not
need to be made by initial
filing
□
13. Consider whether it is desirable to
implement a dual class stock structure
Issuer / L&W Under exchange rules, dual
class stock structures may
only be implemented pre-IPO;
typical structure is that Class
A shares are held by public
stockholders and have one
vote per share and Class B
shares are held by existing
stockholders and have
multiple votes (10) per share
□
A-3Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
14. Negotiate lock-up agreements (typically
180 days for IPOs); distribute lock-
up agreements to directors, officers,
stockholders and option holders
L&W /
Underwriters’
Counsel
Underwriters will typically
request that all lock-up
agreements are signed and
delivered prior to commencing
the road show and sometimes
prior to initial filing of the
registration statement
□
15. Review and negotiate underwriting
agreement and, if selling stockholders
are selling shares, power of attorney and
custody agreement
L&W /
Underwriters’
Counsel
While the underwriting
agreement is negotiated
pre-road show, it is typically
executed on the day of pricing
of the IPO
□
16. Consider whether any stockholder
consents are required under stockholders’
agreement or other agreements
L&W Stockholder agreements
typically (but not always) fall
away at the closing of the
IPO, although registration
rights for controlling
stockholders usually continue
post-IPO
□
17. Reserve stock symbol — generally three
to four characters
Issuer / L&W Stock symbols can be
reserved on a confidential
basis well in advance of
initial filing of S-1 (note that
reserving a symbol on one
exchange also reserves it on
the other)
□
18. Select stock exchange and confirm the
company will meet the applicable listing
standards (e.g., NYSE/Nasdaq Global
Select Market); conduct preliminary
conversations with NYSE/Nasdaq listing
representatives; prepare necessary listing
applications
Issuer / L&W Exchange does not need to
be selected prior to initial
filing. It is often a good
idea to engage both major
exchanges in a dialogue
about options
□
19. Select financial printer Issuer
□
20. Select transfer agent and registrar Issuer Transfer agent can be
selected post initial filing of
S-1
□
21. Select bank note company Issuer Many transfer agents also
have the ability to print stock
certificates
□
Due Diligence and Related Disclosure Matters
22. Assemble electronic data room for
providing due diligence materials to
underwriters and counsel; underwriters’
counsel to deliver due diligence request
letter
Issuer / L&W
□
A-4
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
23. Distribute Directors and Officers
(D&O), NYSE/Nasdaq and FINRA
Questionnaires to all officers, directors
and 5% securityholders (10% for FINRA
Questionnaires); provide completed
questionnaires to underwriters’ counsel
Issuer / L&W Underwriters’ counsel will
prepare FINRA Questionnaire
□
24. Review material contracts
(i.e., registration rights agreements,
stockholders agreements, loan
agreements, if any) for potential
restrictions that may require notice,
consent and/or waivers prior to filing
registration statement
Issuer / L&W An IPO does not always
trigger a change of control,
but it is a good idea to take a
hard look at any requirements
in debt agreements for the
existing stockholders group to
maintain control
□
25. Evaluate potential disclosure problems
(i.e., material litigation; material
contingent liabilities; insider transactions)
Issuer / L&W
□
26. Review contracts to determine material
contracts that will need to be filed as
exhibits to the registration statement
and the terms of which will need to be
disclosed in the registration statement;
determine whether notice needs to be
given to 3rd parties and/or consents
obtained to disclose terms in the
registration statement; make preliminary
assessment of competitive harm and
materiality issues
Issuer / L&W Item 601(b)(10)(iv) of
Regulation S-K allows an
issuer to redact provisions or
terms of material contracts
that are not material and that
would likely cause competitive
harm to the issuer if publicly
disclosed
The SEC may request
supplemental information to
substantiate the redactions
See SEC Division of
Corporation Finance
Announcement: New Rules
and Procedures for Exhibits
Containing Immaterial,
Competitively Harmful
Information
□
27. Analyze related-party transactions during
the current year and the last three fiscal
years that will need to be disclosed
under “Certain Relationships and Related
Party Transactions” in the registration
statement
Issuer / L&W
□
28. Determine whether any “conflicts of
interests” disclosure is required in
the registration statement pursuant to
applicable FINRA rules
Underwriters’
Counsel
This issue arises if, for
example, one of the
underwriters or its affiliates
will be receiving 5% or more
of the net proceeds of the
offering in connection with the
repayment of a credit facility
or other indebtedness
□
A-5Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
29. Prepare back-up binder of all factual
statements included in the registration
statement
Issuer / L&W
□
30. Conduct legal and accounting due
diligence meetings/calls
Issuer /
Underwriters’
Counsel
□
31. Background checks of directors
and executive officers conducted by
underwriters
Underwriters’
Counsel
□
Auditor Items
32.
Confirm schedule for preparation of
audited financials (three years of audited
financial statements will be required to be
included in registration statement)
ONLY IF issuer is an EGC, issuer may go
public with two, rather than three years,
of audited financial statements
Accountants
□
33. Determine whether quarterly financial
data for prior two fiscal years will be
called for in the MD&A
Underwriters This is not required by
the SEC rules but is often
required for marketing
purposes
□
34. Confirm auditor independence Accountants SEC rules require an auditor
to be independent under both
S-X Rule 2-01(b) and (c) for
the most recent audited year
The SEC Staff may also
apply S-X 2-01(b) to some
activities performed during
prior audited years included in
the registration statement
35. Assess SOX 404 compliance — review
internal control over financial reporting
and disclosure controls and procedures
(if issuer is an EGC, issuer is exempt
from auditor attestation requirements
of SOX 404(b) for so long as issuer is
an EGC; non-EGC issuers have until
the 2nd annual report to comply with
SOX 404(b))
Issuer /
Accountants /
L&W
Identify and remediate any
material weaknesses and/
or significant deficiencies
pre-initial filing of S-1
□
36. Meet with accountants to discuss
required financial statements and any
necessary changes in accounting
procedures due to the company
becoming a public company
Accountants
□
A-6
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
37. Determine whether any of the company’s
operations must be reported as separate
segments
Accountants /
L&W
□
38. Discuss use of non-GAAP financial
measures
Issuer /
Accountants /
Underwriters’
Counsel
□
39. “Cheap stock” analysis Accountants Cheap stock comments by
the Staff cannot be resolved
until a price range is provided
to the Staff
□
40. Determine “significant subsidiaries” under
Rule 1-02 of Regulation S-X
Issuer Frequently used in connection
with reps and warranties in
underwriting agreement
□
41. Underwriters’ counsel and auditors
discuss comfort letter
Underwriters’
Counsel /
Accountants
If quarterly financial data for
previous fiscal years will be
included in the MD&A, be
sure to discuss comfort on
that data
□
42. Obtain draft of accountant’s consent L&W /
Accountants
It is not necessary to
submit a signed consent in
a confidential submission,
but verbal approval from
accountants to file is always
advisable
□
General Corporate Matters
43. Consider whether a name change of the
issuer is desired
Issuer Be thoughtful about
intellectual property issues in
the event of a name change
□
44. Consider whether it is desirable to
restructure the capitalization of the
company; consider whether a leveraged
re-cap is desirable
Issuer /
Underwriters
□
45. Consider whether there is a need to
revise or enter into:
• employment agreements
• employee benefit matters (i.e., stock
option plans, employee stock purchase
plans)
• renegotiation of any covenants in loan
agreements that restrict or limit the
use of proceeds in a public offering, as
applicable
Issuer / L&W It is customary for the board
to revisit management
compensation arrangements
concurrently with the IPO,
usually with the advice of a
compensation consultant
□
A-7Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
46. Revise organizational/constitutional
documents as necessary for public
companies:
• certificate of incorporation
• bylaws
• registration rights agreements
• stockholders agreement
• other
Issuer /
Accountants /
L&W
Board resolutions typically
provide that public
company governance
documents become
effective in connection with
consummation of the IPO
Stockholders agreements
typically terminate in
connection with an IPO
□
47. Conduct NYSE / Nasdaq / SOX director
“independence” analysis; board of
directors to make independence
determination; determine whether
additional directors need to be appointed
to the board of directors to meet
independence requirements
Issuer / Board
of Directors /
L&W
Consider whether board of
directors is going to avail itself
of the “controlled company”
exemption; phase-in rules
for the independence
requirements do apply in
connection with an IPO
□
48. Review composition of board committees,
consider:
• heightened independence
requirements for audit and
compensation committee members
• “outside director” and “non-employee
director” requirements for
compensation committee members
• staggered terms
• mandatory retirement age
• separation of Chairman / CEO roles
Board of
Directors /
L&W
Directors who are not
planning to remain on the
board post-IPO should
resign prior to the filing of the
registration statement to avoid
liability for the registration
statement
□
49. Designate board committees; prepare
NYSE/Nasdaq compliant:
• audit committee charter
• nominating and corporate governance
committee charter
• compensation committee charter
Board of
Directors /
L&W
Determine whether any audit
committee members qualify
as “audit committee financial
experts”
□
50. Prepare corporate governance policies
• code of business conduct and ethics
• corporate governance guidelines
• insider trading policy
• Regulation FD policy
• related-party transaction policy
• compensation clawback policy
• communications with stockholders
• disclosure controls and procedures
• whistleblower policy
Board of
Directors /
L&W
Board resolutions typically
provide that public company
governance policies become
effective in connection with
the consummation of the IPO
□
A-8
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
51. Consider formation of a disclosure
committee
• disclosure committee charter
Issuer / L&W
□
52. Confirm appropriate levels of D&O
insurance
Issuer
□
53. Consider entering into stand-alone
indemnification agreements with directors
and executive officers
Issuer / L&W This is advisable under the
law of most states. The form
of indemnification agreement
needs to be filed as an exhibit
to the registration statement
□
Preparation of S-1 Registration Statement
54. Prepare registration statement (must
meet the requirements of Form S-1 or
F-1 for foreign private issuers)
• Prospectus Summary
• Summary Financial Data
• Risk Factors
• Forward-Looking Statements
• Use of Proceeds
• Dividend Policy
• Capitalization
• Dilution
• Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
• Industry Overview
• Business
– Products
– Sales and Marketing
– Research and Development
– Competition
– Intellectual Property
– Manufacturing
– Regulatory, if applicable
– Employees
– Facilities
– Legal Proceedings
• Management
• Board of Directors/Board Committees
• Compensation Discussion and
Analysis
– not required for EGCs
• Compensation of Directors
• Executive Compensation
• Benefit Plans
• Employment Agreements/Change of
Control Agreements
• Certain Relationships and Related
Party Transactions
Issuer /
Underwriters /
Counsel
□
A-9Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
• Principal Stockholders (and Selling
Stockholders, if applicable)
• Description of Indebtedness, if
applicable
• Description of Capital Stock
• Shares Eligible for Future Sale
• Material US Federal Income Tax
Consequences to Non-US Holders of
the Common Stock
• Underwriting
• Legal Matters/Experts
• Financial Statements
• Part II
– Expenses of Issuance and
Distribution
– Indemnification of Directors and
Officers
– Recent Sales of Unregistered
Securities (past three years)
– Exhibits
• Signature Pages/Power of Attorney
55. Prepare cover art graphics for prospectus
(coordinate with financial printer
regarding proper format; lead time
required)
Issuer /
Underwriters
SEC will review graphics
□
56. Perform S-1 form check of registration
statement to confirm registration
statement meets all applicable
requirements
L&W
□
57. Edgarize / typeset registration statement L&W / Printer
□
58. Edgarize exhibits L&W Frequently a long lead-time
item; ideally have Word
versions of documents to
Edgarize
□
59. Prepare confidential treatment request (if
applicable)
L&W
□
60. Review and revise company website
as appropriate (gun-jumping concerns,
information inconsistent with the
disclosures in the registration statement)
Issuer / L&W The SEC will typically review
a company’s website and
other public announcements
regarding the company
□
Board Items
61. Prepare pre-filing board resolutions
authorizing initial filing of registration
statement, listing application with
exchange, establishment of pricing
committee and other IPO-related matters
Board of
Directors /
L&W
□
62. Distribute registration statement for board
to review
Issuer / Board
of Directors
□
A-10
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
63. Hold board meeting to approve pre-filing
IPO resolutions
Board of
Directors
□
Miscellaneous Items
64. Distribute signature pages to the
registration statement and power of
attorney to directors and appropriate
officers; obtain executed signature pages
L&W
□
65. Obtain CIK and CCC EDGAR filing
codes on behalf of the company and the
directors, Section 16 officers and 10%
securityholders (confirm none of these
individuals/entities already possess
CIK/CCC codes)
L&W
□
66. Have financial printer make a “test” filing
and confirm CIK and CCC codes are
accepted
L&W
□
67. Prepare Rule 134 press release to be
issued at time of filing of registration
statement
Issuer / L&W Issuers are extremely limited
in what they can include in
the press release regarding
the IPO
□
Initial Filing of Registration Statement:
68. Confirm receipt of executed signature
pages to registration statement from all
directors and officers
Issuer / L&W
□
69. Confirm receipt of executed signature
pages to lock-up agreements and provide
to underwriters’ counsel
Issuer / L&W Underwriters will typically
request that all lock-up
agreements are signed and
delivered prior to commencing
the road show and sometimes
prior to initial filing of the
registration statement
□
70. Confirm receipt of executed auditor’s
consent
Issuer /
Accountants
It is not necessary to
submit a signed consent in
a confidential submission,
but verbal approval from
accountants to file is always
advisable
□
71. Consider submitting draft registration
statement confidentially via EDGAR for
nonpublic SEC review
Note: issuer must publicly file initial
submission plus all amendments at least
15 days before conducting traditional
road show
Issuer / L&W
□
A-11Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
72.
If issuer is not submitting confidentially,
calculate SEC filing fee; coordinate wire
transfer of fee to the SEC; have financial
printer confirm filing fee has been
accepted prior to filing
Filing fee is due at the time of the first
public filing
Issuer / L&W No SEC filing fee is required
for a confidential submission
□
73. Calculate FINRA filing fee; coordinate
payment of fee to FINRA
Underwriters’
Counsel
Payment of FINRA filing fee is
due within one business day
following the initial filing with
FINRA
Underwriters’ counsel will
calculate the fee and provide
wire instructions, but the
issuer will submit the payment
to FINRA
Note that FINRA requires the
filing fee to be paid based on
a “preliminary estimate” of
the offering size even if the
registration statement has
been confidentially submitted
to the SEC
□
74. Conduct bring-down due diligence call
with CFO and general counsel prior
to (day of) initial filing of registration
statement
Issuer /
Underwriters /
Counsel
□
75. If underwriters request, conduct “Testing
the Waters” meetings with QIBs and/or
IAIs
Issuer /
Underwriters
□
76. Confirm acceptance of the company’s
CIK and CCC EDGAR filing codes
L&W
□
77. Publicly file or confidentially submit
registration statement with SEC (EDGAR
filing deadline of 5:30 p.m. (Eastern
Standard Time))
L&W Unless S-1 is confidentially
submitted, S-1 will be publicly
available as soon as it is filed
with SEC through EDGAR.
SEC comment letters are
made public approximately
20 business days after
registration statement is
declared effective
□
78. Make initial filing through FINRA Public
Offering System
Underwriters’
Counsel
FINRA filings must be made
within three business days of
any filing with or confidential
submission to the SEC
□
79. Submit registration statement to
NYSE/Nasdaq for review
Underwriters’
Counsel
If submitting to NYSE,
schedule company for review
by Clearance Committee
□
A-12
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
80. Accountants to deliver draft comfort letter
to underwriters
Accountants
□
81. Confirm quantities of registration
statement to be distributed to various
parties of the working group; coordinate
distribution with financial printer
L&W
□
Post-filing of Initial Registration Statement:
82. Within a week of filing the registration
statement, contact SEC and determine
who the SEC examiner will be for the
offering and when the company can
expect to receive comments on the filing
(typically 30 days following initial filing /
submission date)
L&W
□
83. Receive and respond to SEC comments;
file / submit necessary amendments to
registration statement (SEC typically
takes approximately two weeks to review
each amendment to the registration
statement)
Issuer /
Underwriters /
Counsel
Accountants’ consent will be
required to be filed with each
amendment filing
Attorney-in-fact will sign on
behalf of all directors
□
84. Receive and respond to SEC comments
on confidential treatment request,
if applicable (SEC typically takes at
least 30 days to respond to initial CTR
application)
Issuer / L&W
□
85. Prepare and deliver listing application,
requisite copies of the registration
statement and any other required
documents to NYSE/Nasdaq
L&W
□
86. Prepare road show presentation;
management, investment bankers and
lawyers to review pre-recorded road
show; company must make the electronic
road show available without restriction to
any person (i.e., post the road show on
its website, or on a commercial website
approved for such purposes, and grant
unrestricted access or file road show with
SEC)
Underwriters /
Issuer
Information provided in road
show must be consistent with
information provided in red
herring
Underwriters frequently use
netroadshow.com
□
87. Finalize negotiation of underwriting
agreement, power of attorney, and
custody agreement
L&W /
Underwriters’
Counsel
Underwriters will want power
of attorney and custody
agreement to be executed
and shares placed in custody
prior to commencement of
road show; transfer agent
typically acts as custodian
□
88. Obtain executed copies of any
outstanding lock-up agreements
Issuer / L&W
□
A-13Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
89. Finalize listing application with
NYSE/Nasdaq; deliver appropriate
documentation
Issuer / L&W
□
90. Finalize any necessary “corporate
housekeeping” and corporate governance
documents (e.g., post-IPO certificate of
incorporation and bylaws; adoption of
committee charters/governance policies)
L&W / Issuer
□
91. Prepare and have board authorize
resolutions adopting:
• public company certificate of
incorporation
• public company bylaws
• committee composition
• committee charters
• Section 16 officers and “executive
officers” lists
• governance policies
• stock split
L&W / Board
of Directors
□
92. Prepare any necessary stockholder
consents
L&W
□
93. Advise banknote company of offering
schedule; obtain specimen stock
certificate; determine lead time for
printing of stock certificates
L&W Specimen stock certificate
must be filed as an exhibit to
the registration statement
□
94. Prepare certificate of appointment of
transfer agent and other necessary
documents (typically transfer agent needs
executed certificate of appointment prior
to effective date of registration statement)
L&W
□
95. Obtain CUSIP number from CUSIP
Service Bureau (www.cusip.com)
L&W
□
96. Prepare Form 8-A for Exchange Act
registration
L&W The 8-A registration
statement registers the
company’s common stock
under the Exchange Act and
is effective immediately upon
the Securities Act registration
statement being declared
effective by the SEC
□
97. Determine any changes to the proposed
Maximum Aggregate Offering Price
to be included in the fee table of
the registration statement (consider
converting to Rule 457(a) fee table)
Issuer /
Underwriters /
L&W
□
A-14
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
98. Determine price range of offering and
submit supplemental price range letter
to SEC if there are potential cheap stock
issues
Issuer /
Underwriters
□
99. If issuer is submitting confidentially,
publicly file all confidential submissions at
least 15 days prior to the road show
L&W
□
100. Update FINRA filing to reflect initial public
filing and pay additional FINRA filing fees,
as applicable
Underwriters’
Counsel
Additional FINRA filing fees
will be required based on
total aggregate dollar amount
of securities registered
(including over-allotment
option)
□
101. Effectuate stock split, if applicable Issuer /
Accountants /
L&W
□
102. Confirm no further SEC comments on
S-1 and confidential treatment request
L&W
□
103. Prepare and deliver preliminary blue sky
memo
Underwriters’
Counsel
□
104. File and print preliminary prospectus
(referred to as the red herring)
L&W / Printer Additional FINRA filing fees
may be required based on
total aggregate dollar amount
of securities registered
(including over-allotment
option)
□
105. Prepare road show slides (confirm no
material departures from the registration
statement disclosure)
Underwriters
/ Issuer /
Counsel
□
106. Road show commences Underwriters /
Issuer
Road show typically lasts
two weeks; CEO and CFO
typically participate; first
day of road show will be
presentations to underwriters’
sales force teams
□
107. Launch press release under Rule 134 L&W / Issuer
□
108. Post pre-recorded road show on website Underwriters /
Issuer
Netroadshow.com
□
Between Commencement of Road Show and Effectiveness of Registration Statement:
109. Prepare pricing committee resolutions L&W
□
110. Prepare Form 3s and Form 4s for
directors, Section 16 officers, and 10%
securityholders (obtain any remaining
CIK/CCC codes)
L&W
□
A-15Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
111. FINRA matters:
• Underwriters to obtain “no objections”
clearance from FINRA regarding
reasonableness of underwriting terms
and arrangements
• FINRA notifies SEC of “no objections”
determination
Underwriters’
Counsel
SEC will not declare
registration statement
effective without FINRA
clearance
Provide underwriters’ counsel
with name and contact
information for SEC examiner
□
112. Confirm that underwriters’ counsel has
resolved any outstanding blue sky issues
and completed blue sky registration and
qualification
L&W /
Underwriters’
Counsel
Will only apply if securities
will not be listed on a national
securities exchange
□
113. Analyze need to distribute and file
any FWPs (updating disclosure from
preliminary prospectus)
L&W
□
114. Prepare and deliver to SEC company’s
request for acceleration of the registration
statement (48 hours prior to desired
effectiveness time)
L&W
□
115. Underwriters to deliver to SEC letter
joining the company’s acceleration
request
Underwriters
□
Effective Date of Registration Statement:
116. SEC declares registration statement
effective
SEC
□
117. Conduct pricing call with pricing
committee
Underwriters
/ Pricing
Committee
□
118. Pricing committee resolutions adopted Board of
Directors
□
119. Finalize and execute underwriting
agreement
Issuer /
Underwriters
□
120. Price offering and issue press release
announcing pricing
L&W / Issuer
□
121. Accountants deliver comfort letter Accountants
□
122. File Form 3s with SEC (directors, Section
16 officers, and 10% securityholders)
L&W
□
123. File Form 8-A registration statement
for Exchange Act registration (effective
immediately upon filing)
L&W
□
124. Post corporate governance guidelines,
committee charters and code of business
conduct and ethics on company’s website
as required by SEC and NYSE/Nasdaq
requirements
Issuer If NYSE, file NYSE 303A
Corporate Governance
Certification no later than the
night before the initial trading
date
□
A-16
Latham & Watkins – US IPO Guide
Task
No.
Description Responsible
Party
Notes/Status Completed
125. Provide required link on company’s
website to Section 16 filings and future
periodic Exchange Act reports
Issuer
□
126. Conduct bring-down due diligence call Underwriters
/ Issuer /
Counsel
□
127. Prepare final prospectus L&W Referred to as 424(b)
prospectus
□
Day Following Effectiveness of Registration Statement:
128. File 424(b) prospectus with the SEC L&W
□
129. File effectiveness notice, 424(b)
prospectus, and final underwriting
agreement with FINRA within three
business days of SEC filing
Underwriters’
Counsel
Additional FINRA filing fees
may be required based on
total aggregate dollar amount
of securities registered
(including over-allotment
option)
□
130. Prepare and deliver final blue sky memo Underwriters’
Counsel
□
131. Trading commences on Nasdaq/NYSE N/A
□
132. Finalize closing documents
• officers’ certificate
• secretary’s certificate
• legal opinions
• other
L&W /
Underwriters’
Counsel
□
133. Prepare summary “funds flow memo” for
closing
□
Closing:
134. Conduct bring-down due diligence call Underwriters /
Issuer /
Counsel
□
135. Confirm no stop orders have been issued
on registration statement
L&W /
Counsel
□
136. Confirm receipt of executed copies of all
closing documents
L&W /
Underwriters’
Counsel
□
137. File public company certificate of
incorporation with applicable secretary of
state
L&W
□
138. Underwriters to wire funds to company
(and selling stockholders, if applicable)
Underwriters
□
139. File Form 4s, if applicable L&W
□
A-17Annex A: Sample IPO Checklist
Task
No.
Description Responsible
Party
Notes/Status Completed
140. Deliver final copies of prospectus to
applicable parties (i.e., FINRA, NYSE/
Nasdaq, CUSIP bureau, transfer agent)
L&W /
Underwriters’
Counsel
If NYSE, deliver final NYSE
Listing Application within
30 days of initial listing date
□
141. Issue press release regarding closing of
offering
Issuer / L&W
□
142. File S-8 registration statement covering
stock option plans (effective immediately
upon filing)
L&W
□
[THIS PAGE INTENTIONALLY LEFT BLANK]
B-1Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
ANNEX B: NYSE QUANTITATIVE LISTING CRITERIA AND
CORPORATE GOVERNANCE STANDARDS
The NYSE’s requirements for initial listing and listing maintenance are set out below. Foreign private issuers
may satisfy either the general NYSE listing standards applicable to domestic US issuers or the NYSE’s Alternate
Listing Standards for foreign private issuers. They apply only to foreign private issuers with a broad, liquid market
for their securities in their country of origin.
1
Quantitative Initial Listing Standards
2
Under the NYSE initial listing standards, an issuer typically must meet the following minimum distribution and
market value criteria
3
and must also meet one of the two financial standards described below.
4
Minimum Distribution Requirements
An IPO issuer must have 400 holders of 100 shares or more
5
and 1.1 million publicly held shares.
6
Market Value of Publicly Held Shares
The aggregate market value of publicly held shares must be at least $40 million for IPO issuers.
7
In addition, a
company must have an IPO price per share of at least $4 at the time of initial listing.
Financial Standards
A company seeking to list must meet the requirements of either the Earnings Test or the Global Market
Capitalization Test:
• Earnings Test: An issuer’s pre-tax earnings (from continuing operations and after minority interest,
amortization, and equity in the earnings or losses of investees, subject to certain adjustments) must total:
– at least $10 million in the aggregate for the last three fiscal years including a minimum of $2 million in
each of the two most recent fiscal years and positive amounts in all three years;
– at least $12 million in the aggregate for the last three fiscal years together with a minimum of $5 million in
the most recent fiscal year and $2 million in the next most recent fiscal year;
8
or
– if the issuer is an EGC
9
and it avails itself of the Securities Act and Exchange Act provisions permitting
EGCs to report only two years of financial statements, it may meet the final prong of this test if it has at
least $10 million in aggregate pre-tax earnings for the last two years with at least $2 million in both years.
• Global Market Capitalization Test: An issuer must have at least $200 million in global market capitalization.
10
Alternate Listing Standards for Foreign Private Issuers Only
The NYSE provides Alternate Listing Standards for foreign private issuers that do not list under the standards
listed for domestic issuers listed above. These alternative minimum distribution, market value criteria, and
financial standards are described below.
11
FPI Minimum Distribution Requirements
A foreign private issuer must have:
• 5,000 worldwide holders of 100 shares or more; and
• 2.5 million shares held publicly worldwide.
12
B-2
Latham & Watkins – US IPO Guide
FPI Market Value of Publicly Held Shares
The aggregate worldwide market value of publicly held shares of the foreign private issuer must be at least
$100 million. In addition, an issuer must have a closing price or, if listing in connection with an IPO, an IPO price
per share of at least $4 at the time of listing.
Financial Standards
A foreign private issuer seeking to list must satisfy the requirements of either the Earnings Test or the Valuation/
Revenue Tests:
• Earnings Test:
– The pre-tax earnings (from continuing operations and after minority interest, amortization, and equity in
the earnings or losses of investees, subject to certain adjustments) of the foreign private issuer must be
at least $100 million in the aggregate for the last three fiscal years, including a minimum of $25 million in
each of the most recent two fiscal years;
13
or
– If the issuer is an EGC and it avails itself of the Securities Act and Exchange Act provisions permitting
EGCs to report only two years of financial statements, it may meet the final prong of this test if it has at least
$100 million in aggregate pre-tax earnings for the last two years with at least $25 million in each year.
• Valuation/Revenue Tests:
Valuation/Revenue with Cash Flow Test:
14
– At least $500 million in global market capitalization, at least $100 million in revenues during the most
recent 12-month period, and $100 million in the aggregate cash flows for the last three fiscal years,
including $25 million in each of the two most recent fiscal years (subject to certain adjustments); or
– If the issuer is an EGC and it avails itself of the Securities Act and Exchange Act provisions permitting
EGCs to report only two years of financial statements, it may meet the final prong of this test if it has at
least $100 million aggregate cash flows in the last two fiscal years with at least $25 million in each year.
Pure Valuation/Revenue Test:
15
– At least $750 million in global market capitalization and $75 million in revenues during the most recent
fiscal year.
Quantitative Maintenance Requirements
To maintain its listing on the NYSE, a domestic US issuer or foreign private issuer must meet certain quantitative
maintenance standards, which are summarized below.
Minimum Distribution Requirements
The NYSE may promptly initiate suspension and delisting procedures against an issuer if:
• the total number of stockholders is less than 400; or
• the total number of stockholders is less than 1,200 and the average monthly trading volume for the most
recent 12 months is less than 100,000 shares; or
• the number of publicly held shares is less than 600,000.
16
B-3Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
Minimum Financial Standards
The NYSE will consider an issuer to be below compliance (and so eligible for suspension and delisting) if an
issuer’s average global market capitalization over a consecutive 30 trading-day period is less than $50 million
and, at the same time, total stockholders’ equity is less than $50 million.
17
An issuer that falls below an average
global market capitalization of $15 million over a consecutive 30 trading-day period will be subject to prompt
suspension and delisting procedures.
18
When determining an issuer’s ability to meet the market capitalization test in any of the financial standard tests
above, include the total number of outstanding shares of common stock (excluding treasury shares, if any) along
with any shares of common stock issuable upon conversion of any other outstanding equity security. All such
shares should be included in the calculation of market value so long as the security is the “substantial equivalent”
of the issuer’s common stock. All securities included in the calculation must be either publicly traded (or quoted)
or convertible into a publicly traded (or quoted) security.
Price Criteria
An issuer will be considered to be below compliance standards and accordingly may be subject to suspension
and delisting if the average closing price of its listed security is less than $1.00 over a consecutive 30 trading-day
period. The NYSE will grant the issuer six months to cure the deficiency as long as the issuer (1) files a press
release disclosing the deficiency within four days following notification; and (2) notifies the NYSE that it intends
to return its share price and average share price to more than $1.00 within 10 business days following NYSE
notification. A foreign private issuer has 30 days following notification to issue a press release disclosing that
it has fallen below the continued listing standards. In the event that an issuer does not comply with the press
release requirement, the NYSE will issue a press release noting the issuer’s failure to meet the continued listing
requirements. If, on the final trading day of any calendar month during the six-month cure period, the issuer’s
shares have a closing price of at least $1.00 and an average closing price of $1.00 over the prior 30 trading days,
then the issuer will be deemed to be in compliance. However, if the six-month cure period expires without the
securities meeting these requirements, then the NYSE will initiate the suspension and delisting of the securities.
19
Other Maintenance Requirements
An issuer may also be subject to suspension and delisting on a number of additional grounds, including:
• a substantial reduction in operating assets and/or scope of operations;
• the failure of an issuer to make timely, adequate, and accurate disclosures of information to its shareholders
and the investing public; and
• the failure to observe good accounting practices in reporting of earnings and financial position.
20
NYSE Corporate Governance Requirements
In addition to the quantitative and maintenance listing standards detailed above, an issuer must meet certain
corporate governance standards for an initial listing, with two key exceptions:
• Foreign Private Issuers. Foreign private issuers are permitted to follow home-country practice in lieu of the
NYSE’s corporate governance standards, other than the NYSE’s requirements that it must: (1) have an audit
committee that meets the requirements of Exchange Act Rule 10A-3; (2) provide prompt notification from
its CEO of non-compliance with the applicable provisions of the NYSE’s corporate governance rules; and
(3) comply with the requirements regarding erroneously awarded compensation.
21
Whether a listed foreign
private issuer follows the NYSE corporate governance standards or its home-country practice, it must disclose
any ways in which its corporate governance practices differ from those followed by domestic US issuers under
NYSE listing standards.
22
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Latham & Watkins – US IPO Guide
• Controlled Companies. A “controlled company” is an issuer in which more than 50% of the voting power for
the election of directors is held by an individual, a group, or another company. Master Limited Partnerships
(“MLPs”) often qualify as controlled companies. A “controlled company” is not required to comply with the
NYSE’s requirements to have a majority of independent directors, a nominating/corporate governance
committee, or a compensation committee.
23
Majority of Independent Directors
A majority of the issuer’s board of directors must consist of independent directors.
24
A director will qualify as
independent only if the board affirmatively determines that the director does not have any material relationships
with the company (either directly or as a partner, shareholder, or officer of an organization that has a relationship
with the company).
25
In making its determination, the board of directors must consider a candidate’s commercial,
industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among others. The NYSE
notes that a director’s stock ownership, even if significant, should not in and of itself negate a determination of
independence.
26
A director would not be independent if:
• currently or during the previous three years, either the director was an employee of the company or an
immediate family member of the director was an executive officer of the company;
27
• during any 12-month period within the last three years, the director (or any of the director’s immediate family
members) has received more than $120,000 in direct compensation from the company (other than in the form
of director and committee fees, pension, or other forms of deferred compensation for prior service, provided
such compensation is not contingent in any way on continued service);
28
• (A) the director is a current partner or employee of a firm that is the company’s internal or external auditor;
(B) the director has an immediate family member who is a current partner of such a firm; (C) the director
has an immediate family member who is a current employee of such a firm and personally works on the
company’s audit; or (D) the director or an immediate family member was within the last three years a partner
or employee of such a firm and personally worked on the company’s audit within that time;
29
• the director or an immediate family member is, or has been within the last three years, employed as an
executive officer of another company where any of the listed company’s present executive officers at the
same time serves or served on that company’s compensation committee;
30
or
• the director is a current employee, or an immediate family member is a current executive officer, of a
company that has made payments to, or received payments from, the listed company for property or services
in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other
company’s consolidated gross revenues.
31
An “immediate family member” is defined broadly to include a person’s spouse, parents, children, and siblings,
as well as mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone who
shares that person’s home (other than a domestic employee). “Listed company” or “company” for the purpose of
determining independence includes any parent or subsidiary in a consolidated group with the company.
32
Furthermore, with respect to service on the compensation committee, the board of directors must affirmatively
conclude that the director is able to be independent from management after consideration of all relevant factors,
including, but not limited to:
33
• the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed
company; and
• any affiliation between such director and the listed company, any of its subsidiaries, or any affiliates of its
subsidiaries.
B-5Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
Executive Session
The listed company must hold regularly scheduled meetings of non-management directors without management
present. Furthermore, a listed company that chooses to include all non-management directors at such meetings
should also hold an executive session solely for independent directors at least once a year.
34
Recovery of Erroneously Awarded Compensation (“Claw Back” Rules)
The listed company must adopt a written policy that provides for the reasonably prompt recovery of erroneously
awarded incentive-based compensation if the listed company is required to prepare an accounting restatement due
to a material noncompliance by the listed company with any financial reporting requirement under the securities
laws. This includes any such restatement required to correct any material errors in previously issued financial
statements or errors that would result in a material misstatement if such errors were corrected in the current period
or left uncorrected in the current period.
35
Each listed company must also file disclosures with respect to such erroneously awarded compensation recovery
policy as required by the federal securities laws and any applicable SEC filings.
36
Nominating/Corporate Governance Committee
The listed company must have a fully independent nominating/corporate governance committee,
37
which is
governed by a written charter that:
• addresses the committee’s purpose and responsibilities, which must include identifying and selecting or
recommending director nominees, developing and recommending corporate governance principles, and
overseeing the evaluation of the board and management;
38
and
• provides for an annual performance evaluation of the committee.
39
The nominating/corporate governance committee charter should also address how the committee:
• qualifies its members;
• appoints and removes its members;
• is structured and operates (including the authority to delegate to subcommittees); and
• reports to the board.
40
Finally, the committee charter should also specify that the committee has the sole authority over the retention and
termination of any company engaged to identify director candidates, including the terms and fees relating to such
search.
Compensation Committee
Companies must have a fully independent compensation committee,
41
which is governed by a written charter that:
• addresses its purpose and responsibilities, including, at a minimum, direct responsibility for:
– setting corporate goals and objectives relevant to CEO compensation, evaluating CEO performance, and
determining and approving CEO compensation levels in light of such evaluation;
42
– recommending compensation, incentive-compensation plans, and equity-based plans for non-CEO
executives that are subject to board approval to the board;
43
and
– producing a report on executive compensation as required by the SEC to be included in the company’s
annual proxy statement or annual report filed with the SEC;
44
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Latham & Watkins – US IPO Guide
• provides for an annual performance evaluation of the compensation committee;
45
and
• sets forth the following rights and responsibilities with respect to the use of compensation consultants, legal
counsel, or other advisers by the compensation committee:
46
– the ability, in its sole discretion, to retain or obtain the advice of a compensation consultant, independent
legal counsel, or other adviser upon consideration of all of the factors relevant to that person’s
independence from management, including the following:
• any other services to be provided to the issuer by the employer of the compensation consultant, legal
counsel, or other adviser;
• any fees to be received from the issuer by the employer of the compensation consultant, legal
counsel, or other adviser taken as a percentage of the total revenue of such employer;
• the policies and procedures of the employer of the compensation consultant, legal counsel, or other
adviser that are designed to prevent conflicts of interest;
• any business or personal relationships between any member of the compensation committee and the
proposed compensation consultant, legal counsel, or other adviser;
• whether such compensation consultant, legal counsel, or other adviser owns any stock of the listed
company;
• any business or personal relationship of the compensation consultant, legal counsel, other adviser, or
the person employing the adviser with an executive officer of the listed company;
47
and
• responsibility for the appointment, compensation and oversight of the work of any such compensation
consultant, independent legal counsel, or other adviser.
48
The listed company must provide for
appropriate funding, as determined by the compensation committee, for payment of reasonable
compensation to such compensation consultant, independent legal counsel, or other adviser.
49
The compensation committee charter should also address committee member qualifications, committee member
appointment and removal, committee structure and operations (including authority to delegate to subcommittees),
and committee reporting to the board.
50
Audit Committee
Composition
Companies must have an audit committee composed of at least three members that meet all of the NYSE
independence requirements as well as the independence and other requirements of Exchange Act Rule 10A-3
(implementing Section 301 of Sarbanes-Oxley).
51
The audit committee members must be “financially literate,” and at least one member must have accounting or
financial management expertise, as determined by the company’s board based on its business judgment. For any
audit committee member that serves on the audit committees of more than three public companies at the same
time, the board must determine that such service would not impact such member’s ability to serve effectively
on its audit committee, and it must disclose its determination on or through the company’s website or in the
company’s annual proxy statement or, if the company does not file an annual proxy statement, in its annual report
filed with the SEC.
52
Charter
The audit committee must have a written charter that addresses:
• the committee’s purpose, which at a minimum must be to:
B-7Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
– assist the board with oversight of: (1) the integrity of the company’s financial statements; (2) the
company’s compliance with legal and regulatory requirements; (3) the independent auditor’s qualifications
and independence; and (4) the performance of the company’s internal audit function and independent
auditors;
53
and
– prepare an audit committee statement as required by the SEC to be included in the company’s annual
proxy statement or annual report filed with the SEC;
54
• an annual performance evaluation of the audit committee;
55
and
• the duties and responsibilities of the audit committee, which at a minimum must include those set out in
Exchange Act Rule 10A-3(b)(2), (3), (4) and (5) (concerning responsibilities relating to: (1) registered public
accounting firms; (2) complaints relating to accounting, internal accounting controls or auditing matters;
(3) authority to engage advisers; and (4) funding as determined by the audit committee),
56
as well as to:
– at least annually, obtain and review a report by the independent auditor describing: (1) the firm’s internal
quality-control procedures; (2) any material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or investigation by government or professional
bodies, within the preceding five years respecting one or more independent audits carried out by the
firm, and any steps taken to deal with any such issues; and (3) all relationships between the independent
auditor and the company (to assess the auditor’s independence);
57
– meet to review and discuss the company’s annual audited financial statements;
58
quarterly unaudited
financial statements with management and the independent auditor, including the company’s MD&A
disclosures;
59
earnings press releases;
60
financial information and earnings guidance provided to analysts
and rating agencies;
61
and policies with respect to risk assessment and risk management;
62
– meet separately, periodically, with management, with internal auditors and with independent auditors;
63
– review with the independent auditors any audit problems or difficulties and management’s response;
64
– set clear hiring policies for employees or former employees of the independent auditors;
65
and
– report regularly to the board.
66
Internal Audit
Companies must have an internal audit function that evaluates the company’s risk management processes and
internal control systems and reports its findings to management and the audit committee. This function may be
provided by a third party other than the company’s independent auditor.
67
Shareholder Meetings
Each fiscal year, a listed company must hold an annual meeting of its shareholders.
68
Shareholder Approval of Certain Transactions
Shareholder approval is required for each of the following material transactions, with certain exceptions:
• the implementation of equity-compensation plans and material revisions thereto
69
(any sale of stock to an
employee, director, or services provider is also subject to the equity compensation rules in Section 303A.08
70
);
• prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in
any transaction or series of related transactions to a related party (that is, directors, officers, or substantial
security holders of the issuer) if such transaction is a cash sale for a price that is less than the Minimum
Price,
71
and the number of shares of common stock to be issued, or if the number of shares of common stock
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into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of
common stock or 1% of the voting power outstanding before the issuance.
72
• prior to the issuance of common stock, or of securities convertible into or exercisable for common stock,
where such securities are issued as consideration in a transaction or series of transactions in which a Related
Party has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or
indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or
series of related transactions and the present or potential issuance of common stock, or securities convertible
into common stock, could result in an issuance that exceeds either 5% of the number of shares of common
stock or 5% of the voting power outstanding before the issuance.
73
• an issuance of more than 20% of the outstanding common stock of the issuer (measured either by amount of
shares or voting power);
74
and
• an issuance that will result in a change of control of the issuer.
75
Related Party Transactions
A company's audit committee or another independent body of the board of directors, is required to conduct a
reasonable prior review and oversight of all related party transactions for potential conflicts of interest and will
need to prohibit such a transaction if it determines it to be inconsistent with the interests of the company and its
shareholders.
76
Corporate Governance Guidelines
Companies must adopt and disclose corporate governance guidelines that must address:
• director qualification standards;
• director responsibilities;
• director access to management and, as necessary and appropriate, independent advisers;
• director compensation;
• director orientation and continuing education;
• management succession; and
• annual performance evaluation of the board.
The company must make its corporate governance guidelines available on its website, and it must state in its
annual proxy statement or, if the company does not file an annual proxy statement, in its annual report filed with
the SEC, that the guidelines are available on its website and provide the website address.
77
Code of Business Conduct and Ethics
Companies must adopt and disclose a code of business conduct and ethics for directors, officers, and employees.
This code should address, among other things:
• conflicts of interest;
• corporate opportunities;
• confidentiality;
• fair dealing;
B-9Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
• protection and use of company assets;
• compliance with laws, rules, and regulations (including insider trading laws); and
• encouraging the reporting of illegal or unethical behavior.
The code must contain compliance standards and procedures to facilitate its effective operation and must require
that only the board or a board committee may waive any provision of the code for executive officers or directors,
and that any such waiver be disclosed to shareholders within four business days.
The company must make the code available on its website, and it must state in its annual proxy statement or, if
the company does not file an annual proxy statement, in its annual report filed with the SEC, that this information
is available on its website and provide the website address.
78
NYSE Communication and Notication Requirements
The NYSE requires that any listed company promptly notify the public of any information that it might reasonably
expect to materially affect the market for its securities. A listed company should also act promptly to dispel
unfounded rumors that produce unusual market activity or price variations.
79
If the company will announce a material event or make a statement regarding a rumor between 7:00 a.m. and
4:00 p.m. Eastern Standard Time, it must notify the NYSE by telephone at least 10 minutes before it releases
the announcement. The company must also provide the text of any written announcement to the NYSE at least
10 minutes prior to releasing the announcement. This will allow the NYSE to determine if a trading halt should
be imposed.
80
Corporate Governance Requirements for Foreign Private Issuers
As noted above, foreign private issuers are permitted to follow home-country practice in lieu of the NYSE’s corporate
governance standards, other than the NYSE’s requirements that it must: (1) have an audit committee that meets the
requirements of Exchange Act Rule 10A-3; and (2) provide prompt notification from its CEO of non-compliance with
the applicable provisions of the NYSE’s corporate governance rules. As described earlier, a foreign private issuer
must also provide an annual written affirmation as well as an interim written affirmation to the NYSE.
81
Whether a listed foreign private issuer follows the NYSE corporate governance standards or its home-country
practice, it must disclose any ways in which its corporate governance practices differ from those followed by
domestic US issuers under NYSE listing standards.
82
A detailed and cumbersome analysis is not required; a brief,
general summary of differences is enough. A foreign private issuer that is required to file an annual report on
Form 20-F with the SEC must include the statement of significant differences in that annual report. All other foreign
private issuers may either (i) include the statement of significant differences in an annual report filed with the SEC
or (ii) make the statement of significant differences available on or through the listed company’s website. If the
statement of significant differences is made available on or through the listed company’s website, the listed company
must disclose that fact in its annual report filed with the SEC and provide the website address.
83
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ENDNOTES
1
See generally NYSE Listed Company Manual, § 103.00 (NYSE Manual).
2
Both affiliated companies and companies listing following emergence from bankruptcy have different listing standards.
3
When considering a listing application from a company organized under the laws of Canada, Mexico or the US (North America), the NYSE
will include all North American holders and trading volume in applying the minimum stockholder and trading volume requirements. When
listing a company from outside North America, the Exchange may, in its discretion, include holders and trading volume in the company’s
home country or primary trading market outside the United States in applying the applicable listing standards, provided that such market
is a regulated stock exchange. In exercising this discretion, the Exchange will consider all relevant factors including: (i) whether the
information is derived from a reliable source, preferably either a government- regulated securities market or a transfer agent that is subject
to governmental regulation; (ii) whether there exist efficient mechanisms for the transfer of securities between the company’s non-US
trading market and the United States; and (iii) the number of shareholders and the extent of trading in the company’s securities in the
United States prior to the listing. For securities that trade in the format of American Depositary Receipts ("ADR's"), volume in the ordinary
shares will be adjusted to be on an ADR-equivalent basis. See NYSE Manual §102.01.
4
See NYSE Manual § 102.01. In addition, in certain circumstances, the NYSE will take into account certain other qualitative factors,
including: the company must be a going concern or the successor to a going concern, the degree of national interest in the company, the
character of the markets for its products, its relative stability and position in its industry, and whether it is engaged in an expanding industry
with prospects for maintaining its position. Higher minimum standards might apply if there is a lack of public interest in the securities
of a company as evidenced, for example, by low trading volume on another exchange, lack of dealer interest in the over-the-counter
market, unusual geographic concentration of holders of shares, slow growth in the number of shareholders, and a low rate of transfers.
See NYSE Manual § 102.01C. A company formed by a reverse merger is subject to additional initial listing requirements. See NYSE
Manual § 1-02.01F. In order to qualify for initial listing a reverse merger company must also: (i) have been trading for at least one year
on the US over-the-counter market, on another national securities exchange or on a regulated foreign exchange, and, in the case of a
domestic issuer, have filed a Form 8-K containing all required information under Item 2.01(f) including audited financial statements or, in
the case of a foreign private issuer, have filed all such information on Form 20-F; (ii) have maintained a minimum closing price of $4 per
share for at least 30 of the most recent 60 trading days preceding the filing of the initial listing application; and (iii) have filed all periodic
financial reports required by the SEC or other regulatory authority during the year preceding the initial listing, including one annual report
containing audited financial statements for a full fiscal year after the filing of the initial Form 8-K or 20-F, as applicable. In addition, in
order to qualify for listing, the reverse merger company must (i) have timely filed all periodic financial reports required by the SEC or other
regulatory authority during the year preceding the listing date, including one annual report containing audited financial statements for a full
fiscal year; and (ii) have maintained a minimum closing price of $4 per share for at least 30 of the most recent 60 trading days prior to the
listing date. However, a reverse merger company will not be required to meet the above additional conditions if it lists in connection with a
firm-commitment underwritten public offering with gross proceeds of at least $40 million.
5
See NYSE Manual § 102.01A. If the issuer has less than 100 shares, the requirement relating to the number of publicly held shares will be
reduced proportionately.
6
See id. If the unit of trading is less than 100 shares, the requirement relating to the number of publicly held shares will be reduced
proportionately. Shares held by directors, officers, or their immediate families and other concentrated holdings of 10% or more are
excluded in calculating the number of publicly held shares.
7
See NYSE Manual § 102.01B. For IPOs, the NYSE will rely on a written commitment from the underwriter regarding the anticipated
value of the offering. Under certain limited circumstances, the NYSE may allow an issuer to list without conducting a public offering
(a “direct listing”). For a selling shareholder direct listing, the exchange will determine whether the company has met the $100 million
market value requirement based on the lesser of (i) the value calculable based on the valuation and (ii) the value calculable based on the
most recent trading price in a private placement market. In the absence of recent trading in a private placement market, the NYSE will
determine that the company has met the market value of publicly-held shares requirement if the company provides a valuation showing a
market value of publicly-held shares of at least $250 million. For a primary direct listing, the NYSE will determine that the company has met
the market value of publicly-held shares requirement if the company will sell at least $100 million in market value of shares in the opening
auction on the first day of trading on NYSE. For this purpose, market value will be calculated using a price per share equal to the lowest
price of the price range in the registration statement minus an amount equal to 20% of the highest price of such price range.
8
See NYSE Manual § 102.01C(I).
9
As defined in Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act.
10
See NYSE Manual § 102.01C(II).
11
In addition, a foreign private issuer listing its equity securities in the form of ADRs must sponsor its ADRs and enter into an agreement with
a US depository bank to provide such services as cash and stock dividend payments, transfer of ownership and distribution of company
financial statements and notices, such as shareholder meeting material. See generally NYSE Manual § 103.04.
12
See NYSE Manual § 103.01A. Shares held by directors, officers, or their immediate families, and other concentrated holdings of 10%
or more are excluded in calculating the number of publicly held shares. If an issuer either has a significant concentration of stock, or if
changing market forces have adversely impacted the public market value of an issuer which otherwise would qualify for listing on the NYSE
such that its public market value is no more than 10% below $100 million, the NYSE will generally consider $100 million in stockholders’
equity as an alternate measure of size and therefore, as an alternative basis to list the issuer.
13
See NYSE Manual § 103.01B(I).
B-11Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
14
See NYSE Manual § 103.01B(II)(a). For IPOs, the company’s underwriters must provide a written representation that demonstrates the
company’s ability to meet the global market capitalization requirement based upon the completion of the offering.
15
See NYSE Manual § 103.01B(II)(b). For IPOs, the company’s underwriters must provide a written representation that demonstrates the
company’s ability to meet the global market capitalization requirement based upon the completion of the offering. For all other companies,
market capitalization valuation will be determined over a six-month average.
16
See NYSE Manual § 802.01A. If the unit of trading is less than 100 shares, the requirement relating to the number of shares publicly held
will be reduced proportionately. Shares held by directors, officers, or their immediate families, and other concentrated holdings of 10% or
more are excluded in calculating the number of publicly held shares.
17
See NYSE Manual § 802.01B(I).
18
See generally NYSE Manual § 802.01B.
19
See NYSE Manual § 802.01C. For any curative actions requiring the approval of the issuer’s shareholders, the issuer must include such
approval requirement in its notification to the NYSE, seek and obtain such approval by the next annual meeting, and then effect such action
without delay. Note that the NYSE may exercise discretion with respect to the minimum price criteria after evaluating the financial status of
the issuer if the security that has fallen below compliance is other than the issuer’s primary trading common stock (for example, a tracking
stock or a preferred class).
20
See generally NYSE Manual § 802.01D for additional enumerated criteria.
21
See NYSE Manual §§ 303A.00, 303A.06, 303A.12.
22
See NYSE Manual § 303A.11.
23
See NYSE Manual §§ 303A.00, 303A.01, 303A.04, 303A.05.
24
See NYSE Manual § 303A.01. Issuers listing in connection with an IPO have one year following the initial listing date to meet the majority
independent board of directors requirement and may phase in independent committees as follows: at least one independent director per
committee at the time of listing, a majority of independent directors within 90 days following listing, and fully independent committees, as
required, within one year. See NYSE Manual § 303A.00.
25
See NYSE Manual § 303A.02.
26
See Commentary to NYSE Manual § 303A.02.
27
See NYSE Manual § 303A.02(b)(i).
28
See NYSE Manual § 303A.02(b)(ii).
29
See NYSE Manual § 303A.02(b)(iii).
30
See NYSE Manual § 303A.02(b)(iv).
31
See NYSE Manual § 303A.02(b)(v).
32
See Commentary to NYSE Manual § 303A.02(b).
33
See NYSE Manual § 303A.02(a)(ii).
34
See NYSE Manual § 303A.03.
35
See NYSE Manual § 303A.14. The policy must be applied to compensation received after October 2, 2023.
36
See NYSE Manual § 303A.14.
37
See NYSE Manual § 303A.04(a).
38
See NYSE Manual § 303A.04(b)(i).
39
See NYSE Manual § 303A.04(b)(ii).
40
See Commentary to NYSE Manual § 303A.04.
41
See NYSE Manual § 303A.05(a). As of July 1, 2013, compensation committee members must satisfy additional independence
requirements as set forth in § 303A.02(a)(ii). In determining the independence of a director who will serve on an issuer’s compensation
committee, the board of directors must consider all factors specifically relevant to determining whether that director has a relationship to
the issuer that is material to that director’s ability to be independent from management in connection with the duties of a compensation
committee member, including, but not limited to (i) any sources of compensation of such director, including any consulting, advisory, or
other compensatory fee paid by the issuer; and (ii) whether such director is affiliated with the issuer, any of its subsidiaries, or any affiliates
of its subsidiaries. Smaller reporting companies (as defined in Exchange Act Rule 12b-2) are not required to comply with §303A.02(a)(ii) or
the second paragraph of the Commentary to §303A.02(a). See § 303A.00.
42
See NYSE Manual § 303A.05(b)(i)(A).
43
See NYSE Manual § 303A.05(b)(i)(B).
44
See NYSE Manual § 303A.05(b)(i)(C).
45
See NYSE Manual § 303A.05(b)(ii).
46
See NYSE Manual § 303A.05(b)(iii).
47
See NYSE Manual § 303A.05(c)(iv).
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Latham & Watkins – US IPO Guide
48
See NYSE Manual § 303A.05(c)(ii).
49
See NYSE Manual § 303A.05(c)(iii).
50
See Commentary to NYSE Manual § 303A.05.
51
See NYSE Manual §§ 303A.06, 303A.07(a).
52
See NYSE Manual § 303A.07(a); see also Commentary to NYSE Manual § 303A.07(a). While the NYSE does not require that an audit
committee include a person who satisfies the definition of audit committee financial expert as set out in Item 407(d)(5)(ii) of Regulation S-K,
a board may presume that such a person has accounting or related financial management expertise.
53
See NYSE Manual § 303A.07(b)(i)(A).
54
See NYSE Manual § 303A.07(b)(i)(B).
55
See NYSE Manual § 303A.07(b)(ii).
56
See NYSE Manual § 303A.07(b)(iii).
57
See NYSE Manual § 303A.07(b)(iii)(A).
58
See NYSE Manual § 303A.07(b)(iii)(B).
59
See id.
60
See NYSE Manual § 303A.07(b)(iii)(C).
61
See id.
62
See NYSE Manual § 303A.07(b)(iii)(D).
63
See NYSE Manual § 303A.07(b)(iii)(E).
64
See NYSE Manual § 303A.07(b)(iii)(F).
65
See NYSE Manual § 303A.07(b)(iii)(G).
66
See NYSE Manual § 303A.07(b)(iii)(H).
67
See NYSE Manual § 303A.07(c); see also Commentary to NYSE Manual § 303A.07(c).
68
See NYSE Manual § 302.00. This Section 302 is not applicable to companies whose only securities listed on the Exchange are non-voting
preferred and debt securities, passive business organizations (such as royalty trusts), or securities listed pursuant to 5.2(j)(2) (Equity
Linked Notes), 5.2(j)(3) (Investment Company Units), 5.2(j)(4) (Index-Linked Exchangeable Notes), 5.2(j)(5) (Equity Gold Shares), 5.2(j)(6)
(Equity-Index Linked Securities, Commodity- Linked Securities, Currency-Linked Securities, Fixed Income Index-Linked Securities,
Futures-Linked Securities and Multifactor Index-Linked Securities), 5.2(j)(8) (Exchange-Traded Fund Shares), Rule 8.100 (Portfolio
Depositary Receipts), 8.200 (Trust Issued Receipts), 8.201 (Commodity-Based Trust Shares), 8.202 (Currency Trust Shares), 8.203
(Commodity Index Trust Shares), 8.204 (Commodity Futures Trust Shares), 8.300 (Partnership Units), 8.400 (Paired Trust Shares), 8.600
(Managed Fund Shares), 8.601 (Active Proxy Portfolio Shares), 8.700 (Managed Trust Securities), and 8.900 (Managed Portfolio Shares).
Foreign private issuers may follow home-country practice with respect to shareholder meetings. See NYSE Manual § 103.00.
69
See NYSE Manual § 312.03(a); see also Commentary to NYSE Manual § 303A.08.
70
See NYSE Manual § 312.03(b)(iii): For example, a sale of stock to any of such parties at a discount to the then market price would be
treated as equity compensation under Section 303A.08, notwithstanding that shareholder approval may not be required under Sections
312.03(b) or 312.03(c). Consequently, the company would be required to either: (i) obtain shareholder approval of such sale, or (ii) issue
such shares under an equity compensation plan that had previously been approved by shareholders and for which shareholder approval
under Section 303A.08 is not otherwise required. Moreover, shareholder approval is required if any of the subparagraphs of Section 312.03
require such approval, notwithstanding the fact that the transaction does not require approval under this subparagraph or one or more of
the other subparagraphs.
71
See NYSE Manual § 312.04(h); Minimum Price” means a price that is the lower of: (i) the Official Closing Price immediately preceding the
signing of the binding agreement; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the
binding agreement.
72
See NYSE Manual § 312.03(b)(i). Shareholder approval will not be required if such transaction is a cash sale that meets the Minimum
Price requirement.
73
See NYSE Manual § 312.03(b)(ii).
74
See NYSE Manual § 312.03(c). Shareholder approval will not be required for any issuance involving: (1) any public offering for cash; or
(2) any other private financing (that is not a public offering for cash) in which the issuer is selling securities for cash, if it involves a sale of
common stock, or securities convertible into or exercisable for common stock, at a price at least equal to the lesser of either the stock’s
official closing price or the average official closing price for the five trading days immediately preceding entry into the binding agreement,
provided that if these securities are issued in connection with an acquisition of the stock or assets of another company, shareholder
approval will be required if the issuance of such securities alone or when combined with any other present or potential issuance of common
stock or securities convertible into common stock in connection with such acquisition, is equal to or exceeds either 20% of the number of
shares of common stock or 20% of the voting power outstanding before the issuance.
75
See NYSE Manual § 312.03(d).
B-13Annex B: NYSE Quantitative Listing Criteria and Corporate Governance Standards
76
See NYSE Manual § 314.00. For purposes of this rule, the term "related party transaction" refers to transactions required to be disclosed
pursuant to Item 404 of Regulation S-K under the Securities Exchange Act. In the case of foreign private issuers, the term "related party
transactions" refers to transactions required to be disclosed pursuant to Form 20-F, Item 7.B.
77
See NYSE Manual § 303A.09; see also Commentary to NYSE Manual § 303A.09.
78
See NYSE Manual § 303A.10; see also Commentary to NYSE Manual § 303A.10.
79
See NYSE Manual § 202.05.
80
See NYSE Manual § 202.06(B).
81
See NYSE Manual §§ 303A.00, 303A.12(b), 303A.12(c).
82
See NYSE Manual § 303A.11.
83
See NYSE Manual § 303A.11.
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C-1Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
ANNEX C: NASDAQ QUANTITATIVE LISTING CRITERIA AND
CORPORATE GOVERNANCE STANDARDS
There are three distinct markets within Nasdaq: the Nasdaq Global Market (NGM), the Nasdaq Global Select
Market (NGSM), and the Nasdaq Capital Market (NCM). The NGSM mandates the highest initial listing
requirements, while its maintenance requirements are identical to those of the NGM. The NGM, in turn, has more
stringent quantitative listing and maintenance requirements than the NCM.
1
Except as noted below, the quantitative listing and maintenance criteria applicable to non-Canadian foreign
private issuers for the NGM, NGSM, and NCM are identical to those of domestic US issuers and Canadian
issuers.
2
However, all foreign private issuers (including Canadian issuers) may elect to follow home-country
practice in lieu of compliance with certain Nasdaq corporate governance requirements.
3
An issuer of a security
listed on either the NGM or NCM may, at any time, apply to transfer the respective security to the NGSM as
long as it satisfies all of the requirements for listing on the NGM and it meets the additional financial and liquidity
requirements described below.
4
NGM Quantitative Listing and Maintenance Standards
NGM Quantitative Initial Listing Standards
An issuer, whether a domestic US issuer or a foreign private issuer, generally must meet one of the following
standards to be listed on the NGM.
5
Entry Standard 1 Entry Standard 2 Entry Standard 3/4
Income Standard Equity Standard Market Value or Total Assets/
Total Revenue Standard
Minimum bid price
6
At least $4 per share At least $4 per share At least $4 per share
Unrestricted publicly held
shares
7
At least 1.1 million At least 1.1 million At least 1.1 million
Number of round lot holders
8
At least 400 At least 400 At least 400
Stockholders’ equity At least $15 million
9
At least $30 million
10
—
Number of registered and
active market-makers
At least three
11
At least three
12
At least four
13
Market value of unrestricted
publicly held shares
At least $8 million
14
At least $18 million
15
At least $20 million
16
Annual pre-tax income from
continuing operations in the
most recently completed
fiscal year or in two of the
last three most recently
completed fiscal years
At least $1 million
17
— —
Operating history — Two-year operating
history
18
—
Market value of listed
securities
— — $75 million for Market Value
Standard
19
Total assets and total
revenue
— — $75 million, each in total assets
and total revenue, for the most
recently completed fiscal year
or two of the last three most
recently completed fiscal years
for Total Assets/Total Revenue
Standard
20
C-2 Latham & Watkins – US IPO Guide
NGM Quantitative Maintenance Standards
Once an issuer has been listed on the NGM, it must continue to satisfy one of the following maintenance
standards.
Maintenance Standard 1 Maintenance Standard 2/3
Equity Standard Market Value/Standard or Total Assets/
Total Revenue Standard
Minimum bid price
21
$1 per share $1 per share
Total Holders
22
At least 400 At least 400
Stockholders’ equity At least $10 million
23
—
Market value of publicly held
shares
At least $5 million
24
At least $15 million
25
Number of publicly held shares At least 750,000
26
At least 1.1 million
27
Registered and active
market-makers
At least two
28
At least four
29
Market value of listed securities — $50 million for Market Value Standard
30
(No requirement for Total Assets/Total
Revenue Standard)
Total assets and total revenue — $50 million each, in total assets and total
revenue, for the most recently completed
fiscal year or two of the last three most
recently completed fiscal years for Total
Assets/Total Revenue Standard
31
(No requirement for Market Value
Standard)
NGSM Quantitative Listing and Maintenance Standards
NGSM Quantitative Initial Listing Standards
The issuer must meet one of the following financial standards:
Financial Requirement Standard 1:
Earnings
Standard 2:
Capitalization with
Cash Flow
Standard 3:
Capitalization
with Revenue
Standard 4:
Assets with
Equity
Aggregate income from
continuing operations before
income taxes
At least $11 million
over the prior three
fiscal years
32
— — —
Positive income from
continuing operations before
income taxes in each of the
prior three fiscal years
Required
33
— — —
Income from continuing
operations before income
taxes
At least $2.2 million
in each of the two
most recent fiscal
years
34
— — —
Aggregate cash flows — At least $27.5 million
over the prior three
fiscal years
35
— —
C-3Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
Financial Requirement Standard 1:
Earnings
Standard 2:
Capitalization with
Cash Flow
Standard 3:
Capitalization
with Revenue
Standard 4:
Assets with
Equity
Positive cash flows in each
of the prior three fiscal years
— Required
36
— —
Market capitalization — Average of at least
$550 million over
prior 12 months
37
Average
of at least
$850 million
over prior
12 months
38
At least
$160 million
39
Total revenue in the previous
fiscal year
— At least
$110 million
40
At least
$90 million
41
—
Total assets — — — At least
$80 million
42
Stockholders’ equity — — — At least
$55 million
43
Minimum bid price
44
$4 per share $4 per share $4 per share $4 per share
Liquidity Requirements
An issuer must also meet the following liquidity requirements:
• 2,200 total holders
45
or 450 round lot holders;
46
and
• 1.25 million unrestricted publicly held shares
47
with a $45 million minimum market value.
48
In computing the number of unrestricted publicly held shares, Nasdaq will not consider shares held by an officer,
director, or 10% or greater shareholder of the company.
49
In addition, where the issuer meets the requirements of the NGM Income Standard or the NGM Equity Standard
(as detailed above), it must have at least three registered and active market-makers.
50
Otherwise, the issuer must
have at least four registered and active market-makers.
51
NGSM Quantitative Maintenance Requirements
Once an issuer has been listed on the NGSM, it is subject to the same maintenance standards as issuers listed
on the NGM, as described above.
52
NCM Quantitative Listing and Maintenance Standards
NCM Quantitative Initial Listing Standards
For initial listing on the NCM, an issuer must meet one of the following standards:
Standard 1:
Equity
Standard 2:
Market Value of
Listed Securities
Standard 3:
Net Income
Stockholders’ equity At least $5 million
53
At least $4 million
54
At least $4 million
55
Market value of unrestricted
publicly held shares
At least $15 million
56
At least $15 million
57
At least $5 million
58
Two-year operating history Required
59
— —
Market value of listed securities — At least $50 million
60
—
C-4 Latham & Watkins – US IPO Guide
Standard 1:
Equity
Standard 2:
Market Value of
Listed Securities
Standard 3:
Net Income
Net income — — At least $750,000
in the most recently
completed fiscal year
or in two of the last
three most recently
completed fiscal years
61
Additionally, each issuer must satisfy the following requirements:
• at least 300 round lot shareholders;
62
• at least 1 million unrestricted publicly held shares;
63
• a minimum bid price of $4 a share;
64
• at least three registered and active market-makers;
65
and
• in the case of ADRs, at least 400,000 must be issued.
66
NCM Maintenance Requirements
For continued listing on NCM, an issuer must maintain:
• either: (1) stockholders’ equity of at least $2.5 million (Equity Standard); (2) a market value of listed securities
of at least $35 million (Market Value of Listed Securities Standard); or (3) net income of at least $500,000 in
the most recently completed fiscal year or in two of the last three most recently completed fiscal years (Net
Income Standard);
67
• at least 300 public shareholders;
68
• at least 500,000 publicly held shares;
69
• a market value of publicly held shares of at least $1 million;
70
• a minimum bid price of $1 a share;
71
and
• at least two registered and active market-makers, one of which may be a market-maker entering a stabilizing
bid.
72
Failure to Meet Continuing Listing Requirements (NGM, NGSM, and NCM)
The Listing Qualifications Department will immediately notify any company that fails to meet a maintenance
requirement. Depending on the type of deficiency, the Listings Qualifications Department will issue one of
the following four types of notifications: (i) a Staff Delisting Determination, which is a notification that, unless
appealed, will subject the company to immediate suspension and delisting; (ii) a notification of deficiency for
which the company may submit a plan of compliance to the Listing Qualifications Department for review; (iii) a
notification of deficiency, which automatically grants the company a cure or compliance period; or (iv) a letter of
public reprimand.
73
Nasdaq Corporate Governance Requirements
In addition to the quantitative listing criteria set out above, listed companies must comply with the Nasdaq rules
relating to corporate governance described below, with two key exceptions:
C-5Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
• Foreign Private Issuers. A listed foreign private issuer is permitted to follow home-country practice in
lieu of Nasdaq’s corporate governance standards, other than the Nasdaq’s requirements that it must (1)
provide Nasdaq with notification of any non-compliance by the issuer with Nasdaq corporate governance
requirements; (2) have an audit committee that meets the requirements (including independence
requirements) of Exchange Act Rule 10A-3; (3) comply with the diverse board requirements; (4) disclose
board diversity information; and (5) abide by the Nasdaq voting rights requirements. A foreign private issuer
making its IPO or first US listing on Nasdaq that follows home-country practice in lieu of the Nasdaq corporate
governance requirements must disclose in its registration statement or on its website each requirement which
it does not follow and describe the home-country practice followed by it in lieu of such requirements.
74
• Controlled Companies. A controlled company is one in which more than 50% of the voting power for the
election of directors is held by an individual, a group or another company. Master Limited Partnerships
(“MLPs”) often qualify as controlled companies. A controlled company is not required to comply with Nasdaq
requirements to have a majority of independent directors or a compensation committee, or requirements
relating to independent director oversight of director nominations.
75
Majority of Independent Directors
A majority of the issuer’s board of directors must consist of independent directors.
76
The board of directors
must affirmatively determine that the director has no relationship with the issuer that would impair his or her
independence,
77
and the issuer must disclose in its annual proxy (or, if it does not file a proxy, on its annual report
on Form 10-K — or Form 20-F for foreign private issuers, if applicable — filed with the SEC) those directors that
the board of directors has determined to be independent.
78
Ownership of an issuer’s stock, by itself, is not a bar to an independence finding.
79
The Nasdaq rules define an
independent director to mean a person other than an officer or employee of the company or its subsidiaries or any
other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a director.
80
A director cannot be independent if he or she:
• is, or at any time in the past three years was, employed by the issuer or any parent or subsidiary (as defined
below) of the issuer;
81
• has accepted, or has a family member (as defined below) who has accepted, any compensation from the issuer
or any parent or subsidiary of the issuer in excess of $120,000 during any period of 12 consecutive months
within the three years preceding the determination of independence,
82
other than:
– compensation for board or board committee service;
83
– compensation paid to a family member who is a non-executive employee of the issuer or a parent or
subsidiary of the issuer;
84
or
– benefits under a tax-qualified retirement plan, or non-discretionary compensation;
85
• is a family member of an individual who is, or at any time during the past three years was, employed by the
issuer or any parent or subsidiary of the issuer as an executive;
86
• is, or has a family member who is, a partner in, or controlling shareholder or executive officer of, any
organization to which the issuer made, or from which the issuer received, payments for property or services in
the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues
for that year, or $200,000, whichever is more,
87
other than:
– payments arising solely from investments in the issuer’s securities;
88
or
– payments under non-discretionary charitable contribution matching programs;
89
C-6
Latham & Watkins – US IPO Guide
• is, or has a family member who is, employed as an executive officer of another entity where at any time
during the past three years any of the executive officers of the issuer serves on the compensation committee
of such other entity;
90
or
• is, or has a family member who is, a current partner of the issuer’s outside auditor, or was a partner or
employee of the issuer’s outside auditor who worked on the issuer’s audit at any time during any of the past
three years;
91
or
• in the case of an investment company, in lieu of the above paragraphs, a director who is an “interested
person” of the Company as defined in Section 2(a)(19) of the Investment Company Act of 1940, other than in
his or her capacity as a member of the board of directors or any board committee.
92
For these purposes, a “parent or subsidiary” covers entities that the issuer controls and consolidates with its
financial statements as filed with the SEC (but not if the issuer reflects such entity solely as an investment in its
financial statements).
93
A “family member” is defined to include a person’s spouse, parents, children, siblings,
mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than
domestic employees) who shares such person’s home.
94
Meetings of Independent Directors
Independent directors must have regularly scheduled meetings at which only independent directors are present.
95
Those meetings should occur not less than twice a year.
96
Recovery of Erroneously Awarded Compensation (“Claw Back” Rules)
Each issuer must adopt a written policy that provides for the reasonably prompt recovery of erroneously awarded
incentive-based compensation received by executive officers and comply with such policy if the issuer is required
to prepare an accounting restatement due to a material noncompliance by the issuer with any financial reporting
requirement under the securities laws. This includes any such restatement required to correct material errors in
previously issued financial statements or errors that would result in a material misstatement if such error were
corrected in the current period or left uncorrected in the current period.
97
Each issuer must also file disclosures with respect to such erroneously awarded compensation recovery policy as
required by the SEC and any other federal securities laws and any applicable SEC.
98
Director Nominees
Director nominees must be selected, or recommended for the board of directors’ selection, either by a majority of
the independent directors in a vote in which only independent directors participate or by a nominations committee
comprised solely of independent directors.
99
Each issuer must certify that it has adopted a formal written charter
or board resolution addressing the nominations process (and such related matters as may be required under the
federal securities laws).
100
In certain circumstances a single non-independent director, who is not a current officer
or employee (or family member of an officer or employee), may serve for up to two years on an independent
nominations committee composed of at least three members.
101
Compensation Committee
An issuer must have, and certify that it has and will continue to have, a compensation committee composed
of at least two independent directors.
102
In order to serve as a member of the listed company’s compensation
committee, the board of directors must affirmatively determine that the director does not have a relationship to
the company that is material to that director’s ability to be independent from management. Relevant factors in this
determination include, but are not limited to:
• the source of any compensation received by such director, including any consulting, advisory, or other
compensatory fee paid by the company to such director; and
C-7Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
• any affiliations between the director and the company, a subsidiary of the company, or an affiliate of a
subsidiary of the company.
103
Under certain limited circumstances, if the compensation committee is composed of at least three members,
one director who does not otherwise meet the independence requirements and who is not currently an executive
officer or employee or a family member of an executive officer may serve on the compensation committee
for up to two years if the board of directors determines it is required by the best interests of the issuer and its
shareholders. Such an exception must be disclosed on the company’s website or in the proxy statement for the
next annual meeting subsequent to such determination (or, if the company does not file a proxy, in its Form 10-K
or 20-F), and such disclosure must include the nature of the relationship and the reasons for the determination.
In addition, the issuer must provide any disclosure required by Instruction 1 to Item 407(a) of Regulation S-K
regarding its reliance on this exception.
104
The compensation committee must have a written charter that:
105
• addresses the scope of the committee’s responsibilities, including structure, process, and membership
requirements;
• addresses the committee’s responsibility for determining, or recommending to the board for determination,
the compensation of the chief executive officer and all other executive officers of the company (the chief
executive officer may not be present during voting or deliberations on his or her compensation); and
• sets forth the following rights and responsibilities with respect to the use of compensation consultants, legal
counsel, or other adviser by the compensation committee:
– the ability, in its sole discretion, to retain or obtain the advice of a compensation consultant, legal
counsel, or other adviser. The compensation committee will be directly responsible for the appointment,
compensation, and oversight of the services provided by any such compensation consultant, legal
counsel, or other adviser. The compensation committee must provide for appropriate funding for payment
of reasonable compensation. The compensation committee may retain or obtain the advice of such
consultant, legal counsel, or other adviser only after considering the following:
• any other services provided to the issuer by the employer of such compensation consultant, legal
counsel, or other adviser;
• any other fees paid by the issuer to the employer of the compensation consultant, legal counsel, or
other adviser as a percentage of the total revenue of that employer;
• the policies and procedures of the employer of the compensation consultant, legal counsel, or other
adviser with respect to the prevention of conflicts of interest;
• any business or personal relationships between any member of the compensation committee and
such compensation consultant, legal counsel, or other adviser;
• any ownership of the issuer’s equity by such compensation consultant, legal counsel, or other
adviser; and
• any business or personal relationship between the compensation consultant, legal counsel, or other
adviser or such person’s employer and any of the issuer’s executive officers.
Audit Committees
Sarbanes-Oxley
An issuer’s audit committee must satisfy the independence and other requirements of Exchange Act Rule 10A-3
(implementing Section 301 of Sarbanes-Oxley).
106
C-8
Latham & Watkins – US IPO Guide
Charter
Each issuer must certify that it has a written audit committee charter and that the audit committee will review
and assess the adequacy of the audit committee charter on an annual basis.
107
The charter must specify:
• the scope of the audit committee’s responsibilities, and how it carries out those responsibilities, including
structure, processes, and membership requirements;
108
• the audit committee’s responsibility for ensuring its receipt from the outside auditors of a formal written
statement delineating all relationships between the auditor and the issuer, and the audit committee’s
responsibility for engaging in a dialogue with the auditor with respect to any disclosed relationships or
services that might impact the objectivity and independence of the auditor and for taking, or recommending
that the full board take, appropriate action to oversee the independence of the outside auditor;
109
• the committee’s purpose of overseeing the accounting and financial reporting processes of the issuer and the
audits of the financial statements of the issuer;
110
and
• the specific audit committee responsibilities and authority necessary to comply with the audit committee
requirements of Sarbanes-Oxley concerning responsibilities relating to: (1) registered public accounting firms;
(2) complaints relating to accounting, internal accounting controls or auditing matters; (3) authority to engage
advisers; and (4) funding as determined by the audit committee.
111
Composition
The issuer must have, and certify that it has and will continue to have, an audit committee of at least three
members, each of whom must:
• be independent, within the meaning of the Nasdaq director independence rules discussed above;
• meet the requirements for audit committee independence, set out in Exchange Act Rule 10A-3(b)(1), that,
subject to certain limited exceptions:
112
(1) such member be a member of the board of directors of the issuer;
(2) such member (other than in his or her capacity as a member of the board of directors, the audit committee,
or another board committee) not accept directly or indirectly any consulting, advisory, or other compensatory
fee from the issuer or any subsidiary thereof; and (3) such member not be an affiliated person of the issuer or
any subsidiary thereof;
113
• not have participated in the preparation of the financial statements of the issuer or any current subsidiary of
the issuer at any time during the past three years; and
• be able to read and understand fundamental financial statements, including an issuer’s balance sheet,
statement of comprehensive income, and cash flow statement, at the time of appointment.
114
In addition, each issuer must certify that it has, and will continue to have, one member of the audit committee
who has past employment experience in finance or accounting, requisite professional certification in
accounting, or other comparable experience or background which results in financial sophistication.
115
Note that
a director who qualifies as an audit committee financial expert under Item 407(d)(5)(ii) and (iii) of Regulation
S-K will be presumed to meet this financial sophistication requirement.
116
Under certain circumstances a single
director who meets the independence requirements of Exchange Act Rule 10A(m)(3) but not the independence
requirements of the Nasdaq rules, who is not a current officer or employee (or family member of an officer or
employee), may serve for up to two years on an audit committee. Such a person may not, however, chair the
audit committee.
117
Responsibility and Authority
The audit committee must have the specific responsibilities and authority needed to satisfy Exchange Act
Rule 10A-3(b)(2), (3), (4) and (5) (concerning responsibilities relating to: (1) registered public accounting firms;
(2) complaints relating to accounting, internal accounting controls, or auditing matters; (3) authority to engage
advisers; and (4) funding as determined by the audit committee).
118
C-9Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
Cure Periods
The Nasdaq rules provide for certain cure periods if an audit committee member ceases to be independent for
reasons outside the member’s reasonable control, or if there is a vacancy on the audit committee.
119
Shareholder Meetings
An issuer must hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal
year-end.
120
A newly listed company that was not previously subject to a requirement to hold an annual meeting is
required to hold its first meeting within one year after its first fiscal year-end following listing.
121
Quorum
An issuer must provide for a quorum as specified in its bylaws for any meeting of the holders of its common stock;
provided that in no case shall such quorum be less than 33
1
/3% of the outstanding shares of the issuer’s common
voting stock.
122
Issuers organized as limited partnerships are required to have a quorum of at least 33
1
/3% of the
outstanding limited partnership interests.
123
Proxy Solicitation
An issuer must solicit proxies and provide proxy statements for all meetings of shareholders and must provide
copies of such proxy solicitation to Nasdaq.
124
Conicts of Interest and Related Party Transactions
An issuer must have its audit committee or another independent committee of the board of directors review all
related-party transactions for potential conflicts of interest on an ongoing basis. A “related-party transaction” for
this purpose means those transactions required to be disclosed pursuant to Item 404 of Regulation S-K (and
includes transactions and loans between management and the issuer for amounts over $120,000) or, in the case
of foreign private issuers, pursuant to Item 7.B of Form 20-F (and includes transactions and loans between the
issuer and enterprises under common control of the issuer, associates, and individuals owning an interest in the
voting power of the company that gives them significant influence or key management).
125
Shareholder Approval of Certain Transactions
An issuer must obtain shareholder approval prior to the issuance of securities:
• when a stock option or purchase plan is to be established or materially amended or other equity
compensation arrangement made or materially amended, pursuant to which stock may be acquired by
officers, directors, employees, or consultants,
126
subject to limited exceptions;
127
• when the issuance or potential issuance will result in a change of control of the issuer;
128
• in connection with the acquisition of the stock or assets of another company: (1) if any director, officer, or
substantial shareholder of the issuer has a 5% or greater interest (or such persons collectively have a 10%
or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to
be paid in the transaction or series of related transactions and the present or potential issuance of common
stock, or securities convertible into or exercisable for common stock, could result in a 5% or greater increase
in outstanding common shares or voting power;
129
or (2) where, other than in a public offering for cash: (a) the
common stock to be issued has or will have upon issuance voting power equal to 20% or more of the voting
power outstanding before the issuance of the stock or convertible securities, or (b) the number of shares of
common stock to be issued is or will be 20% or more of the number of shares of common stock outstanding
before the issuance of the stock or convertible securities;
130
or
• in connection with a transaction other than a public offering involving the sale, issuance, or potential
issuance by the issuer of common stock (or securities convertible into or exercisable for common stock) at
a price below the lesser of either the closing price or the average closing price for the previous five days on
C-10
Latham & Watkins – US IPO Guide
nasdaq.com, which together with sales by certain affiliates of the issuer equals 20% or more of the common
stock or voting power outstanding before the issuance.
131
An exception may be made upon application to Nasdaq when a delay in securing stockholder approval would
seriously jeopardize the financial viability of the enterprise and the audit committee (or other comparable body of
the board of directors comprised solely of independent, disinterested directors) expressly approves reliance on
this exception.
132
Only shares actually issued and outstanding (excluding treasury shares or shares held by a subsidiary) are to be
used for any calculation under the shareholder approval requirement. Shareholder approval must be obtained prior
to the issuance of certain private financing instruments, generally in the form of convertible securities under which
the number of shares that will be issued is uncertain until the conversion occurs, unless the instrument contains
certain features (potentially a cap on the number of shares that can be issued upon conversion or a floor on the
conversion price) and the issuance will not result in a change of control.
133
Shareholder approval is not required for a public offering. Generally, any securities offering registered with the
SEC and which is publicly disclosed and distributed in the same general manner and extent as a firm-commitment
underwritten securities offering will be considered a public offering for purposes of the shareholder approval rules.
134
Auditor Registration
An issuer must be audited by an independent public accountant that is registered as a public accounting firm with
the Public Company Accounting Oversight Board, as provided for in Section 102 of Sarbanes-Oxley.
135
Code of Conduct
An issuer must adopt a code of conduct applicable to all directors, officers, and employees and make it publicly
available. A code of conduct satisfying this requirement must comply with the definition of a “code of ethics”
set out in Section 406(c) of Sarbanes-Oxley and any regulations promulgated thereunder. Also, the code must
provide for an enforcement mechanism. Any waivers of the code for directors or executive officers must be
approved by the issuer’s board and must be disclosed on a Form 8-K or, where a Form 8-K is not required, must
be distributed via press release (foreign private issuers shall disclose such waivers either by distributing a press
release or including disclosure in a Form 6-K). Alternatively, an issuer, including a foreign private issuer, may
disclose waivers on its website in a manner that satisfies the requirements of Item 5.05(c) of Form 8-K.
136
Notication of Non-Compliance
An issuer must promptly notify Nasdaq as soon as an executive officer of the issuer discovers any
non-compliance by the issuer with the Nasdaq corporate governance standards.
137
Corporate Governance Certication
After the initial certification, an updated certification form is required only if a change in the company’s status
results in the prior certification no longer being accurate.
138
Nasdaq Communication and Notication Requirements
Except in “unusual circumstances,” Nasdaq requires an issuer to make prompt disclosure to the public through
any Regulation FD-compliant method of disclosure of material information that would reasonably be expected to
affect the value of its securities or influence investors’ decisions.
139
The issuer must notify Nasdaq prior to the release of certain types of information (and should make that
notification at least 10 minutes prior to the release if the release is made during Nasdaq market hours or prior to
6:50 a.m. Eastern Standard Time if the release is made outside of Nasdaq market hours), including:
• financial-related disclosure (including earnings releases and restatements);
C-11Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
• corporate reorganizations and acquisitions;
• new products or discoveries, or developments regarding customers or suppliers;
• material senior management changes or a change in control;
• resignation or termination of independent auditors or withdrawal of a previously issued audit report;
• events regarding its securities (e.g., defaults on senior securities, calls of securities for redemption,
repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, or public or
private sales of additional securities);
• significant legal or regulatory developments; and
• any event requiring the filing of a Form 8-K.
140
An issuer (other than an issuer solely of ADRs) must notify Nasdaq on the appropriate form not later than
15 calendar days prior to certain events, including:
• establishing or materially amending a stock option plan, purchase plan, or other equity compensation
arrangement pursuant to which stock may be acquired by officers, directors, employees, or consultants
without shareholder approval;
141
• issuing securities that may result in a change of control of the issuer;
142
• issuing any common stock (or security convertible into common stock) in connection with the acquisition of
the stock or assets of another company, if an officer, director, or substantial shareholder of the issuer has a
5% or greater interest (or if such persons collectively have a 10% or greater interest) in the company to be
acquired;
143
or
• entering into a transaction that may result in the potential issuance of common stock (or securities convertible
into common stock) greater than 10% of either the total shares outstanding or the voting power outstanding
on a pre-transaction basis.
144
An issuer must also file a form prescribed by Nasdaq within 10 days after any aggregate increase or decrease of
any class of shares listed on Nasdaq that exceeds 5% of the amount of securities of the class outstanding.
145
Corporate Governance Requirements for Foreign Private Issuers
A listed foreign private issuer is permitted to follow home-country practice in lieu of Nasdaq’s corporate
governance standards, other than the Nasdaq’s requirements that it must:
146
• provide Nasdaq with notification of any non-compliance by the issuer with Nasdaq corporate governance
requirements;
147
and
• have an audit committee that meets the requirements (including independence requirements) of Exchange
Act Rule 10A-3.
148
A listed foreign private issuer that follows home-country practice in lieu of the Nasdaq corporate governance
requirements must disclose in its annual report on Form 20-F each requirement that it does not follow and
describe the home-country practice followed by it in lieu of such requirements (if the listing foreign issuer is not
required to file its annual report on Form 20-F, it may make this disclosure only on its website).
149
In addition,
a foreign private issuer making its IPO or first US listing on Nasdaq must make the same disclosure in its
registration statement or on its website.
150
C-12
Latham & Watkins – US IPO Guide
ENDNOTES
1
See generally Nasdaq Rule 5300 Series, 5400 Series, 5500 Series.
2
See Nasdaq Rule 5225(b)(2).
3
See Nasdaq Rule 5615(a)(3).
4
See Nasdaq Rules 5305(c)-(d).
5
A company formed by a reverse merger is subject to additional initial listing requirements. See Nasdaq Rule 5110(c). In order to apply for
listing, a reverse merger company must also (i) have been trading for at least one year in the U.S. over-the-counter market, on another
national securities exchange, or on a regulated foreign exchange, following the filing with the SEC or other regulatory authority of all
required information about the transaction, including audited financial statements for the reverse merger company; and (ii) have maintained
a minimum closing price of $4 per share for at least 30 of the most recent 60 trading days. In order to be approved for listing, at the time
of approval, the reverse merger company must (i) have timely filed all periodic financial reports required by the SEC or other regulatory
authority during the year preceding the initial listing, including one annual report containing audited financial statements for a full fiscal year;
and (ii) have maintained a minimum closing price of $4 per share for at least 30 of the most recent 60 trading days. However, a reverse
merger company will not be required to meet the above additional conditions if it lists in connection with a firm-commitment underwritten
public offering with gross proceeds of at least $40 million.
6
See Nasdaq Rule 5405(a)(1).
7
See Nasdaq Rule 5405(a)(2). Note: Effective August 2019, Nasdaq’s initial listing criteria were revised to exclude securities subject
to resale restrictions for any reason from the calculation of publicly held shares, market value of publicly held shares and round lot
shareholders.
8
See Nasdaq Rule 5405(a)(3). A “round lot” or “normal unit of trading” is defined as 100 shares of a security. See Nasdaq Rule 5005(a)(40).
Note: Effective August 2019, the round lot shareholder requirements were revised to also require that at least 50% of the minimum required
number of round lot holders must each hold unrestricted securities with a minimum value of $2,500.
9
See Nasdaq Rule 5405(b)(1)(B).
10
See Nasdaq Rule 5405(b)(2)(A).
11
See Nasdaq Rule 5405(b)(1)(D).
12
See Nasdaq Rule 5405(b)(2)(D).
13
See Nasdaq Rules 5405(b)(3)(C),5405(b)(4)(C).
14
See Nasdaq Rule 5405(b)(1)(C).
15
See Nasdaq Rule 5405(b)(2)(C).
16
See Nasdaq Rules 5405(b)(3)(B), 5405(b)(4)(B).
17
See Nasdaq Rule 5405(b)(1)(A).
18
See Nasdaq Rule 5405(b)(2)(B).
19
See Nasdaq Rule 5405(b)(3)(A). Current publicly traded companies must meet this criteria and the $4 bid price requirement for
90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value Standard.
20
See Nasdaq Rule 5405(b)(4)(A).
21
See Nasdaq Rule 5450(a)(1).
22
See Nasdaq Rule 5450(a)(2).
23
See Nasdaq Rule 5450(b)(1)(A).
24
See Nasdaq Rule 5450(b)(1)(C).
25
See Nasdaq Rules 5450(b)(2)(C), 5450(b)(3)(C).
26
See Nasdaq Rule 5450(b)(1)(B).
27
See Nasdaq Rules 5450(b)(2)(B), 5450(b)(3)(B).
28
See Nasdaq Rule 5450(b)(1)(D).
29
See Nasdaq Rules 5450(b)(2)(D), 5450(b)(3)(D).
30
See Nasdaq Rule 5450(b)(2)(A).
31
See Nasdaq Rule 5450(b)(3)(A).
32
See Nasdaq Rule 5315(f)(3)(A)(i).
33
See Nasdaq Rule 5315(f)(3)(A)(ii).
34
See Nasdaq Rule 5315(f)(3)(A)(iii).
35
See Nasdaq Rule 5315(f)(3)(B)(i).
C-13Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
36
See Nasdaq Rule 5315(f)(3)(B)(ii).
37
See Nasdaq Rule 5315(f)(3)(B)(iii).
38
See Nasdaq Rule 5315(f)(3)(C)(i).
39
See Nasdaq Rule 5315(f)(3)(D)(i).
40
See Nasdaq Rule 5315(f)(3)(B)(iii). Average market capitalization of at least $550 million over the prior 12 months and total revenue of at
least $110 million in the previous fiscal year.
41
See Nasdaq Rule 5315(f)(3)(C)(ii).
42
See Nasdaq Rule 5315(f)(3)(D)(ii).
43
See Nasdaq Rule 5315(f)(3)(D)(iii).
44
See Nasdaq Rule 5315(e)(1). The issuer also must have at least 1,250,000 in unrestricted publicly held shares. See Nasdaq Rule 5315(e)(2).
45
See Nasdaq Rule 5315(f)(1)(B). Companies affiliated with another company listed on NGSM and those with common stock or equivalents
currently trading may, in the alternative, have a minimum of 550 beneficial shareholders and an average monthly trading volume over the
prior 12 months of at least 1.1 million shares a month See Nasdaq Rule 5315(f)(1)(A).
46
See Nasdaq Rule 5315(f)(1)(C). At least 50% of such round lot holders must each hold unrestricted securities with a market value of at
least $2,500.
47
See Nasdaq Rule 5315(e)(2).
48
See Nasdaq Rule 5315(f)(2)(C). “Seasoned companies” (those with common stock or equivalents trading) will be required to have a
market value of at least $110 million or $100 million and a stockholders’ equity of $110 million. See Nasdaq Rules 5315(f)(2)(A) and (B).
A closed-end management investment company registered under the Investment Company Act of 1940 will be required to have a market
value of at least $70 million. See Nasdaq Rule 5315(f)(2)(D).
49
See Nasdaq Rule 5310(d).
50
See Nasdaq Rule 5315(e)(3).
51
See Nasdaq Rule 5315(e)(3).
52
See Nasdaq Rule 5305(e).
53
See Nasdaq Rule 5505(b)(1)(A).
54
See Nasdaq Rule 5505(b)(2)(B).
55
See Nasdaq Rule 5505(b)(3)(B).
56
See Nasdaq Rule 5505(b)(1)(B).
57
See Nasdaq Rule 5505(b)(2)(C).
58
See Nasdaq Rule 5505(b)(3)(C).
59
See Nasdaq Rule 5505(b)(1)(C).
60
See Nasdaq Rule 5505(b)(2)(A). Current publicly traded companies must meet this requirement and the $4 bid price requirement for
90 consecutive trading days prior to applying for listing if qualifying to list only under the Market Value of Listed Securities Standard.
61
See Nasdaq Rule 5505(b)(3)(A).
62
See Nasdaq Rule 5505(a)(3). At least 50% of such round lot holders must each hold unrestricted securities with a market value of at
least $2,500.
63
See Nasdaq Rule 5505(a)(2).
64
See Nasdaq Rule 5505(a)(1). In certain circumstances, an issuer that meets either the Equity (Nasdaq Rule 5505(b)(1)) or Net Income
(Nasdaq Rule 5505(b)(3)) Standards may have a minimum closing price of $3 per share and an issuer that meets the Market Value of
Listed Securities Standard (Nasdaq Rule 5505(b)(2)) may have a minimum closing price of $2 per share. In each case, the issuer must
have: (i) net tangible assets over $2 million (if the issuer has been in continuous operation for at least three years); (ii) net tangible assets
over $5 million (if the issuer has been in continuous operation for less than three years); or (iii) average revenue of at least $6 million for
the last three years; and the security meets such applicable closing price for at least five days prior to approval.
65
See Nasdaq Rule 5505(a)(4).
66
See Nasdaq Rule 5505(a)(6).
67
See Nasdaq Rule 5550(b).
68
See Nasdaq Rule 5550(a)(3).
69
See Nasdaq Rule 5550(a)(4).
70
See Nasdaq Rule 5550(a)(5).
71
See Nasdaq Rule 5550(a)(2).
72
See Nasdaq Rule 5550(a)(1).
C-14
Latham & Watkins – US IPO Guide
73
See Nasdaq Rule 5810.
74
See Nasdaq Rules 5615(a)(3), 5606(c), 5605(f), 5625, 5606, 5640. See Nasdaq IM-5615-3.
75
See Nasdaq Rules 5615(c)(1)-(2), 5605(b), 5605(e), 5606(d).
76
See Nasdaq Rule 5605(b)(1).
77
See Nasdaq IM-5605.
78
See Nasdaq Rule 5605(b)(1).
79
See Nasdaq IM-5605.
80
See Nasdaq Rules 5005(a)(20), 5605(a)(2); See Nasdaq IM-5605.
81
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(A).
82
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(B).
83
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(B)(i).
84
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(B)(ii).
85
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(B)(iii).
86
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(C).
87
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(D).
88
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(D)(i).
89
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(D)(ii).
90
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(E).
91
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(F).
92
See Nasdaq Rules 5005(a)(20), 5605(a)(2)(G); Nasdaq IM-5605.
93
See Nasdaq IM-5605.
94
See Nasdaq Rules 5005(a)(18), 5605(a)(2).
95
See Nasdaq Rule 5605(b)(2) (the rule refers to these meetings as executive sessions).
96
See Nasdaq IM-5605-2.
97
See Nasdaq Rule 5608(a)-(b). The policy must be applied to any incentive-based compensation granted after the October 2, 2023.
98
See Nasdaq Rule 5608(b)(2).
99
See Nasdaq Rule 5605(e)(1)(A)-(B).
100
See Nasdaq Rule 5605(e)(2).
101
See Nasdaq Rule 5605(e)(3). Independent director oversight of director nominations does not apply in cases where the right to nominate
a director belongs legally to a third party (although certain committee composition requirements remain). See Nasdaq Rule 5605(e)(4).
Note that this rule also does not apply if the issuer is subject to a binding obligation inconsistent with the rule, and such obligation predates
November 2003. See Nasdaq Rule 5605(e)(5).
102
See Nasdaq Rule 5605(d)(2)(A).
103
Id.
104
See Nasdaq Rule 5605(d)(2)(B). Rule 5605(d)(4) provides for a cure period for companies that fall out of compliance with these
requirements. Rule 5650(d)(5) includes certain exceptions for smaller reporting companies.
105
See Nasdaq Rules 5605(d)(1), 5605(d)(3).
106
See Nasdaq Rule 5605(c)(2); Nasdaq IM-5605, Nasdaq IM-5605-3, Nasdaq IM-5605-4, Nasdaq IM-5605-5.
107
See Nasdaq Rule 5605(c)(1).
108
See Nasdaq Rule 5605(c)(1)(A).
109
See Nasdaq Rule 5605(c)(1)(B).
110
See Nasdaq Rule 5605(c)(1)(C).
111
See Nasdaq Rules 5605(c)(1)(D), 5605(c)(3).
112
See Nasdaq Rule 5605(c)(2)(A).
113
See generally Exchange Act Rule 10A-3(b)(1). In the case of investment company issuers, the term “affiliated person” is replaced with
“interested person,” as defined in Section 2(a)(19) of the Investment Company Act of 1940.
114
See Nasdaq Rule 5605(c)(2)(A).
115
Id.
116
See Nasdaq IM-5605-4.
C-15Annex C: Nasdaq Quantitative Listing Criteria and Corporate Governance Standards
117
See Nasdaq Rule 5605(c)(2)(B).
118
See Nasdaq Rule 5605(c)(3). Audit committees for issuers that are investment companies must also establish procedures for the
confidential, anonymous submission of concerns regarding questionable accounting or auditing matters by employees of the investment
adviser, administrator, principal underwriter, or any other provider of accounting-related services for the issuer, as well as the issuer’s
employees.
119
See generally Nasdaq Rule 5605(c)(4).
120
See Nasdaq Rule 5620(a). An issuer organized as a limited partnership is only required to hold an annual meeting of the limited partners if
such meeting would otherwise be required under state law or the issuer’s partnership agreement. See Nasdaq Rule 5615(a)(4)(D).
121
See Nasdaq IM-5620.
122
See Nasdaq Rule 5620(c). Non-US companies that are not foreign private issuers may rely on home-country practice if home-country law
mandates a quorum requirement that prohibits the company from establishing a quorum requirement provided by Nasdaq. Any company
relying on this exception must provide a statement from independent home-country counsel regarding such restriction and disclose
such reliance publicly. Foreign private issuers may follow home-country practice with respect to shareholder meetings. See Nasdaq
Rule 5615(a)(3).
123
See Nasdaq Rules 5615(a)(4)(E), 5620(c)(i).
124
See Nasdaq Rule 5620(b). Note that foreign private issuers are not subject to the US proxy rules. See Nasdaq Rule 5615(a)(3). An issuer
organized as a limited partnership will only be required to solicit a proxy if a meeting of the limited partners will be held where a vote will be
required. See Nasdaq 5615(a)(4)(F).
125
See Nasdaq Rule 5630(a).
126
See Nasdaq Rule 5635(c). See also Nasdaq IM-5635-1 paragraph (2). “Material amendments” to an equity compensation arrangement
include any material increase in the number of shares to be issued under the plan (other than to reflect a reorganization, stock split,
merger, spin-off, or similar transaction), any material increase in benefits to participants, any material expansion of the class of participants
eligible to participate in the plan, and any expansion in the types of options or awards provided under the plan.
127
See Nasdaq Rule 5635(c). The exceptions include: (1) warrants or rights issued generally to all security holders of the issuer or stock
purchase plans available on equal terms to all security holders of the issuer; (2) certain tax-qualified, non-discriminatory employee
benefit and parallel non-qualified plans; (3) plans or arrangements involving mergers or acquisitions, either when conversions,
replacements, or adjustments of outstanding options or other equity compensation awards are necessary to reflect the transaction, or
when shares available under certain plans acquired in acquisitions or mergers are to be used for certain post-transaction grants; and (4)
employment inducements to new employees. The items described under (2) and (4) above must be approved by the issuer’s independent
compensation committee or a majority of independent directors. See Nasdaq Rule 5635(c)(1)-(4).
128
See Nasdaq Rule 5635(b).
129
See Nasdaq Rule 5635(a)(2).
130
See Nasdaq Rule 5635(a)(1)(A)-(B).
131
See Nasdaq Rule 5635(d)(1)-(2).
132
See Nasdaq Rule 5635(f).
133
See Nasdaq Rule 5635(e)(1); see also Nasdaq IM-5635-4.
134
See Nasdaq IM-5635-3.
135
See Nasdaq Rule 5210(b); see also 15 U.S.C. Section 7212.
136
See Nasdaq Rule 5610.
137
See Nasdaq Rule 5625.
138
See Nasdaq Frequently Asked Questions: — Non-US Companies (Identication Number 400); see generally Nasdaq Rule 5600 Series.
139
See Nasdaq Rule 5250(b)(1); see also Nasdaq IM-5250-1.
140
See Nasdaq IM-5250-1.
141
See Nasdaq Rule 5250(e)(2)(A)(i).
142
See Nasdaq Rule 5250(e)(2)(B).
143
See Nasdaq Rule 5250(e)(2)(C).
144
See Nasdaq Rule 5250(e)(2)(D).
145
See Nasdaq Rule 5250(e)(1).
146
See Nasdaq Rule 5615(a)(3).
147
See Nasdaq Rules 5615(a)(3), 5625; see also Nasdaq IM-5615-3.
148
See Nasdaq Rule 5615(a)(3); see also Nasdaq IM-5615-3.
149
See Nasdaq Rule 5615(a)(3)(B)(i).
150
See Nasdaq Rule 5615(a)(3)(B)(ii).
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D-1
ANNEX D: EXCHANGE ACT REPORTING REQUIREMENTS
Form 8-K
Form 8-K requires a current report in a variety of circumstances, including the following. In most cases, a Form
8-K is due within four business days after the event in question:
• entry into or amendment of a material definitive agreement not made in the ordinary course of business;
• termination of a material definitive agreement not made in the ordinary course of business;
• bankruptcy or receivership;
• shutdowns or receipt of order or notice of mine safety violations;
• material cybersecurity incidents;
• the acquisition or disposition (including by purchase, lease, exchange, merger, consolidation, mortgage,
destruction, or succession) of a significant amount of assets (including a business) other than in the ordinary
course of business by the company;
• public announcement or release disclosing material nonpublic information regarding the company’s results of
operations or financial condition for an annual or quarterly fiscal period that has ended;
• creation of a material, direct financial obligation or an obligation under an off-balance sheet arrangement,
whether or not the company is a party to the agreement;
• occurrence of any event that accelerates or increases a material direct financial obligation or a material
obligation under an off-balance sheet arrangement, whether or not the company is a party to the transaction
under which the triggering event occurs;
• exit or disposal activities to which the company is committed under which material charges will be incurred
under GAAP;
• determination that the company is required to record a material impairment charge under GAAP;
• receipt of a notice of delisting or failure to satisfy a continued listing rule or standard or transfer of listing from
a national securities exchange or inter-dealer quotation system;
• unregistered sales of equity securities by the company aggregating at least 1% of the outstanding class (5%
for smaller reporting companies);
• material modifications to the rights of holders of the company’s registered securities;
• a change in the company’s accountants previously engaged in auditing the company’s financial statements or
hiring of other accountants as principal accountants;
• determination that investors should no longer rely on previously issued financial statements or a related audit
report or completed interim review;
• a change in control of the company;
• the resignation of a director of the company or refusal of a director to stand for re-election since the date
of the last annual stockholders’ meeting because of a disagreement with the company with respect to the
company’s affairs;
Annex D: Exchange Act Reporting Requirements
D-2
Latham & Watkins – US IPO Guide
• any (i) departure of a director or principal executive officer, president, principal financial officer, principal
accounting officer, or principal operating officer, or person performing similar functions, (ii) election of directors
other than by stockholder vote and (iii) appointment of a principal officer;
• a description of any material plan, contract, or arrangement by which a newly appointed principal officer is
covered, or participates in, or any modification to any such agreement involving a principal officer;
• a description of any material plan, contract, or arrangement to which a director is a party, or participates in, or
any modification to any such agreement involving a director;
• any amendment to the company’s certificate of incorporation or bylaws if the company did not propose the
amendment in a previously filed proxy statement, and any change in fiscal year other than by stockholder
vote or certificate of incorporation or bylaw amendment;
• the results of any matter submitted to a vote of stockholders (or the solicitation of any stockholder
authorization or consent); and
• temporary suspension of trading under an employee benefit plan.
Form 10-Q
Form 10-Q is intended to update the most recent year-end and interim disclosures and must include a variety of
information, including the following.
Financial Statements and MD&A
Form 10-Q must include condensed financial statements. These are unaudited but must be subject to a
Statement of Accounting Standard No. 100 review by the company’s independent accountants and include:
• a statement of comprehensive income for the most recent fiscal quarter, for the period between the end of
the preceding fiscal year and the end of the most recent fiscal quarter and for corresponding periods of the
preceding fiscal year;
• a balance sheet as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year;
and
• a statement of cash flows for the period between the end of the preceding fiscal year and the end of the most
recent fiscal quarter and for the corresponding period of the preceding fiscal year.
Although not required, the statements of comprehensive income and cash flows may also be presented for
the cumulative 12-month period ending at the end of the most recent fiscal quarter and for the corresponding
preceding period.
The financial statements must contain appropriate notes and be accompanied by an MD&A section, which
enables readers to assess material changes in financial condition and results of operation. Known trends and
uncertainties not apparent on the face of the financial statements should also be discussed.
Starting with an IPO company’s first Form 10-Q filing, financial statements must be in XBRL format.
1
XBRL is an
open technology standard that facilitates the electronic tagging of individual pieces of data in financial statements
so that the data can be extracted easily and processed using an XBRL-compatible viewer. All operating company
filers (including foreign private issuers) are required to embed XBRL data directly into the body of an SEC filing,
rather than tag the information in a separate exhibit.
2
D-3
Other Disclosures
Form 10-Q also requires disclosure of:
• material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and
other relationships of the company with unconsolidated entities or other persons that may have a material
current or future effect on financial condition, changes in financial condition, results of operations, liquidity,
capital expenditures, capital resources, or significant components of revenues or expenses;
• material changes to risk factors since the Form 10-K;
• material legal proceedings commenced or terminated (or which changed materially) during the period;
• quantitative and qualitative information about market risk associated with risk-sensitive financial instruments
entered into by the company; and
• changes in securities or defaults upon senior securities;
• any other materially important event not previously reported on Form 8-K that occurred during the reporting
period, in which case a Form 8-K may not need to be filed with respect to that event. Certain exhibits are also
required to be attached to the Form 10-Q.
Certication
Certifications of the chief executive officer and chief financial officer under Sections 302 and 906 of Sarbanes-
Oxley must accompany each Form 10-Q as exhibits.
Form 10-K
Generally speaking, the annual report on Form 10-K requires comprehensive information about an issuer,
including the following.
Audited Financial Statements
• Audited balance sheets as of the end of each of the two most recent fiscal years;
• audited statements of income and cash flows for each of the three fiscal years preceding the date of the most
recent audited balance sheet set forth in the Form 10-K; and
• summary financial data for each of the previous five fiscal years (or from inception).
Each financial report containing financial statements must be prepared in accordance with (or reconciled to)
GAAP. The company must identify any non-GAAP financial measures and include a presentation of the most
directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure to
the most directly comparable GAAP financial measure.
EGCs benefit from a phased-in approach to complying with the foregoing financial statement requirements. At
the time of its IPO, an EGC is required to provide two, rather than three, years of audited financial statements.
After its IPO, an EGC will phase into full compliance by adding one additional year of financial statements in each
future year until the EGC presents the traditional three years of audited financial statements plus two additional
years of summary financial data. The required MD&A will cover only the years for which audited financial
statements are provided. Thus, an EGC will not be required to provide audited financial statements, summary
financial data or MD&A disclosure for periods prior to those presented in its IPO registration statement.
Except with respect to certain accounting standards, the company may choose to provide the long-form
disclosure, even if it identifies itself as an EGC.
Annex D: Exchange Act Reporting Requirements
D-4
Latham & Watkins – US IPO Guide
Description of the Company
• description of the company’s business;
• risk factors affecting the company’s business;
• unresolved comments from the SEC Staff;
• cybersecurity risk management, strategy, and governance
• description of material property and employees;
• pending legal proceedings;
• information about directors and executive officers, their compensation, and related-party transactions, which
can be incorporated by reference to the company’s proxy statement;
• all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and
other relationships of the company with unconsolidated entities or other persons that may have a material
current or future effect on financial condition, changes in financial condition, results of operations, liquidity,
capital expenditures, capital resources, or significant components of revenues or expenses must be disclosed
as a separately captioned subsection of the MD&A;
• description of material contractual obligations of the company; and
• information regarding the company’s equity compensation plans.
Miscellaneous
• Disclosure as to whether or not the company has adopted a code of ethics for its principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing similar functions,
and, if not, why it has not. In addition, the company must either: (i) file its code of ethics as an exhibit to its
annual report; (ii) post the text of its code of ethics, or relevant portions thereof, on its website, provided that
the company must disclose its website address and intention to provide disclosure in this manner in its annual
report; or (iii) provide an undertaking in its annual report to provide a copy of its code of ethics to any person
without charge upon request;
• disclosure as to whether or not the company’s audit committee includes among its members at least one audit
committee financial expert;
• description of the leadership structure of the company’s board of directors, such as whether there is a
combined CEO/Chairman or a lead independent director, and an explanation of why that structure is
appropriate for the company (this information may be included in the company’s proxy statement);
• description of the role of the company’s board of directors in risk oversight (this information may be included
in the company’s proxy statement);
• an internal control report that states the responsibility of management for establishing and maintaining internal
control over financial reporting and contains an assessment, as of the end of the most recent fiscal year, of
the effectiveness of internal control over financial reporting;
• for accelerated filers (including large accelerated filers), beginning with the second Form 10-K, an auditor’s
report attesting to the effectiveness of the company’s internal control over financial reporting;
3
• for accelerated filers (including large accelerated filers), the company’s website address and whether the
company will make available, free of charge, on or through its website, its Form 10-Ks, Form 10-Qs, current
reports on Form 8-K, and all amendments to those reports. If the company is not making its filings available in
D-5
this manner, it must disclose why it is not doing so and whether the company will provide electronic or paper
copies of its filings free of charge upon request; and
• for certain companies involved in mining operations, information concerning mine safety violations and certain
other regulatory matters required to be disclosed by Dodd-Frank.
Because information from Form 10-Ks is incorporated by reference into certain other registration statements
registering shares of an issuing company’s securities under the Securities Act, such as Form S-8 registration
statements covering shares issued under incentive stock plans, many issuers use the Form 10-K to update risk
factors relating to the company’s business and investments in the various classes of the company’s securities
which may be publicly traded. Although this information is not expressly required by the disclosure requirements
of Form 10-K, investors have become accustomed to seeing business risk disclosure. Accordingly, the trading
prices of the company’s securities are generally unaffected by the mere inclusion of such information. Of course,
the substance of the disclosure can still impact the market’s perception of the value of the company’s securities
and, consequently, the trading prices.
Attention should be directed towards the section of the Form 10-K regarding MD&A. This section is scrutinized
by the SEC because it is a narrative explanation of the company’s financial statements and accompanying notes.
In addition, MD&A is a means by which management informs investors of its view of the company’s financial
performance and condition. It also provides them with information that is not shown in the financial statements, as
well as trends and risks that have caused the company to perform the way it has or are reasonably likely to affect
the company’s performance in the future. The SEC has placed particular emphasis on disclosure of off-balance
sheet arrangements and aggregate contractual obligations. Management should view MD&A as the SEC does, as
a means of increasing the transparency of the company’s financial performance and providing investors with the
information necessary to make informed investment decisions.
As described above, if the company qualifies as an emerging growth company, its MD&A is required to cover only
the years for which the company’s audited financial statements are provided. Additionally, as long as the company
qualifies as an EGC, it is also exempt from:
• the detailed compensation discussion and analysis narrative requirement in registration and proxy statements
and instead may provide scaled executive compensation disclosure under the requirements that apply to
smaller reporting companies;
• the executive compensation provisions of Dodd-Frank;
• the requirement to comply with new or revised GAAP accounting pronouncements applicable to public
companies until those standards also apply to private companies; and
• any future PCAOB rules mandating auditor rotation or expanded narrative in the auditor report and any other
future PCAOB rules, unless the SEC makes certain determinations regarding the importance of a particular
rule to investor protection and capital formation.
The Form 10-K must be signed by the company’s principal executive officer or officers, its principal financial
officer or officers, its controller or principal accounting officer (or persons performing similar functions), and by at
least the majority of the board of directors. The company must indicate in a transmittal letter accompanying the
filing whether the financial statements in the report reflect a change from the preceding year in any accounting
principles or practices or in the method of applying any such principles or practices.
The precise level of liability that is attributable to the directors and signing officers is uncertain. However, every
effort should be made to have the Form 10-K reviewed by the directors, signing officers, and other officers and
employees of the company who may have valuable input at the earliest practicable date. Sufficient time should be
provided to solicit and receive comments from all such persons.
Annex D: Exchange Act Reporting Requirements
D-6
Latham & Watkins – US IPO Guide
Certication
In addition to the execution by the persons listed above, the company’s principal executive officer or officers and
principal financial officer or officers must each make two separate certifications of each Form 10-K and each
Form 10-Q. These certifications are required by Sections 302 and 906 of Sarbanes-Oxley. The content and
wording of these certifications must be exactly the same as the SEC prescribes in the forms.
Proxy Statements
The SEC proxy rules are quite extensive. They require full disclosure to stockholders with respect to matters to be
acted on at each annual or special meeting of stockholders. If a majority of stockholders act by consent without a
meeting, the SEC rules require the company to disseminate essentially identical information to the non-consenting
stockholders.
Preliminary Proxy Statement
Preliminary proxy materials need not be filed with the SEC if the only matters to be acted upon at the meeting are:
• the election of directors;
• the selection of accountants;
• a vote on a stockholder proposal;
• the adoption or approval of an amendment to certain stock option or similar plans;
• a vote to approve executive compensation or the frequency with which future votes on executive
compensation will be held; and
• in each case, the company does not comment upon or refer in the proxy material to a solicitation in opposition
of any company proposal to be presented at the meeting.
If other matters are to be acted on, preliminary copies of the proxy statement, and any other material to be
distributed with it, must be filed with the SEC at least 10 calendar days before the company distributes the
definitive proxy statement to stockholders. Since the company may need additional time to comply with
comments of the SEC, if SEC comments are expected, preliminary proxy materials should be submitted to the
SEC approximately four weeks prior to the scheduled mailing date. Copies of the proxy materials in final form as
well as the annual report to stockholders (which must be delivered to the stockholders with or prior to the proxy
materials for the annual meeting) must be filed with the SEC when they are first mailed to the stockholders.
4
Regardless of the method of distribution used for its proxy materials, the company must provide all proxy
materials and its annual report, free of charge, on a website hosted by the company or a third party (in addition to
the SEC’s EDGAR site).
Written questionnaires should be used to obtain from directors and officers of the company information required to
be included in the proxy statement.
Broker-Dealer Search
The company is also obligated to inquire as to the number of beneficial owners of shares held in “street name”
by brokers, dealers, and other nominees, and it must supply those holders with sufficient quantities of proxy
materials for forwarding to the beneficial owners. The company’s transfer agent will be familiar with the steps
necessary to comply with the broker-dealer search.
Content of Proxy Statement
As noted above, the proxy rules contain detailed provisions regarding what must be included in the proxy
statement. The form of proxy must indicate in boldface type whether or not the proxy is being solicited on behalf of
D-7
the company’s board of directors, or, if provided other than by a majority of the board of directors, it must indicate
in boldface type on whose behalf the solicitation is made and the interest of that person in the matters to be acted
upon. It must also provide a specifically designated blank space for dating the proxy card, and it must clearly and
impartially set forth each separate matter intended to be acted upon, whether or not related to or conditioned
upon another matter, and whether proposed by the company or a securityholder. In addition, the proxy card must
provide a means of withholding authority to vote for each director nominee.
Information must be supplied with respect to each director nominee relating to his or her ownership of the
company’s securities and the securities of any of its affiliates, the nominee’s business experience, and the
nominee’s principal occupation and certain related-party transactions. Similar information is also required with
respect to certain officers of the company, as well as disclosure regarding compensation paid to such officers.
Particular attention should be directed towards the Compensation Discussion and Analysis section of the proxy
statement (CD&A). A CD&A is required in proxy statements involving the election of directors, the approval of a
compensatory agreement in which any director, director nominee, or executive officer will participate, any pension
or retirement plan in which any such person will participate, or the grant or extension to any such person of options,
warrants, or rights to purchase any securities, other than warrants or rights issued to security holders as such, on
a pro rata basis. A company’s CD&A is generally subject to particular scrutiny by the SEC. This section is intended
to provide a narrative explanation of the company’s compensation policies for its named executive officers (who
generally consist of the chief executive officer, chief financial officer, and next three most highly compensated
executive officers), and the key factors in the decision-making process for implementing such policies. Such
disclosure should include information regarding the objectives of the company’s compensation program, what the
compensation program is designed to reward, the individual elements of compensation under that program, how
those elements are determined, how the company determines the amount (and, where applicable, the formula)
for each element of compensation, how each compensation element is evaluated by the company, and how the
company’s decisions regarding the compensation element help to reach the company’s objectives.
In addition to the CD&A, the proxy statement will include detailed tabular disclosure about the compensation paid
and equity awarded to named executive officers.
Smaller reporting companies and EGCs are permitted to dispense with the detailed CD&A and provide scaled
executive compensation disclosure. The scaled disclosure generally covers the three, rather than five, most highly
compensated executive officers for a period of two, rather than three, years and will include substantially reduced
narrative discussion about the company’s compensation programs and philosophies.
Additional information may be required, depending upon the nature of the subject matter (e.g., approval of a
benefit plan or an acquisition) with respect to which the proxy is solicited.
Even if the company does not desire to solicit proxies from its public stockholders, an “Information Statement”
containing substantially the same information as a proxy statement must be filed with the SEC and mailed to all
stockholders prior to any annual or other meeting of stockholders.
Stockholder Proposals
In certain circumstances, a stockholder may request to include a proposal in the company’s proxy statement. The
submission of stockholder proposals and requirements regarding inclusion in the company’s proxy materials of
such proposals is governed by Exchange Act Rule 14a-8 and is also subject to any advance notice provisions in
the company’s bylaws. A stockholder is eligible to submit a proposal under Rule 14 a-8 if the stockholder provides
in a written statement a proof that such stockholder has continuously held the company’s securities entitled to
vote on the proposal at the meeting in at least the market values and for the time periods specified below and
continues to hold these securities through the date of the meeting.
• $2,000 three years • $15,000 two years • $25,000 one year
Annex D: Exchange Act Reporting Requirements
D-8
Latham & Watkins – US IPO Guide
Say on Pay, Frequency, and Golden Parachute Votes
Pursuant to Dodd-Frank, the SEC adopted rules requiring public companies to provide stockholders with the
opportunity to vote, on an advisory, non-binding basis, on the following matters at any annual meeting at which
directors will be elected and for which executive compensation disclosure is required to be included in the
proxy statement:
• to approve the compensation of the company’s named executive officers (a Say on Pay Vote); and
• to approve the frequency with which future Say on Pay Votes should be held (a Frequency Vote), with
stockholders receiving a choice of every one, two, or three years, or to abstain from the Frequency Vote, and
the company’s board of directors making a recommendation as to the desired frequency.
The Say on Pay Vote is an overall approval or disapproval of an issuer’s compensation of its named executive
officers and must relate to all of an issuer’s executive compensation disclosure included in the proxy statement,
including the CD&A, compensation tables, and other required narrative executive compensation disclosure. The
Say on Pay vote does not cover director compensation or disclosure relating to policies and practices concerning
risk management and risk-taking incentives (except to the extent such discussion is included in the CD&A). In
subsequent proxy statements, the company is required to discuss in its CD&A whether and how it considered
the results of the most recent Say on Pay Vote in structuring its executive compensation. The company also is
required to disclose its decision on how frequently it will hold the Say on Pay Vote no later than the earlier of:
(i) 150 calendar days after the date of the stockholder meeting at which a Frequency Vote was held or; (ii) 60
calendar days prior to the deadline for submission of stockholder proposals for the next annual meeting following
the annual meeting at which a Frequency Vote was held.
In addition, public companies must include a non-binding, advisory vote to approve golden parachute payments (a
Golden Parachute Vote) in any proxy statement in which stockholders are asked to approve a merger, acquisition,
consolidation, or proposed sale or other disposition of all or substantially all of the company’s assets, unless such
golden parachute payments have been approved as part of the Say on Pay Vote.
Smaller reporting companies do not have to provide a Say on Pay Vote or Frequency Vote until the first annual or
other meeting of stockholders held on or after January 21, 2013 at which directors are to be elected and for which
executive compensation disclosure is required to be included in the corresponding proxy statement. EGCs are
exempt from the Say on Pay Vote, Frequency Vote, and Golden Parachute Vote requirements for as long as they
qualify as EGCs. After a company ceases to qualify as an EGC, it must hold a Say on Pay Vote within one year of
ceasing to qualify as an EGC or, if later, by the end of the third year after its IPO.
D-9
ENDNOTES
1
See Regulation S-K Item 601(b)(101)(i).
2
See Final Rule: Inline XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018).
3
Smaller reporting companies and non-accelerated filers are not subject to the auditor attestation requirement. EGCs are exempt from the
requirement for the duration of their on-ramp period.
4
Instead of mailing a full set of proxy materials and the annual report to its stockholders, the company may elect to notify stockholders of
the availability of proxy materials on an Internet website. Such “Notice of Internet Availability of Proxy Materials” must be sent at least
40 calendar days in advance of the meeting date.
Annex D: Exchange Act Reporting Requirements
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* Source: IPO Vital Signs