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Publisher
Timothy Dempsey
Consulting publisher
Brian Curran, NYSE Euronext
Editor
Carolyn Boyle
Consulting editors
Nicolas Grabar and Sandra L Flow,
Cleary Gottlieb Steen & Hamilton LLP
Production
Richard Proctor
The NYSE IPO Guide
is published by
Caxton Business & Legal, Inc
27 N Wacker Drive, Suite 601
Chicago, IL 60606
United States
Tel +1 312 361 0821
Fax +1 312 278 0821
www.caxtoninc.com
Printed by Bowne & Co, Inc
ISBN 978-1-905783-45-8
The NYSE IPO Guide
2010 Caxton Business & Legal, Inc
Copyright in individual chapters rests
with the co-publishers. No photocopying:
copyright licenses do not apply.
DISCLAIMER
This guide is written as a general guide
only. It should not be relied upon as a
substitute for specific legal or financial
advice. Professional advice should alwaysbe sought before taking any action based
on the information provided. Every effort
has been made to ensure that the
information in this guide is correct at the
time of publication. The views expressed
in this guide are those of the authors.
The publishers and authors stress that
this publication does not purport to
provide investment advice; nor do they
accept responsibility for any errors or
omissions contained herein.
The NYSE IPO Guide contains summary
information about legal and regulatory
aspects of the IPO process and is currentas of the date of its initial publication (June
14, 2010). Although the NYSE IPO Guide
may be revised and updated at some time
in the future, the NYSE does not have a
duty to update the information contained in
the NYSE IPO Guide, and the NYSE will not
be liable for any failure to update such
information. The NYSE makes no
representation as to the completeness or
accuracy of any information contained in
the NYSE IPO Guide. It is your responsibility
to verify any information contained in the
NYSE IPO Guide before relying upon it.
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The NYSE IPO Guide
1NYSE IPO Guide
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Preface 3Duncan Niederauer
Chief Executive Officer, NYSE Euronext
Introduction: Advantages 5of NYSE listingNYSE Euronext
1. Why go public? 91.1 Advantages of conducting 10
an IPO
J.P. Morgan
1.2 Potential issues 10
J.P. Morgan
1.3 Going public without an offering 10J.P. Morgan
1.4 Foreign private issuers 11J.P. Morgan
2. Preparing to go public 132.1 Choosing advisors 14(a) Retention of advisors/service 14
providers
J.P. Morgan
(b) Identifying investor relations 14
services providerThomson Reuters
2.2 Building financial reporting 15infrastructure
KPMG LLP
2.3 Preparing a communications 24strategy
FD
2.4 Designing the capital structure 25(a) American depositary receipts 25
J.P. Morgan
(b) Anti-takeover defenses and 29other governance matters
Cleary Gottlieb Steen& Hamilton LLP
2.5 Providing for employees 30Cleary Gottlieb Steen& Hamilton LLP
3. The IPO process 333.1 Process timeline 34
J.P. Morgan
3.2 SEC registration 35Cleary Gottlieb Steen& Hamilton LLP
3.3 The prospectus 37Cleary Gottlieb Steen& Hamilton LLP
3.4 Underwriting, marketing 41and sale
J.P. Morgan
4. Communications 454.1 Investors, analysts and 46
employees(a) Communications with 46the market
FD
(b) Research analysts 48Cleary Gottlieb Steen& Hamilton LLP
(c) Employee communications 50FD
4.2 The proxy statement and 50the annual meeting
Georgeson Inc
4.3 Communication mechanics 55(a) Investor relations tools 55
Thomson Reuters
(b) Other communication 57mechanics
Computershare Limited
4.4 Share ownership mechanics 59Computershare Limited
5. Obligations of a public 63company
5.1 Reporting requirements64
Cleary Gottlieb Steen& Hamilton LLP
5.2 Listing standards 70NYSE Euronext
5.3 Trading and repurchases 70Cleary Gottlieb Steen& Hamilton LLP
5.4 Obligations affecting
shareholders 73
(a) Ownership reporting by 73shareholders
Cleary Gottlieb Steen& Hamilton LLP
(b) Reporting by insiders 74Bowne & Co, Inc
(c) Related party transactions 75Cleary Gottlieb Steen& Hamilton LLP
6. Managing risk 776.1 Litigation 78
(a) Legal standards 78Cleary Gottlieb Steen& Hamilton LLP
(b) Class actions and 79derivative lawsuits
Marsh Inc
6.2 Indemnification 81Marsh Inc
6.3 D&O liability insurance 83Marsh Inc
6.4 Personal risk management 87
Marsh Inc
Appendices 89Appendix I: NYSE listing standards, 90US companies
NYSE Euronext
Appendix II: NYSE listing standards, 92non-US companies
NYSE Euronext
Appendix III: NYSE Amex listing 93standards
NYSE Euronext
Appendix IV: NYSE financial 94continued listing standards,
US companies
NYSE Euronext
Appendix V: NYSE Amex continued 96listing standards
Contributor profiles 97
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market transformation continues to moreclosely align it with the technology sector
as a customer, a developer and acommercial market technology supplier.
For example, the March 24, 2010 IPO
of MaxLinear, a provider of radio-frequency and mixed-signal semiconductorsolutions for broadband communication
applications, priced above its range andsoared 34% on its first day of trading. Thetools and support the NYSE provided as
we headed into the IPO, and post offering,have proven to be incredibly valuable forus, said co-founder Kishore Seendripu,
who is also MaxLinears chairman,president and chief executive officer. OurIPO would not have been the same without
the splendor and pageantry that goes withbeing listed on the NYSE, the grandest andmost historically rich bourse in the world.
Meanwhile, the 2009 IPO ofDigitalGlobe, a leading earth imaging andinformation company, raised $280 million
in gross proceeds. The stock rose 13% onits first day of trading. Chief FinancialOfficer (CFO) Yancey Spruill named severalreasons for choosing the NYSE: Brand,
reputation and higher listing standardsthat are a good filter for company quality.
Now that the company is listed, he saysthat the association with the NYSE brandis a strong positive with our customersand other stakeholders. Spruills advice
to those contemplating an IPO? Get outahead of the work flow early; for a CFO,this is an additional full-time job, and
there is a lot to do.Beyond technology, the NYSE is
experiencing an uptick in non-US IPOs.
Investor appetite for the 2009 IPO ofBanco Santander (Brasil) SA showedconfidence in the IPO market and Brazil.
The offering, which raised more than $8
billion and listed simultaneously in Braziland the United States, was the largest IPO
ever conducted by a Brazilian company andthe largest in the world since March 2008.
Another Brazilian IPO was that
of Gafisa SA, a homebuilding and realestate company that went public in 2007.CFO Alceu Duilio Calciolari notes the
advantages of going public: The financialbenefit in the form of raising capital is themost distinct advantage. In the case of
Gafisa, the capital was used to developthe company mainly through acceleratedorganic growth and M&A opportunities.
As you contemplate the journey fromprivate to public enterprise, the challenges
ahead might seem daunting. The goal ofthis guide is to demystify the initial publicoffering (IPO) process. We are grateful to
our partners on the project, including ourpublisher and expert contributors whoworked tirelessly on this publication.
Collectively, we hope to help youunderstand and navigate a complex processthat will ultimately lead to a positive and
successful IPO experience.Crucial to that success is the decision of
where to list. Choosing your market is
a long-term decision. Your market will bea partner throughout your journey as apublic company well into the future. By
accessing the US public equity market viayour IPO, you will stimulate job creation andinnovation while tapping an attractivefinancing option to fuel your companys
growth. You will also create exciting newinvestment opportunities for individuals andinstitutions, with whom you will need to be
transparent through good times and bad.NYSE Euronext has grown to become
a leading marketplace for entrepreneurial
companies of all sizes and sectors. It maysurprise some to learn that 40% of NYSE-
listed companies are small cap (marketcapitalization below $1 billion). Theadoption of a new NYSE listing standardin late 2008 enabled growth-stage,
venture-backed companies to list directlyon the Big Board, and the acquisitionof the American Stock Exchange re-
branded NYSE Amex and now running onthe same technology platform with thesame high-tech, high-touch model
expanded our US listing venue optionsto companies of all sizes and maturity.
In addition, NYSE continues to show
leadership in listing growth-stagecompanies, especially portfolio companiesof leading venture-capital and private-
equity firms. Since 2007, nearly 58% ofthe technology companies that qualifiedto list on the NYSE chose to do so, raising
$7.7 billion in IPO proceeds. Early in 2010NYSE listed some of the most importanttechnology companies undertaking IPOs,
such as Sensata Technologies, MaxLinearand Calix. This is in addition to many ofthe most visible tech IPOs of 2009,including Rosetta Stone, SolarWinds and
DigitalGlobe. Meanwhile, as an appliedtechnology company, NYSEs ongoing
Another advantage is an increased publicawareness because IPOs often generate
publicity by making our products knownto a new group of potential customers.Listing on the NYSE, he says, also provided
better access to the financial market andhigher liquidity with lower volatility,making it possible for shareholders to
take larger positions in our stock.Companies from other emerging
markets are also finding their way to the
NYSE. The IPO of Longtop FinancialTechnologies Ltd, a leading softwaredeveloper and IT services provider
targeting the financial services industry inChina, raised $182.6 million in October2007. We were delighted to join the NYSEand gain access not only to US investors,
but to the superior services, market qualityand brand visibility that come with listingon NYSE Euronext markets, said
Chairman Xiaogong Jia. As an NYSE-listed company, we strengthened ourability to develop our business both inside
and outside China.Prospective listing applicants can avail
of a free, confidential review process to
determine their eligibility and whatadditional conditions, if any, might have
to be satisfied. A company that qualifiesfor listing can normally expect its sharesto be admitted to trading within four tosix weeks of filing its original listing
application. And should the goingsubsequently get tough, NYSE Euronextcan assist further with professional advice
from its client-service teams and extensivenetwork of professionals. It also providessupport as an advocate on public policy
and regulatory issues affecting all marketparticipants. For example, NYSE is workinghard in Washington, DC to represent listed
companies on issues including corporategovernance, regulatory reform, globalcompetitiveness and tax policies.
I am excited about what the futureholds the creativity and entrepreneurialspirit that will drive the capital-raisingprocess and help deliver untapped
opportunities for issuers and investorsworldwide. We look forward to workingwith you through your IPO journey and
wish you success in obtaining thissignificant corporate milestone.
Duncan Niederauer
Chief Executive Officer, NYSE Euronext
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Introduction:
Advantages of NYSE listing
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flexibility, judgment, automation andanonymity with minimal market impact.
Floor brokers provide human expertiseand value-added service to facilitate larger-sized institutional orders (block orders).
They have parity with other orders inNYSEs allocation model and may servicecustomers using algorithms, which
accounts for one-quarter of their activity.Floor brokers also use their booths as anupstairs trading desk to send orders to
multiple markets. The NYSE is in theprocess of replacing the broker boothswith modern trading desks to create a
unified trading environment for upstairsand on-floor operations, with some firmschoosing to locate their entire operations
on the NYSE trading floor.
2. Global reach and visibility
Beyond market structure and marketquality, a markets size and scope should
also be considered when choosing a listingsvenue. The historic merger that resultedin the formation of NYSE Euronext created
the worlds largest cash equitiesmarketplace. NYSE Euronext is a globalexchange operator with listings of 4,000
companies from nearly 55 countries.
It operates six cash equities exchangesin five countries and six derivativesexchanges in six countries. Its footprint
is broader than that of any other exchangegroup and it offers the most diversearray of financial products and services
for issuers, investors and financialinstitutions.
On its exchanges in Europe and the
United States, NYSE Euronext tradesequities, futures, options, fixed-incomeand exchange-traded products. With
about 8,000 listed issues (excludingEuropean structured products), NYSE
Euronexts equities markets the NewYork Stock Exchange, NYSE Euronext,NYSE Amex, NYSE Alternext and NYSEArca represent one-third of the worlds
equities trading, the most liquidity of anyglobal exchange group. NYSE Euronextalso operates NYSE Liffe, one of the
leading European derivatives exchangesand the worlds second-largest derivativesexchange by value of trading. NYSE
Euronext also offers comprehensivecommercial technology, connectivityand market-data products and services
through NYSE Technologies.
One of the most important decisions inthe IPO process is choosing the rightmarket for listing of the companyssecurities. The NYSE Euronext market
model is designed to maximize liquidity,encourage market activity and helpparticipants trade more efficiently.
NYSE and NYSE Amex offer acombination of cutting-edge, ultrafasttechnology with the volatility buffer of
human judgment, when required, andaccountability. This market structureestablishes reliable price discovery at the
opening, the closing and during periods
of volatility, such as times of marketdislocation. Designated market makers
(DMMs) add significant liquidityto the market, which is further enhancedby supplemental liquidity providers (SLPs)
and floor brokers equipped with new,algorithmic trading tools.
1. DMMs
DMMs are at the center of the NYSEand NYSE Amex markets. DMMs serve
as a buffer against market volatility,increase liquidity and are obligated tomaintain a fair and orderly market. The
NYSE features both a physical auction
convened by DMMs and a completelyautomated auction that includes
algorithmic quotes from DMMs andother market makers.
Today, DMMs are among the most
active trading firms on the NYSE. Theyhave strong obligations to maintain anorderly market, quote at the NationalBest Bid and Offer (NBBO) and facilitate
price discovery during openings, closingsand imbalances. New incentive-basedquoting standards by issue have further
increased the percentage of time and sizethe DMMs are at the NBBO.
Complementing the liquidity of otherquote providers are SLPs: electronic, high-volume members which are incentivizedto add liquidity. Several SLPs may be
providing liquidity per issue. SLPs aretrading firms deploying their own capitalusing proprietary trading models. The SLP
program began in November 2008.Also providing liquidity on NYSE and
NYSE Amex markets are trading floor
brokers. These brokers leverage theirphysical point-of-sale presence withinformation technologies and algorithmic
tools to offer customers the benefits of
As an innovative applied technologycompany in the financial space, NYSEEuronext has built a universal tradingplatform that is being deployed to support
not only its global exchange operations, butalso its customers around the world that areengaged in trading activities and operating
exchanges. Beginning in 2010, twin datacenters in the greater New York and Londonmetropolitan areas, in which NYSE
Euronext has strategically invested $500million, will offer one-stop access toliquidity with the highest levels of resilience
and the lowest available latency (the time
gap between trade placement and execution)to NYSE Euronext market participants.
NYSE Euronext is the only global exchangeoperator to own its own data centers.
Meanwhile, to expand in Asia, NYSE
Euronext and its affiliates have offices inBeijing, Tokyo, Hong Kong and Singapore,as well as equity positions in the National
Stock Exchange of India and Indias MultiCommodity Exchange. To expand in theMiddle East, it acquired a 20% stake in
the Qatar Exchange, one of the leadingstock markets in the region.
Many companies use NYSE Euronexts
global facilities located in Amsterdam,
Brussels, Lisbon, London, New York andParis for analyst, investor or boardmeetings, product launches, marketing
initiatives and more. The daily openingsand closings also represent an opportunityfor companies to elevate their own brand
visibility. Many listed companies returnto the NYSE multiple times a year to useits facilities, including the NYSE trading
floor, for analyst, investor or boardmeetings, as well as corporateannouncements and events.
NYSE Euronext offers a host of othervisibility programs for its listed companies,including global investor conferences,
virtual investor forums and multimediachannels.
NYSE Euronext continues to develop
enhanced visibility services for Europeancustomers. For example, it created the firstinternational bell ceremony room, in Paris,
where NYSE Euronext-listed companiescan celebrate IPOs, transfers, milestones,initiatives and more.
3. NYSE Market Access Center
Another important factor to consider when
choosing a listing venue is customer
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and lawmakers articulating companiesviews on existing or proposed rules and
regulations, particularly those designedto make markets more fair, transparentand efficient. It has actively encouraged
a more flexible and principles-basedapplication of the internal controlprovisions of SOX, prodded the SEC to
accept International Financial ReportingStandards accounting standards as analternative to US Generally Accepted
Accounting Principles (GAAP), writtencomment letters to the SEC on behalfof non-US companies to oppose the
shortening of the allotted time periodsfor filing financial statements in Englishand led the dialogue on mutual recognition
of comparable regulatory regimes inforeign jurisdictions.
5. Fast-Path listing: gateway
to the eurozone
NYSE Euronext has also worked with
service and the quality of products themarketplace offers. Successful companies
require significant resources to buildshareholder value. NYSE Euronexts NYSEMarket Access CenterSM is a full-service
solution including global visibility andinvestor relations services, which enablesmanagement to remain focused on its
business objectives as a public company.
4. Issuer advocate
NYSE Euronext acts as an advocate forlisted companies, championing policiesthat are consistent with the values of fair,
efficient and transparent markets fromshort-sale trading issues to corporategovernance reform; from the cost of
complying with the Sarbanes-Oxley Actof 2002 (SOX) to the difficulties ofadhering to the United States intricate
and idiosyncratic accounting rules.For example, NYSE Euronext has sent
numerous recommendations to regulators
regulators overseeing its markets in France,the Netherlands, Belgium and Portugal to
make it easier for companies listed on itsUS markets to list on its European markets.A number of issuers have elected to cross-
list on Euronext to get closer to theEuropean shareholder base and areinquiring about Asia as well. To facilitate
this, NYSE Euronext has established Fast-Path, a process that allows companieslisted on the NYSE and other US marketsto request admission for listing and trading
on a European regulated market. WithFast-Path, companies listed or about to be
listed on the NYSE or NYSE Amex cancross-list on NYSE Euronexts Europeanmarkets using their filings with the SEC,with or without a simultaneous capital
raising. Euronext regulators now acceptdocumentation previously filed with theSEC to meet the EU Prospectus Directive
requirements, so companies can now avoidthe need to draft and translate a separate
Recent Fast-Path transactions
Company Country Security Currency Listing type Purpose
PartnerRe
(Dec 09)
Bermuda Common shares Euro Technical listing In connection with the companys
acquisition of NYSE Euronext-listedParis Re in an all-stock transaction
WeatherfordInternational(Oct 09)
Switzerland Common shares Euro Technical w/ocapital raising
In connection with the companysredomestication to Switzerland in2009. Provide European fundmanagers with a greater accessto the companys shares.
Cliffs NaturalResources(April 09)
US Common shares Euro Technical w/ocapital raising
Consistent with the companysgrowth and internationaldiversification strategy. Increaseexposure to a broader investorbase.
Vale(July 08)
Brazil ADS Euro Global offeringto qualifiedinvestors
Enlarge investor pool for globalcapital raising and attract greatervisibility.
Philip MorrisInternational(March 08)
US Common shares Euro Spin-offw/o capitalraising
Create a tool for equity-basedcompensation for European-basedemployees and obtain greatervisibility in Europe.
Anheuser Busch(April 08)
US Common shares Euro Transfer fromLSE w/o capitalRaising
Reduce compliance costs andpromote liquidity.
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registered US and foreign (non-EuropeanEconomic Area) companies already listed
or about to be listed in the US markets.A Euronext listing can occur at the sametime as a US IPO. Transaction types
available on Fast-Path are: capital raisings (Form S-1 or F-1); spin-offs (Form 10); and
technical listings (Form 10-K or 20-F).
Recent transactions are outlined inthe table on the previous page.
To learn more about the NYSE and
NYSE Amex listing standards, please see
Appendices I, II, III, IV and V.
prospectus to be admitted to trading inEurope. Documents filed with and
reviewed by the SEC serve as the backbonefor a listing prospectus. The result is quick,easy and cost-effective access to listing
and trading on NYSE Euronext, theeurozones largest equity market.
Fast-Path is valuable for any company
looking to enhance its global profile,support an international business orexpand its non-US investor base. A Fast-
Path listing provides a fast, easy and cost-effective way to gain a presence in theEuropean capital markets. NYSE Euronext
is the only exchange group offering a listingprogram with leading markets on both sidesof the Atlantic for its listed companies. A
total of 50 companies are currently cross-listed on both NYSE and NYSE Euronextmarkets (as of December 2009).
Cross-listed companies enjoy manybenefits, such as: a simplified way to increase their
visibility to business partners andinvestors in the eurozone, the worlds
largest source of capital; commitment to a strategically
important region (customer proximity,
commercial opportunities);
branding and product visibilityopportunities in all of NYSE Euronexts
European locations (London, Paris,Amsterdam, Brussels and Lisbon);
media coverage which can enhance
their global profile; a tool for employee stock purchase
plans or equity incentive plans;
access to European investors and adiversified shareholder base;
euro-denominated acquisition
currency; and a facility for future capital raisings
and/or M&A activity
With Fast-Path, issuers benefit fromsimplified periodic reporting obligations.
SEC filings may be used to comply withthe companys ongoing obligations withEuronext regulators under the EU
Transparency and Market Abuse Directives.US GAAP and post-listing filings in Englishare both acceptable. The overall process
takes approximately five weeks oncedocumentation is available. Documentationreview by a European regulator usually takes
10 to 15 business days.Fast-Path is available for SEC-
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Why go public?
1
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Why go public?
(d) Public currency for acquisitionsOnce the company is public, it can use its
common stock to acquire other public orprivate companies in conjunction with,or instead of, raising additional capital.
(e) Enhanced benefits for current employeesStock-based compensation incentives align
employees interests with those of thecompany. By allowing employees to benefitalongside the companys financial success,
these programs increase productivity andloyalty to the company and serve as a keyselling mechanism when attracting top
talent. Furthermore, issuing equity-basedcompensation will allow the company toattract top talent without incurring
additional cash expenses
1.2 Potential issues
While there are numerous advantages togoing public, there are also a few
considerations which the company shouldevaluate prior to embarking on the IPOprocess. The most successful companies
with the smoothest IPO processes are thosewhich begin to put in place the necessaryregulatory and compliance requirements
months, if not years, ahead of time.
(a) Loss of privacy
In order to comply with securities laws,public companies must disclose variousforms of potentially sensitive information
publicly, which regulatory agencies, as wellas competitors, can then access. Privatecompanies can operate without disclosingproprietary information in a public forum.
(b) Regulatory requirements
Correspondingly, public companies mustregularly file various reports with theSecurities and Exchange Commission
(SEC) and other regulators. In order tocomply with disclosure requirements,companies often need to completelyrevamp or expand their existing
documentation policies, which canbe costly and time consuming.
(c) Sarbanes-OxleyThe Sarbanes-Oxley Act (SOX) was passedin 2002 as a reaction to a number of major
corporate and accounting scandals, whichcost investors billions of dollars and shookpublic confidence in the nations securities
markets. SOX set new standards for public
1.1 Advantages of executing an IPOWhen considering an initial public offering(IPO), the company should evaluate theassociated pros and cons, as well as themotivations for going public. This evaluation
process is best conducted in conjunctionwith an investment bank, which can assistthe company in working through the salient
issues. There are several advantages to goingpublic, which are detailed below.
(a) Access to capitalOne of the most common reasons forgoing public is to raise primary capital to
fund organic growth, repay debt or fund anacquisition. Further direct results includethe following:
Once the company is public, it hasaccess to an entirely new, incredibly
deep and liquid source of capital forany future needs it may have.
Adding equity to the companys
capital-raising toolkit helps equipthe company with the tools to achieveoptimal capital structure.
After the company has been publicfor one year, it will be eligible to accessthe equity capital markets on demand
via a more expeditious process through
a shelf registration statement.
(b) Liquidity eventListing on the NYSE has numerousbenefits, not only for the company, but
also for its shareholders. The IPO can bestructured such that existing owners ofthe company can exit their position and
receive proceeds for their shares. Inaddition, once the company is public, theexisting owners have a public marketplace
through which they can liquidate theirholdings in a straightforward and orderlyfashion at any time.
(c) Branding eventBy listing on the NYSE, the company
will receive worldwide media coveragethrough the financial markets, whichprovide constant live coverage on publicly
traded companies. In addition, researchanalysts at broker-dealers will begin towrite reports on the stock and thecompany, thus raising the profile of the
company. Broader coverage across varioussources will likely enhance the companysvisibility, market share and competitive
position.
companies, including requirements relatingto accounting, corporate governance,internal controls and enhanced financial
disclosure. SOX compliance can be anincredibly time-consuming and costlyprocess for a newly public company.
(d) CostGoing public is a relatively expensive
process, incurring one-off and ongoingcosts for legal counsel, accounting andauditing services, underwriting and
printing, as well as for additionalpersonnel to handle expanded reporting
and compliance activities and investorrelations. Further, planning and executingan IPO is a time-consuming processthat can distract management fromthe companys core business.
1.3 Going public without an offeringIt is possible to go public without
conducting a simultaneous offering,although this is typically notrecommended by an investment bank.
If the company does not conduct asimultaneous offering, its existing sharesare listed on the exchange without being
placed in the hands of new investors.
Two examples of going public withoutan offering are spin-offs of existingcompanies and foreign issuers listing
American depositary receipts (ADRs)in the United States.
(a) Spin-offsA spin-off from an existing companyoccurs when a public listed company
spins off a part of its business into aseparate public entity listed on anexchange. Typically, that part can function
as a separate, standalone business, withdistinct characteristics from the parent
company. In such a transaction, eachexisting investor in the parent companywill receive shares in the spin-off entity
pro rata to its ownership in the parent.
For example, Investor A, which owns 5%of Parent Company A, will receive 5% ofthe shares outstanding in SpinCo A. In
this transaction, liquidity is generallypreserved for the SpinCo, but the investorchurn may be considerable. For example,
Investor A may own Parent Company A forits other businesses which still reside inParent Company A, and have no interest in
SpinCo A and sell the shares it receives. To
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Why go public?
Ready access to worlds largest equitymarket: A US listing affords ready accessto the worlds largest equity market,
facilitating future capital raising throughfollow-on, secondary and rights offerings.As the numerous rights offerings by both
foreign and US issuers in 2009 have
demonstrated, such access can be crucialto a companys capital structure.
Diversification of shareholder baseand valuation support: By going public in
the United States and maintaining a listingthere, US investors can more easily investin a foreign issuer. For some foreign issuers
a US listing results in higher corporategovernance standards, further increasingits appeal. Attracting US investors helps
broaden and diversify a foreign issuersshareholder base, reducing the issuersdependence on investors in its home
market for its capital needs. Moreover,the incremental demand that US investorscan bring to bear on a foreign issuers
shares helps drive its market valuation and hence lowers its cost of capital over the long term.
US acquisition currency: Because theADRs used to raise capital in the United
States are dollar denominated, they caneventually be used to make stock-basedacquisitions of US companies. Generally,
US shareholders are more likely to acceptADRs than foreign shares.
this end, it is difficult to control theinvestor base in a spin-off transaction,
whereas during an offering processshares are strategically issued to thoseinvestors known to be interested in
owning the name.
(b) Foreign issuers listing ADRs
A foreign company that is publicly tradedon an international exchange can listADRs on the NYSE without conducting
an offering. The stock is tied to theunderlying international security andtraditionally trades in tandem with that
security. While the ADR will give thecompany incremental exposure to USinvestors, there are often fund limitations
on ADRs similar to internationalinvestments, and typically the liquidityand trading of ADRs can be subpar ascompared to traditional listings.
1.4 Foreign private issuersThrough a US listing, foreign private
issuers can significantly improve their
access to the US equity market. Duringthe last decade, demand for foreignequities has grown appreciably among
US institutional and individual investors
alike. This demand has been driven by aneed for enhanced portfolio diversification,
which holdings of foreign equities canprovide, and a desire to tap into the highereconomic growth rates found in many
countries outside the United States emerging markets in particular.
The tranche of shares that foreignissuers sell to US investors when going
public typically takes the form of ADRs.These instruments subsequently trade
just like ordinary shares on the NYSE,
another US stock exchange or in theover-the-counter market.
ADRs are often the only way thatcertain institutional funds can investin foreign issuers while complying withtheir investment charters, which place
limitations on trading in the ordinaryshares of non-US companies. For bothinstitutional and individual investors,
ADRs offer the convenience of dollar-based trading and dividend payments.
(a) AdvantagesFor foreign issuers, going public in theUnited States has numerous advantages
beyond an initial capital raising.
Stock-based compensation for USemployees: Being dollar denominated,ADRs allow foreign issuers to establish
stock purchase and option plans for US-based employees. Absent these plans,foreign issuers can be at a significant
disadvantage when competing for talent
in the US labor market. ADRs also allowfor the creation of direct purchase and
dividend reinvestment plans, whichcan enhance the investment appeal ofa foreign issuer.
Enhanced corporate visibility in the UnitedStates: Finally, by going public in the
United States, a foreign issuer can increaseits visibility not just in the US investmentcommunity, but in the commercial and
consumer markets that make up theworlds largest economy. The majorityof US citizens own equities and tend
to follow publicly traded companies.Consequently, a US listing can raise aforeign issuers corporate profile as
well as capital.
US investment in foreign equities (ADR and local shares), 1980-1Q09 ($bn)
0
1000
2000
3000
4000
5000 25%
20%
15%
10%
5%
1980
1981
1982
1983
1984
1985
1986
1987
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
19
17
17
26
26
44
72
95
129
197
198
279
314
5
44
628
777
1003
1208
1475
2004
1853
1613
1375
1270
1516
1661
1958
2170
2189
2193
2520
2547
2524
2821
2966
3267
3406
3524
3941
4110
4743
4901
4786
4393
4662
3625
2678
2401
3265
3941
4097
Source: Federal Reserve, September 2009
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companies that are contemplating anIPO, there are a number of boutique
and regional auditing firms that are wellregarded and talented. The companyshould consider industry expertise,
reputation and fit with the company,among other factors, when selectingan auditing firm.
In many cases the company requiresassistance in designing enhancedaccounting processes and controls,
preparing financial information subjectto audit and supplementing its staff duringthe transition to becoming a public
company. The auditor may be unable toperform some of these elements underindependence requirements, so an
additional accounting advisor may benecessary. Accounting advisors provideuseful skills, experience and resources
to supplement the companys accountingand controls functions.
Underwriters: The company shouldcarefully choose its bookrunner(s), also
sometimes referred to as lead manager(s),given the significant role that they playthroughout the process. As the quarterback
of the IPO, the lead bookrunner(s) advises
the company on all facets of the IPOprocess, assists the company in shaping its
investment thesis to be used whilemarketing the transaction, guides thecompany with investors while on the road
and develops the optimal pricingrecommendation for the company. Thebookrunner(s) are closely involved indiligence, drafting Form S-1, crafting the
marketing materials, creating the roadshowschedule, pricing the transaction andsupporting the stock in the aftermarket.
The bookrunner(s) should be chosen basedon their relationship with the company,
industry expertise, expertise in executingIPOs, distribution platform and market-making ability.
The co-managers on an IPO are
typically significantly less involved in theday-to-day advisory role for which thebookrunner(s) are responsible. They are,
however, involved in most (if not all) of thediligence conducted. The co-managersresearch analysts will also take part in all
analyst diligence that is conducted. Theprimary role of the co-managers is tounderwrite additional shares in the
offering, provide additional research
2.1 Choosing advisors
(a) Retention of advisors/service providersA large team of professionals is typicallyinvolved in the initial public offering (IPO)
process, including lawyers, auditors,underwriters and insurance brokers. Thecompany should carefully consider the
qualifications of all parties it hires, giventhe importance of the advice they willprovide throughout the process. The
key advisors/service providers that thecompany and board need to evaluateand hire are company counsel, auditors
and underwriters.
Company counsel: Company counsel
work in concert with the companysgeneral counsel to represent the companys
legal interests throughout the process.They are integrally involved in diligence,drafting Form S-1 and crafting lock-upand underwriting agreements, and
generally providing legal advice to thecompany throughout the process.
In selecting company counsel, it is
important to choose a party that hasappropriate industry and sector expertise,as well as a proven track record of
executing the IPO process.
Auditors and accountants: The
independent accountants are involvedin performing an audit on certain of
the financial statements prepared bymanagement and providing comforton certain elements derived from the
companys records subject to internalcontrols over financial reporting andincluded in Form S-1. The underwriters
and lawyers will conduct in-depthdiligence with the accounting firm aroundtheir relationship with the company and
the integrity of the financials.The decision to hire auditors isincredibly important, given that they will
be integrally involved in the companysfinancial reporting for many years.Auditors should be hired well in advanceof launching the IPO so that the financial
statements have consistent prior yearaudits. The Securities and ExchangeCommission (SEC) requires three years
of annual historical audited financialsfor Form S-1 and it is best for one firm tohave conducted all of the audits. Although
a Big 4 firm is typically recommended for
coverage post-IPO and assist in marketmaking once the stock is public. Co-managers should be chosen based on their
relationship with the company, industryexpertise and market-making ability.
(b) Identifying investor relationsservices providerPublic companies have a fiduciary
responsibility to their stakeholders tomaximize shareholder value. At the sametime, they must promote good corporate
governance and implement effectivedisclosure practices. For companies that
have filed an IPO or that have recentlygone public, understanding and complyingwith evolving regulations while attractinginvestment capital and delivering solidresults can be a challenge.
To meet this challenge, companiesoften rely on third parties to provide theinformation, tools and insight they need
to navigate the investor relationslandscape. Any third-party investorrelations solutions provider selected
should be focused on the dual aims ofproviding quick information and contextabout share developments and trends
about the company, as well as deep insight
into capital markets, sectors, investors andresearch coverage. This will help the
company accurately identify key areas ofrisk and opportunity, which will in turnhelp it retain and attract long-term
investors that will ensure its valuation isclosely aligned with its true economicworth. Ultimately, this will help lower the
companys cost of capital.When selecting a third-party investor
relations solutions provider, the following
criteria should be considered for eachaspect of the companys workflow.
Understanding market dynamics: Does the provider have access to thesame information and analytics that
drive institutional investmentdecisions?
Does the provider offer services in all
global regions, given the increasingattractiveness of emerging marketsas a source of capital?
Does the provider have theinstitutional contacts to gather
feedback on how the company isperceived in the marketplace?
Does the provider have a team of
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stability to continue investing in anddeveloping innovative solutions designed
to help the company better manage itsinvestors?
2.2 Building financial reporting
infrastructure
(a) Financial informationAn entity making an offering of securitiesregistered with the SEC under the
Securities Act of 1933 must file aregistration statement and distribute aprospectus in connection with the
offering. The registration statement andprospectus must contain financialstatements and other financial
information regarding the financialcondition of the company and the resultsof its operations.
The Securities Act and the related rulesand regulations set out the requirementsthat the company must follow when
making an offer to sell securities that donot meet one of the limited exceptionsfrom registration. This framework includes
the use of forms (in particular, Forms S-1,S-3, S-4 and S-11) for registrations ofoffers. These forms specify the information
that must be disclosed under Regulation S-X and Regulation S-K. Regulation S-Xgenerally deals with financial statement
form and content, while Regulation S-Kgenerally deals with non-financialstatement disclosures in the body of the
registration statement. Form S-1 is thebasic registration form used for a UScompanys IPO. Form S-3 is generally used
for the registration of securities by acompany that already has securitiesregistered with the SEC, while Form S-4 isgenerally used for the registration of debt or
equity securities issued in relation to a
merger or acquisition. Form S-11 may beused for the registration of securities issued
by certain real estate companies, includingreal estate investment trusts or securitiesissued by other companies whose business
is primarily that of acquiring and holdingfor investment interests in real estate.
The SEC has specific and complex
rules regarding the financial statementsand other financial information that mustbe presented in a registration statement
for an IPO. Some of the significantfinancial statement information that maybe required includes:
analysts focused solely on thecompanys sector to act as an extension
of the investor relations team? Does the provider have clients across
the sector and industry to provide
information on key institutionalanalysts covering the sector, keysector-based events and emerging
capital market trends?
Anticipating investor activity:
Is the provider able to give insight onlyon trading activity that has alreadyoccurred or can it help anticipate
investor risks and opportunities? What methodology or proprietaryalgorithms does the provider use toaccurately identify and prioritize theprospective funds to target?
Is the provider able to provide insightinto alternative strategies employed bynon-traditional investors such as hedge
funds? Increased volume in derivativemarkets, trading in listed options andcredit default swaps can often drive
trading in equity and fixed incomemarkets.
Communicating with investors:
Does the provider have the investorrelations experience to provide the
company with proven best practicesto incorporate in its investor relationscommunications strategy?
Does the provider have a distributionnetwork that will ensure investorsreceive company communications
without interrupting their workflow? Does the provider offer the capability
to control the creation and distribution
of the companys message?
Measuring the impact of the investor
relations program: Does the provider have an integratedIR platform that can track the impact
of outreach efforts? Does the provider offer detailed
reporting tools that gauge the impact
of the companys onlinecommunications and how theycompare to those of its peers?
Will the provider help track the marketsentiment created by company
communications and actions of itsinvestor relations program?Does the provider have the financial
audited annual financial statements forrecent fiscal years;
unaudited interim financial statementsfor the most recently completedinterim period and the corresponding
period of the preceding year; selected financial information (usually
summarized from the companys
financial statements) for the past fivefiscal years and most recentsubsequent interim periods;
separate audited annual and unauditedinterim financial statements forbusinesses that have been acquired or
will probably be acquired that meetcertain significance thresholds(described below). Depending on the
significance of the acquisition, thecompany may be required to presentone to three years of audited financial
statements; separate audited or unaudited annual
financial statements for significantinvestments accounted for under theequity method that meet certain
significance thresholds; financial statements of guarantors of
securities being offered and affiliates
whose securities collateralize the
securities being offered; pro forma financial information giving
effect to certain events such assignificant business acquisitions/dispositions, reorganizations, unusual
asset exchanges and debtrestructurings;
segment reporting for companies
that are engaged in multiple lines ofbusiness or with operations in morethan one geographic area. Required
disclosures include separate revenuesand operating data for each segment;
supplemental schedules for particular
industries and circumstances; and enhanced disclosure of financial andoperational metrics for companies in
certain industries
Companies that are classified in either
of the following categories have modifiedreporting requirements: Smaller reporting company, as
defined by Item 10(f)(1) of RegulationS-K, generally applies to new issuerswith an expected market capitalization
of less than $75 million when theirregistration becomes effective.
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registration statement.The preparation of these financial
statements often raises certain datacollection, accounting and auditing issues,such as:
the need to re-evaluate existingaccounting policies and considerexpanding disclosures to comply with
reporting requirements for publiccompanies (eg, segment information,tax-rate reconciliation, earnings per
share and general compliance withRegulation S-X and SEC GenerallyAccepted Accounting Principles
(GAAP) interpretations); the treatment of changes in accountingpolicies or financial statementpresentation that arise during the mostrecent period covered by the financial
statements that may have a retroactiveimpact on the financial statements andother financial information presentedfor previous years; and
the retrospective presentation ofdiscontinued operations consistently
across the periods covered by thefinancial information presented.
Accordingly, a company with financial
statements covering the required numberof years should revisit those financial
statements and ensure that they arecompliant with SEC requirements andrecent SEC staff interpretations. Any
modifications to previously issued auditedfinancial statements will likely requirethe independent accountant to perform
additional procedures.
Age of financial statements: Knowing the
periods for which financial statementswill be required to complete a particularfinancing is a critical step in planning an
IPO. Financial statements must complywith the SECs age of financial statementsrequirements before the SEC staff will
commence review of a filing.The age of financial statements
included in an IPO is measured by the
number of days between the date ofeffectiveness of the registration statementand the date of the latest balance sheet in
the filing. The latest audited annualfinancial statements included in theprospectus cannot be more than one
year and 45 days old.If more than 134 days have lapsed since
Foreign private issuer, as defined bySection 3b-4 of the Exchange Act of
1934, generally applies to companiesincorporated outside the United Statesthat meet certain additional criteria.
Some additional details regarding thesetwo categories and some of the differences
in reporting requirements are outlined atthe end of this chapter. The followingdiscussion focuses on the SEC
requirements for companies that do notfall into either of the above two categories.
Audited financial statements: Auditedannual financial statements required to
be included in the registration statementinclude: balance sheets as of the end of the two
most recent fiscal years. If the companyhas been in existence for less than oneyear, an audited balance sheet as of a
date within 135 days of the date offiling the registration statement isrequired; and
statements of income, cash flows,changes in shareholders equity andcomprehensive income for each of the
most recent three fiscal years, or such
shorter period as the company (and itspredecessors designation of an
acquired business as a predecessor isgenerally required where a companyacquires in a single succession, or in
a series of related successions,substantially all of the business (or aseparately identifiable line of business)
of another entity (or group of entities),and the companys own operations priorto the succession appear insignificantrelative to the operations assumed or
acquired) has been in existence.
Audited financial statements for thecompany and its predecessors must beaccompanied by an audit report issued byindependent accountants that are registered
with the Public Company AccountingOversight Board (PCAOB) and audited inaccordance with PCAOB standards. If any
of the audited financial statements requiredto be included with the registrationstatement were audited by a predecessor
independent accountant, consent may beneeded from that independent accountantto allow for inclusion of those financial
statements and their audit report in the
the latest audited annual balance sheet,unaudited interim financial statementsmust also be included in the registration
statement. Whenever updated interimfinancial statements are included, aninterim income statement, statement ofcomprehensive income and statement of
cash flows must be included for thecorresponding period of the prior year.Interim financial statements for the first
and second quarters must each be updatedafter 134 days. Interim financial statementsfor the third quarter must be updated 45
days after the fiscal year-end, at which
time audited financial statements for therecently completed fiscal year are required.
Unaudited interim financial statements:Article 10 of Regulation S-X provides
guidance on the form and content ofcondensed interim financial statements.Interim financial statements (also referred
to as stub-period financial statements)must be included in the registrationstatement if the period between the date
of effectiveness of the registrationstatement and the date of the latest auditedbalance sheet in the filing exceeds aspecified number of days. Interim financial
statements include a balance sheet as ofthe end of the most recent interim fiscalquarter, statements of income,
comprehensive income, shareholders equityand cash flows for the period between thelatest audited balance sheet and interim
balance sheet and the corresponding periodof the preceding year. The interim financialstatements can be presented in a condensed
format, but often are presented in a non-condensed format. The interim financialstatements may be unaudited, but the
companys underwriters might requestthem to be reviewed by an independent
accountant prior to filing as part of theirrequested comfort letter procedures.
Selected financial information: Item 301
of Regulation S-K requires selected incomestatement and balance-sheet data for each
of the last five fiscal years (or, if shorter,for the life of the company and itspredecessor entities), and the most recent
interim period included in the financialstatements (together with comparativeinformation for the corresponding interim
period of the prior year). The purpose ofthe selected financial data is to supply
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agreements, execution of letters ofintent, conduct of due diligenceprocedures, approvals of the board
of directors and/or shareholders andsubmission to appropriate governmentregulators for acquisition approval;
economic and legal penalties associatedwith failure to consummate, includingcosts incurred to date in pursuing the
acquisition; and significance of required regulatory
approvals.
The independent accountant that hasaudited these financial statements need
not be registered with the PCAOB, unlessthe acquired business is a public companyin the United States. The number of years
of audited financial statements required isdetermined by the size of the acquisitionand its significance relative to the
company, based on the following threesignificance tests under Rule 1-02(w) ofRegulation S-X:
the amount of the companysinvestment in the acquired business
selected financial data which highlightscertain significant trends in the companys
financial condition and results of itsoperations. It must include: net sales or operating revenues;
income (loss) from continuingoperations;
income (loss) from continuing
operations per common share; total assets; long-term obligations and redeemable
preferred stock; and cash dividends declared per common
share.
The selected financial data may also
include any additional items that wouldenhance an understanding of thecompanys financial condition and trends
in its results of operations, such as cashand cash equivalent balances, workingcapital balances and summary comparativeincome statements.
Financial statements of an acquired
business: If the company has made or isproposing to make a significant acquisitionof a business, an investment that will be
accounted for under the equity method or
multiple acquisitions of related orunrelated businesses, it may need to
include audited financial statements ofthe acquired business plus appropriateunaudited interim financial statements to
comply with Rule 3-05 of Regulation S-X.Whether a proposed acquisition
requires inclusion of financial statements
in a registered offering depends on thesignificance of the acquisition and whetherthe acquisition is probable. The SEC hasissued no formal or informal guidance on
the standard of probability for businesscombinations. Generally, the determination
is based on the preponderance of evidencesupporting the conclusion that anacquisition is probable. However, the SECviews public announcement of a business
combination as strong evidence of aprobable acquisition. The company mustassess the probability of an acquisition by
considering factors such as the following,in addition to the advice of its securitiescounsel:
progress of the negotiations,considering such factors as progress ofdiscussions among senior executives,execution of confidentiality
compared to its total assets; the total assets of the acquired
business compared to the companys
total assets; and the pre-tax income from continuing
operations of the acquired business
compared to the companys pre-taxincome from continuing operations(pre-tax income from continuing
operations is income before incometaxes, extraordinary items and thecumulative effect of a change in
accounting principle exclusive ofamounts attributable to any non-controlling interests). The rules should
be consulted as they contain specificinstructions for modifying thecalculation under certain
circumstances.
The test generally is performed using
the companys and the targets mostrecent audited financial statements priorto the date of acquisition. The table
above summarizes the general rules foracquisitions that occurred more than
Acquisition criteria Reporting requirement
The acquisition does not exceed 20% forany of the three significance criteria.
No audited financial statements required.
The acquired business (or multipleacquisitions of related businesses)exceeds 20% but not 40% for anyof the three significance criteria.
One year of audited financial statementsrequired.
There have been multiple acquisitions ofunrelated businesses whose significance
is less than 20% individually but morethan 50% for any of the three significancecriteria when aggregated.
One year of audited financial statementsrequired for a mathematical majority of
the individually insignificant acquisitions.
The acquired business (or multipleacquisitions of related businesses)exceeds 40% but not 50% for anyof the three significance criteria.
Two years of audited financial statementsrequired.
The acquired business or any acquisitionthat is probable at the time of the IPOexceeds 50% for any of the threesignificance criteria (or securities arebeing registered to be offered to theshareholders of the acquired business).
Three years of audited financialstatements required, unless the businesshas under $50 million in revenues, inwhich case only two years of auditedfinancial statements required.
General rules for acquisitions more than 75 days pre-IPO
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related party, only one year of incomestatements must be provided if certain
additional textual disclosure is made.Rule 3-14(a) also requires certainvariations from the typical form of
income statement. If the property is to be operated by
the company, a statement must be
furnished showing the estimatedtaxable operating results of thecompany based on the most recent
12-month period, including suchadjustments as can be factuallysupported. If the property is to be
acquired subject to a net lease, theestimated taxable operating resultsshall be based on the rent to be paid
for the first year of the lease. In eithercase, the estimated amount of cash tobe made available by operations shall
be shown. An introductory paragraphis required stating the principalassumptions which have been made in
preparing the statements of estimatedtaxable operating results and cash tobe made available by operations.
If appropriate under the circumstances,a table should be provided disclosing
the estimated cash distribution per
unit for a limited number of years,with the portion thereof reportable
as taxable income and the portionrepresenting a return of capitaltogether with an explanation of annual
variations, if any. If taxable net incomeper unit will become greater than thecash available for distribution per
unit, that fact and the approximateyear of occurrence should be stated,if significant.
The SEC staff has noted that oneelement used in distinguishing a real estate
operation from an acquired business subjectto Rule 3-05 of Regulation S-X is thepredictability of cash flows ordinarily
associated with apartment and commercialproperty leasing, which generally includesshopping centers and malls. Nursing homes,hotels, motels, golf courses, auto
dealerships, equipment rental operationsand other businesses that are moresusceptible to variations in costs and
revenues over shorter periods due to marketand managerial factors are not considered tobe real estate operations. In such cases, the
Rule 3-05 requirements will apply.
75 days before the offering.An exception to the general
requirements occurs when an individual or
multiple acquisitions that exceed 50% ofany of the significance criteria occur, orwill probably occur, within 75 days of the
offering for which inclusion of financialstatements is required.
In addition, if audited financialstatements are required, applicable interim
financial information that would berequired according to the guidelinesdescribed in the Age of financial
statements and Unaudited interim
financial statements sections above mustalso be included.
Staff Accounting Bulletin No 80 (SAB80) provides a special interpretation ofRule 3-05 of Regulation S-X for IPOs
involving companies whose operationshave been built by the aggregation ofdiscrete businesses that remain
substantially intact after acquisition. SAB80 allows first-time issuers to consider thesignificance of businesses recently
acquired or to be acquired based on the pro
forma financial statements for the issuersmost recently completed fiscal year. While
compliance with this interpretation
requires an application of SAB 80sguidance and examples on a case-by-case
basis, this interpretation allows currentlyinsignificant business acquisitions to beexcluded from the financial statement
requirements, while still ensuring that theregistration statement will include not lessthan three, two and one year(s) of financial
statements for not less than 60%, 80%and 90%, respectively, of the constituentbusinesses of the issuer.
The acquisition or probable acquisition
of real estate operations is subject to itsown set of disclosure requirements underRule 3-14 of Regulation S-X, which
addresses income-producing real estateoperations such as apartment buildingsand shopping malls. Rule 3-14(a) requires
as follows: Audited income statements must be
provided for the three most recentfiscal years for any such acquisition orprobable acquisition that would be
significant (generally, that wouldaccount for 10% or more of thecompanys total assets as of the last
fiscal year end prior to the acquisition).If the property is not acquired from a
Financial statements of an equity methodinvestment: If the company holds an
investment in unconsolidated subsidiariesor 50% or less owned entities accountedfor under the equity method that exceeds
significance thresholds as defined by Rule3-09 of Regulation S-X, separate financialstatements for the investee company may
need to be filed with the registrationstatement, including an audit for certainperiods.
Significance of investees is evaluatedunder Rule 1-02(w) of Regulation S-X,based on the following tests:
The companys and its othersubsidiaries investments in and
advances to the investee exceed 20%of the total assets of the company andits subsidiaries consolidated as of theend of the most recently completed
fiscal year; and The companys and its subsidiaries
equity in the pre-tax income fromcontinuing operations of the investeeexceeds 20% of such income of the
company and its subsidiariesconsolidated for the most recentlycompleted fiscal year.
If either of these tests is met, separatefinancial statements of the investee must
be filed. Insofar as practicable, the separatefinancial statements required shall be as ofthe same dates and for the same periods as
the audited consolidated financialstatements required to be filed by thecompany. The required financial statementsof the investee must be audited only for
those fiscal years in which either of theabove tests is met; the remaining years canbe unaudited. These audited financial
statements may or may not be required tobe audited by an independent accountant
registered by the PCAOB, depending on thelevel of reliance placed on these auditedfinancial statements by the companysprincipal independent accountant.
Under Rule 4-08(g) of Regulation S-X,for any unconsolidated subsidiaries and50% or less owned entities accounted for
under the equity method that meet any ofthe three Rule 1-02(w) criteria at thegreater than 10% but not more than 20%
significance level, summary financialinformation as described by Rule 1-02(bb)must be presented in the notes to the
financial statements.
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balance sheet; and a condensed pro forma income
statement for the companys mostrecently completed fiscal year and themost recent interim period of the
company, unless the historical incomestatement reflects the transaction forthe entire period.
Pro forma adjustments related to the
pro forma condensed balance sheet and
condensed income statement must includeadjustments which give effect to eventsthat are:
directly attributable to the transaction; factually supportable; and expected to have a continuing impact
on the company (applicable only to thecondensed income statement).
As a result, any pro forma adjustmentsfor expected future cost synergies or other
similar adjustments that are notspecifically supported by the acquisitiondocuments will generally not be allowed.
If a business or assets are disposedof or planned to be disposed of after thelatest balance sheet presented in theregistration statement, but before the
effective date of the IPO, the effect ofthe disposal should be reflected in thecompanys pro forma financial statements
that are prepared in accordance withArticle 11.
Segment reporting: For companies thatoperate in multiple lines of business or
geographic regions, additional disclosuredata may be required to be presented, whichincludes separate revenues and operating
results information for each major line ofbusiness or geographic region. FinancialAccounting Standard Board Accounting
Standards Codification Topic 280,Segment Reporting (ASC Topic 280)requires disclosures regarding segments for
each year for which an audited statement ofincome is provided. Item 101(b) ofRegulation S-K requires disclosure of
certain financial information aboutindustry segments, including revenuesfrom external customers, profitability
measures and total assets for each of thelast three fiscal years presented.
ASC Topic 280 establishes standards
for the way that public business enterprisesreport information about operating
Financial statements of guarantors and forcollateralizations:A guarantee of a public
security (eg, a guarantee of a public debt orpublic preferred equity security) is itselfconsidered a security that must be
registered under the Securities Act, absentan applicable exemption. Rule 3-10 ofRegulation S-X requires each guarantor
of registered securities to file the samefinancial statements required for thecompany in the filing. If certain criteria
are met, condensed consolidating financialinformation may be provided in lieu ofseparate audited financial statements,
unless a guarantor is newly acquired.Under Rule 3-16 of Regulation S-X,audited financial statements must also
be filed for each affiliate whose securitiescollateralize any class of registeredsecurities if the greater of the aggregate
principal amount, par value, book value ormarket value equals 20% or more of theprincipal amount of the secured class of
securities being offered.If any of the above situations is
applicable, Rules 3-10 and 3-16 should
be reviewed to determine the extent offinancial information required to beincluded with the registration statement.
Pro forma financial information:Pro formafinancial information may be required toassist investors in understanding thenature and effect of significant
acquisitions that have occurred,dispositions, reorganizations, unusualasset exchanges, debt restructurings or
other transactions contemplated in theprospectus. In such cases, historicalfinancial information is adjusted in the proforma financial information to reflect thetransactions and the impact of the offeringon the companys capital structure All
significant assumptions must be disclosed.Guidance regarding pro forma financialinformation is provided in Article 11 of
Regulation S-X. Rule 11-01 of Regulation S-X specifies the circumstances under which
pro forma financial information is requiredin filings with the SEC and sets forth
general guidelines for the contentof that information. Article 11 requires: a condensed pro forma balance sheet as
of the end of the most recent period for
which a consolidated balance sheet ofthe company is required, unless thetransaction is already reflected in that
segments in annual financial statements,requires those enterprises to report
selected information about operatingsegments in their interim financial reportsand also establishes standards for related
disclosures about products and services,geographic regions and major customers.It defines an operating segment as a
component of an enterprise: that engages in business activities from
which it may earn revenues and incur
expenses (including revenues andexpenses relating to transactionswith other components of the same
enterprise); whose operating results are regularlyreviewed by the enterprises chiefoperating decision maker to makedecisions about resources to be
allocated to the segment and assessits performance; and
for which discrete financialinformation is available.
Determining whether the company
has multiple operating segments involvesan assessment of how management runsits business. Aggregating two or more
operating segments may be highly
subjective and involves considerationof the similarities in the economic
characteristics and in other factors such asthe nature of the products and services, thenature of the production process, customer
type or class, distribution channels andapplicable regulatory environment.
The company must provide requireddisclosure information about an operating
segment if it meets any of the followingthresholds: Its reported revenue (including both
sales to external customers and inter-segment sales) is 10% or more of the
combined revenue (internal andexternal) of all reported operatingsegments.
The absolute amount of its reportedprofit or loss is 10% or more of thegreater, in absolute amount, of:
the combined profit of all operatingsegments that did not report a loss;or
the combined loss of all operatingsegments that did report a loss.
Its assets are 10% or more of thecombined assets of all operatingsegments.
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that must be audited by the companysindependent accountant:
Schedule I Condensed FinancialInformation of Registrant must be filedwhen the restricted net assets of
consolidated subsidiaries exceed 25%of consolidated net assets as of the endof the most recently completed fiscal
year. For purposes of this test,restricted net assets of consolidatedsubsidiaries are the amount of the
companys proportionate share of netassets of consolidated subsidiaries(after inter-company eliminations)
which, as of the end of the most recentfiscal year, may not be transferred tothe parent company by subsidiaries in
the form of loans, advances or cashdividends without the consent of athird party (eg, lender, regulatory
agency, foreign government). Schedule II Valuation and Qualifying
Accounts must be filed in support ofvaluation and qualifying accounts (eg,allowance for doubtful accounts,
allowance for inventory obsolescence)included in each balance sheet.
Schedule III Real Estate and
Accumulated Depreciation must be
filed for real estate held by companieswith a substantial portion of their
business involving acquiring andholding investment real estate,interests in real estate or interests in
other companies a substantial portionof whose business is acquiring andholding real estate or interests in real
estate for investment. Real estate usedin the business is excluded from theschedule.
Schedule IV Mortgage Loans onReal Estate must be filed by certaincompanies for investments in mortgage
loans on real estate. Schedule V SupplementalInformation Concerning Property-
Casualty Insurance Operations mustbe filed when the company, itssubsidiaries or 50% or less owned
investees accounted for under theequity method have liabilities forproperty-casualty (P/C) insurance
claims. The schedule may be omittedif reserves for unpaid P/C claims andclaims adjustment expenses of the
company and its consolidatedsubsidiaries, its unconsolidated
The company must disclose the factorsused to identify the enterprises reportablesegments, including the basis of
organization and the types of productsand services from which each reportablesegment derives its revenues. The
company must also report for each of itsreportable segment a measure of profitor loss, total assets attributable to that
segment, revenues from externalcustomers and a reconciliation to thecorresponding consolidated amounts.
Furthermore, disclosure of items such asinterest revenue and expense, depreciation
and related expense, equity methodinvestments and capital expendituresmay be required under ASC Topic 280if such amounts are included in the
measure of segment profit or loss or inthe determination of segment assets, asreviewed by the companys chief operating
decision maker on a segment basis.ASC Topic 280 also requires certain
enterprise-wide disclosures regardless
of whether the company has multiplereportable segments, if not alreadyprovided as part of the reportable
operating segment information. Thesedisclosures include revenues from external
customers for each product and service oreach group of similar products, as well asservices and revenues by geographic area.
For interim periods, disclosure for
each segment must include revenuesfrom external customers, inter-segmentrevenues, a measure of profit or loss, areconciliation to the companys
consolidated information and materialchanges to total assets.
The time and effort required in
identifying, gathering and reportingfinancial information for operatingsegments may be significant. A first-time
issuer should carefully consider therequirements for segment reporting andrevisit its reporting obligations whenever
it enters into new lines of business orwhere management begins to analyze itsbusiness in a new or a different way.
Supplemental schedules for certaintransactions: Rule 5-04 of Regulation S-X
requires that a number of supplementalschedules be provided for particularindustries and under certain
circumstances. Each of these schedulescontains additional financial information
subsidiaries and its 50% or less ownedequity method investees did not, in
aggregate, exceed one-half of commonshareholders equity of the companyand its consolidated subsidiaries as
of the beginning of the fiscal year.For purposes of this test only, theproportionate share of the company
and its other subsidiaries in thereserves for unpaid claims and claimadjustment expenses of 50% or less
owned equity method investees takenin the aggregate after inter-companyeliminations shall be taken into
account.
Companies in specific industries,
including insurance, may have additionalsupplemental information requirementsthat vary from those listed above. Theschedule information may be provided
separately or in the notes to the auditedfinancial statements.
Industry guides: Item 801 of RegulationS-K sets out five industry guidesrequiring enhanced disclosure of financialand operational metrics for companies in
certain industries:
Guide 3 Statistical Disclosure byBank Holding Companies;
Guide 4 Prospectuses Relating toInterests in Oil and Gas Programs;
Guide 5 Preparation of Registration
Statements Relating to Interests inReal Estate Limited Partnerships;
Guide 6 Disclosure Concerning
Unpaid Claims and Claim AdjustmentExpenses of Property-CasualtyInsurance Underwriters; and
Guide 7 Description of Propertyby Issuers Engaged or to be Engagedin Significant Mining Operations.
New guidance for disclosures forcompanies with oil and gas operations take
effect for registration statements filed onor after January 1 2010, superseding theguidance of Industry Guide 2 Disclosure
of Oil and Gas Operations. The newguidance is provided in Item 1200 ofRegulation S-K.
Smaller reporting companies: Smallerreporting companies, as defined by Item10(f) of Regulation S-X, may be eligible forscaled reporting requirements. These
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of separate financial statements ofinvestees as would be required under
Rule 3-09, but summarized financialinformation must be disclosed.
If the company qualifies as a smallerreporting company in an initial registrationstatement, it must reassess this status at
the end of its second fiscal quarter in eachsubsequent fiscal year. If the company failsto meet the test, a transition to the larger
company reporting requirementscommences with the first quarter of thesubsequent fiscal year.
Foreign private issuer: A foreign privateissuer is any company (other than aforeign government) incorporated ororganized under the laws of a jurisdiction
outside of the United States, except incases where a majority of voting securitiesare directly or indirectly owned by USresidents and either:
the majority of its executive officers ordirectors are US citizens or residents;
more than 50% of its assets are locatedin the United States; or
its business is administered principally
in the United States.
The financial statement requirements
for an initial registration statement of aforeign private issuer are found in Items 3,8, 17 and 18 of Form 20-F and in Regulation
S-X. The financial statement requirementsdiffer in a number of significant ways fromthose of domestic US issuers. Some of the
key differences in the requirements are asfollows: Audited financial statements are
required only for the most recent twoyears if the financial statementspresented are prepared in accordance
with US GAAP. Foreign private issuers may use GAAPother than US GAAP, but may need to
reconcile to US GAAP. Thisreconciliation is not required if thecompany uses International Financial
Reporting Standards (IFRS) as issuedby the International AccountingStandards Board (IASB). If the company
uses GAAP other than US GAAP, theaudited financial statements must beaccompanied by an audit report issued
by independent accountants that areregistered with the PCAOB and audited
scaled requirements streamline andsimplify the disclosure requirements tomake it easier and less costly for smaller
reporting companies to comply. Under therules, a company qualifies as a smallerreporting company if it:
has a common equity float of less than$75 million; or
has no public float and has annualrevenues of $50 million or less, uponentering the system.
A company registering common equity
securities in an initial registration
statement should calculate its public floatas of a date within 30 days of the date itfiles its initial registration statement. The
public float is computed by multiplyingthe aggregate worldwide number ofcommon equity shares held by non-
affiliates before the offering plus thenumber of common shares being offeredin a Securities Act registration statement
by the estimated public offering price ofthe common equity shares. If smallerreporting company status is achieved, the
registration statement may comply withthe SECs scaled disclosure system.
The scaled disclosure requirements are
integrated into Regulation S-X (Article 8for financial statement requirements) andRegulation S-K (for non-financial
statement disclosure requirements). A fewof the key differences in financialstatement requirements are as follows:
Audited annual financial statements these include statements of income,
cash flows, changes in shareholdersequity and comprehensive income forthe past two years, as contrasted to
three years for large companies. Thebalance-sheet requirement is the same.
Financial statements for significant
acquisitions Rule 8-04 of RegulationS-X requires two years of financialstatements for a business acquired by
a smaller reporting company if theacquisition is greater than 50%significant. Under Rule 3-05, a third
year is required if the acquisition isgreater than 50% significant and theacquired business had revenues of at
least $50 million in its most recentfiscal year.
Audited financial statements for
significant equity method investments Article 8 does not require the filing
in accordance with PCAOB standards. The latest audited annual financial
statements included in the registrationstatement must be as of a date notolder than 12 months prior to the date
the registration statement is filed. TheSEC will waive this requirement incases where the company can represent
adequately that it is not required tocomply with this requirement in anyother jurisdiction outside the United
States, and that complying with therequirement is impracticable orinvolves undue hardship. Regardless,
the latest audited annual financialstatements included in the filingcannot be more than 15 months old as
of the date the registration statementbecomes effective.
If a registration statement becomes
effective more than nine months afterthe end of the last audited fiscal year,
the company must provide unauditedinterim financial statements inaccordance with, or reconciled to,
US GAAP (this reconciliation is notrequired if the company uses IFRS asissued by the IASB) covering at leastthe first six months of the year.
Foreign private issuers may report inany currency.
Financial statements of an acquiredforeign business need not be reconciledfrom local GAAP to US GAAP when
the acquired business is below 30%for any of the Rule S-X 1-02(w)significance tests. This reconciliation
is not required if the acquired businessuses IFRS as issued by the IASB.
Financial statements of a significant
equity method investment meeting thesignificance threshold of Rule 3-09 ofRegulation S-X need not be reconciled
to US GAAP (or, if applicable, IFRS asissued by the IASB), unless either ofthe two tests is greater than 30% as
calculated on a US GAAP (or, ifapplicable, IFRS as issued by the IASB)basis. A description of the differences
in accounting methods is required,however, regardless of the significancelevels.
Summary: Planning an IPO is a complexundertaking that requires the compilationand collection of numerous financialstatements and related information.
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documenting processes involvingmajor classes of transactions;
identifyi