Initial Public Offerings:
Considerations for
Business Owners andExecutives Taking Their
Company Public
THIRD EDITION

Joshua Ford Bonnie, Simpson Thacher & Bartlett LLP
Doug Chu, PwC
William R. Golden III, Simpson Thacher & Bartlett LLP
Meredith Strong, PwC

THIRD EDITION | IPO HANDBOOK

About the Authors
Joshua Ford Bonnie is co-head of the Global Capital Markets practice of the law firm Simpson Thacher &Bartlett LLP and co-managing partner of the firm’s Washington, D.C. office. Josh is one of the preeminent
IPO lawyers in the nation and regularly counsels public companies on spin-offs and other significant
strategic transactions, capital markets offerings and general corporate and securities law matters. Josh has
extensive experience with cross-border and complex IPOs, including those employing UP-C and othermultiple-tier umbrella partnership structures.
Doug Chu leads PwC’s Capital Markets Advisory practice, with over 20 years of capital markets advisory
experience. Doug is based in Silicon Valley and has advised on billions of dollars of financings andstrategic transactions including IPOs, carve-outs, equity and equity-linked financing, private placements,
M&A, leverage buyouts, bank and bond financing, SPACs and structured products. Doug’s experience
encompasses a wide range of industries, with a particular focus on Technology.
William R. Golden III is a partner in the Capital Markets practice and Washington, D.C. office of Simpson
Thacher & Bartlett LLP. Will has represented issuers and underwriters on a broad range of securities
transactions, including initial public offerings and other equity and equity-linked offerings and high yieldand investment grade debt offerings, as well as exchange offers and other liability managementtransactions. Will has extensive experience with complex IPOs, including those employing UP-C and othermultiple-tier umbrella partnership structures.
Meredith Strong is a Capital Markets partner in PwC’s Deals practice in Silicon Valley, providing capital
markets and accounting advisory services to clients, with specialization in the technology sector. Meredith
advises clients in connection with various forms of capital markets transactions, including initial public
offerings, divestitures, carve-outs and M&A transactions, as well as with continuing registration statementswith the SEC. Meredith has helped her clients through many complex accounting and financial reporting
matters in anticipation of capital markets transactions and with evaluations of systems and processes
required to become a publicly traded company. Meredith helps her clients access the capital markets byproviding them with advice on preparing for life as a public company.
The authors would like to extend a special thanks to Aarthy Thamodaran, associate at Simpson Thacher &Bartlett LLP, Samantha Zytko, and Steven Kenney and Ryan Lee, partner and directors, respectively, in PwC’s
Deals practice focusing on Capital Markets, who contributed significantly to this book, as well as to Joe
Kaufman, Ken Wallach, Katharine Thompson and Jonathan Pacheco at Simpson Thacher & Bartlett LLP, fortheir thoughtful insights. All errors remain, of course, the authors’ alone.

THIRD EDITION | IPO HANDBOOK

About PwC
Our purpose—to build trust in society and solve important problems—is at the core of everything we do. It
guides how our global network of more than 328,000 professionals in 152 countries deliver sustained
outcomes to our clients. PwC provides professional services across two segments: Trust Solutions andConsulting Solutions. Within these segments we bring a range of capabilities to help organizations solve
faster, solve more, and realize more value. These capabilities include cloud and digital, deals, ESG,
cybersecurity and privacy, governance/boards, risk, transformation, tax services and much more.
Whether an acquisition or divestiture, IPO or debt offering, restructuring or alliance, our deals
professionals have seen it before and know how to support your transaction efficiently. Our experience
combined with an intimate knowledge of your business delivers the objective advice and data-fueled
insights you need to make confident decisions at the right time.
When pursuing an IPO, public debt issuance or another type of capital market event, the right experience isthe runway to ongoing success, and PwC can help you set the course. We advise clients throughout the life
cycle of the IPO process, from pre-IPO readiness preparation to the offering process and beyond.
Accelerate a confident, successful public company journey that builds a lasting impact by visiting
www.pwc.com/us/iposervices for more IPO specific PwC materials and insights.

THIRD EDITION | IPO HANDBOOK

About Simpson Thacher & Bartlett LLP
Simpson Thacher & Bartlett LLP is widely recognized as one of the world’s top law firms. With more than
1,000 lawyers across eleven offices worldwide, we help our clients address complex matters across the
spectrum of corporate and litigation matters.
Having advised on more than 300 IPOs over the past decade, we have unsurpassed experience guiding
issuers and underwriters through the process of going public. We have been ranked in the top 3 law firms
as counsel to the issuer or underwriters in U.S. IPOs in 12 of the last 15 years and have served as counsel inconnection with many of the largest and most complex IPOs in the world, including Bumble (largest U.S.
IPO by a U.S. issuer in 2021), Airbnb (second largest technology IPO of 2020), Avantor (largest healthcare IPO
in U.S. history (2019)), 10x Genomics (largest life sciences IPO of 2019), Dropbox (largest venture-backed
software IPO in history (2018)), LINE Corporation (2nd largest technology IPO of 2016), First Data (largest U.S.
IPO of 2015), Alibaba (2nd largest IPO in history (2014)), Hilton Worldwide (2nd largest U.S. IPO of 2013),
Facebook (largest U.S. IPO of 2012), HCA Holdings (largest U.S. IPO of 2011), Blackstone (largest U.S. IPO of2007), MasterCard (largest U.S. IPO of 2006) and Google (largest technology IPO of 2004).
Clients value our broad expertise in preparing companies, their founders and equity sponsors for their
IPOs, navigating the complexities of the offering process and dealing effectively with the myriad issues thatarise in public offerings, the stock exchange listing process and issuers’ ongoing reporting obligations andinvestor relations issues. In addition, we have deep experience advising underwriters and benefit from longand established relationships with most of the world’s major and mid-market investment banks.
For more information, please visit us at www.simpsonthacher.com.

THIRD EDITION | IPO HANDBOOK

About Donnelley Financial Solutions
DFIN is the leading provider of innovative, software and technology–enabled financial regulatory andcompliance solutions. Supporting every stage of our clients’ business and investment lifecycle, DFIN
provides regulatory filing and transactional deal solutions to public and private companies, mutual funds,
and other regulated investment firms. As the global leader in IPO services, DFIN IPO solutions and experts
help you successfully navigate the intricacies and prepare for life as a public company. When it comes tocapitalizing on key moments in the IPO process, DFIN leads the way – and we have the numbers to prove it.
Over the last six years, DFIN has supported a majority of PE and VC-backed IPOs, filed 700+ traditional IPOs,
partnered on 70% of traditional IPOs valued at more than $100M for US-based issuers, and serviced 350+
SPACs.

Corporate Repositories and Virtual Data Rooms
Our corporate repositories empower teams to easily manage, share and protect files in a secure and costeffective environment, so you can secure data, protect privacy and streamline projects. Venue virtual data
rooms (VDRs) help you safeguard and share your most sensitive documents with all your stakeholders witheasy-to-use privacy scans, contract analysis and multi-file redaction for full transparency and regulatorycompliance.

Financial Reporting and SEC Filing
Starting financial reporting early is key to a successful IPO. Drive efficiencies and optimize your financial
reporting with ActiveDisclosure while leveraging our 24/7/365 financial expertise to reduce cost andfinancial risk. Our financial reporting and SEC filing software streamlines S-1 reporting as you prepare foryour IPO and helps you to develop the robust systems needed for success. Once public, leverage
ActiveDisclosure for Proxy, ESG, beneficial ownership and other compliance disclosures.

Expert DFIN Support
Augmenting our innovative financial solutions is 24/7/365 support from detail-oriented, tenured, certified,highly experienced and highly trained subject matter experts. DFIN EDGAR reporting and deal experts keep
everyone aligned on process while delivering best-practice advice, hands-on assistance and regulatory
guidance to empower corporate teams to achieve their goals.
To discover all the power of DFIN’s IPO solutions, visit https://www.dfinsolutions.com/solutions/ipo.

THIRD EDITION | IPO HANDBOOK

Table of contentsPage
I.

INTRODUCTION .................................................................................................................................................................... 1

II.

OVERVIEW OF THE IPO PROCESS ................................................................................................................................... 4
A. What are the principal phases of the IPO process? How long does it take?.......................................... 4
B. What goes in the registration statement? What financial statements are required? ......................... 9
C. How much does going public cost? ....................................................................................................................... 14
D. How do I select lead underwriters?....................................................................................................................... 17
E. Do I need to switch my accounting firm? ............................................................................................................ 18
F. NYSE or Nasdaq? .......................................................................................................................................................... 19

III.

PLANNING AHEAD—WHAT SHOULD I BE THINKING ABOUT NOW?..................................................................... 21
A. Look at your company the way investors will.................................................................................................... 21
B. Prepare to be a public company ............................................................................................................................ 22
C. Revisit risk with a public company mindset....................................................................................................... 23
D. Consider your tax and organizational structure ...............................................................................................24
E. How many independent directors do I need to have and when? And what makes a director“independent” anyway? ............................................................................................................................................. 25
F. Review related party transactions .........................................................................................................................29
G. Shareholder arrangements ......................................................................................................................................30
H. Anti-takeover protections ......................................................................................................................................... 31
I.

IV.

Management incentive arrangements ................................................................................................................. 33

BUILDING A PUBLIC COMPANY FINANCE ORGANIZATION ..................................................................................... 35
A. What is uniquely different for public company finance functions? ..........................................................36
B. Record to report process .......................................................................................................................................... 37
C. Financial planning and analysis .............................................................................................................................39
D. Finance structure ......................................................................................................................................................... 41
E. Finance processes and controls .............................................................................................................................43
F. Finance systems ...........................................................................................................................................................44
G. Finance talent................................................................................................................................................................45

V.

DEALING WITH THE SEC—What do they care about and how can you navigate the process assmoothly as possible? ......................................................................................................................................................48
A. Overview of the SEC review process......................................................................................................................48
B. Typical areas of SEC comment ................................................................................................................................ 51
C. Publicity—Do I really need to take a vow of silence?......................................................................................60

THIRD EDITION | IPO HANDBOOKVI.

YOUR RELATIONSHIP WITH THE UNDERWRITERS....................................................................................................62
A. The underwriting team members and how they can help with your IPO................................................62
B. How to select underwriters ......................................................................................................................................63
C. The underwriting agreement ..................................................................................................................................65
D. Syndicate economics..................................................................................................................................................66

VII.

MARKETING, PRICING AND DISTRIBUTION .................................................................................................................67
A. Overview of the marketing process.......................................................................................................................67
B. The role of research analysts in marketing your IPO .....................................................................................68
C. Testing-the-waters (TTW) .........................................................................................................................................70
D. The roadshow................................................................................................................................................................71
E. Price and allocation ....................................................................................................................................................74
F. Stabilization and the overallotment (or “greenshoe”) option.....................................................................75
G. A few words on direct listings .................................................................................................................................76
H. A few words on special purpose acquisition companies (“SPACs”) .........................................................79

VIII.

LIFE AS A PUBLIC COMPANY ............................................................................................................................................81
A. Only the beginning ......................................................................................................................................................81
B. Ongoing reporting........................................................................................................................................................82
C. Liability under the federal securities laws .........................................................................................................89
D. Parting thoughts...........................................................................................................................................................91

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I. Introduction
If you are picking up this book you may be contemplating an initial public offering of your company. The
authors have each been advising companies on going (and being) public for decades—Doug and Meredithat PricewaterhouseCoopers (PwC) and Josh and Will at a law firm (Simpson Thacher). Over the years wehave met with countless business owners and executives who are considering an IPO and have found thatthey ask many of the same questions regardless of the size of their company or the industry in which itcompetes.
‰ What is the basic process for an IPO?
‰ How long does it take?
‰ How much does it cost?
‰ What things should I be thinking about now, when a possible IPO is still a fair way off?
‰ What kinds of changes to my finance and accounting organization will I need to make?
‰ What kinds of things does the SEC care about and how can I anticipate these?
‰ How will my company be valued and how will the stock actually get sold?
We wrote this short book to answer these kinds of questions directly and without a lot of technical jargon.
This book is not, however, a “how to” manual written for other practitioners or a comprehensive survey ofthe myriad legal and accounting rules that apply. If you choose to move forward with taking your company
public, you should engage advisors who have the practical, real world experience to guide you through the
thicket. For example, we have not identified the relatively limited number of places where the topics
discussed would vary if your company is organized outside of the United States and qualifies as a “foreign
private issuer” nor discussed at any great length, the process of going public through a businesscombination with a special purpose acquisition company (“SPAC”). Readers who are nonetheless interested
in the detailed nuts and bolts will find that there is already a fairly extensive catalogue of multi-volume
treatises out there that have been written covering the technical aspects of the process.
The founders, CEOs, CFOs and GCs who are far enough along in their thinking about an IPO to come in tomeet with us are typically quite familiar with the anticipated benefits—enhancing their company’s access tocapital, providing it with a publicly traded stock that can be used as an acquisition currency andcompensation tool, enhancing its brand and market profile and providing a public market valuation andpath to liquidity for its owners.

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1

On the other hand, and apart from a general understanding that it will result in a lot of additional costs
and hassles, we have found that the disadvantages of becoming a public company are frequently more
hazy. If only to avoid IPO clients later saying “how could you let me do this!?”, we always go over with themnot only the hard dollar costs of becoming and being a public company, but also the less tangible risks
that going public could adversely impact the company’s culture, distract its leadership from effectively
managing to its long-term objectives, decrease the “nimbleness” of its strategic decision-making, expose it
to a much greater level of public scrutiny (including heightened attention from regulators and enforced
public disclosure of competitively and otherwise sensitive information) and erode its existing owners’
control. It is worth emphasizing that the burdens of being a public company only increase over time, often
in ways we cannot currently predict. Even since the time we published the prior edition of this book, thedisclosure requirements applicable to public companies have expanded in multiple respects. Publiccompanies here in the United States, and especially newly public companies, are also potentially subject toclass action lawsuits (many of dubious merit) if their stock drops. It may reveal an interesting andhumorous insight into human nature that this lecture rarely has either dissuaded a client from proceedingwith an IPO or prevented the very same client from subsequently expressing shock at the consequences.
The “initial public offering” in one form or another has been around since ancient Rome and its
development can be traced through the invention of the joint-stock company in 16th century Europe to theintroduction of broad corporate limited liability laws in New York in the early 1800s. But one thing about
the new issue market has been true throughout its history—it opens and closes sporadically and without
much warning, as has been seen recently amid a challenging macroeconomic environment. While the IPO
market is correlated with demand for equities generally as reflected in the broader stock price indices, it isalso uniquely tied to market psychology as to whether new offerings are considered “hot.” As you will learn
in the following pages, the process of preparing for and executing an IPO typically takes anywhere from six
months to two years. Where a company has made the strategic decision to become publicly traded, thestandard approach is to move forward with preparations without being distracted by the day-to-day
gyrations of the stock markets so that it is in a position to execute its debut at a time of its choosing whenthe markets are receptive.
We have tried to distill our experience into straightforward answers to your questions in the following
pages—we hope that you find it useful. However, to avoid burying the lede, our principal messages to thosecontemplating an IPO are:‰ start to prepare early;‰ engage experienced advisors;

2

THIRD EDITION | IPO HANDBOOK‰ objectively assess your readiness not only for the IPO process itself but also for life as a publiccompany, including the attendant demands on your company’s finance organization;‰ develop realistic work plans based on that assessment to redress gaps or areas of weakness inaddition to the execution of the IPO itself; and‰ methodically and efficiently implement these plans, considering interdependencies with otherinitiatives.

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3

II. Overview of the IPO Process
A. What are the principal phases of the IPO process? How long does it take?
An IPO may be thought of as having several principal phases—the preparatory period prior to the formal
engagement of underwriters and kicking off the transaction, the period between the transaction kick-off
and the initial submission of the registration statement to the SEC, the period during which the staff of the
SEC reviews the company’s registration statement, and the exciting final few weeks where the transaction islaunched and marketed to investors. At the conclusion of the roadshow, the IPO is priced and thecompany’s stock begins trading, commencing the company’s life as a public company with obligations to a
new set of stakeholders. Successfully meeting investor expectations during the initial post-IPO trading andreporting of financial results is critical.
Pre-transaction preparation. Initially, from six to 18 or even 24 months or more prior to making an initialsubmission of a registration statement to the SEC, you will prepare for the IPO process and for life as apublic company thereafter. One of the most important parts of this preparation will involve beginning toprepare the SEC-compliant financial statements to be included in the IPO registration statement itself andupgrading and enhancing your financial reporting capabilities so as to permit your company to produce
SEC-compliant financial reporting on a timely and recurring basis going forward. During this phase, you
should evaluate the capabilities and independence of your outside audit firm and assess whether any
changes are warranted, assess which financial statement periods may be required depending on theultimate desired IPO timeline, and begin to prepare auditor reviewed (albeit not audited) interim financial
statements in addition to your annual audited statements, if you do not already do so. Note, in addition to
any interim (year to date) financial statements that may be required, there is often additional quarterly
information requested for the marketing process, discussed in greater detail in Chapter VI (Your
Relationship with the Underwriters), which may require additional preparation and involvement from yourauditors. It is also worth noting that financial statements included in the registration statement will be
subject to the auditing standards of the Public Company Accounting Oversight Board (“PCAOB”) instead of
the private company auditing standards of the American Institute of Certified Public Accountants, which
oftentimes lead to a lower level of auditor materiality thresholds and additional auditing procedures. In
addition to your auditors, many companies also engage accounting advisors to help, which we’ll discuss ingreater detail in Chapter III (Planning Ahead—What Should I Be Thinking About Now?).
The preparation of SEC-compliant financial statements (potentially including pro forma financial
information and financial statements for acquired businesses and equity method investees) and thedevelopment of the capability to produce these in a timely way going forward is almost always the “longest

4

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pole” in the IPO timeline and the area most demanding of the up-front investment of resources. Publiccompany reporting requirements often require an organization to add and retain employees who possess
skill sets a private company does not typically have. For example, 78 percent of recently public companies
participating in a PwC survey hired between one and five new staff members, specifically to increase their
SEC reporting capabilities.
It will also be crucial for you to develop, to the extent that you do not already have it, a robust financial
planning and analysis (“FP&A”) capability. It would be difficult to overemphasize the importance to the IPO
process (and to life as a public company thereafter) of being able to produce a reliable financial
forecasting model. Chapter IV (Building a Public Company Finance Organization) provides a deeper diveinto this most important area.
In addition to building out its finance capabilities, a company preparing for an IPO needs to understand how
it will be viewed and valued by the market and prepare itself to be positioned appropriately. You should also
think about whether there are changes to your corporate or tax structures or ownership or compensation
arrangements that will be desirable or necessitated as a result of the IPO—sometimes it can be less costly to
implement these types of changes in advance rather than on the eve of the transaction itself or
subsequently as a public company. A company should evaluate its control environment and begin to design
and implement processes and controls that will enable it to comply with the requirements applicable topublic companies. Finally, you should also perform the difficult task of taking a fresh look at your company
and consider whether you should revisit the historical approaches you have taken to risk and to practices
and arrangements that may be less suitable for a public company than a private one. Chapter III (Planning
Ahead—What Should I Be Thinking About Now?) discusses in greater detail selected areas that we havefound from past experience to be productive objects of focus for companies preparing for an IPO.
Post kick-off/Pre-submission. Two to six months prior to the initial submission of the IPO registration
statement to the SEC, you will typically formally mandate your lead underwriters and kick in to high gear
preparation of the registration statement itself, including developing and refining the investment thesis forthe offering. The preparation of the registration statement, discussed below in somewhat greater length, isa major undertaking, entailing a cooperative effort by the company and its counsel and its auditors working
with the lead underwriters and their counsel.
During this phase, the lead underwriters and the legal counsels will conduct a thorough review of thecompany, referred to as a “due diligence” investigation, including intensive meetings with management andreview of the company’s legal documentation, as well as background checks on its leadership and callswith a selection of the company’s important customers or other counterparties.

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5

The CEO and CFO will also typically have initial meetings with the research analysts who cover thecompany’s sector at the lead underwriting firms. The views of the analysts on the company and its industry
will not only be an important input into the decision by the “commitment committees” of the underwriting
firms whether or not to proceed with the transaction, but will also be a critical factor in the success of theoffering and subsequent trading as the analysts share these views with investors. For a more detailed
discussion of the role the analysts play in the successful execution of an IPO, see Chapter VII (Marketing,
Pricing and Distribution).
SEC review. Once the registration statement is in shape for SEC review you will submit it to the SEC. Since
2017, the SEC has permitted all IPO companies initially to submit their registration statement to the SEC on
a confidential basis, a dispensation previously available only to “emerging growth companies.” The SEC
staff will take approximately four weeks to perform their initial review of the registration statement andissue their initial comment letter (although it’s worth giving a shout out to the SEC staff because they reallydo try to adhere to a four-week time frame).
Following receipt of the initial SEC staff comment
letter, you will respond by resubmitting yourregistration statement, revised to reflect updates
made in response to the SEC staff’s comments
and, if required, updated financial statements andaccompanied by your own letter explaining(politely!) your responses to each of the staff’scomments. In an IPO there will typically be several
rounds of SEC staff comments and resubmissionsof the registration statement in response, with theoverall time required for this phase taking fromtwo-and-a-half to four months, or even longer if
problematic SEC staff comments are encounteredor if the company lollygags in moving forward. It is
worth noting that no earlier than 20 days after the
publicly filed registration statement is declaredeffective, all prior comment letters and responses,
and related revisions, are also made publicly
available (including those made during theinitially confidential phase of the SEC’s review
process). Chapter V (Dealing with the SEC— What
Do They Care About and How Can We Navigate theProcess as Smoothly as Possible?) provides amore in-depth look at the SEC review process.

6

An “emerging growth company” (“EGC”) is any issuer
that had total annual gross revenues of less than
$1.235 billion (adjusted for inflation every five years;
prior to September 20, 2022, the threshold was$1.07 billion) during its most recently completed
fiscal year. A company that is an emerging growthcompany on the first day of its fiscal year will nolonger qualify as an emerging growth company upon
the earliest of:‰

the last day of its fiscal year following the fifth
anniversary of the first sale of its common equity
securities in a public offering;‰

the last day of a fiscal year during which it had
total annual gross revenues of $1.235 billion ormore (adjusted for inflation every five years, with
the next reset expected to occur in 2027);‰

the date on which it has, during the previous
three-year period, issued more than $1 billion in
non-convertible debt; or‰the date on which it is deemed to be a “large
accelerated filer” (a company that has been public
for at least twelve months, has filed one
Form 10-K, and has a public float of at least$700 million).

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During the SEC review period, you and the underwriters (and your respective counsels) will work on thepresentation to be used during the “roadshow” and any preceding “testing-the-waters” meetings described
below and in Chapter VII (Marketing, Pricing and Distribution). It is also during the SEC review period thatyou, with the assistance of the investment bankers, will refine your financial model and then separately
conduct more intensive meetings with the underwriting firms’ research analysts. Informed by thecompany’s model, these analysts will build their own financial models that will form the basis for theirviews on valuation and their future research coverage following completion of the IPO.
As a result of the Jumpstart Our Business Startups (“JOBS”) Act passed in 2012, companies contemplating an
IPO can conduct “testing-the-waters” meetings (“TTW”) with qualified institutional buyers and otherinstitutional accredited investors before publicly filing a registration statement. Such TTW meetings allow
the company’s management team and underwriters to get feedback on the offering and their pitch toinvestors, which can be used later on in the actual roadshow. You should consult with your underwriters todetermine whether TTW meetings or other forms of pre-deal investor education would be valuable.
Companies should bear in mind that any materials used to test the waters may be requested by the SEC.
During this phase your counsel will also typically prepare and submit the company’s application to list on
the relevant stock exchange, with the listing process thereafter proceeding in parallel with the SEC review
process. Generally speaking, the stock exchange listing process is much less onerous than the SEC review
process. The major stock exchanges compete vigorously for listings and are keen to make the listing process
as efficient as it can be. Your counsel will also use this time to prepare amendments to the company’sorganizational documents and plans and policies so that they are appropriate for a public company.
Your and the underwriters’ legal counsels will also prepare an underwriting agreement, which is therelatively standardized contract between the underwriters, the company and any selling stockholders
whereby the underwriters actually agree to buy the stock being sold. The underwriting agreement is only
executed at the time of the pricing of the offering following the conclusion of the roadshow. It’s an odd
aspect of U.S. listings that a working group can work together for months and even years without any formof written agreement. It is only when the transaction actually prices that there is a contract between you
and the underwriters setting out the parties’ respective obligations to sell and buy the stock.
During this phase your auditors will also work with the underwriters’ counsel to prepare a “comfort letter”
to support the underwriters’ due diligence investigation. A comfort letter is a letter that is delivered by yourauditors to the underwriters (and typically also is addressed to the company and its board of directors)
that confirms matters relating to the financial statements themselves and also addresses specified
financial information that appears in the registration statement outside of the financial statements. So, for

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7

example, a statement in the MD&A saying that your revenue increased 15% year-over-year wouldn’t
technically be “in” the financial statements but it is derived from them, and so the underwriters would get“comfort” from the auditors on the recalculation of the percentage change and that the underlying
amounts agree back to the financial statements. Typically, two comfort letters are issued to theunderwriters—one at the time the underwriting agreement is signed (generally the pricing date), and one(an updated letter or “bring-down letter”) at the closing date.
Marketing and pricing. Once the company has largely (if not entirely) cleared the SEC staff comments, it isin a position to commence the active marketing of the IPO, which typically starts with meetings with thesales forces of the lead underwriting firms and is followed by a roadshow where company management(typically the CEO and the CFO and, if multiple roadshow teams will be deployed, other senior members ofmanagement), accompanied by the lead underwriters, meet with prospective investors in cities throughout
the United States and also sometimes internationally. A recorded version of the roadshow presentation is
also ordinarily made publicly available on specialized third-party websites that have bells and whistles thatenable them to comply with the applicable SEC rules. As discussed further in Chapter VII (Marketing, Pricing
and Distribution), it is worth noting the shift towards conducting virtual roadshows catalyzed by thecoronavirus pandemic, has survived and has continued, in many circumstances, to permit roadshows to becompleted in a more compressed timetable.

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Illustrative IPO Timeline
Preparation

Pre-Filing

Initialsubmission of S-1

SEC
review

Roadshow

Pricing/
Trading

T — 12-18 months

T — 4-6 months

T — 3 months

T — 2 weeks

Prepare work planfor IPO readiness

Engage leadunderwriters (note thattrusted relationshipbankers may beconsulted during
preparation phase prior
to awarding formal
underwriting mandates)

Confidential submissionof S-1 and SEC review
process (typically—12-14
weeks)

Finalize
preliminary
prospectuswith indicative
price range

Price IPO after market
close at conclusion ofroadshow

Launchroadshow(typically 7‒10
trading days)

Close third trading day
after pricing

Assess financial
statements, informedby EGC status, andevaluate audit firm
Assess internal
resources(accounting, FP&A,
legal, IR)

Prepare S-1

Evaluate need forthird-party advisers
Consider structuraldecisions (e.g.,
corporate, tax,compensation)‒ Equity story/
investment thesis‒ Historical financial
statements & MD&A
‒ Risk factors/legal
sections
Financial model

Teach-in with syndicate
analysts
Possible “testing-the-waters”
meetings

Trade date

Begin trading next day
after pricing

Prepare roadshow presentation
Publicly file S-1 at least 15 days
prior to launch of roadshow
Finalize IPO documentation‒ Organizational andgovernance documents‒ Listing application

Note that if the company has availed itself of the ability to submit its registration statement to the SEC staff
on a confidential basis, the registration statement must have been publicly filed at least 15 calendar days
prior to the commencement of the roadshow. Typically, on the day that the roadshow concludes, yourcounsel arranges for the registration statement to be declared “effective” by the SEC and, after the market
close on that date, the IPO will be priced and the company will enter into the underwriting agreement withthe underwriters. On the following trading day the company’s stock will open for trading on the relevant
stock exchange and your life as a public company will begin. Generally on the third trading day following
the pricing, and the second trading day following the initial trading, the IPO will close, with the stock being
delivered to the underwriters in exchange for the offering proceeds, net of underwriting discounts. Chapter
VII (Marketing, Pricing and Distribution) describes in greater detail the process by which the company isvalued and the stock is sold.

B. What goes in the registration statement? What financial statements are required?
In the United States, the basic regulatory framework governing IPOs has been in place since the early 1930s,
when Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 (“Exchange Act”)
in reaction to the stock market crash of 1929. The Securities Act and the Exchange Act to this day continue

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9

to frame the process by which companies conduct public offerings of their securities and provide ongoing
public reporting thereafter. The Securities Act requires a company to file a registration statement with theSEC, and have that registration statement be declared “effective” by the SEC, prior to publicly distributing
its shares in the United States.
Far and away, the most common type of registration statement for an IPO in the United States is Form S-1.
(While real estate investment trusts use Form S-11 and most foreign companies use an alternate form, thebasic concepts are the same.) The applicable SEC form specifies the information that must be included in
the registration statement and refers to specific SEC regulations (Regulation S-K and Regulation S-X) thatprovide instructions on what information must be presented and how. If your company qualifies as an EGC
and/or smaller reporting company (or “SRC”), you will be able to benefit from reduced disclosure
obligations in the IPO registration statement and in your subsequent ongoing SEC reporting. We highlightsome of these benefits throughout this book.
A “smaller reporting company” is any issuer that:‰has public float of less than $250 million or‰

has less than $100 million in annual revenues and

You will almost certainly have looked at the IPO
registration statements (or the “prospectus” that
constitutes the most important part of these– no public float or

filings) and subsequent SEC reports of other public– public float of less than $700 million.

companies in your industry before having gotten so
far as reading this book—and if you have not you

are encouraged to do so! We will not go through in extensive detail the specific requirements for thecontent of the registration statement, but suffice it to say that the registration statement is intended to be
a comprehensive document that gives investors a balanced view of the company. In addition to describing
the terms of the offering itself, it includes financial statements and a discussion and analysis of thecompany’s results of operations and financial condition, a description of the company’s business,
disclosure regarding the material risks relating to the company’s business and an investment in its stock
and information relating to the company’s directors and executive officers and significant stockholders.
Although the rules can be quite technical, you should assume that the registration statement will be
required to disclose any dealings in which the company is a participant that also directly or indirectly
involve any of its directors, officers or significant stockholders.

10

THIRD EDITION | IPO HANDBOOKThe SEC also has specific and sometimes complex rules regarding the content and age of the financial
statements that must be presented in a registration statement. In a Form S-1 registration statement, acompany must generally present:‰ Audited balance sheets as of the end of the two most recent fiscal years. The latest audited
financial statements cannot be more than one year and 45 days1 old at the date the registration
statement becomes effective.
‰ Audited income statements, cash flows, and changes in shareholders’ equity for each of the past
three fiscal years. EGCs and SRCs may present such information for two years only.

Audited Financial Statement Requirements

Form S-1

Form S-1(for EGCs and SRCs)

Income statement

3 years

2 years

Balance sheet

2 years

2 years

Statement of cash flows

3 years

2 years

Statement of changes in shareholders’ equity

3 years

2 years‰ Interim financial statements are required if the fiscal year-end financial statements are morethan 134 days old, except for third-quarter financial statements, which are timely in an IPO
through the 45th day after the most recent fiscal year end. After the 45th day, audited financial
statements for the most recently completed fiscal year must be included. This means that for acalendar year-end company, audited financial statements as of the most recently completed fiscal
year must be included as of the first business day after February 14th. (This is the reason why
there is typically a dead period for IPOs each year starting in the middle-of February until thesecond half of March.) Interim financial statements can be presented in a condensed format andgenerally are not audited. However, a review of the interim financial statements is typically
performed by the company’s independent auditors.
One question that is frequently asked is—“do I have to go back and audit ‘Year A’ for purposes of including
it in the initial submission of the registration statement when the requirement to include ‘Year A’ is goingto roll off due to the eventual inclusion of ‘Year C’ or ‘Year D’ prior to the registration statement actually
being circulated to potential investors or becoming effective?” Happily, following passage by Congress of
1

Note there are certain situations where SRCs may have up to one year and 90 days as opposed to one year and 45 days.

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11

the FAST Act in 2015 and subsequent guidance from the SEC, EGCs and non-EGCs may confidentially submit
draft IPO registration statements that omit annual and interim financial statements (and the related
management discussion and analysis disclosure) that they reasonably believe will not be required to bepresented separately at the time they launch their IPO, in the case of EGCs, and file publicly, in the case of
non-EGCs.
In addition to the financial statements of the company itself, separate financial statements of businesses
that the company has acquired or where the acquisition is probable may also be required in theregistration statement if the acquisition rises to specified levels of “significance” to the company asmeasured by the SEC’s rules (S-X 1-02(w)). In May 2020, the SEC adopted amendments to these rules, which
generally reduce the number of financial statement periods required for acquirees. These new rules wereeffective on January 1, 2021. Previously, up to three years of separate financial statements could be
required, whereas now a maximum of two years is required, which can significantly reduce the burden forregistrants that have grown inorganically. The SEC also revised its tests of significance in ways thatgenerally have resulted in fewer acquisitions being deemed significant as compared with the previous
rules. If required, these separate financial statements cover one or two years plus more recent interim
periods, if applicable, depending on the “significance” of the acquisition and generally must also be
SEC-compliant as to form and content, although the financial statements of a non-public entity need notinclude public company disclosures, such as segment information, certain disclosures about employers’
pensions and other postretirement benefits, and earnings per share. Acquiree financial statements do notneed to be included in initial registration statements once the acquired business has been reflected in
post-acquisition audited financial statements of an IPO registrant for a period of nine months or one year,
depending on significance. The requirement to include separate financial statements of acquired and to beacquired businesses can be a major stumbling block in the IPO process, particularly where the acquired
businesses do not have financial statements that have been audited. Accordingly, this is an area whereclose consultation with the company’s auditors and accounting advisors early in the process is crucial andrecent acquisitions of any size should be evaluated. Given the significant timing and other hurdles thatthese requirements create, it is not at all uncommon for companies to freeze their acquisition activity inthe run up to an IPO to avoid the challenges presented by the requirement to present acquired businessfinancial statements.
In addition, the registration statement may be required to include the separate financial statements ofsignificant equity investees of the company as of the same dates and for the same periods as thecompany’s financial statements. Individual years in these financial statements only need to be audited for
periods in which the equity investment is “significant.”

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Further, a company may be required to present financial information of the parent on a standalone basis
in instances where restrictions (for example, regulatory capital requirements or covenants in debt
agreements) prevent its subsidiaries from freely transferring funds or assets to the company. In practice,
this information is commonly disclosed via an audited footnote to the consolidated financials.

The registration statement for an IPO may also be required to, and frequently does, contain “pro forma”
financial statements or financial tables, with accompanying footnote disclosure, giving pro forma effect tocertain transactions or events as if they had already occurred. While the need for pro forma financial
information most obviously occurs in connection with significant business combinations or dispositions,the requirement can also arise in other circumstances if pro forma financial information would be material
to investors. For example, the use of proceeds from the IPO to repay outstanding debt obligations, thepayment of extraordinary dividends, a reorganization anticipated in conjunction with the IPO, theconversion of debt or preferred stock or other changes in capitalization may necessitate the presentationof pro forma financial information, as could other situations in which the company’s historical financial
statements are not indicative of the ongoing entity.

Pro forma financial statements are required to include:‰ Balance Sheet: Pro forma presentation should be based on the latest historical balance sheet
included in the filing, and presented as if the transaction or transactions being given pro forma
effect had occurred on the date of the balance sheet. A pro forma balance sheet is not required if
the transaction being given pro forma effect is already reflected in the registrant’s historicalbalance sheet presented.
‰ Income Statement: Pro forma presentation should be based on the latest fiscal year and latest
interim period (and, if you wish, the corresponding interim period from the prior year) included in
the filing and presented as if the transaction or transactions being given pro forma effect had
occurred on the first day of the earliest pro forma period presented.

The basic guidelines for pro forma adjustments require breaking out:
‰ “Transaction accounting adjustments” which reflect the application of the required accounting to
the transaction (such as acquisition accounting);‰ “Autonomous Entity Adjustments” which reflect the operations and financial position of theregistrant as an autonomous entity if the registrant was previously part of another entity, such asa spin-off transaction in which the costs allocated to the entity do not reflect all of the expected
costs of operating as a standalone public company; and

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13

‰ Optional “Management Adjustments” which allow the registrant more flexibility to include more
forward-looking information by depicting synergies and dis-synergies of the transaction—theseare only presented in the notes to the pro forma financial statements. In practice, “Management
Adjustments” are often excluded due to their uncertain nature unless the company believes suchadjustments would enhance the readers’ understanding of pro forma effects of the transaction.

C. How much does going public cost?
IPOs are expensive. It is frequently remarked that the dollars raised in a company’s IPO may be the mostexpensive capital it will ever raise. There are significant costs relating to the transaction itself, as well as
incremental costs to operate as a public company going forward. The following chart provides a summaryof the different types of costs associated with going public and being a public company:

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THIRD EDITION | IPO HANDBOOK

Going public

Being public

Directly attributable to the offering (reported asnetted against gross proceeds)

One-time costs to convert the organization to a
public company (expensed as incurred)‰

Underwriter discount, which based on public
registration statements, results in fees equal
to 3.5%-7% of gross proceeds for most average
sized offerings‰

Costs to implement new financial reporting
systems and processes‰

Initial costs to document internal controls andcomply with SOX‰

Legal, accounting and printing fees associatedwith drafting the registration statement andcomfort letter‰

Costs to identify and recruit a new board of
directors‰

Roadshow expenses‰

Costs to implement new executive andemployee compensation plans‰

In addition to the underwriter discount, on
average companies incur $5.8 million of costs
directly attributable to their IPO, though thiscan vary depending on the size and complexityof the company and the offering‰

Based on PwC survey results, on averagecompanies incur more than $1 million of
one-time costs to convert their organization toa public company‰

SEC filing and exchange listing fees

Other incremental organizational costs (expensed
as incurred)

Recurring incremental costs of being a publiccompany (expensed as incurred)‰

Tax and legal entity restructuring costs inanticipation of the IPO‰‰

Additional audit, interim/quarterly review costs,
advisory accounting and other costs tomake the financial statements S-X compliant

Incremental internal staffing costs (accounting,tax, legal, human resources, technology,internal audit and investor relations)‰

Professional fees for legal and accounting advice‰

Public company Directors & Officers (“D&O”)
insurance‰

Based on PwC survey results, on averagecompanies spend more than $1 million on
annually recurring costs as a result of being
public‰Valuation reports‰

Costs to draft new articles of incorporation,
audit committee charter, by-laws and otheragreements

Transaction-related costs. The largest transaction cost is typically the underwriting discount (i.e., thedifference between the amount the underwriters pay for the stock being sold and the initial public offering
price at which they sell this stock to investors), which is borne by the company in a primary offering andtypically borne by selling stockholders in a secondary offering where they are the ones receiving theproceeds. The underwriting discount is almost always calculated as a percentage of the gross proceeds andtypically ranges from three and a half percent to seven percent but may be a lower percentage in the caseof large offerings.

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The most significant other offering expenses tend to be the cost of the company’s outside counsel andother advisors (e.g., accounting advisor), the cost of its auditors and the cost of the financial printer. The
company will also be required to pay a registration fee to the SEC, which is calculated based on theoffering size and varies from year to year based on the funding requirements of the SEC, as well as fees tothe relevant stock exchange. We note, however, that these non-underwriting discount transaction-related
expenses typically range upwards from $3 million in the aggregate and are frequently significantly higher.
Offering costs also, perhaps unsurprisingly, tend to be higher for larger offerings and larger companies. In
particular, legal and accounting costs, areas where larger companies may face additional complexities in
preparing for an IPO, increase significantly for larger companies. Printing costs also trend upward for larger
deals, likely as a result of larger filings and demands on printer resources. SEC registration fees also
increase in proportion with increases in gross proceeds, but are a relatively minimal cost of an IPO.
Incremental going forward costs. After the IPO, companies incur incremental expenses on an ongoing basis
to be a public company, including expanded accounting, investor relations and legal capabilities, higher
levels of professional fees for auditors, outside counsel and other advisers, annual stock exchange listing
fees, as well as director fees and suitable directors and officers (“D&O”) insurance coverage, for which thepremiums often can be a surprise to newly public companies.
Additional staff requirements account for a significant portion of the cost differential between public andprivate companies. Accounting, legal, financial planning and analysis, and internal audit and compliancedepartments within public companies often have to hire staff to acquire new capabilities, according to
PwC’s survey (see figure below). Other areas where newly public companies may need to hire people
include investor relations, human resources, technology, tax, and treasury and risk management. While theactual costs incurred are highly dependent on the size and complexity of the company and the expertise of
its existing personnel, it is clear that the costs of these additional hires can add up quickly.

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THIRD EDITION | IPO HANDBOOK

Number of New Staff Added in Each Functional
Area Since Going Public
10%

SEC reporting

16%

Accounting
Financial planning & analysis

4%

Legal

5%

Internal audit/compliance

6%

5%

1%

8%

2%

6%
10%

4%

Technology support

11%

2%

8%

5%

8%

Treasury & risk management

4%

Taxation
0%

1%

3%

8%

Investor relations

Human resources

3%

12%

3% 1%
3%

5%

10%

15%

20%

25%

30%

% of CFOs

Source: PwC survey conducted by Oxford Economics

Number of staff added▪ 1–2 ▪ 3–4 ▪ 5–10

D. How do I select lead underwriters?
A private company that is viewed as an attractive IPO candidate is usually already being called on bycoverage bankers at investment banking firms. Investment banks devote incredible resources to finding
and cultivating pre-IPO companies. The idea being that if a company has a longstanding and close
relationship with a particular banker and his or her firm, that may well be enough to ensure that bank aseat at the table for the IPO. But being the first doesn’t necessarily mean being alone. In fact, it is notuncommon for even very small IPOs to have more than one lead underwriter, and this has become
ubiquitous in large transactions. The idea from the company’s perspective is that, since the banks will justshare the gross spread, it won’t cost you any more to add another bank (and it may in fact help you foster
stronger ties to multiple banks and to their research analysts).
So how should you go about selecting these banks? Without wishing to be overly dramatic, the leadunderwriters are highly significant to the ultimate success of the IPO. In addition to taking a guiding role in
the overall process and, most importantly, actually selling the stock, they will provide insights into how
investors will view the company and its industry and how the company should best be positioned, guidethe company in crafting and communicating its investment thesis and structuring the offering, assess

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17

investor demand and provide recommendations on valuation. Given this critical and multifaceted role,companies will often interview a number of banks before selecting the leads. In addition to considering theinstitutional and personal relationships they have with the banks and bankers and their reputations andtrack records in the sector, companies will focus intently on the quality and views of the banks’ analysts,
their familiarity with the company and its industry and their ideas for how the company can be best
positioned to achieve a favorable valuation. You should also pay attention to the percentage of deals thelead manager launches that actually price. Finally, if the company has other financing or capital needs you
should consider what institutions are able to be helpful in this area as well. For example, it may bepossible for your company to refinance its bank debt or bonds in connection with the IPO or secure new oradditional liquidity commitments.
It is becoming more common for companies pursuing an IPO to engage an objective capital markets
advisor to assist with various aspects of its preparation and execution. In some cases, capital markets
advisors will help with the overall equity story and investor positioning, key financial metrics and investor
relations preparation and assist in benchmarking and advising on roles and economics to the underwriters.
In other cases, capital markets advisors will further assist the company in interacting with the underwriters
going forward, such as by participating in investor targeting and launch, pricing and allocation decisions.
These advisors are typically boutiques that field experienced former equity capital markets (“ECM”)
professionals from the major investment banks who will tout their ability to redress the information
asymmetry that can arise when the company’s management team does not have experience dealing withthe equity capital markets and their ability to help the company get more out of its investment banks. In
addition to contributing their practical and technical expertise, capital markets advisors can also help
mitigate concerns that the investment banks may prioritize the interests of their institutional investor
clients over the interests of the company. ....................................................................................................................................

E. Do I need to switch my accounting firm?
Although a somewhat awkward topic, the authors have found that CFOs of companies that are not alreadyusing one of the “Big Four” firms inevitably ask whether they need to switch accountants if they decide topursue an IPO.
To start with, let us note that there are hundreds of audit firms that are registered with the Public Company
Accounting Oversight Board and permitted to audit the financial statements of an SEC-registered company.
But let us also say that year in and year out the Big Four firms audit more than 60% of all of the companies
going public in the United States, a percentage which increases if you exclude very small transactions. If
you add to these the next five or six major accounting firms in terms of IPO experience you will have

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captured almost the entire IPO market. Simply put, the Big Four firms, plus a select handful of others, audit
the vast majority of IPO companies. Guidance on the identification of potentially sensitive or problematic
accounting issues, financial disclosure issues and the overall transparency of financial reporting isparticularly important. If you have a desire to deviate from the norm here, you should first discuss withyour underwriters as they may say that use of a lesser known auditor will adversely impact marketing as
certain investors will simply choose to pass. In addition, a number of the bulge bracket investment banks
will simply refuse to take a company public unless they are using an independent auditor that they believe
has the requisite experience and expertise. Our own personal view is that it is well worth it to engage a firmthat has the desirable depth of experience, and to bring them on board early enough that they can do atleast one (if not all) of the years of audit that are required to be presented in the registration statement—
often this audit can reveal financial reporting issues that must be resolved before the registration
statement can be submitted to the SEC. (Although admittedly entirely self-serving to say, Josh and Will
would also suggest that a similar analysis applies when considering whether to hire new legal counsel—thebottom line is that you will save time and reduce execution risk if you have lawyers in this role who do it
for a living.)
One additional note on the use of an accounting advisory firm. The Sarbanes-Oxley Act, when passed in
2002, put in place a number of absolute rules relating to what an audit firm can and cannot do for a clientand still be considered “independent.” A company may have a truly magnificent accounting team, but
without SEC and transactional accounting experience they will struggle to do what is needed to get thecompany through the IPO process and beyond. As a result, it has become increasingly common forcompanies to seek transaction support and advisory services from a second accounting firm that is not
restricted by professional and statutory independence standards. Among other things, an advisoryaccountant with significant relevant experience can provide project management, strategic advice, issue
resolution, advice and assistance with complex financial reporting matters and the design, documentationand testing of internal controls over financial reporting, supporting accounting and finance staff, as well as
post-transaction services such as implementation of new reporting protocols, etc. Further, use of an
accounting advisory firm, especially early in the process, can enable management to devote more focus on
the marketing phase of the IPO.

F. NYSE or Nasdaq?
The vast majority of companies pursuing an IPO in the United States list their stock on either the New York
Stock Exchange (“NYSE”) or the Nasdaq Stock Market (“Nasdaq”). Generally, the listing requirements of thetwo exchanges are quite similar. For example, the NYSE and Nasdaq both require that an IPO company
satisfy certain earnings, income or market value tests and that the distribution meet minimum

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19

parameters. Similarly, while each exchange has its own corporate governance requirements, theserequirements, too, have converged over the years and are now fairly similar, except with respect to board
diversity, as discussed in more detail in Chapter III (Planning Ahead—What Should I Be Thinking About
Now?). Indeed, even the distinction of three versus four letter ticker symbols that used to identify acompany’s listing venue (four letters for Nasdaq versus three or fewer for the NYSE) have fallen by thewayside with ticker portability.
Given the convergence of the more concrete distinctions between the two exchanges and the fact that
underwriters will typically say that there is no meaningful marketing impact on the IPO that will result fromselecting one versus the other, many companies will meet with both exchanges prior to making adecision. The two exchanges also still do have somewhat different brands, with the NYSE associated morewith blue chips and Nasdaq with the technology and life sciences sectors, although even here you haveseen the NYSE recently attract high profile technology listings while the Nasdaq has attracted some old line
brand name companies.

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III. Planning ahead—What should I be thinking
about now?
As noted in Chapter II (Overview of the IPO Process), companies may take six, 12, 18 or even 24 or moremonths to prepare for their IPOs before formally engaging underwriters and kicking off the actual
transaction. What are they doing during all this time? And, perhaps more to the point, what should you be
doing now if you believe your company is a viable candidate to go public at some point in the near- or
medium-term future?

A. Look at your company the way investors will
As discussed in Chapter VII (Marketing, Pricing and Distribution), every company that pursues an IPO isgoing to be compared by analysts and investors with other companies that are already public. As
off-putting as this may be for the founders and leadership of a private company that is almost certainly
wonderfully unique in many ways, it is a reality. And, rather than fight it, it makes sense to understand it
and, to the maximum extent possible, use this knowledge to take the steps necessary to ensure that yourcompany is positioned correctly.

Think about the different lines of business your company is in—what publicly traded companies are inthese or similar areas? How do the research analysts and the investment community value these peers?
What metrics are used to evaluate these peers’ performance? Are there different peer sets, approaches tovaluation, and/or multiples applied to your company’s different business lines? By reading the analyst
reports on potential peers, thinking about these questions and even taking the time to meet with investors
and analysts, you can start to understand how your company will be viewed by analysts and investors.

Having done this work, step back and think about how your company looks when viewed in this way. Do you
have the ability today to capture and report the metrics that the market is used to seeing for companies
like yours? Are you able to isolate information about separate lines of business that are valued differently
by the market? If not, is it appropriate to rework your internal and even external financial reporting to beable to do this? Effecting these types of changes in reporting can take time.

Having accessed the information that will allow you to view your own company like a public market analyst
or investor, what does this data say? For example, if you want your company to be viewed as primarily
belonging with, and valued like, a particular peer set—is that a true reflection of your company’s business?

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Everyone involved should want the company to be valued appropriately in its IPO. Even setting aside
potential shareholder lawsuits attracted by a stock drop, there is perhaps nothing more painful for acompany that has recently completed an IPO than being rerated downward by the market in post-IPO
trading. Are there acquisitions or new products (or, conversely, dispositions or discontinuances) that are on
the whiteboard that may make sense to accelerate during this pre-transaction phase in order to bolster theintended investment thesis? As another example, how do your company’s results, whether in terms of top
line growth or margins or otherwise, compare to the peer set? Do they differ materially and, if so, why? Are
there strategic initiatives to undertake now to enhance your company’s future relative performance as it
will be measured by the market?
Although no one without a deep understanding of your business can predict what specific insights may begained from going through the exercise of understanding how the market values potential peers and thenviewing your own company through the same lens or lenses, it would be quite surprising if such an exercise
fails to uncover areas where an investment of your time and attention, and perhaps even dollars, inadvance of an IPO would yield attractive returns.

B. Prepare to be a public company
Running a private company with a small number of shareholders or investors can be very different thanoperating a public company. Private companies usually lack a public company finance infrastructure,almost certainly will not have an investor relations capability and may require additional resources within
their legal function. They may also need to expand or reconfigure their management team to ensure thatthey have senior officers with the skill set to interact with a public company board of directors and publiccompany investors. More broadly, a company should take a cross-functional and holistic approach topreparing its management team and business units to begin acting and functioning as a public company,
both internally and externally.
During the pre-transaction preparatory phase, you should make yourself aware of the public company
requirements to which you will be subjected as part of and following the IPO, and particularly those related tofinance and accounting (e.g., public company accounting, internal audit and financial modeling and forecasting)and then evaluate your internal capabilities to identify deficiencies. Some of the key questions to ask include:‰ Do we currently have a repeatable monthly and quarterly close process? Do we have the ability toclose our books accurately each quarter, and to review and report the results to the public on atimely basis and in accordance with SEC guidelines?
‰ Do we have a finance department with expertise in SEC accounting and reporting requirements?

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As we will discuss more in the next chapter, many private companies looking to become public companies
have inadequate skill sets within their finance departments and hire additional internal staff in connection
with going public.
‰ Do we have a finance team comfortable preparing reliable forecasts and projections and able toanalyze current period results for reporting purposes?
‰ Are our processes and controls adequately documented and tested? Do we have a plan to comply
with Sarbanes-Oxley requirements?
‰ Does our technology infrastructure adequately support our compliance efforts?
‰ Overall, the common theme to these questions is for companies to consider how prepared they
are to be a public company, not just to go public. Having performed this IPO readinessassessment, create—and then execute on—a realistic work plan that addresses internal gaps anddetails necessary internal staff hires. It can take many months to address areas of deficiency or
weakness, and you should build into your plans the time and cost of evaluating and implementing
policies, building the necessary infrastructure and making critical hires. Private companies often
underestimate the time it takes to get ready to be a public company—a transformation that needs
to take place before, not after, the IPO.

C. Revisit risk with a public company mindset
Every company, whether public or private, makes risk management decisions every day. Whether
consciously, such as by deciding to undertake an enterprise-wide risk assessment exercise, or
unconsciously, such as by deciding not to approve the hire of that additional resource in the compliancefunction. One way or the other, your company has decided what balance to strike in terms of accepting andmitigating risk.
Undertaking an IPO alters a company’s risk profile. First, and somewhat self-evidently, a company that hasgone public is exposed to entirely new types of risk—SEC enforcement actions, insider trading scandals andstock drop lawsuits, for example. But somewhat less obviously, a company that becomes publicly traded isalso likely to find that this changes the cost-benefit equation it has previously used in deciding the rightlevels of risk appetite and investment in risk mitigation.
To see why this may be the case, consider a private company that faces an unfortunate regulatory censure.
This is obviously not good, and the company in this hypothetical may be required to pay a fine andpotentially be subject to new limitations or constraints on its business as a result. But consider the same
circumstances arising in respect of a company that is publicly traded. The publicly traded company may berequired to disclose to all and sundry the unfortunate event and the fine and other sanctions, potentially

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23

impairing its reputation or attracting adverse attention in ways that would not have otherwise been thecase, increasing the level of distraction for management and even attracting class action lawsuits if thestock drops as a result of the disclosure or even drops around the same time as the disclosure for a totally
unrelated reason. In 2022, 208 new securities class action lawsuits were filed in state and federal court, andover a broader time period, it has been estimated that, at any given time, approximately 5%-10% of U.S.listed companies are subject to securities class action lawsuits. In any event, you can see how the costs tothe company of a misstep may be higher following its IPO than would have been the case before.
For this reason, consider conducting a thoughtful assessment of your company’s risk exposure during the
pre-transaction preparatory phase and identify whether there are areas that should be tightened up. As
just one example, has the company invested appropriately in cybersecurity? Indeed, putting aside the factthat post-IPO the cost to the company of a misstep can be meaningfully higher, it will make the IPO
process itself go more smoothly if you have thoughtfully assessed the risks impacting your business andconsciously decided on the appropriate level of investment in risk mitigation. It can be unpleasant foreveryone involved if as part of the IPO due diligence process the company’s management appears lessthan fully conversant with the risks to its business or unable to convincingly articulate its approach toaddressing these. Indeed, investors themselves are increasingly focused on how well the companies they
invest in manage risk.

D. Consider your tax and organizational structure
Choosing the appropriate structure for an IPO can provide substantial benefits and drive value andefficiency. It is far beyond the scope of this book (or, indeed, any book) to discuss the countless factorsthat may impact which tax structure is the right one for you. What can be said is that it is sometimes morecostly (and perhaps even impossible) to effect changes on the eve of an IPO rather than well in advance.
For this reason, consider during the preparatory phase whether any significant restructuring will be
desirable and, if so, whether any advantage to effecting this earlier in the process outweighs any
associated disruption or risk of “buyer’s remorse” in the event the IPO fails to occur as anticipated.
Moreover, the adoption of a complex tax or organizational structure can lead to complex accounting, legal
and presentational challenges and may introduce the need to take additional time to educate the SEC staff
and the market. We cannot overemphasize the importance of evaluating your tax and organizational
structure early in the going public process so that unnecessary costs and delays can be avoided.

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E. How many independent directors do I need to have and when? And whatmakes a director “independent“ anyway?
The technical answer to the first question is “at least three—one at the time of the IPO, a second 90 days
later and a third (and possibly even a few more) within a year, but it may be a good thing for marketing tohave three identified at the time of the IPO itself.” The answer to the second question is “there are a lot oftechnical rules relating to relationships a potential director can or cannot have with the company,
including relationships with companies that do business with the company, so ask your lawyer to vet theseissues before asking a new director to join your board.” And the answer to the third, unasked, question is“it takes a long time to find good directors so even though you may not want to formally add them to theboard until the IPO actually happens, you should at least start thinking about it now.” It is worth
mentioning that, in addition to the independent director requirements, board diversity has become
increasingly important. We will spend the next few pages going over this in a little more detail—but given
the number of questions we get on this topic we thought it made sense to fly down to 3,000 feet or so
before doing so. Those who are content with the takeaways should feel free to flip ahead since we
captured them earlier in this paragraph.
How many independents are needed and when. The general rule for both NYSE- and Nasdaq-listedcompanies is that a majority of their board must be “independent”, and they must have fully independent
audit, compensation and nominating committees (although the Nasdaq does not require a separate
nominating committee if this function is performed by a majority of the independent directors). However,both exchanges have a transition rule for IPO companies that requires that they have at least one
independent director on each of the three requisite committees at the time of the listing, majority
independent committees (i.e., at least two independent directors) within 90 days of the listing and only
become fully compliant—with a majority independent board and fully independent committees (i.e., atleast three independent directors)—within one year after listing.

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25

For purposes of the NYSE rules, a director qualifies as“independent” if the board of directors of the company
has affirmatively determined that she or he has nomaterial relationship, direct or indirect, with thecompany. In making this determination, the board of
directors should broadly consider all of the relevantfacts and circumstances surrounding a director’s
relationships with the company from the standpoint of
the director as well as that of persons or organizations
with which the director has an affiliation. The NYSE rules
preclude a director from being determined independent
if the director or an immediate family member:

All this being said about what the requirements‰of some time before and during the IPO process to

‰

‰

‰

‰

‰

26

is (or was in the last three fiscal years) an
employee of the company (or, in the case of animmediate family member, an executive officer ofthe company);received more than $120,000 per any twelvemonth period in the last three fiscal years in directcompensation from the company, other than in
director and committee fees or pension or otherdeferred compensation for prior service (provided
such compensation is not contingent in any way on
continued service);
is a current partner or employee of the company’s
internal or external auditor or was within the last
three fiscal years a partner or employee of such
firm and personally worked on the company’s audit
within that time;

are, it is standard operating procedure forunderwriters to advise companies they are taking
public that it is preferable to be able to disclose to
the market at the time of the launch of themarketing for the IPO that the company will have amajority independent audit committee coming outof the gate. Accordingly, it is worth the investment
identify at least two or three independent
directors. The job of identifying and finding
independent directors can be a difficult and time
consuming one. In addition to the fact that anaudit committee member must meet heightened
independence requirements as described below,
they must also be “financially literate” and at least
one member of the audit committee needs to havereal finance and accounting expertise (frequently aformer public company CFO or partner of an
accounting firm). Putting aside the technicalities,

has an immediate family member who is a current
partner of the company’s internal or external
auditor or is a current employee of such a firm andpersonally works on the company’s audit, or who
was within the last three fiscal years a partner or
employee of such firm and personally worked on
the company’s audit within that time;

one of the independent directors is going to haveis (or was in the last three fiscal years) an
executive officer of a company that has acompensation committee on which any of thecompany’s present executive officers serves orserved; or

unglamorous job of overseeing the company’s

is a current employee (or, in the case of animmediate family member, a current executive
officer) of another company that makes payments
to, or receives payments from, the company forproperty or services in an amount that exceeds (inany single fiscal year in the last three fiscal years)
the greater of $1 million or 2% of such othercompany’s consolidated gross revenues.

nominating committee member.) And all this is on

to be able (and willing!) to serve as the chair of theaudit committee, which is a tremendous (and wemean tremendous) amount of work. The audit
committee has the critically important but
financial reporting. (Conversely, at least one of theauthors has frequently mused that he would like tocome back in his next life as a professional
top of the fact that you want individuals on yourboard who understand your industry, can add
value by bringing useful skills and insights to bear
and work constructively with the other board
members and management. And, in addition to the

THIRD EDITION | IPO HANDBOOK

application of the specific policies regarding“overboarding” discussed below, it also helps if theother demands on their time are not so significant
as to prevent them from devoting themselves
appropriately to their board work.
What makes a director “independent”? The NYSE
and Nasdaq both require that public companies
that list with them have, with a few exceptions

For purposes of the Nasdaq rules, a director qualifies as“independent” if the board of directors has affirmatively
determined that such director has no relationship withthe company which, in the opinion of the board of
directors, would interfere with the exercise of
independent judgment in carrying out the
responsibilities of a director. The Nasdaq rules preclude
a director from being determined independent if thedirector or an immediate family member:‰is (or was in the last three fiscal years) an employeeof the company (or, in the case of an immediatefamily member, an executive officer of the company);‰

accepted more than $120,000 per any twelve-month
period in the last three fiscal years in compensationfrom the company, other than in director andcommittee fees, compensation paid to a family
member who is an employee (other than an executive
officer) of the company or benefits under atax-qualified retirement plan, or non-discretionary
compensation;‰

is a current partner of the company’s outside auditor
or was in the last three fiscal years a partner or
employee of such firm and personally worked on thecompany’s audit;‰

is an executive officer of a company that has acompensation committee on which any of thecompany’s executive officers served at any time
during the last three fiscal years; or‰is, a partner in, or a controlling shareholder or an
executive officer of, any organization to which thecompany has made, or from which the company hasreceived, payments for property or services in thecurrent year or any of the past three fiscal years, inan amount that exceeds the greater of 5% of therecipient’s consolidated gross revenues for aparticular year or $200,000, other than payments
arising solely from investments in the company’s
securities or payments under non-discretionary
charitable contribution matching programs.

(such as for controlled companies), a majority of
independent board members. While the exchanges
still have some minor differences in how they
define “independence,” these standards have
converged to the extent that their material
provisions are now substantially identical. Bothexchanges require the board to determine that thedirector in question has no material relationshipwith the company that would jeopardize his or her
ability to act independently. Note that the NYSE
has stated that “as the concern is independence
from management, [it] does not view ownership ofeven a significant amount of stock, by itself, as abar to an independence finding.” In addition tothese “determination” requirements, bothexchanges impose a number of bright line tests
that bar a board from determining an individual to
be independent—for example, the board member
cannot have been an employee of the company
within the past three years and cannot havereceived compensation from the company(excluding board fees) in excess of $120,000 in anyof the last three years. Similar prohibitions apply tothe director’s immediate family members. The rules also limit how much business the company can do withthe board member’s employer.

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27

Additional requirements for audit committee
To be independent for audit committee purposes, acommittee member must meet the general NYSE or
Nasdaq independence standards for directors describedabove and also the following additional SEC
requirements for audit committee members. SEC rules
define an “independent” director, for purposes ofserving on an audit committee, as a director who, except
in his or her capacity as a director or board committee
member:(1) does not accept directly or indirectly any consulting,advisory or other compensatory fee from the company
or any of its subsidiaries; and(2) is not an “affiliated person” of the company or any of
its subsidiaries.
Direct or indirect acceptance of a compensatory fee by adirector includes acceptance of such a fee by (1) aspouse, a minor child or stepchild or a child or stepchildsharing a home with the director or (2) an entity (a) inwhich the director is a partner, member, an officer suchas a managing director occupying a comparable position
or executive officer, or occupies a similar position(except limited partners, non-managing members andthose occupying similar positions who, in each case,have no active role in providing services to the entity)and (b) that provides accounting, consulting, legal,
investment banking or financial advisory services to thecompany or any of its subsidiaries.

members. Audit committee members must qualify
under an enhanced independence analysis that
imposes additional, stricter independence
standards above and beyond those outlined above.
So while a board member can be “independent” forpurposes of the rules requiring that a company
have a majority of independent directors, even if
they own a significant amount of the company’s
stock or are affiliated with a controlling stockholder
for example, the enhanced independence
standards would preclude such an affiliated personof the company or any of its subsidiaries from
qualifying as independent for purposes of servingon the audit committee. An audit committee
member must also not be an “affiliated person” ofthe company or any of its subsidiaries. In addition,some proxy advisory firms establish limits on thenumber of audit committees a director can sit on
and if a board member serves on more than threepublic audit committees the NYSE requires anaffirmative determination (which is disclosed) thatsuch service will not impair their ability to serve.

In addition to these enhanced independence standards, members of the audit committee must also satisfy
the substantive standard that they are “financially literate” (as such qualification is determined by theboard). Also, the NYSE requires that at least one member of the audit committee have “accounting or
related financial management experience” while the Nasdaq requires that at least one member have “pastemployment experience in finance or accounting, requisite professional certification in accounting, or any
other comparable experience or background which results in the individual’s financial sophistication,
including being or having been a chief executive officer, chief financial officer or other senior officer withfinancial oversight responsibilities.” Under both sets of stock exchange rules, a director who qualifies as an“Audit Committee financial expert” (as defined by the SEC) is presumed to satisfy this financial
sophistication requirement—public companies are required to disclose whether they have an “Audit
Committee financial expert” and, if not, explain the reasons why not.

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Additional requirements for compensationcommittee members. Both the NYSE and the
NASDAQ require public companies to consider
additional factors when evaluating theindependence of compensation

A “non-employee director” is a director who:‰

is not currently an officer or employee of the issuer
or a parent or subsidiary of the issuer;‰

does not receive compensation in excess of theamount that would be required to be disclosed under
Item 404(a) of Regulation S-K (currently $120,000),
either directly or indirectly, from the issuer or aparent or subsidiary of the issuer, for services
rendered as a consultant or in any capacity otherthan as a director; and‰does not possess an interest in any other transaction
for which disclosure would be required under
Item 404(a) of Regulation S-K.

committee members. The board of directors must
consider all factors specifically relevant todetermining whether a director has a relationshipto the listed company which is material to that
director’s ability to be independent frommanagement in connection with the duties of acompensation committee member, including, but

not limited to: (1) the source of compensation of such director, including any consulting, advisory or othercompensatory fee paid by the company to such director; and (2) whether such director is affiliated with thecompany, a subsidiary of the company or an affiliate of a subsidiary of the company.
You might also consider constituting a compensation committee with directors who are “non-employee
directors” for purposes of Rule 16b-3 under the Exchange Act, and thereby able to exempt equity awards todirectors and officers from the short-swing profit recovery provisions of Section 16 of the Exchange Act.
Board diversity. Board diversity is currently a matter where the corporate governance requirements of the
NASDAQ and the NYSE diverge. While the below can be of debate and of course subject to future change,
currently the NASDAQ requires listed companies to disclose certain board diversity statistics pursuant to a
standardized template and to have or explain why they do not have at least two diverse directors. The NYSE
does not currently have any disclosure or other requirements related to board diversity. However,notwithstanding any legal or listing requirements, certain investors may expect board diversity.

F. Review related party transactions
The SEC requires companies wishing to go public to include a separate section in their registration
statement that details the company’s transactions involving its related parties. The overarching disclosure
rule is relatively simple: provide the details for any transaction in the last three years involving more than$120,000 in which the company is a participant and any director, executive officer or 5% stockholder (or their
immediate family members) had or has a direct or indirect material interest. The rule’s complexity comesfrom its exceptions, which go on for several pages, but suffice it to say that if the company is a participant in
a transaction that involves more than $120,000 and in which a director or officer is also interested, even

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29

indirectly, you will probably need to disclose it. In addition, even if related party transaction disclosure is not
required, you may nonetheless need to disclose transactions involving your independent directors if thesetransactions are considered by the board in determining their independence.
With a few exceptions, SEC rules do not prohibit specific activities as long as these are disclosed toinvestors. If the arrangement looks unusual or off-market, it can garner negative public attention. Manycompanies decide that they would rather forego certain arrangements than have them disclosed in SEC
filings and then picked up by the press or become the subject of water cooler conversation in the office. In
addition, the existence of certain types of arrangements can also negatively affect the voting
recommendations of proxy advisory firms.
However, some things are flat out prohibited whether you disclose them or not. In response to theaccounting scandals of the early 2000s, Congress passed a law that prohibits public companies fromextending credit, or arranging for the extension of credit, to their directors and executive
officers. Previously, it had been quite common for public companies to lend money to their executive
officers to either buy company stock or a home in a new city and these loans are still quite common for
private companies. Then WorldCom lent its CEO, Bernie Ebbers, $408 million to cover margin calls on loans
against his WorldCom stock, which did not turn out to be a great investment after all, and the rest is
history. One of the unexpected traps in preparing to go public relates to the timing of this prohibition. The
limitations and restrictions to which public companies are subject typically begin to apply when thecompany actually sells its stock to public investors. This insider lending prohibition, by contrast, applies
from the time of the first public filing of the registration statement. As a result, insider loans need to becleaned up before you publicly file with the SEC.
During the preparatory phase, consider reviewing the transactions and arrangements your company has
with management and stockholders and see whether these are compatible with your anticipated future
public company disclosures. It may be that some level of disclosure in the IPO registration statement
cannot be avoided, given that these disclosure requirements look back three years, but it may be more
appealing to be able to say that they were wound up prior to the eve of the IPO. Also, it can frequently taketime to unravel arrangements so giving all concerned some runway to do this can make it less painful.

G. Shareholder arrangements
Another area that makes sense to focus on well in advance of an IPO is arrangements with and among thecompany’s shareholders, to be sure that these are compatible with the IPO and being a public company.
More specifically, it may make sense to take inventory of all shareholder arrangements to identify if there

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are consent, participation or other rights shareholders have that may directly or indirectly impact thetransaction timeline. This need not be an explicit right to consent to or to participate as a seller in an IPO—
if a shareholder has the ability to block amendments to charter documents or corporate reorganizations,this may itself effectively give that shareholder the ability to hold up the transaction. Even soft items suchas governance rights can pose a problem. For example, as discussed above, following an IPO a company’sboard will be required to ultimately have at least three and possibly more independent directors, and it
may not be consistent with the anticipated composition of the company’s post-IPO board to include
designees of smaller shareholders who may have been granted the right to a seat on the board of thecompany as a private company. Depending on the dynamics, it can be tricky to request consents or takerights away from a stockholder on the eve of a transaction. As such, consider on a case-by-case basis if
your company has afforded shareholders rights that could be problematic and whether it makes sense torevisit these arrangements in advance.
In addition, we note it is standard operating procedure in an IPO for the underwriters to seek to “lock up”
all pre-IPO shareholders for a period of time following the date of the pricing of the IPO (typically 180
days). So called “lock-up letters” are agreements directly between the pre-IPO shareholders and theunderwriters whereby the shareholders agree they won’t sell their shares, lend them, margin them or reallydo anything with them that involves putting money in the shareholders’ pockets or shifting away from themthe economic consequences of ownership of the shares until the lock-up period has expired. Underwriters
will frequently express an interest in locking up “all” of the pre-IPO shares if they can.
And while in our experience if this “lock up” is not practicable it need not be a show stopper, theunderwriters do have a legitimate concern that it could impede the successful marketing of the offering if
IPO investors are not able to be assured that there will not be a large volume of stock from pre-IPO holders
being dumped into the market shortly after trading starts. Accordingly, in anticipation of making the IPO
process run more smoothly, you may wish to consider whether your arrangements with existing
shareholders, including employee shareholders, can be designed in such a way that they will prevent theseholders from selling during the anticipated IPO lock-up period and even require them to enter into
customary lock-up letters directly with the underwriters.

H. Anti-takeover protections
It is worth considering whether to implement “anti-takeover” protections at the time of an IPO that will
impede hostile acquirers who may seek to gain control of your company without negotiating with yourboard. Given that investors may suspect that management is attempting to use such protections toentrench its own position at the expense of shareholders, a company should be thoughtful about its

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31

approach to such protections. Such protections could also affect a public company’s eligibility for inclusionin certain stock indices.
A number of devices and protections are available to IPO issuers. The most straightforward, and powerful,anti-takeover protection seen with some level of frequency (particularly in specific industries) is a dualclass high vote/low vote structure, which affords the holders of a high vote class of stock (typicallyfounders, family owners, selected pre-IPO owners or insiders) with voting power sufficient to control theelection of directors even when public investors, who hold a separate low vote class of stock, own amajority of the economic interests in the company. While the precise percentage varies significantly fromyear to year depending in part on market conditions and the nature of the companies going public duringthat market window, upwards of a quarter of newly public companies in some years may employ disparate
voting capital structures. In response to investor preferences, however, a growing proportion of thesecompanies have begun to build in time-based sunsets on these arrangements. In recognition of theprevalence of these multiple class capital structures, following a consultation with market participants thatcommenced in late 2022, S&P Dow Jones Indices announced in April 2023 that it was reversing a policy
adopted in 2017 and will again permit companies with multiple share class structures within the S&P
Composite 1500 Index and its component indices. FTSE Russell still excludes companies from its indices if
their “unrestricted public shareholders” do not hold at least 5% of the voting power.
Another such device is a “classified board”, which is a board of directors divided into multiple classes(almost always three), each of which serves a staggered multi-year term (almost always three years), which
prevents a hostile acquirer from replacing more than a specified percentage (almost always one-third) of
the directors at any single annual meeting. The prospect of having to conduct successful proxy fights at two
successive annual meetings in order to gain control of a company’s board can in and of itself be asignificant deterrent to a hostile bidder. In contrast to the use of a high vote/low vote structure, which
remains less common outside of specific industries and can attract investor resistance, the significant
majority of IPO issuers have classified boards. For example, based on a survey of certain of the largest IPOs
by deal size between July 2020 and September 2022, over 90% of companies going public implemented aclassified board. However, among larger publicly traded companies it has become increasingly rare for thisboard structure to be retained over the long-term in the face of high levels of support from shareholders
for proposals to declassify boards. For example in 2020, only approximately 10% of S&P 500 companies hada classified board. As with high vote/low vote structures, proxy advisory firms generally disfavor classified
boards absent a reasonable time-based sunset provision (often 3-5 years).
There are also a welter of additional measures that are nearly universally implemented without significant
investor resistance. For example, an IPO issuer’s certificate of incorporation typically prohibits stockholder

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action by written consent, which prevents a majority of the shareholders of the company from taking
pre-emptive, unilateral action in lieu of a meeting. The certificate will also typically be drafted to include
provisions restricting stockholders’ ability to call a special stockholders’ meeting, thus further inhibiting
their ability to take extraordinary action. A company’s bylaws will also almost always require timely
advance notice to the company from stockholders before such stockholders may nominate new directors
or propose other matters for consideration at a shareholders’ meeting. A supermajority of shareholders’votes may also be required in order to amend the company’s certificate of incorporation or bylaws. As withclassified boards, supermajority voting requirements and certain other of these measures have becomeless common among larger, seasoned public companies.
It is also almost universal for IPO issuers to authorize in their certificate of incorporation what is referred
to as “blank check” preferred stock, which enables a board to create and issue new series of preferredstock with whatever rights and preferences the board may desire at a given time. The board may use thisability to take certain anti-takeover actions, including the implementation of a stockholder rights plan, or“poison pill”, without further stockholder approval. A poison pill generally allows stockholders to purchasea company’s common stock at a highly discounted price if a large block of stock is acquired by a third-party
who has not been pre-approved by the board, the effect of which is to dilute the third-party’s value. Poison
pills are extremely rare in IPO issuers due to the negative reaction they tend to engender among investors
and the fact that with the authorization of blank check preferred stock the board may deploy a poison pill
later when needed.
You should also be aware that unless you take affirmative action to opt out, Delaware’s anti-takeover
statute (section 203 of the Delaware General Corporation Law) will apply to companies incorporated in thatstate (which is the jurisdiction of most publicly traded U.S. companies). This statute provides that, subject
to certain exceptions specified in the law, a publicly held Delaware corporation may not engage in certain“business combinations” with any “interested stockholder” for three years after the date of the transactionin which the person became an interested stockholder. These provisions generally prohibit or delay theaccomplishment of mergers, assets or stock sales or other takeover or change-in-control attempts that are
not approved by a company’s board of directors. Other states have adopted similar statutes. Some IPO
issuers, such as companies controlled by financial sponsors, typically opt out of these anti-takeover
statutes to avoid impeding the sponsors’ ability to sell off its stake following the IPO.

I. Management incentive arrangements
Companies going public often revisit the arrangements they are employing to incentivize management andtheir employees more broadly. Indeed, the ability to use publicly traded equity as a compensation currency

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33

is frequently viewed as a key benefit of pursuing an IPO. There are various types of management incentive
arrangements that might be established in connection with an IPO, which broadly fall into two categories:(1) stock-based arrangements, in which value is tied to the company’s stock price, subject to specified
vesting requirements, which are often only subject to continued service with the company; and(2) performance-based compensation arrangements, in which value is subject to the achievement ofpreestablished performance goals, which may include stock price and/or other company financial metrics
as a measure of performance. Of course, frequently arrangements are structured that have characteristics
of both stock-based arrangements and performance-based compensation arrangements, such as restricted
shares, restricted units or stock options that vest upon achieving specified performance goals. In
structuring management incentive arrangements, it is important to take into account potential tax,
securities law and accounting issues such as (1) potential limitations on the deductibility of compensationin excess of $1 million under Internal Revenue Code Section 162(m), (2) reporting and short-swing profit
rules applicable to officers, directors and 10% beneficial owners of public companies under Section 16 of
the Exchange Act, and (3) potential earnings charges associated with performance-based compensationand certain types of stock-based awards. There are also various types of broad-based employee
arrangements that might be established once the company is public, such as an employee stock purchaseprogram.
In addition, in connection with a potential IPO, consideration is commonly given to (1) entering into
employment and noncompete agreements with key members of the senior management team;(2) reassessing, potentially with the assistance of a compensation consultant, the appropriate mix of salary,bonus, benefits, perquisites and company stock incentives offered to senior management, relative to otherpeer group public companies in similar industries; and (3) the impact of an IPO on the financial and estateplanning of senior executives and substantial equity holders. Consideration should also be given as towhether any modifications to the company’s existing compensation and employment arrangements may benecessary in order to comply with applicable tax and securities law requirements or that may otherwise beappropriate once the company is public.

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IV. Building a public company finance organization
The first few quarters of life as a public company are critical. There is uncertainty among investors andanalysts because the company is relatively unknown and the consequences of not meeting expectations
can be severe. The newly established public company is also unfamiliar with communicating with theinvestment community about its results and performance. An inability to communicate effectively withanalysts and investors to manage expectations in those first few quarters can be damaging to shareholder
value and compromise credibility.
As a result, getting the right finance organization,with the right capabilities to deliver quality financial
reporting at the right time, is an important factor toa successful IPO and to being public. Finance staff
and systems must be prepared to meet the needs
and requirements of new external stakeholders,
including higher expectations of transparency anddata reliability, increased scrutiny of budgets andprojections and demands for accelerated filing. Thisis typically achieved by first focusing on reducing
the monthly financial close to a reasonable amountof time for a public company and then preparing thequarterly financial information in a timely manner
and with the level of detail and accuracy that is
expected of a public company. Enabling the financeorganization with mature processes and technology
will help to ensure that finance resources are able
to provide value-added analysis rather than simply
gathering data.
While accounting and financial reporting issues
are often one of the more challenging and timeconsuming areas, they can be the mere tip of theiceberg in terms of IPO preparation. The IPO
process is cross-functional and companies must
focus holistically on their preparations for going
public as well as being public. A good IPO plan
will identify the critical aspects of the financefunction that need to be in place before starting
the IPO preparation process, such as the CFO
and controllership functions. Others, such as
SEC reporting, can be built up during the IPO
preparation process, initially relying on external
resources and migrating the SEC and external

THIRD EDITION | IPO HANDBOOK

reporting functions to internal personnel as the
IPO launch date approaches. The key is getting theappropriate resources in place at the right time
without over-investing in making changes before
the IPO is certain.
Questions to ask about your finance organization:‰Will we have the time and capacity to focus on
ongoing operations and marketing the IPO?

‰

Are there any data gaps in the financial information?

‰

Do we have sufficient technical accounting expertiseto handle the additional external reporting
requirements?

‰

Do we have sufficient documentation and policies tosupport external audits?

‰

Does sufficient reporting exist to form the basis for
management’s discussion and analysis (“MD&A”)
and the business section?

‰

Have we identified the accounting implications of
any changes to the legal entity structures that may
occur prior to the IPO?

‰

Is our closing process sufficient to support ourorganization as a public company?

‰

Can we provide the right information at the righttime to investors, regulators, and management?

‰

Can we accurately forecast and meet budget?

‰

Are our budgets and forecasts available in a timely
manner?

35

A. What is uniquely different for public company finance functions?
Running a public company finance organization is a delicate balancing act that involves three core roles:‰ delivering business insights—provide proactive, insightful decision support;‰ maintaining compliance and controls—manage risk and ensure regulatory and control compliance;and‰ achieving transaction efficiency—provide efficient transaction processing and reporting.

Finance Process Framework
PwC Framework for Finance

Finance Processes

How do you partner withthe business to createshareholder value?
Insight

Do you have theright governancemodel to partnerwith the business?

Do you have theoptimal sourcing
strategy?

Business
Insight

Strategy to
Execution(S2E)

Strategic Planning
Target Setting
Budget and Forecasting
Business Analysis &ReportingTransaction
Efﬁciency

Purchase to
Pay (P2P)

Procurement/Purchasing
Accounts Payable &Outgoing Payments (incl.
T&E Accounting)Order to Cash
(O2C)

Credit Management
Customer Billing
Accounts Receivable &Incoming Payments

Record toReport (R2R)

General Accounting & Subledger Close
C/L Close & Consolidation
Reporting & Analysis

Risk,
Compliance &Control

TreasuryCorporate Tax
Risk Management
Internal Control
Investor Relations

Complianceand Control
Control

How well do you leverage technology? Efﬁciency

How do you maintain arobust controls
environment without
constraining the business

Are all Finance services
value-adding and delivered
though lowest cost

Source: PwC

While the overall responsibilities of the finance organization are largely the same for private and publiccompanies, the specifics will differ, as will the skill sets required to fulfill them. In preparing for thetransition, you will need to pay particular attention to the following areas:‰ record to report process;‰ financial planning and analysis;‰ finance structure;36

THIRD EDITION | IPO HANDBOOK‰ finance processes and controls;‰ finance systems; and‰ finance talent.
We will now explore each of these areas in greater detail.

B. Record to report process
The most significant change for many companies is the need to close and publicly report their financial
results on a rigorous timeline. See Chapter VIII (Life as a Public Company) for a discussion of the filingdeadlines for a public company’s ongoing periodic reports. The inability to meet these requirements canshake investor confidence and potentially prohibit the company from completing capital market
transactions while out of compliance. For most private companies, these are changes that take some time
to implement.
Common closing and reporting issues for pre-IPO companies include:‰ inability to gather data from different business units in a timely fashion;‰ poor quality of financial reporting data;‰ policies and procedures are inadequate, poorly documented, or not documented at all;‰ no formalized process for preparing month-end results;‰ overreliance on manual consolidation;‰ ongoing need for late adjustments and corrections; and‰ lack of resources or inadequate skill sets within the finance department, including lack of publiccompany accounting and reporting expertise.
Most companies will need to dramatically accelerate the closing and reporting cycle once they go public,
eliminating bottlenecks and waste, simplifying and standardizing processes, sequencing dependent
activities, focusing on control and accountability, analyzing and eliminating post-close adjustments, andensuring first-time accuracy.
In our experience, companies with successful five-day close processes achieve milestones within thefollowing timeframe, using a series of common practices:

THIRD EDITION | IPO HANDBOOK

37

Streamline, simplify and standardize processes with a focus on control, accountability andfirst-time accuracy.
Close and Consolidation
Leading Practices
Milestone

Common Solutions
Work Day1

Payroll/AP/fixed assets-1‰Intelligent use of accruals and estimatesInter-company processing-1‰

Proactive issue resolution and error correction

Data submission & validation-1‰

Streamline transaction processes

SG&A accruals

1‰

Automate or eliminate manual entries

Accounts receivable

1-2‰

Eliminate non-value-added activities

Revenue recognition

2-3‰

Automate reconciliations

Operational costs allocation

2-3‰

Eliminate duplicate data entry

Division sub-ledger close

2-3‰

Utilize materiality thresholds

Flash reporting

2-4‰

Distribute workload away from period-end

Tax provision

3-4‰

Corporate ledger close

3-4

Establish governance structure to enforce deadlines
and improve accountability‰

Publish the closing calendar and track status

Consolidation (including
eliminations & currencytranslation) activities
Analytic review
Management reporting

1

38

‰

Cross-train finance personnel

4-5‰

Provide clear and regular communication

5‰

Implement culture of continuous process
improvement‰

Leverage consolidation tools to automate
eliminations, currency translation, top-side
adjustments and data capture/promotion‰

Run consolidations daily to facilitate flash reportingand support early error identification

6-7

Leading practice based on PwC experience with successful 5 Day closes at large multi-national companies using legacy financial systems.
Source: PwC

THIRD EDITION | IPO HANDBOOKEliminate duplication of effort and non-value-added activities that do not directly support externalreporting requirements or provide effective decision support.
Close and Consolidation
Leading Practices
Milestone

1

Common Solutions
Work Day1

10-Q Draft (w/out final numbers)-5

Variance analysis

5-8Compile supplemental data

10

Disclosures and MD&A

13-15

Sub-certification

17-19

Disclosure review committee

20-22

Earnings release

18-20

SEC filing

24-28

‰

Validate reporting requirements, stakeholder needs
and the underlying data structure‰

Automate roll forward analysis and the preparationof cash flow statements‰

Automate the collection of support material throughsupplemental accounts‰

Standardize monthly variance analysis to identify key
business drivers & support MD&A‰

Utilize a controller’s questionnaire to identify
disclosures and support sub-certifications‰

Leverage reporting tools to automate and standardize
segment, regional, legal entity, tax and other internaland external reports

Leading practice based on PwC experience with successful 5 Day closes at large multi-national companies using legacy financial systems.
Source: PwC

Most companies do become more efficient in closing and reporting once they become public as they add
resources and standardize processes. For example, a PwC survey reported that pre-IPO, 79% of companies
took more than 10 calendar days to close a quarter, and 67% were taking more than 16 days. Once public,
77% took more than 10 days and just 36% needed more than 16 days. Streamlining the record-to-report
process through automation and standardized procedures will free up much-needed staff for otheractivities.

C. Financial planning and analysis
Financial planning and analysis, or “FP&A”, includes budgeting/forecasting, target setting and strategicplanning, capital investment and risk analysis, and performance measurement.
Budgeting and forecasting, in particular, will become an increasingly important task in your life as a publiccompany. Research analysts rely on this information, and a public company’s ability to meet its own
earnings estimates and “The Street’s” estimates has a significant impact on its stock performance. Accurate

THIRD EDITION | IPO HANDBOOK

39

budgeting and forecasting is critical for a successful IPO and for the ongoing life of a public company.
Therefore, it is paramount that the company has a well-functioning FP&A team. The FP&A team is
responsible for developing realistic budgets and forecasts and must be able to articulate why variances
have occurred.
Common FP&A issues for pre-IPO companies include:‰ organizational silos that get in the way of collaboration;‰ lack of standardized/consistent processes;‰ lack of consistent metrics and reports to analyze business results;‰ poorly defined budgeting and forecasting materiality levels;‰ lengthy budgeting and forecasting cycle time;‰ disconnect between strategic plan and operational plan;‰ too many people involved in budgeting/forecasting processes;‰ limited ability to perform scenario modeling/what-if analysis;‰ disintegrated balance sheet and income statement planning; and‰ lack of common terminology and hierarchies.

40

THIRD EDITION | IPO HANDBOOKCompanies with high-performing FP&A functions often exhibit the following capabilities:
Strategic Planning/
Target-Setting

Capital Investment & Risk
Analysis

Budgeting, Forecasting,and Analysis

Value-Based/Performance
Measurement‰‰

Evaluates capital
investment, special
projects, and market
risk

‰

‰

‰

Analyzes risk
scenarios andexposures via
modeling,
monitoring, andexternal research

Drives planning
activities andprocesses andsupports audits/
performance
reviews

Conducts shareholder
value analysis,
identifying where
value is being
created or destroyed‰‰

Creates
responsibility for
integrity of reported
results and internalmanagement
reports‰

Supports functions
related to theinvestmentcommunity (e.g.,
investor relations,board of directors,etc.), divisions,products, andcustomer segments
as they relate
to profitability
reporting

Ensures valuebased analysis andmonitoring of risk
is being used toevaluate current
business, newproducts, and M&A
opportunities‰

Drives performance
management (e.g.,business intelligenceand scorecards) andanalytics processacross the entire
corporation‰

Monitor key
measures ofbusiness performance

‰

‰

‰

Determines critical
success factors/
value drivers andaligns them withthe organization’s
vision and strategic
objectives
Creates joint
responsibility
between strategicplanning and FP&A
for the integrity
and analysis that
supports thestrategic plan
Establishes realistic
targets forbudgeting andforecastingprocesses; setstargets for key
measures ofaccountability‰‰

Enables more
effective capital
allocation andallocation of
resources to balancerisk appropriately
Evaluates returnon investment andresults of specificorganizational
endeavors against
the risk involved

Mitigates the impact
of market andoperational risk

Source: PwC

D. Finance structure
You may need to make adjustments to the structure of your finance organization in order to streamline
processes and increase efficiency, particularly in the external reporting and controllership areas. For
transactional-type processes, many high-functioning public finance organizations have adopted sharedservices models that centralize these activities internally or with an outsourced third party. Complianceand control activities are also best addressed through centralization so that they can be managed bypeople with deep functional knowledge of the area.

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41

Activities that involve support for business decisions such as investments, new business ventures, newproducts, or other general management decisions may call for a more distributed finance organization
model in which finance professionals are co-located in the businesses where these decisions are made.
The following table depicts the three core roles of the finance organization and the common practices wesee public companies follow to structure the organization.

Common Practices of Public Company Finance Organizations

Organization
Structure

Insight
Provide proactive, insightfuldecision support

Compliance andControlManage risk andensure regulatory andcontrol complianceTransaction Processing
Provide efficienttransaction processing
and reporting‰

Organized “By Customer”‰‰

Organized “By Activity”‰

Centralized governance

Organized “By
Product or Service”‰‰

Senior level
reportingrelationships

Economies of scale
through centralizationor shared services‰‰

Small groups, flat
span of control‰

Deep functional
knowledge

Outsourcing whenfurther savings
available and control
not sacrificed‰

Structured recurring
complianceactivities‰

Highly standardized‰

Highly automated‰Continuous
improvement program‰‰

Process

Single contact forcustomer‰

Customized analysis tosatisfy customer needs‰

Standardized andintegrated planning andforecasting‰42

Direct line to Finance anddotted line to business
unitsStandardized metrics andreporting‰

Other value-added
activities are more
flexible‰

Involves a highdegree of analysis

THIRD EDITION | IPO HANDBOOK

PeopleTechnology

Insight

Compliance and Control

Transaction Processing‰

Highly skilled in financial
analysis‰

Deep functional
knowledge‰‰

Deep business knowledge‰‰

Strong interpersonal skills

Ongoing training tostay current in areaof specialization

Non-automatedactivities performedby lower-skilledemployees‰‰

Rotated throughout
company‰

Ongoing training to stay
current on the industry andanalysis tools

Source additional
expertise when not acore competency

Continuous
improvement
mindset‰Possible high spanof control‰

Highly cross-trained‰

Automation of highvolumes oftransactions using
core ERP
functionality and/or
automation tools‰

Automated, built-in
controls‰

Self-service
functionality‰

Specific tools tofacilitate an efficient
close process
through tracking &routing‰

Integrated accountreconciliation
solutions‰‰

Automates standard
reporting‰Specialty data andanalysis‰

Supports ad hoc analysis‰‰

Performs scenario planning

Perform scenario
planning‰

Integrated financial systems‰‰

EPM software to streamline
FP&A processes and solidify
KPI/metric generation

Integrates withoverall financial
systems

Source: PwC

E. Finance processes and controls
Good internal controls are no longer just best practice. Section 404 of Sarbanes-Oxley requires that publiccompanies have in place an internal control framework to prevent and/or detect material misstatements
to the financial statements. This control framework should include documentation of the controls,
associated policies, and procedures that contribute to the control framework and documentation, which
can be relied on as part of a validation procedure to ensure that the controls are operating as designed.

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43

Sarbanes-Oxley also requires the CEO and CFO to certify in each annual report on Form 10-K and quarterly
report on Form 10-Q that:‰ the report (10-K or 10-Q) neither contains any untrue statement of a material fact nor omits tostate a material fact;‰ the financial statements and other information in the report fairly present, in all material
respects, the company’s financial condition and results of operations;‰ disclosure controls and procedures are established and maintained;‰ certain disclosures about the company’s internal control over financial reporting have been madeto the issuer’s auditors and the audit committee, including disclosures about significant
deficiencies, material weaknesses, and any fraud;‰ the report includes information about their conclusion on the effectiveness of disclosure controls
and procedures and whether there have been changes in internal control over financial reporting
during the most recent period; and‰ the report fully complies with the Exchange Act.

F. Finance systems
You cannot run a public company on the back of Excel spreadsheets. Most companies heading into an IPO
spend considerable time and resources upgrading their finance IT infrastructure. Specifically, you will needto ensure that your systems and processes are documented and tested to comply with Sarbanes-Oxley
requirements and that your technology infrastructure adequately supports compliance efforts. To
accomplish this, many companies implement an ERP system ahead of the IPO. The accelerated financial
reporting requirements and increased investor relations demands of newly public companies reinforce theneed for a strong technology environment. KPI’s & non-GAAP measures will need to be defined andcommunicated while preparing for an IPO. It is recommended to support this process and underlying datawith EPM (Enterprise Performance Management) tools for repeatability and reliability.
You will also need to submit XBRL-formatted financial statements and financial statement schedules in an“XBRL Exhibit” for annual and quarterly filings and certain registration statements (in addition to posting
the XBRL Exhibit on your corporate website). See Chapter VIII (Life as a Public Company) for additional
information regarding XBRL-formatted financial statements and financial statement schedules. In 2020, one
SEC Commissioner suggested that the SEC should consider additional opportunities for XBRL tagging, suchas in proxy-voting disclosures.

44

THIRD EDITION | IPO HANDBOOK

Issuers are required to tag the following:‰ each significant accounting policy within the significant accounting policies footnote tagged as asingle block of text;‰ each table within each footnote and schedule tagged as a separate block of text; and‰ each quantitative amount (i.e., monetary value, percentage, and number) separately tagged withineach footnote and schedule.

G. Finance talent
Public company reporting requirements often require organizations to add and retain employees who
possess skill sets a private company does not typically have. For example, 50% of newly publiccompanies participating in a PwC survey hired new staff members specifically to increase their SEC
reporting capabilities.

Other areas where companies typically need to add staff include accounting, legal, financial planning andanalysis, and internal audit and compliance, as well as investor relations, human resources, technology,
taxation, and treasury and risk management.

Common talent issues for pre-IPO companies include:‰ knowledge gaps in the area of external reporting, FP&A, and tax;
‰ accounting organization focused primarily on transaction processing (e.g., AP, AR, monthly close)
at the exclusion of other critical areas, such as forecasting, delivering business insights, or control
and risk management;‰ poor understanding of operational reasons for finance variances;‰ significant number of post-close adjustments (e.g., due to lack of adequate review processes andteams); and‰ challenges meeting earnings release, quarter-end, and tax compliance timelines.
Specific areas where you may need to add staff to your finance organization include:

SEC financial reporting: A typical SEC financial reporting team includes a director of SEC financial reporting
and additional personnel commensurate with the size and complexity of the company and its financial
reporting objectives. Your existing accounting and financial reporting team may need to hire additional

THIRD EDITION | IPO HANDBOOK

45

personnel to handle the incremental annual and quarterly reporting requirements and the compressed
timeline for completing these tasks. Companies frequently establish a disclosure committee that reports to
the CEO/CFO and has responsibility for ensuring timely compliance with disclosure and financial reporting
obligations and proper implementation of a company’s disclosure controls and procedures.
Taxation: Once you become public, there will be more emphasis on your income tax provision and tax
planning strategies; therefore, it is common to increase the size of the taxation team. A typical taxationteam includes a tax director, one or more tax managers, and additional personnel commensurate with thesize and complexity of the company.
The taxation group is typically responsible for ensuring compliance with all federal, state, and internationaltax requirements, as well as compliance with indirect taxes including sales/use taxes, property taxes, andvalue-added taxes. In addition, a public company’s taxation group is subject to shorter quarter andyear-end close cycles, specific interim reporting rules that govern the quarterly tax provision preparation
process, and more robust disclosure requirements for year-end reporting.
Furthermore, your overall tax planning function will become increasingly important. Effective tax planningis essential as it will drive enhancements in shareholder value through management of your effective tax
rate and its impact on earnings per share (“EPS”).
Internal audit: NYSE-listed companies are required to establish an Internal Audit (“IA”) function as part ofbecoming a public company. While companies that list on the Nasdaq do not have the same requirement,
we believe it is best practice to establish an IA function. The typical IA function is structured as anindependent assurance and consulting department that can have varied responsibilities, which may
include assessing the company’s internal controls and their ability to support the achievement of defined
strategic objectives, mitigate key risks, ensure compliance with internal policies, and support financial
reporting requirements. The role of IA usually involves assisting management in performing tests andprocedures designed to verify the company’s compliance with Section 404 of Sarbanes-Oxley, as well as
providing comfort to the CEO and CFO when they sign the 302/906 certification attesting to the accuracy offinancial information and operating results published in periodic reports.
Given the cost and time needed to hire the company’s IA resources, many companies will engage external
resources to help support their IA function rather than hiring additional staff. These external resources canwork in tandem with the company’s existing IA resources through a co-sourcing arrangement, or if thecompany does not have any IA resources, it may consider a fully outsourced IA function. The cost to engage
external resources could be higher than the cost to hire IA resources internally, but this option has several

46

THIRD EDITION | IPO HANDBOOK

advantages. Using external resources allows the company to scale up or down rapidly without having tohire or dismiss internal resources. External providers may also have topical specialists who can provide
significant value to the IA function and who can transfer additional knowledge to internal resources.
Treasury and financial risk management: A dedicated treasury and financial risk management group is alsoa requisite for a public company. Often, newly public companies struggle to adequately manage theirliquidity, foreign currency exposure, and derivatives used to hedge interest rates and other risks to theirbusiness. An experienced treasury and financial risk management function can mitigate the growing pains
that come with being a newly public company.

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47

V. Dealing with the SEC—What do they care about
and how can you navigate the process assmoothly as possible?
A. Overview of the SEC review process
The Division of Corporation Finance (and that is not a typo—it is “Corporation” and not “Corporate”) (“CorpFin”) within the SEC is, among other responsibilities, tasked with reviewing the registration statements of
IPO companies as well as the SEC filings of the thousands of already reporting companies. (Sarbanes-Oxley
requires that some level of review of each reporting company be undertaken at least once every three
years, and the SEC reviews a significant number of companies more frequently.)
Corp Fin assigns filings by companies based on their industry to one of 9 offices, each headed by an Office
Chief (such as the Chief of the Office for Energy & Transportation or the Chief of the Office for Life Sciences
and so on). Generally, each industry office is staffed with professionals, primarily lawyers and accountants
but also those with specialized expertise such as mining or petroleum engineers who may be involved withthe reviews of companies in specific industries. (When you take a moment to reflect on it, you realize thatthese folks have an awful lot on their plates, particularly when markets are active and there are lots oftransactional filings in addition to the ongoing reports that public companies must file.)
It is important to understand that when the SEC staff reviews filings, they are not doing so to say whether
or not any IPO or other investment is a good one. Rather, they are primarily focused on ensuring that the
SEC’s disclosure requirements for the registration statement are being adhered to and that the financial
presentation complies with applicable authoritative accounting literature and SEC staff interpretations andpolicies dealing with accounting and auditing issues—and even here, the SEC does not pass on whether theregistration statement is adequate or accurate (indeed, it is against the law to say that they have).
When your IPO registration statement is first submitted to the SEC, they will assign it, typically within aweek or so, to a review team. Typically, this will include a lawyer and an accountant who are the primary
examiners, and a more senior lawyer and accountant who are the reviewers. This team will be overseen by
the relevant office chief. After the team is assigned, the legal examiner ordinarily will reach out to youroutside counsel to let them know that the filing will be subjected to a full review and obtain theappropriate email addresses for where the staff should eventually send their initial comment letter andsubsequent correspondence. Your counsel thereafter ordinarily maintains open lines of communication
with the SEC staff while the registration statement is being reviewed.

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THIRD EDITION | IPO HANDBOOK

A word on the level of review—the SEC staff does not review each and every SEC filing and, for those filings
that are pulled for review, the staff conducts differing levels of review. However, although the SEC does notreveal the criteria that it uses to select filings for review, IPO registration statements almost without
exception always get a full review (with the rare exceptions relating to those companies who have publicly
traded debt, already have their common stock registered under the Exchange Act for compensation orother reasons or who were recently public and are re-registering).
As noted within Chapter II (Overview of the IPO Process), the SEC staff will take approximately one month toperform their initial review of the registration statement and issue their first comment letter. When this is
received (frequently on a Friday afternoon…) it is usually the catalyst for a frenzy of activity as the company
and its counsel and auditors, in consultation with the underwriters and their counsel, rush to prepare
appropriate responses. The basic format is to resubmit an amended version of the registration statementthat has been revised to reflect the SEC staff’s comments and, if required, to provide updated financial
statements and other recent developments, accompanied by a letter explaining the company’s responses
to each of the staff’s comments. In the authors’ experience it usually takes at least a week and a half to two
weeks (or more) to do this in a thoughtful way and allow time for internal layers of review both within thecompany and its auditors. Different practitioners have different approaches to the process, but the authors’
general advice is to comply with the staff’s comments on specific disclosures where possible,
notwithstanding that this may result in some mangling of words that were painstakingly written as part ofthe drafting process leading up to the initial submission or, when the comment is simply inapposite, toexplain clearly and respectfully in the response letter why this is the case. Where staff comments relate toaccounting matters, the participation and advice of the company’s auditors and accounting advisors are
critical—the experienced firms will have a wealth of practical experience on just about every issue that the
SEC staff may raise (indeed, the big firms each have partners in their national offices who havebackgrounds working in senior capacities at the SEC). Generally speaking, however, it is safe to say thatwhen the SEC staff has issued a comment questioning or seeking to understand the company’s accounting
in a particular area it is important to respond in a way that is explicitly grounded in the relevant accounting
standards and literature. Note that the SEC staff’s comment letters and the company’s responses will
eventually become publicly available on the SEC’s website after the IPO occurs.
In an IPO there will typically be several rounds of SEC staff comments and resubmissions of the registration
statement in response thereto, with the overall time required for the SEC review phase commonly taking
from two-and-a-half to four months. Statistically, studies have shown that in recent years the median timefrom initial submission to effectiveness for IPO registration statements (which time period also includes
the marketing phase as effectiveness of the registration statement occurs after the roadshow just prior

THIRD EDITION | IPO HANDBOOK

49

to pricing) is approximately 16-18 weeks. (For purposes of blocking out timetables, the authors generally
assume that the SEC staff will take a month to respond to the submission of the initial registration
statement, two weeks to respond to the submission of the first amendment, one week to respond to thesubmission of the second amendment, and several days for subsequent amendments thereafter, althoughwith the exception of the staff’s response to the initial submission (which almost invariably appears
somewhere close to the one month time frame), response times can vary significantly based on theworkload of the review team and other factors, including the difficulty of any specific issues that areraised.) To the extent that the overall review period takes longer than this, it is usually due either to thefact that the company has decided for whatever reason not to move as quickly as it could have (or perhaps
chosen to take a “resistant” posture to staff comments) or because problematic questions relating to its
historical accounting have been raised. While “legal” comments on the disclosure can usually ultimately beresolved by revising the relevant disclosure, comments relating to historical accounting may result in theneed to restate the financial statements included in the registration statement, a process which can taketime and result in a great deal of attention from the company’s auditors. Avoiding this unfortunate
situation should be a key objective of the company as it is preparing the financial statements to be
included in the registration statement and, in the authors’ view, is yet another reason why it is advisable toengage auditors and accounting advisors with significant relevant experience. Indeed, in order to make the
SEC review process as expeditious as possible a company should draw on the well of experience of its
counsel, accounting advisors and auditors when preparing the entire registration statement to anticipate
the areas that will be of particular interest and concern to the SEC staff.
In some cases, the appropriate application of generally accepted accounting principles may not be clear or
there may be questions concerning the age, form or content of financial statements required to be
included in a filing. In these circumstances, it may make sense to consult with the accounting staff of theSEC (generally, the SEC’s Office of the Chief Accountant addresses the former types of questions while theaccounting staff within Corp Fin resolves the latter) prior to the initial submission of the registration
statement, which although it may take additional time on the front end can save time and aggravation
overall. Analogously, albeit less frequently, there may be uncertainty about a legal aspect of the proposedtransaction and pre-filing consultation with the legal staff of the SEC may be warranted. The SEC haspublished specific guidelines as to how such consultations should be handled, and your counsel andauditors should have practical experience in doing so. Certainly, one way or the other it should be on yourpre-filing work plan to at least expressly consider with your auditors and counsel whether there are any
items that warrant such a pre-filing consultation with the SEC staff. In recent years, the SEC staff has been
increasingly open to communications and encourages outreaches where necessary.

50

THIRD EDITION | IPO HANDBOOKTo give you a little bit of a sense of the back and forth of the SEC comment process, below is a table thatlays out some of the metrics regarding the back and forth between a real (but anonymous) IPO issuer andthe SEC during the review of the registration statement for that company’s IPO. The SEC review process forthis transaction, while speedier than average, was not atypical for a well-managed and well-advised
company in terms of the number, and number of rounds, of comments received and the overall time taken.

Example of SEC comment letter process
Area (# of comments)

1st
round

2nd
round

3rd
round

Total

Summary

3

-

-

3

Risk factors

3

1

-

4

Business and industry

6

2

-

8

MD&A

7

4

1

12

Non-GAAP Financial Measures

-

1

-

1

Financial statements – Overall

3

1

-

4

Financial statements – Revenue Recognition

2

-

-

2

Financial statements – Segments

1

-

-

1

Financial statements – Subsequent Events

1

-

2

3

Other financial

4

2

-

6

Total

30

11

3

44

B. Typical areas of SEC comment
Outside of the accounting area, the SEC staff tends to focus on the overall quality of the disclosure, withparticular attention paid to the risk disclosures and the “Summary” portion of the registration statement
and on ensuring adherence to the specific requirements of the SEC relating to the description of thecompany’s business itself. As specific examples, in recent years, the SEC staff has begun issuing comments
focusing on climate-related risks and opportunities as well as cybersecurity, which may be required in thecompany’s description of its business, risk factors or MD&A. Ideally, your counsel will be thoroughly familiar
not only with the specific formal SEC requirements for the content of the registration statement but also
facile with writing the disclosures in a plain English, factual and “fair and balanced” manner that is less

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51

likely to draw fire during the review process. Unlike an understanding of the common and recurring areasof SEC staff comment in the accounting area, which can be vitally important to understand as you first startto put together your financial statements and think through the financial metrics that you will bepresenting to investors, there is less advantage to be gained from a deep dive into the SEC staff’s
precedent activity on legal comments until you reach the stage of putting pen to paper on your registration
statement.
The SEC staff comments that can be the most problematic for an IPO are those that call into question thecompany’s historical accounting or how its financial statements or pro forma financial information havebeen presented, those regarding recent or anticipated acquisitions and those relating to complex tax andorganizational structures. We touch on several of the most common areas of accounting comment below—
such as Management’s Discussion and Analysis, use of non-GAAP financial measures (“NGFMs”), segment
reporting, business combinations, revenue recognition, stock-based compensation, income taxes andpresentation of earnings per share.
Non-GAAP financial measures. As companies plan for an IPO, among the many choices they must make is
how to utilize non-GAAP financial measures in their IPO filings and in discussions with potential investors.
Use of the right NGFMs allows companies to highlight key facts and circumstances and position themselvesto the investment community and against their peers. However, while NGFMs can be a key tool during an
IPO, companies should carefully consider the costs and benefits associated with their use. The SEC willclosely review the basis of calculation and level of disclosure. The investment community will expect
consistent usage of the NGFMs and consistency with peers both during and following the IPO. Thus,
appropriately identifying these items early in the IPO planning process is critical. In a worst case scenario,
improper usage or disclosure of NGFMs can lead to unanticipated costs and delay the company’s IPO. It canalso have a negative impact on the company’s share price after its IPO.
Companies often present certain quantitative measures of past performance, financial position or cash
flows that make various adjustments (inclusions or exclusions) to measures reported in the GAAP financial
statements. Such NGFMs are permitted to be included in registration statements, including IPO filings, aslong as they meet the requirements of Regulation G and Item 10(e) of Regulation S-K. Examples of common
NGFMs can include adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted
EBITDA”), or free cash flow.
Typical areas of SEC comment relating to NGFMs include:‰ equal or greater prominence given to NGFMs relative to the equivalent GAAP measure;‰ reasons why management believes NGFMs provide useful information to investors;

52

THIRD EDITION | IPO HANDBOOK‰ items in the reconciliation of NGFMs to the most comparable GAAP measure, including whether
such adjustments represent ordinary course operational expenditures where inclusion could
cause the NGFM to be misleading;‰ use of individually-tailored accounting principles (“ITAPs”), such as those relating to revenue;‰ labeling of items as non-recurring, infrequent or unusual when a similar item has occurred in theprior two years and/or is reasonably likely to occur again; and‰ labeling NGFMs as “pro forma” when they do not comply with the provisions of Article 11 ofRegulation S-X.
Management discussion and analysis. The SEC continues to emphasize the importance of MD&A throughthe comment process, as well as its rulemaking. Indeed, on November 19, 2020, the SEC adopted changes tothe specific MD&A requirements intended to modernize and enhance the quality of MD&A disclosure forinvestors while simplifying compliance efforts for companies, and also provided guidance for the
discussion of key performance indicators and metrics in MD&A disclosure.
A stumbling block that many companies face is their inability to describe the effect of underlying factors on
the company’s performance. A registration statement and all future financial statement filings with the SEC
will require the inclusion of MD&A related to a company’s financial statements. Specifically, MD&A isintended to give the reader information about the quality of the company’s earnings and cash flow so thatinvestors can ascertain the likelihood that past performance is indicative of future performance. The
company will need to describe in-depth such items as changes in sales volumes and cost structures,liquidity and capital resources, sources and uses of cash flows, vendor relationships, employeecompensation, unusual nonrecurring charges, significant environmental exposures, off-balance sheet
arrangements, contractual obligations and other risks and uncertainties.
As a company completes its annual and quarterly financial statements, it should take time to write its
MD&A. It can be very difficult to remember, three years after the fact, why insurance costs, for example,
went up or when a marketing campaign commenced. The practice of writing a high quality, comprehensive
MD&A will expedite a company’s registration process and be a major step toward operating like a publiccompany. The SEC comment letter process has reinforced the well-established MD&A objectives that
disclosures should be transparent in providing relevant information, tailored to the company’s facts andcircumstances, consistent with the financial statements and other public communications andcomprehensive in addressing the many business risks that exist in today’s economic environment.

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Typical areas of SEC comment relating to MD&A include:‰ addition of an executive overview section;‰ explanation of the underlying specific drivers behind changes in financial position, results ofoperations and cash flows;‰ reasons for and specifically quantifying significant underlying variances, even when they offset
each other;‰ discussion and quantification of the impact of pricing and volume changes on results ofoperations;‰ material known trends that may positively or negatively impact future results of operations andliquidity;‰ quantified impact of foreign currency fluctuations on revenues, expenses and margins;‰ quantified impact of acquired or disposed businesses on results of operations;‰ discussion of known trends, events or uncertainties that are reasonably likely to impact futureliquidity;‰ further disclosure of sources and uses of cash and drivers of cash flows as opposed to repeating
what can already be found on the face of the cash flow statement itself;‰ description of the covenants in the company’s debt agreements and an indication regarding
compliance;‰ amounts of cash held overseas, especially where a company has asserted that it will permanently
reinvest foreign earnings;‰ discussion of critical accounting estimates, qualitative and quantitative disclosures about market
risk (i.e., interest rate risk and foreign currency exchange risk); and‰ impacts on specific current issues, which as of the date of this publication could include the
COVID-19 pandemic, inflation, supply chain disruptions, the Russia/Ukraine conflict, rising interest
rates, etc.
Climate change matters. While the SEC proposed sweeping new climate-related disclosures in March 2022,
even in 2021 the SEC staff began a renewed focus on the quality and adequacy of climate-related
disclosures under existing rules, specifically as detailed in the SEC’s 2010 interpretive release. These
comments have been largely focused on information related to climate change-related risks andopportunities that may be required in a company’s description of business, legal proceedings, risk factors,
and MD&A. In these letters, the staff frequently commented on:‰ inconsistencies between a registrant’s corporate social responsibility report and its SEC filings;

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THIRD EDITION | IPO HANDBOOK‰ the lack of disclosure in a registrant’s SEC filing of the risks, trends, and impact of climate change
for the registrant and its business; and‰ the lack of disclosure in a registrant’s SEC filings related to pending, or existing climate-related
legislation and regulations that could have a material impact on a registrant’s business.
Segment reporting. Private companies are not required to report financial information about theirsegments, so this is usually a major change for companies undertaking an IPO. Segment reporting has been
an area of recurrent comments from the SEC, which frequently challenge the identification and aggregationof operating segments. Reporting only one segment can be considered a “red flag”, depending on the size
and maturity of a company, that will frequently attract a comment.
When operating segments are aggregated, questions often center on the application of the “similar
economic characteristics” criterion, with special attention paid to the similarity of long-term average grossmargins. Companies frequently misidentify their operating segments (which is the starting point for thedetermination of reporting segments) and should be prepared for the SEC to request a copy of thereporting package that the chief operating decision maker (“CODM”) receives (and forms the basis fordetermination of operating segments). This is often the CEO or a combination of the CEO and otherdecision makers (e.g. the Board of Directors, COO, CFO).
Segment reporting is based on the information included in the internal reporting package and it ispresumed that all information made available to the CODM is actually used to assess the performance ofthe business and make decisions about the allocation of resources. The objective is for investors to havethe benefit of seeing the business in the same level of detail as management. While the definitions ofoperating segments and reportable segments are provided in the accounting literature and are dependent
upon what information the CODM uses to assess performance and allocate resources, companies often fail
to consider that these accounting conclusions not only impact the financial statements but also need toalign with the information in MD&A, the equity story, the company website, and any other public marketing
materials. The way the business is portrayed needs to be consistent across all publicly available
information.
The SEC will also remind registrants that they are required to disclose certain enterprise-wide information,such as disaggregated revenue by products or services (unless impractical to do so, which should bestated) and geographical disclosures (revenues and assets) by country, if 10 percent or more of theconsolidated totals.

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Typical areas of SEC comment relating to segment reporting include:‰ determination of the CODM, which may not always be a single individual;‰ exclusion of components of a business as a segment when the CODM receives reports of thatcomponent’s operating results on a regular basis;‰ aggregation of operating segments into one reportable segment, which the SEC has noted
represents a “high hurdle” that is only suitable in certain limited situations; and‰ inconsistencies between segment reporting and how the business is described in the businesssection, MD&A, and other publicly available information.
Business combinations. U.S. GAAP requires that the purchase price allocation in a business combination
begin with an analysis to identify all tangible and intangible assets acquired. Intangible assets, such as
patents, copyrights, brand names, customer lists and above/below market contracts should be identified
and the fair value of each asset must be estimated. The total purchase cost is allocated based on therelative fair values of the individual assets.
Underlying assumptions and data used to develop the valuations should be adequately prepared bycompanies and challenged by their auditors. Note, valuations are most commonly prepared with support
from an external valuation provider.
In addition to providing the acquisition disclosures required under Accounting Standards Codification(“ASC”) 805, “Business Combinations,” companies need to evaluate the significance of acquisitions
completed during the most recent fiscal year included in the S-1, as well as any probable acquisitions not
yet closed. Registrants may be required to provide audited historical pre-acquisition financial statementsof the acquiree(s) and pro forma financial information in accordance with Rule 3-05 of Regulation S-X.
Typical areas of SEC comment relating to business combinations include:‰ appropriateness of the fair values, key assumptions, and related disclosures used to record assets
and liabilities acquired;‰ additional information about the qualitative factors that resulted in significant goodwill;‰ accounting for changes in a valuation allowance for acquired deferred tax assets and theresolution of uncertain tax positions; and‰ disclosures associated with contingent consideration and related accounting.

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Revenue recognition. Revenue recognition still receives a great deal of attention from the SEC. ASC 606,
“Revenue from Contracts with Customers,” provides a single, comprehensive model to be applied in allindustries.
Typical areas of SEC comment relating to revenue recognition include:‰ performance obligations—the nature of performance obligations, why goods or services are
distinct, and disclosure of remaining performance obligations. Also, comments related to
information provided in other parts of the filing that appear inconsistent with the number of
performance obligations in a contract;‰ variable consideration—the determination of the transaction price and how a company estimatesvariable consideration;‰ recognizing revenue—the timing of when control transfers, the method of recognizing revenue
over time, and accounting for licensing arrangements;‰ costs to obtain a contract—the determination of the appropriate costs to capitalize, theamortization period, and related disclosures (including election of practical expedients);‰ gross versus net presentation—judgments related to gross versus net presentation of revenue,
including an assessment of whether the company controls the good or service being provided tothe end customer; and‰ disaggregated revenue—disaggregation disclosures that appear inconsistent with information
provided in other parts of the filing or in other forums, such as investor presentations.
Stock-based compensation. “Cheap stock” refers to the issuance of equity instruments (e.g., options,warrants, common stock or restricted stock) typically during the 12 to 18 months preceding an IPO, for a
price (or with a strike price) that is below the expected IPO price. This issue usually arises in connection
with the granting of employee stock options and often results in the recognition of additional stock-based
compensation expense.
The SEC expects that companies will provide critical accounting estimate disclosures within the MD&A
section of the registration statement surrounding methods that management used to determine the fairvalue of the company’s shares and the nature of the material assumptions involved. Alternatively,
companies may request confidential treatment of this information by submitting a letter to the SEC withsuch disclosures. With respect to valuations performed, management should include a detailed discussionof the valuation approaches for estimating the value of an enterprise, such as the cost, market and income
approaches, various methodologies for allocating the value of an enterprise to its common stock, theweighting of the different models used and any significant changes in the weighting over time.

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Companies may receive comments requesting explanations for valuations that appear unusual (e.g.,
unusually steep increases in the fair value of the underlying shares leading up to the IPO). Companies
preparing for an IPO need to carefully review the pricing history of their equity issuances. For example,
where option exercise prices are significantly less than the price of other equity instruments sold near thedates of option grants, there will be close scrutiny by the SEC, and the closer the grant dates are to the IPO,
the more intense the review.
Typical areas of SEC comment relating to stock-based compensation include:‰ significant factors, assumptions and methodologies used to determine the fair value of theunderlying common stock;‰ whether a contemporaneous valuation by an unrelated valuation specialist was performed;‰ the valuation range determined by various methodologies and the combination or weighting of
those methods;‰ significant factors contributing to the difference between the fair value as of the date of eachgrant and the estimated IPO price range;‰ explanations of why or whether marketability discounts, illiquidity discounts and common stock
discounts (due to preferential rights of preferred stock) were used; and‰ determination of comparable companies used.
Income taxes. The accounting for income taxes, including related disclosure requirements, is often complex
and involves significant judgment.
Typical areas of SEC comment relating to income taxes include:‰ disaggregation in the income tax provision disclosure;‰ sufficiency and consistency of indefinite reinvestment disclosures;‰ interplay between indefinite reinvestment assertion and liquidity;‰ incremental disclosure of how the results of operation are impacted by having proportionately
higher or lower earnings in jurisdictions with different tax rates; and‰ sufficiency of valuation reserves and uncertain tax provisions.
Earnings per share (“EPS”). Private companies are not required to present EPS and for companies withcomplex capital structures—including multiple types of equity, different types of potential common sharesand various classes of common stock—this calculation can be complex. To further complicate matters,

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companies may have participating securities that are required to be included in the calculation of basic
EPS using the two-class method (under which EPS is calculated separately for each class of common stock
and any participating securities).
Common shares (securities or other contracts that may entitle their holders to obtain common stock, suchas options, warrants, forwards or other contracts) may be participating securities if, in their current form,
they are entitled to receive dividends when declared on common stock. For example, an unvested, sharebased payment award that includes nonforfeitable rights to dividends or dividend equivalents meets thedefinition of a participating security.
When dividends declared in the latest year exceed earnings for the previous twelve months, the SEC
presumes they will be funded with proceeds from the IPO and, therefore, registrants are required topresent pro forma earnings per share, giving effect to the increase in the number of shares whose
proceeds are assumed to be used to pay the dividend. This requirement applies to dividends declared after
the latest balance sheet included in the registration statement, as well as planned but not yet declared
dividends.
Typical areas of SEC comment relating to EPS include:‰ treatment of nominal issuance/penny warrants; and‰ inclusion of pro forma EPS due to automatic conversion of preferred stock upon IPO.
Pro forma financial information. The objective of pro forma financial information is to provide investors
with an understanding of the impact of particular transactions by indicating how they might have affected
the historical balance sheet and income statement had they occurred at an earlier date. Companies withsignificant business combinations or dispositions, previous history as part of another entity, material
repayment of debt, changes in capitalization at the effectiveness or close of an IPO and other events andtransactions that have had or will have a discrete material impact on the financial statements are likely
required to include pro forma financial statements in the registration statement.
Historically, typical areas of SEC comment relating to pro forma financial information include:‰ sensitivity analysis around how a registrant’s EPS would be impacted in the event the number ofshares issued or related offering price changes; and‰ use of pro forma adjustments in NGFMs.
While the SEC has amended the pro forma rules, we still expect pro forma financial information to be anarea of SEC focus during the comment letter process.

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Debt, Warrants, and Equity. While most recent comments related to debt, warrants, and equity have been
applicable to SEC filings for de-SPAC business combinations, which are outside of the scope of thispublication and briefly discussed in “A few words on special purpose acquisition companies (“SPACs”)”
debt, warrants, and equity are still a common area of comment for IPOs.
The SEC staff has focused on the transparency and quality of the disclosures around these judgments andestimates, frequently requesting:‰ the registrant’s consideration of conversion and redemption options in determining debt or equity
classification;‰ support for the classification of financing transactions as extinguishments or modifications ofdebt; and‰ expanded disclosures of the material terms of debt agreements.

C. Publicity—Do I really need to take a vow of silence?
There tends to be a lot of agita about the constraints on publicity applicable to companies undertaking an
IPO. Below is a discussion of the rules themselves, which is of necessity a little bit technical, followed bysome practical observations.
Under the relevant legal framework in the United States, a company that is pursuing an IPO is generally notallowed to offer to sell its stock before filing a registration statement (and this, mind you, is the public
filing as opposed to a confidential submission). During the period between the public filing of theregistration statement and the time it becomes effective at the conclusion of the roadshow, oral offers are
permitted and written offers through the use of the preliminary (or “red herring”) prospectus included in
the registration statement may be made once an anticipated price range has been included. (While SEC
rules permit written offers other than the traditional prospectus, referred to as “free-writing prospectuses”,
in certain circumstances, IPO issuers are subject to significant constraints on the use of these
non-traditional offering documents and counsel should be consulted if consideration is being given to theuse of any such documents.) Only once the registration statement becomes effective at the conclusion of
the roadshow and prior to pricing, however, may buy orders be accepted and the stock actually sold.
As discussed in Chapter II (Overview of the IPO Process), there is a limited exception to these rules
permitting companies and their representatives to test-the-waters by communicating with certain
institutional investors, either prior to or following publicly filing of the registration statement, in order todetermine whether such investors might have an interest in the offering. Any TTW meetings or other forms

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of pre-deal investor education should be carefully vetted in advance by counsel, as this exception does not
obviate the need to comply with the more generally applicable constraint on offers. Refer to Chapter VII(Marketing, Pricing and Distribution) for further details on the marketing process.
“What is all the fuss about?”, you might well ask. “I had not intended to run around selling the stock before
the roadshow in any event and was not planning on sending out written offers either?” The rub is that the
SEC and the courts construe an “offer to sell” broadly to include the publication of information andpublicity efforts made in advance of a proposed offering that have the effect of “conditioning the publicmind” or “arousing public interest” in the company or in its securities. Indeed, a communication may beconstrued as an “offer to sell” even if it does not make reference to either the securities being offered or
the offering itself. Moreover, the term “writing” is similarly broadly construed, and can include televisionand press coverage where there has been company involvement.
That being said, your initial reaction is not really wrong. First, the SEC rules specifically state that
communications by a company made more than 30 days prior to filing the registration statement that do
not reference the proposed offering are generally permissible, provided that the issuer takes reasonable
steps to prevent further distribution or publication of the communication within the 30-day period. Second,
the SEC’s rules also expressly permit a company, subject to a number of limitations, to continue to release
factual (but not forward-looking) information about its business in a manner consistent with past practice
to persons (such as customers) other than in their capacities as investors or potential investors in theissuer’s securities. These express rules, taken together with the general principle that only communications
that are “offers” (even as broadly defined) are problematic in the first place, should give companies
significant comfort that they can go about their day to day business throughout the IPO process. Indeed,
you will substantially mitigate the risk of a problem in this area if you simply avoid:‰ public references to the IPO prior to the public filing of the registration statement or outside oflegally compliant communications after filing, including via press interviews (whether on or off therecord), speeches or conferences;‰ communications with analysts not in the underwriting syndicate;‰ communications with potential investors prior to the public filing (except for legally compliant
TTW) or outside the legally compliant process after the filing;‰ public disclosure of forward-looking information regarding the company’s financial or operational
results; and‰ unduly “hyping” statements about the company or its prospects.

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VI. Your relationship with the underwriters
A. The underwriting team members and how they can help with your IPO
As noted in Chapter II (Overview of the IPO Process), the lead underwriters (sometimes also referred to as
the “lead managers” or “bookrunners”) are critical to the success of an IPO, with a role that extends wellbeyond simply distributing the offered stock. Among their many contributions, the lead underwriters will
analyze the company’s industry to assess potential investor demand and advise the company and its
shareholders on market positioning, investor receptivity and valuation and assist the company indeveloping the investment story necessary to market the issue. The lead underwriters will also advise ontransaction structure and provide an overall level of coordination to the market-facing aspects of theprocess.

It may be worth reviewing for a moment what the various members of the team at an investment bankactually do on an IPO. The lead managers’ investment bankers are the company’s principal points ofcontact with all of the underwriters throughout the IPO process—they conduct due diligence, help thecompany define its investment proposition and market positioning, participate in the preparation of theregistration statement, develop valuation models, manage the roadshow, and collaborate with equity
capital markets and syndicate personnel to price and size the offering. These banks are sometimes referred
to as the “bookrunners” because (at least before the advent of computers) they would assemble all of theorders from the various institutions and other investors in the IPO in a “book”, which would tell them how
many shares each investor was willing to purchase and at what price. The bank whose name appears in the
top left position in the list of underwriters appearing on the cover page of the prospectus is the “lead left
bookrunner”, or if there are no other bookrunners in the deal, just “the bookrunner.” The research analysts,
who due to regulatory constraints imposed on the banks typically no longer appear alongside theinvestment bankers, also conduct due diligence, develop financial models and forecasts of the company’s
future operating results, educate the investment bank’s sales force about the company and its investment
merits, and express their views about the offering to the investment bank’s commitment committee (whoultimately are the ones who decide whether their bank will participate in or “commit” to the offering). The
research analysts also communicate with institutional investors during the marketing phase and, following
the IPO, issue reports and research relating to the company. Equity capital markets and syndicate
personnel are the “product specialists” on IPOs and recommend the offering price, size, and timing basedon market conditions, company metrics, and investor demand. They also arrange the underwriting
syndicate (which is to say, coordinate bringing in the various investment banks who will be participating in
the offering and manage the logistical side of their interactions), manage the book-building process,62

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interact with the sales forces in assessing investor feedback during the roadshow, participate indiscussions of the offering terms, allocate the shares to investors, and assist with aftermarket pricesupport. And, last but not least, members of the sales force do exactly what you would expect—interactingwith investors during the marketing phase and soliciting indications of interest to buy the stock.
The following chart illustrates how the underwriter team connects the company with the IPO investors:

Information Barrier

How the Investment Banks/Bookrunners Fit in—
Syndicate & Distribution

Source: PwC

B. How to select underwriters
Since the underwriters play a crucial role in successfully executing your IPO, it is worth discussing insomewhat greater depth how to go about selecting the underwriting team for your company. You should
consider several factors when selecting a lead managing underwriter:‰ experience—the more issues an underwriter has successfully managed, both in total and within
the company’s sector, the more likely it will be to understand and execute successfully theelements required for the IPO to succeed. Also pay attention to the bank’s track record inexecuting IPOs; consider how many deals the bank has initiated and compare that to the numberof deals successfully completed—it should give you some insights as to the strengths andpotential weaknesses of any particular lead bank;

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‰ industry expertise—an underwriter with industry knowledge can provide an edge when launching
and marketing an offering;
research coverage—as we have mentioned and will discuss further in Chapter VII (Marketing,
Pricing and Distribution), the research analysts play a key role in your IPO. As a result, selecting an
underwriter with strong research analysts will increase the likelihood of executing a successful
IPO;‰ credit—investment banking firms seeking mandates to underwrite the company’s IPO may bewilling to also assist the company in refinancing its bank debt or bonds in connection with the IPO
or secure new or additional liquidity commitments;‰ distribution capabilities—some underwriters have better connections within the investmentcommunity than others. Some underwriters have broad retail distribution capabilities (the ability
to reach a lot of individual investors) and some have particularly strong relationships with thelarge institutional investors who tend to be the ones who set the valuations and determine thesuccess of the individual deal. Some banks, of course, have both;‰ team focus—since the IPO process is time intensive, it is important to select a lead underwriterwith adequate resources for meeting important deadlines; and‰ range of services—an underwriter with a full platform of products and services, such as equity,
debt and advisory capabilities, foreign exchange management and prime brokerage, can assist an
issuer with other products and services as the company grows following the IPO.
If you select more than one lead underwriter, you will need to appoint which bank will take which role. The
primary roles are stabilization, billing and delivery and roadshow logistics. The banks will likely have astrong preference for being designated as the stabilization agent for the IPO because that role allows thebank to obtain trading color and be involved following your IPO. It is not uncommon for the company tohold off on designating the stabilization agent until later in the IPO process. We will discuss how
stabilization affects an IPO in the next chapter.
The responsibility of a co-manager is to focus on supporting the deal throughout the IPO process and tohelp market the transaction to their own web of investors. Co-managing banks conduct due diligence,
provide additional research coverage and aid in market making after the public offering. They are also
responsible for helping to build an order book. Typically, co-managers are invited to join the underwriting
syndicate at a certain point following the initial submission of the registration statement and sometimes
quite close to the launch of the IPO.

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C. The underwriting agreement
The legal contract between the company going public (and any selling stockholders) and the underwriters
is called an underwriting agreement, which is signed at the time the company agrees to the price at which
to sell the shares to the IPO investors (i.e., at the very end of the IPO roadshow). Until that time the parties
work together based on trust and mutual expectations, and generally at their own risk and expense.
As memorialized in the underwriting agreement, the typical arrangement in the U.S. between the company
and the banks takes on the form of a “firm commitment,” in which the underwriters pledge to buy all of thestock offered in the IPO and resell it to the public. This arrangement offers the company the most security
because the owners know they will receive the full sales price of the issue at the time the underwriting
agreement is executed, absent something going dramatically wrong. In theory a firm commitment
underwriting gives the bank significant exposure since they have just agreed to purchase all of the IPO
stock regardless of whether they can place it with retail or institutional investors. In practice, this exposureis quite minimal since the banks do not sign the underwriting agreement (and hence “firmly commit” topurchase the stock) until after they have lined up buyers for every share—and typically significantly morethan every share. If something goes dramatically wrong enough for all of these investors to back out of
their agreements to buy the stock from the investment bank, then presumably something has gone
sufficiently wrong with the issuer or the markets that the banks could also cancel the underwriting
agreement. Hence the minimal nature of the exposure from a practical perspective.
For example, an underwriting agreement typically will excuse the underwriters from their obligation topurchase the stock if the underwriter determines between the signing and closing that the Company’s
representations in the underwriting agreement were materially false at the time made, if some event
happens between signing and closing that makes the reps that were true at signing no longer true atclosing, or if some circumstance arises in the broader market that makes it inadvisable, typically in theunderwriters’ sole opinion, to consummate the transaction. However, for the underwriters, it would be asignificant blow to not only their relationship with their client (the IPO issuer), its board members and its
backers, but also to the banks’ reputation in the industry to not consummate an IPO once it prices.
Accordingly, almost all IPOs that get to the stage where the underwriting agreement has been executed
ultimately close. A cancelled IPO is so rare in fact that all of the instances where this has occurred aresomewhat famous in the world of securities offerings. The most famous examples are that of the first IPOs
of Eagle Computer in 1983 and of BATS Global Markets in 2012. In the case of Eagle Computer, the presidentof the company (accompanied by the owner of the local yacht company) crashed his new Ferrari at highspeed and was killed on the day the offering priced, resulting in the underwriters cancelling the transaction
hours after it was inked. In the case of BATS Global Markets, BATS, which operates a securities exchange,

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65

was attempting to make its own IPO the first IPO to list on its exchange, when on the first day of trading aspectacular glitch in the company’s trading systems caused a halt to trading in a number of stocks,
including the stock of BATS itself. Given the circumstances, the company and its underwriters decided tocancel the offering. Tragic and tragicomic outcomes, but ones that give you a sense of how rare and how
extreme a situation the underwriters typically need to face before they pull the plug on an IPO that has
already priced.

D. Syndicate economics
The underwriters are compensated by purchasing the company’s shares at a discount to the IPO price,which is called the “underwriting discount” or “gross spread.” The underwriting discount is almost always
calculated as a percentage of the gross proceeds and typically ranges from four percent to seven percent
for an IPO but may be a lower percentage in the case of large offerings. The gross spread is, in turn, divided
into three separate components—the management fee, the underwriting fee and the selling concession.

Syndicate Economics
Gross Spread
20% Management Fee

20% Underwriting Fee

60% Selling Concession

Fee for managing transaction andpreparing company

Compensation set aside for fees andexpenses associated with deal
execution for the underwriting
syndicate (e.g., roadshow,
stabilization and legal fees)

Fee traditionally paid to theunderwriter that actually sells thesharesSplit based on the number of shares
underwritten by each underwriter(which is the number opposite theirname in the prospectus)

Most signiﬁcant and competitive
portion of the gross spread

Divided between bookrunners & comanagers (typically the underwriters
whose names appear on the cover
page of the prospectus)
Other syndicate members do notshare in management fee

Number is unrelated to how many
shares the underwriter actually sells(instead it is what they take liability
for)

Signiﬁcant majority goes to the leadmanagers

10%-15% Retail

85%-90% Institutional Pot

Recognizes retail distribution
capabilities of managers andsyndicate members

Motivates managers to use fullresources in marketing the offering

Can be subject to speciﬁc allocations

66

Compensates and motivatessalesforce for selling effort

Fees can be ﬁxed upfront or bediscretionary based on performance

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VII. Marketing, pricing and distribution
A. Overview of the marketing process
In some respects, the marketing process begins in the earliest meetings between the company and theprospective underwriters when the company’s operating strategy, market positioning and valuation andtarget investor mix are discussed. The lead underwriters assist the company in developing acomprehensive marketing plan for the offering, taking into consideration the company’s investment themes
and targeting specific investors. Later in the IPO process, the company will meet with the research analysts,
the underwriting sales force and ultimately with prospective investors in what is called a roadshow. The
marketing process can be thought of as having various phases, as depicted in the following diagram.
Phase I typically commences in advance of the overall IPO marketing process (pre kickoff) while thebalance of the other phases would occur in the typical 4-6 months filing process that most IPOs requirefrom kickoff to pricing.

IPO Marketing Process
Phase II

Phase I
Documentation
and Reﬁne
Equity Story

Investor
Targeting

Prospectus

Identify institutions
that are potential
long-term core
investors

Objective

Develop key
selling points
Ensure theindustry and thecompany’s
positioning areclearly
understood
Identify and craft
responses topotential
investor
concerns

Analyze holders ofcomparable
companies
Review recent
investors ofcomparable
offerings

Research
AnalystPresentation

EducateSalesforce

Educate researchanalysts on the
Company and key
strength of thebusiness

Brief salesforces ontransaction,
Company, key
selling points, issues
and mitigants

Forms basis forwriting research
reports

Education by capital
markets team,research analysts
and Company
management

Obtain feedback onequity story/key
concerns in orderto reﬁne equity
story ahead of premarking

Enable salesforce tomarket offereing toinstitutional
investors and solicit
feedback

Phase III

Phase IV

Roadshow
Bookbuilding
Distribution

Pricing andAllocation

Comprehensive
roadshow via a
combination of 1x1
and group meetings
Build early-stage
demand momentum
to drive substantial
subscription
throughout the pricerange

Maximize proceeds
while ensuring astable aftermarket
Allocate to highquality long-term
investors at a level
which ensure
demand in theaftermarket andminimized “ﬂipping”

Net roadshow

Preparedocumentation
to reﬂect key
themesdeveloped

Source: PwC

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67

B. The role of research analysts in marketing your IPO
After the underwriters have been hired, the company will host a diligence session with the respective
research analyst(s) from each underwriter. Typically, the investment bankers will not be in attendance atthis session due to legal restrictions intended to bolster the independence of the analysts. If the bankers
are in attendance, the meeting will need to be “chaperoned” (usually by underwriter’s counsel) to ensurethat the analysts are able to freely interface with the company without any form of censorship or guidanceby the investment bankers. At this meeting, the management team will typically provide an overview of its
business, strategy and financial model. This interactive session is instrumental for the research analysts
since it will be the foundation on which they prepare their financial models. As a result, you should be
prepared for the analysts to pepper the management team with questions about all facets of the company.
From this collaborative process each analyst will then produce their own proprietary valuation model,
which should be expected to differ in some ways from the management model.
To create their own financial model of the company, the analysts will make assumptions about thecompany’s growth rate and the company’s industry at large. The analysts will then use multiples, typically aratio of a valuation metric like market capitalization or enterprise value to a financial performance metricsuch as earnings per share, sales, or EBITDA, to reach a final valuation of the company. It is essential to theveracity and the development of their models that the analysts are not basing their projections of future
growth or profitability on outdated or incomplete information, as the data that you provide will be thebasis for many of the assumptions that they make and share with buy-side clients during this investor
education process.
The analysts will also develop models based on the comparable companies (“comps”) in your peer
universe: the set of similar companies that operate in the same industry as the company. Every IPO boundcompany is going to be compared by analysts and investors with other public companies, if any, that are inits peer group. Although the company may be uniquely placed in the market such that your peers may beconsidered (and rightly so) inferior, this sort of competitive intelligence is sensible and can alert thecompany to the practices of, and investor expectations for, public companies in your industry.

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Illustrative IPO Valuation Matrix$400m primary offering($ in millions)

Assumptions
Total offering$400

Primary proceeds

400

Assumed TEV/EBITDA

Secondary proceeds
IPO discount015%

2015E EBITDA

$253

$253

$253

$2,525$2,778$3,030Debt paydown

100%

Fully-distributed Enterprisevalue

Pre-IPO debt

$946

Less: pro forma net debt

(540)

(540)

(540)

Pre-IPO cash

34

Implied equity value$1,985$2,238$2,490Pre-IPO net debt

912

At IPONet debt / 2015E EBITDA

3.6x

Implied equity value at IPO$1,726$1,946$2,166

Post-IPO debt

$574

540

540

540

Post-IPO cash

34

Plus: pro forma net debt
Implied enterprise value$2,266$2,486$2,706% of company ﬂoated (post-IPO)

23.2%

20.6%

18.5%

% of company retained (postIPO)

76.8%

79.4%

81.5%

Implied 2015E TEV/EBITDA

10.0x

11.0x

12.0x

Implied 2016E TEV/EBITDA

7.8x

8.5x

9.3x

Implied 2015E P/E

26.7x

30.1x

33.5x

Implied 2016E P/E

15.9x

18.0x

20.0x
10.7x

Post-IPO net debt540

Net debt / 2015E EBITDA

2.1x

LTM EBITDA$137

CY 2015E EBITDA$253

CY 2016E EBITDA$325

CY 2015E Net Income$74

CY 2016E Net Income$125

Key drivers of valuation

Low

Mid

High

10.0x

11.0x

12.0x

Fully distributed multiples

Multiple range

At IPO multiples

Earnings metric (forward)

Implied 2015E TEV/EBITDA

9.0x

9.8x

Free ﬂoat post IPO

Implied 2016E TEV/EBITDA

7.0x

7.6x

8.3x

Primary / secondary split

Implied 2015E P/E

23.2x

26.2x

29.1x

IPO discountImplied 2016E P/E

13.9x

15.6x

17.4x

Use of proceeds

Credit metrics

Leverage

PF net debt / LTM EBITDA

3.9x

3.9x

3.9x

It’s worth remembering that although the research analysts are essentially “public-side” employees at theunderwriter, they are temporary “private-side” during the IPO process. Indeed, they are effectively thecompany’s voice to the street during the IPO process and as a result are an essential link between thecompany and the investors in your stock. Due to liability concerns, the company typically does notcommunicate to the street its projections for its business. And that’s one of the areas where the researchanalysts come in. Through the diligence and other communication with company management, theresearch analysts form their own views on how the company will perform in the coming years and generate
their own models. Although the research analysts do not publish reports until 25 days after the IPO, they
do talk to investors, who will frequently call the analyst they have a relationship with at that underwriter todiscuss the analyst’s model and views of the company. In other words, the potential investors will heardirectly from management during the roadshow (discussed below) and will also get another perspective on
the company by speaking with the research analysts.

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In addition to direct conversations with potential investors, the other input the research analysts have inthe marketing of your IPO is the teach-in deck. In addition to the salesforce memorandum, which is adocument generated by the coverage bankers at the underwriter that summarizes the roadshow deck andregistration statement, the sales force receives the research teach-in deck from the analysts. The researchanalyst teach-in deck includes the research analyst’s view of the model and valuation. While it is aninternal document, it plays an important role in educating the sales force. Once the sales force receives thesalesforce memo, typically the underwriter will circulate an internal email announcing the IPO. With thesalesforce memo, the teach-in deck and the internal email, the sales force is now primed to hear about thecompany directly from management at the kick-off of the roadshow.

C. Testing-the-waters (TTW)
Traditionally, building investor demand for an IPO was driven primarily by a “roadshow” or marketing
process with investors such as mutual funds and hedge funds over a 1-2 week period just before pricing
where management discussed their company’s strategy and goals in one to one meetings. However, theprocess of building investor demand has changed over the last 10 years as a result of two important
events. First, in 2012 the JOBS Act was passed which enabled companies contemplating an IPO to conduct“testing-the-waters” meetings with qualified institutional buyers and other institutional accredited
investors before publicly filing a registration statement. Such TTW meetings help inform the company’s andunderwriters’ views of the offering and provide feedback which management can use later on in the actualroadshow, which can be especially valuable if the company’s story is complicated or if management has
limited experience making investor presentations. Second, the COVID-19 pandemic coupled with theadvancement of video-meeting technology forced potential issuers, underwriters and investors to find new
ways of building relationships in the context of an IPO. Video meetings have largely replaced most of thein-person one-on-one meetings in roadshows, allowing for more efficient roadshows to be executed in
shorter timeframes. For example during the period from 2020 through 2021, underwriters leveraged virtual
meeting technology to produce nearly an identical level of exposure, as compared to pre-pandemic times,
to the institutional investors who would drive 95% of the demand and the ultimate price of the IPO.
Crossover Investors – Anchors for an IPO. The JOBS Act and the ability to have TTW meetings with investors
was an initial boon to one sector in particular—biotech. Issuers could have a much better read of a market’s
willingness to buy their stock in an IPO than was previously available. Moreover, these feedback sessions
created relationships and a level of familiarity with a management team for the investors that waspreviously only developed after an IPO. One could imagine this is particularly salient to investors evaluating
the prospects of a new small molecule drug which is likely to be more daunting than evaluating the latest

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retail consumer product. As a follow-on development in the market, a select group of traditionally publiccompany investors began seeking to invest in these private biotech companies before they were public. This
was termed “crossover” as the investors were crossing over from being public company investors to also
being private company investors. These investors not only took board seats and provided counsel to the C
suite, they also began to “double down” on their investments by offering to buy more of the companies’
equity in an IPO. This enabled biotech companies to occupy a unique corner of the U.S. IPO market as most
biotech IPOs are already “anchored” with demand from existing investors in an IPO. This is in direct contrast
to other sectors where one often sees early investors selling at the IPO. The result is the average mediansized biotech IPO has doubled in size from $74 million in 2013 to $149 million in 2022 and the roadshow ismore about filling out investor demand beyond the existing anchors. This change in the market over the past
decade has put a particular premium on attracting crossover investors ahead of an IPO. Most crossoverinvestments are made 6-9 months ahead of an IPO which allows for potential step-ups in valuation on theback of an important strategic initiative, such as development with a drug trial for example.

D. The roadshow
When the company is finally ready to launch the IPO and before the roadshow begins, the company’s
management conducts a presentation to the underwriter’s global equity sales force. The presentation
signifies the launch of the IPO and the start of the roadshow. The initial management presentation is
traditionally recorded and then available for viewing on specialized third-party websites that have bells
and whistles that enable them to comply with the applicable SEC rules requiring broad access to the public
and that the issuer’s roadshow be accompanied by the prospectus. The presentation can be viewed online
by potential investors until the offering is priced.
The table below and much of the following discussion relate to a traditional, in-person roadshow. However,
it is worth noting the shift towards conducting virtual roadshows due to the recent coronavirus pandemic.
Even during the recent pandemic, which plagued the global IPO markets, IPOs were successfully marketed.
The SEC implemented a number of procedural measures designed to facilitate greater use of electronic
communications with their staff members. The pandemic also was the catalyst for the widespread adoptionof virtual roadshow presentations. This has enabled a greater level of efficiency with the roadshow teams
being able to conduct more meetings with investors per day than is the case in a traditional in-person
roadshow, which in turn has allowed certain IPOs to be marketed over a shorter marketing period of lessthan a week (rather than the pre-pandemic norm of 7-9 trading days). Virtual roadshow presentations havesurvived the pandemic and have continued, in many circumstances, to permit roadshows to be completed
in a more efficient and compressed timetable than that presented below.

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Roadshow Basics

Illustrative Day on Road

Who is on the Traveling Team?

▪

7:00 amPick-up from hotel▪

Management team (usually CEO and CFO)▪

7:30 am

Small Group Breakfast▪

Investment banker(s) (1–2 people)▪

8:45 am

1x1 Meeting▪

Banking salesperson typically introduces each meeting▪

10:00 am

1x1 Meeting

Who Will the Company Meet With?

▪

11:15 am

1x1 Meeting▪

▪

12:30 pm

Group Luncheon(or travel to 2nd city)▪

2:00 pm

1x1 MeetingGroup presentations and conference calls tolarger groups of investors▪

3:15 pm

1x1 Meeting▪

4:30 pm

1x1 Meeting

Total of 200+ investors touched during courseof roadshow▪

6:30 pm

Fly to Next City▪
▪

Roadshow likely to include 50+ individual
investor meetings (1x1s) with Institutional
Investors and Hedge Funds

Where Will the Team Go?
▪

Typically up to 8 days in the U.S., spanning locations
such as: New York (2 days), Boston, Mid-Atlantic,
San Francisco, LA, Denver, Chicago▪

Option to travel to Europe or reach accounts via
conference calls. Companies with important or a
critical mass of investors outside the U.S. may also
focus on other international locations in an extended
roadshow.

A roadshow consists of a series of meetings with potential investors in key cities across the country; incertain cases these may extend outside the United States. Top company executives deliver a management
presentation covering the company’s business and financial performance, along with its products, services
and markets. A typical roadshow can include 80 or more one-on-one meetings and several large grouppresentations with potential investors.
The lead underwriter/bookrunner also assists management in a roadshow’s preparation by helping toprepare the slides, rehearsing the presentation with management and preparing educational materials forthe sales force (i.e., the salesforce memo). Management presentations should include a summary of theoffering and an overview of the company, its financial performance and business strategy, the competitive
landscape and investment highlights. You likely have looked at the IPO roadshows of other companies
going public—and if you have not you are encouraged to do so at certain specialized third-party websites
such as www.retailroadshow.com or www.roadshowaccess.com. It can be a great way to get a sense of how
other companies (and even your competitors) are marketing their vision to potential investors.
At the start of the roadshow, equity capital markets and institutional sales force personnel will target
investors for you to meet with and begin scheduling one-on-on meetings. The lead underwriter and the72

THIRD EDITION | IPO HANDBOOK

company’s management team conduct a roadshow to meet with potential investors. Management on theroadshow will usually include the CEO and CFO and may or may not include one or two other members ofthe management team, depending on the nature of the business. A biotechnology company, for example,
may occasionally include the company’s chief science officer on the trip; a fashion company may include
their lead designer. Roadshows typically run for between seven and nine trading days, with the longer runs
typically occurring if meetings are scheduled overseas. The very largest IPOs will sometimes have two oreven three roadshow teams simultaneously conducting meetings on different continents. Along withcompany management, the roadshow team walking into the investor meetings will typically be thesalesperson, who actually scheduled the meeting, the senior banker and junior banker at the underwriter.
Typically an in-person roadshow day involves five to seven one-on-one meetings and/or conference calls,a group breakfast and/or lunch, and travel to the following day’s city. For meetings in the mid-Atlantic
region, and in certain other densely populated areas, it is not uncommon to visit multiple cities in a single
day. However, as noted above, the recent shift towards conducting virtual roadshows has permitted more
efficient and compressed timetables, with the roadshow teams able to conduct more meetings withinvestors per day than in a traditional in-person roadshow.
During the course of the roadshow, the sales force builds a book of orders. “Book building” refers to theprocess of assessing institutional and retail demand for the issue from investors. Throughout this stage,
the lead underwriter determines the appropriate size and price of the offering (as discussed in greater
detail below).
During the book building process, the underwriters identify indications of interest, for those that have not
set price limits for their orders, as well as investors with scaled orders at different prices. The latter
category involves investors who, for example, will take up to 5% of the offering if the IPO is priced at $11,
but only 2% if the IPO is priced at $13 and nothing at a higher price. There is a fair amount ofgamesmanship on both sides with the institutional investors seeking to discover the minimum price they
can pay to get the allocation they want and the underwriters seeking to discover whether the institutional
investors will actually walk away from the trade if the price is above a certain point or are merely
threatening to do so. Each side’s position on what would constitute an “acceptable” price can shift multiple
times. As a convention, the most interested institutional investors for a particular deal will place a 10%
order (meaning they would take up to 10% of the offered shares) with no price limit. Interestingly, thisrarely means these investors want or expect this large of an allocation. They are rather indicating to theunderwriters that they would like as much of the shares as they can get (which for a hot IPO is never going
to be 10% of the issue going to a single investor). These investors would be quite surprised (and usuallynegatively so) were they actually given 10% of the deal.

THIRD EDITION | IPO HANDBOOK73

It’s worth noting that the underwriters will work to build the book with a lot more demand than supply. In
other words, the underwriters will strive to obtain orders for the company’s stock far north of the amountof stock the company is actually selling in the IPO. Subscription levels of 5-6 times for industrial companies
or 15 to 20 times for a technology IPO are not uncommon. During the roadshow these are purely indicationsof interest as the underwriters build the book and try to achieve the best shareholder base and price forthe company. Although the underwriters will be providing continuous feedback to the company, in practicethe underwriters will not have a great sense of the strength of the book until the back end of the roadshow
as the potential investors are watching the market and evaluating the new company (well, new to them). In
an ideal world, the underwriters desire a certain amount of momentum that builds as the roadshow
proceeds, seeking for the IPO to be oversubscribed as early in the process as possible.
During this process, the underwriters also will “scrub” the orders, seeking to maximize the number of highquality accounts, which essentially means institutional investors who will not only hold onto their IPO
allocation but will look to add to their position once the stock starts publicly trading (called theaftermarket), thereby helping to drive the momentum in the stock and keeping it from dipping below the
IPO price. In other words, the underwriters and the company are effectively selecting who will be theprimary shareholder base of the company at the outset of its publicly traded life.
In addition to generating demand from institutional investors, the underwriters will solicit demand fromretail investors. Retail investors have the ability to generate substantial demand and are less pricesensitive than institutions, but they are rarely assumed to be long-term investors. In fact, the leadunderwriters have typically assumed that all of the retail investors are quick-flip investors and will makesure the market can absorb their shares, which sometimes will change hands multiple times in the first dayof trading. Retail investors are also more typically price takers and their decisions are more binary—theyare either in the offering at a certain price or they are out but they do not have the ability to influence theprice of the IPO itself. It is worth noting however that a new development has been the slightly increasing
impact that retail investors have had on IPO aftermarket performance in recent years – especially in wellknown consumer-oriented names and technology companies – leading to new retail-oriented platforms
beginning to be incorporated into some IPO syndicates.

E. Price and allocation
The lead underwriter attempts to achieve the most appropriate price for the company, while building ahigh-quality shareholder base. As mentioned earlier, high-quality investors are sought in order to achieve
an attractive valuation for the company as well as to provide the best framework for the stock to trade wellwhen the IPO prices and onward. Generally, the goal in setting the IPO price is to achieve a valuation that is

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at a discount to the price the stock will sell for in the public market once it opens for trading. Dependingon the level of uncertainty surrounding the valuation of the company and the peer-company volatility, such
IPO discount could be up to 10 percent or greater. The IPO discount is designed to reward the initialinvestors in an IPO for accepting the risk associated with the new issue of stock that does not have an
established trading market or a track record of reporting earnings, filing documents with the SEC andconducting earnings calls as well as to generate the impression of a successful IPO and interest in
subsequent offerings of the company’s stock.
Once a company prices its IPO, the lead underwriter begins the process of identifying those investors thatwill receive shares and the amount allocated to each. The allocation of shares at the IPO represents thecore of a company’s shareholder base. A high-quality initial shareholder base creates long-term
partnerships and attracts other quality investors. Typically between 80% and 90% of shares in an IPO are
allocated to institutions, with the remaining 10% to 20% going to retail investors. The lead underwriter will
send the proposed allocation to the company at the agreed price for the company’s review and approval.
At the conclusion of the allocation process and before the market opens, the lead underwriter contacts theinvestors to let them know how many shares they will receive and at what price. After all the IPO shares
have been allocated and confirmed with accounts, the underwriters break the syndicate and the deal
begins trading the next day.

F. Stabilization and the overallotment (or “greenshoe”) option
In a typical IPO, the underwriters will allocate more shares to investors than are being sold by thecompany. This is called creating a short. So if the IPO offering is for 10,000,000 shares, the underwriters will
typically allocate 11,500,000 shares to institutional and retail investors at pricing, thereby creating a 15%
short position. To cover this short position, the underwriters have two options. First they can buy theshares in the open market after the stock starts trading if it trades below the IPO price—this is calledstabilizing the stock and is undertaken on behalf of the underwriting syndicate by one of the banks whowill act as the stabilization agent. It is a way to facilitate the stock’s trading and give investors some
comfort that the stock won’t immediately go below the IPO price once it opens for trading. Second, theunderwriters can exercise their over-allotment option to purchase stock directly from the company. This
option is called the “greenshoe”; so named because it was first used in the stock offering for Green Shoe
Manufacturing (now called Stride Rite Corporation). In an IPO, the greenshoe will be for 15% of the offering,as in the example given above. If the underwriters do not have to purchase stock in the open market tostabilize the offering, or do not have to purchase all 15% of the shorted shares, they can exercise thegreenshoe in whole or in part to cover their short for up to 30 days after the IPO is completed (in this casebuying the shares from the company to deliver to the investors who bought at the IPO).

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In circumstances where the underwriters believe the stock may come under intense selling pressure after
the IPO because of market conditions, the underwriters may sell more than 115% of the offering in theinitial allocation to institutional and retail investors. This is called creating a naked short. Naked because
the underwriters have to purchase at least some shares in the market to cover their short (they are selling
more shares than what they are buying from the company under the underwriting agreement, including thegreenshoe) so the underwriters are exposed for any losses should the stock trade up after the offering
prices. Needless to say, underwriters are loathe to create naked shorts unless they strongly believe they
can cover this short at or below the IPO price.

G. A few words on direct listings
WHAT IS A DIRECT LISTING AND HOW DOES IT DIFFER FROM A TRADITIONAL IPO?

A direct listing occurs when a private company goes public by listing its stock on a national stock exchange,such as NYSE or Nasdaq, without simultaneously also undertaking an underwritten public offering.
In many ways the direct listing process is quite similar to a traditional IPO. The registration statement,
including the financial statements, and the process of having it reviewed by the SEC is substantially thesame as that in a traditional IPO. In addition, the overall timeline and diligence process are likely to beroughly similar. Moreover, many of the expenses borne by the listing company will be comparable—for
example, fees for counsel and auditors, SEC registration fees, listing fees paid to the relevant
exchange, and even the fees of a financial printer will all be similar to a traditional IPO. And, as with a
traditional IPO, the listing company will be required to satisfy the relevant stock exchange’s listing
requirements and governance standards.
However, because the transaction is not underwritten, there is no underwriter-led book building process,no commitment on the part of the company or selling stockholders to sell a specific number of shares andno fixed initial public offering price negotiated with underwriters. Instead, on the first day of trading, any
stockholder listed in the company’s registration statement may simply sell their shares through a broker atwhatever price they are able to obtain in the market, in an auction-based process. Until recently, only
shares owned by existing stockholders, such as employees and pre-IPO investors, could be sold as part of adirect listing and, accordingly, the company did not raise new capital (which resulted in the costs of theoffering being expensed for accounting purposes rather than capitalized). This changed recently when the
SEC approved new listing rules from the NYSE and Nasdaq, respectively, permitting companies to raise newcapital through a direct listing, provided certain market valuation requirements and initial listing
requirements are satisfied.

76

THIRD EDITION | IPO HANDBOOKEven though a direct listing does not necessarily utilize underwriters, all of the major companies who havecompleted a direct listing to date have hired traditional investment banks to act as financial advisors andassist them with the listing process, including to help the company craft its investment thesis and withpreparation of the registration statement and investor communications and presentations. In order toavoid being deemed “underwriters” (and thereby taking on underwriting liability), these financial advisors
do not themselves actually participate in investor meetings or otherwise conduct price discovery activities
or sales of stock. In a traditional IPO, the issuer may rely on its underwriters to generate lists of potential
investors and contact them, to host pre-deal investor education sessions and a roadshow and to train anddeploy a salesforce to sell the company’s shares. The issuer may also rely on the research analysts at its
underwriting firms to provide coverage. The absence of underwriters and the limitations on the services
financial advisors can provide without risking taking on underwriting liability means that much of the
traditional marketing of an offering must be either forgone or managed by the issuer. As a result, many
companies, and particularly those without a high public profile or those who lack a robust investor
relations capacity, may find the marketing process of a direct listing more burdensome and challenging
than a traditional IPO. To date, the few direct listings that have been completed were most often widely
recognized companies with large market capitalizations. So far, at least as of the time that this book went
to press, no companies have used the option for a primary direct listing.
It remains to be seen whether direct listings will gain in popularity following the exchange rule changes
permitting primary offerings (and subsequent rule changes further streamlining the pricing requirements
in a primary direct listing) as well as a recent Supreme Court ruling limiting potential liability under
Section 11 of the Securities Act, as discussed in Chapter VIII (Life as a Public Company). In June 2023, in acase arising out of the 2019 direct listing of Slack Technologies, Inc., the Supreme Court unanimously heldthat a plaintiff who purchases shares in a direct listing must trace his shares to a false or misleading
registration statement to state a Section 11 claim. This “traceability” requirement can prove difficult for aplaintiff in a direct listing because only a portion of the shares traded on the IPO date and thereafter are
sold under a registration statement relating to pre-IPO shares held by affiliates of the issuer and others
that hold “restricted securities,” while unrestricted shares held by non-affiliates are freely tradeable andsold without utilizing a registration statement.
In a direct listing each of the company’s financial advisors is generally paid a flat engagement fee rather
than discounts or commissions on the shares sold as is the case in a traditional IPO. While the fees earned
by financial advisors in some direct listings have to date generally been equivalent to what that bankwould have earned in a conventional underwritten IPO as a bookrunner, because there have been fewer
financial advisors than there would typically be underwriters, the aggregate fees paid by the companies to
its financial advisors (banks) have ended up being lower. This fee dynamic may evolve over time as the

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77

potential to significantly lower the costs associated with an initial public offering has been one of thestated drivers for those who have advocated direct listings. Notwithstanding how these financial advisor
fees may evolve, they are likely to remain a significant expense. And, whereas the underwriters in a
traditional IPO are compensated by underwriting discounts or commissions borne by the seller of theshares (which is the issuer in the case of primary shares or the selling stockholders in the case of
secondary shares), to date the issuers have borne the full cost of these financial advisors. This iscompounded by the accounting consequence noted above that requires offering expenses in a secondaryoffering to be expensed and not capitalized.
In addition to the company’s financial advisors, both the NYSE and Nasdaq require that the listing company
appoint a financial advisor to provide an independent valuation and assist the exchange’s market maker or
specialist, as applicable, in setting a reference price for the opening of trading. The exchange weighs boththis valuation and the pricing of the company’s stock in the private placement market prior to the IPO in
determining the reference price. The reference price is published by the exchange shortly before trading
begins as a starting point for price discovery between potential buyers and sellers in the stock. Unlike a
traditional IPO, the company does not get to determine or consult on the reference price.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A DIRECT LISTING AS COMPARED TO A TRADITIONAL IPO?
In addition to the advantage of potentially lowering the fees payable to investment banks, the otheradvantages and disadvantages of a direct listing as compared with a traditional IPO are sometimes viewed
as opposite sides of the same coin. For example, a common and perennial complaint by pre-IPO
institutional investors and companies is that traditional IPOs are often priced too low with too great of an
IPO discount. Varying theories abound as to why this occurs, but regardless, a successful IPO almost always
has an IPO “pop” where the price increases significantly during the first day of trading from the IPO price.
While this is advantageous for those buying directly in the IPO, companies and selling shareholders often
feel that value directly came out of their pockets and, in addition to the direct expenses, is a significant
cost of undertaking a traditional IPO. A correctly calibrated direct listing, by contrast, should in theory findthe “true” market clearing price in its auction methodology and therefore not “leave any money on thetable.”
However, a direct listing lacks many of the mechanisms of an underwritten offering intended to decreaseprice volatility in the initial trading. For example, there can be no assurance in a direct listing that there will
be an adequate supply of stock for sales or interested buyers when trading opens to create an efficient
market for the stock. The underwriters’ book building process in a traditional IPO can be a very effective
price discovery tool and investors and sellers participating in a direct listing do not have the benefit of78

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reference to an initial public offering price or price range based on this process. In addition, direct listings
do not feature a stabilizing agent bank with the benefit of an overallotment (or “greenshoe”) option thatcan enter into transactions intended to stabilize the trading price in the period immediately after the IPO.

Proponents of direct listings also frequently espouse the more “democratic” and transparent nature of theprocess in contrast to that of a traditional IPO. Because the company or any stockholders listed in theregistration statement for a direct listing can simply sell their stock to whatever buyers are willing to buy it,
the profile of the company’s public investors, at least in the near term, is likely to be different, potentially
including fewer large institutional positions and more retail investors who might otherwise have been
unable to participate by buying stock directly in a traditional IPO rather than only in aftermarket trading.
However, this method of distribution may also increase trading volatility and does not afford the company
with the opportunity that it has in a traditional IPO to allocate shares to investors who are expected to takerelatively stable, long-term positions in the company. Direct listings may also tend to be more popularamong employees and other existing stockholders because of the greater immediate participation andflexibility they offer these stockholders, particularly in that direct listings generally do not require existing
stockholders to sign lock-up agreements restricting their ability to sell shares following the listing, whereas
most traditional IPOs usually subject management and significant stockholders to contractual sales
restrictions for 180 days. However, the impact of unrestricted sales on the trading market of a new issue
can also, like other features of the direct listing process, result in increased trading price volatility.

H. A few words on special purpose acquisition companies (“SPACs”)
WHAT IS A SPAC? AND HOW DOES GOING PUBLIC THROUGH A TRANSACTION WITH ONE DIFFER FROM A
TRADITIONAL IPO?

A SPAC is a newly formed blank check company, usually organized by a “sponsor,” that goes public with thepromise to its IPO investors that it will use its IPO proceeds or the equity of the SPAC, or both, to merge
with a private operating company within a specified period of time (typically 12 to 18 months, subject to a
maximum of 36 months). This process provides an alternative to the traditional IPO route for a private
operating company as it effectively can “go public” by merging with a SPAC. SPACs generally disclose at thetime of their IPO that they have not identified a target private operating company, which reduces theregulatory disclosures required for that IPO and provides the SPAC with flexibility. However, if a SPAC fails
to identify a target private operating company and complete a merger within the specified period of time,
the SPAC must obtain shareholder approval to extend its life or return the proceeds it raised in its IPO to
its shareholders.

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Once the SPAC identifies a target private operating company and the two companies have entered into a
letter of intent, it is typical that binding commitments are sought from institutional investors to make aprivate investment in public equity (“PIPE”) into the combined business in order to supply additional
capital. These PIPE commitments are generally obtained prior to public announcement of the merger
between the SPAC and the private operating company target and prior to the preparation and filing of SEC
disclosures regarding the private operating company. A successful PIPE is generally a predicate for the
execution of definitive merger documentation, and the terms of that merger documentation can varysignificantly from the original letter of intent based upon the feedback from the PIPE investors. The
capitalization structure of the SPAC, along with agreed upon terms in the merger documentation will,
however, invariably provide for the SPAC sponsor to receive a portion of the equity in the combined
company as compensation for fronting the capital to form and operate the SPAC prior to the merger. After
execution of the PIPE subscription agreements and definitive merger documentation, SEC disclosure filings,
such as registration statements and/or proxy statements, are then required to be filed with the SEC andare subject to SEC review. The disclosures regarding the private operating company target and combined
business are similar in many ways to the disclosures required for a traditional IPO. Once the SEC review
process is cleared, the SPAC holds a shareholder meeting to approve the merger. However, while the SPAC’s
arrangements typically incentivize its public shareholder to vote in favor of the merger, these shareholders
are nonetheless permitted to redeem their shares (i.e., to get their money back, with interest), which
typically will occur if the trading price of the SPAC in anticipation of the merger is expected by SPAC
shareholders to trade below the SPAC’s IPO price. Accordingly, it is possible that the only significant
funding that will be available to the combined company at the time of completion of the merger will be theproceeds raised from the PIPE, with trading in the combined company being illiquid due to the absence ofany significant retail participation or research coverage from Wall Street analysts.
While SPACs have been around for decades, SPAC transaction activity rose sharply in 2020 and early 2021.
As a result of subsequent poor market performance, the interest of institutional investors in PIPE
transactions has diminished, leading to a largely frozen SPAC market as of the date this book went to press.
Further, an SEC rule proposal changed the risk profile of SPAC mergers and accordingly, SPACs are now lessattractive for many companies due to the increased regulatory scrutiny and risk.

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VIII. Life as a public company
A. Only the beginning
The IPO is not the end of the story—it is only the beginning. At least one of the authors likens going public
to preparing for and running a marathon—except that after finishing the grueling 26.2 miles, instead offeasting on bananas and other post-race goodies and relaxing after wrapping yourself in one of those foil
blankets, you then have the pleasure of immediately embarking upon a regimen of running quarterly windsprints where a crowd of analysts and the media are waiting at the finish line of each race to punch you in
the gut. Thus is the reality for a company going public.

As discussed in Chapter III (Planning Ahead—What Should I Be Thinking About Now?), the preparation forgoing public should happen in parallel with the IPO. Take stock of your processes and infrastructure so thatyou can address any gaps well in advance of the IPO date. This preparation process can often be lengthy,
depending on the maturity of existing processes. How significant the required improvements are will
determine the number of resources required. Many companies have resource constraints during the going
public process, where there is so much attention being paid to the IPO filings and marketing efforts that
other efforts may find themselves de-prioritized. Find a way to keep these efforts at the forefront!

Oceans of ink have been spilled on treatises, guides, manuals and other materials about the myriad
requirements that apply to public companies and how to comply with them, and a comprehensive
discussion of that subject is well beyond the scope of this book. But, we do think it helpful to cover briefly
the basics of the ongoing public reporting obligations, as an understanding of these informs to a significant
degree the work that is entailed in preparing your company’s finance organization and other functions forthe rigors of being public.

Before diving in, we would be remiss if we failed to note that the reporting obligations of a public company
only tend to grow more burdensome over time. For example, just since the prior edition of this book was
published, public companies have become subjected to additional disclosure requirements related toshare repurchase activity, Rule 10b5-1 trading plans, and cybersecurity. And there are additional potential
disclosure requirements on the horizon. Although it cannot be known at this time what rules will ultimately
be adopted, the SEC is expected to propose rules for expanded human capital disclosures and finalize
rules for climate change disclosures. The SEC’s proposed rules for climate change disclosures, as of thedate this book went to press, would require public companies to disclose risks and material impacts totheir business, strategy, and outlook caused by climate change; greenhouse gas emissions; additional

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qualitative and quantitative climate risk disclosures, including the financial impacts of severe weather
events; and governance of climate-related risks and risk management processes. The PCAOB has also
proposed amendments to PCAOB auditing standards related to the auditor’s responsibility for considering
a company’s noncompliance with laws and regulations in an audit. While any rules and standards
ultimately adopted could look significantly different than current proposals and be subject to legal
challenge, the proposals themselves are emblematic of the principle that the pressures on publiccompanies only grow over time.

B. Ongoing reporting
Annual and quarterly reporting. The SEC requires public companies to file quarterly reports on Form 10-Q
and annual reports on Form 10-K (these 10-Qs and 10-Ks sometimes being referred to collectively as“periodic reports”), with current information regarding the company’s business and financial condition. In away, these reporting obligations can essentially be viewed as a requirement to periodically update theregistration statement that the company used in the IPO. For example, just as the registration statement
used in the IPO included the company’s financial statements, the company’s periodic reports must update
those financial statements. Thus, the company’s annual report on Form 10-K will need to contain an
updated audited balance sheet and audited income statement, cash flows and changes in shareholders’equity. And for the quarterly reports on Form 10-Q, the company will need to provide the public with its
interim financial statements (not generally audited but a review by the outside auditors is required).

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THIRD EDITION | IPO HANDBOOKA “large accelerated filer” is any issuer meeting thefollowing conditions as of the end of its fiscal year:1.

2.

the aggregate worldwide market value of the voting
and non-voting common equity held by
non-affiliates of the issuer was $700 million or more
as of the last business day of the issuer’s mostrecently completed second quarter;
the issuer has been subject to reporting
requirements under the Exchange Act for at least 12
calendar months;

A new issuer has 90 days after the completion of its
fiscal year to file its first annual report on Form 10-K
with the SEC. Thereafter, the timetable for a “large
accelerated filer” (generally, a company that has
been reporting with the SEC for at least a year andhas a public float of at least $700 million and annual
revenues of $100 million or more) is 60 days and thetimetable for an “accelerated filer” (generally, acompany that has been reporting with the SEC for at3.

the issuer has filed at least one annual report under
the Exchange Act; andleast a year and has a public float of at least4.

had annual revenues of $100 million or more.

revenues of $100 million or more) is 75 days. Note,$75 million (but less than $700 million) and annual
the thresholds for exiting accelerated andAn “accelerated filer” is any issuer meeting the following
conditions as of the end of its fiscal year:

non-accelerated filer status differ from those used to1.

the aggregate worldwide market value of the voting
and non-voting common equity held by
non-affiliates of the issuer was $75 million or more,
but less than $700 million, as of the last business
day of the issuer’s most recently completed second
quarter; anddays after the completion of each of the first three

it meets conditions (2)—(4) of the definition of “large
accelerated filer.”

We should point out that a new issuer is permitted to2.

determine initial filer status. A new issuer has 45
fiscal quarters of the year to file its quarterly reports
on Form 10-Q prior to its second annual report on
Form 10-K. Thereafter, the timetable for a large
accelerated filer and an accelerated filer is 40 days.
file its very first quarterly report within 45 days
following the effective date of its registration
statement if this is later than the due date for thereport that would otherwise have applied.

Public float: For purposes of determining accelerated
filer and large accelerated filer status, public float
represents the aggregate market value of the voting andnon-voting common equity held by non-affiliates of theissuer computed by use of the price at which thecommon equity was last sold, or the average of the bid
and asked prices of such common equity, in theprincipal market for such common equity, as of the lastbusiness day of the issuer’s most recently completed
second fiscal quarter.

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Category of filer

Form 10-K

Form 10-Q

deadline

deadline

Large accelerated filer

60 days

40 days

Accelerated filer

75 days

40 daysNon-accelerated filer

90 days

45 days

Sarbanes-Oxley requires the chief executive officer and chief financial officer of an issuer to makecertifications pursuant to Sections 302 and 906 of Sarbanes-Oxley with respect to its annual reports on
Form 10-K and quarterly reports on Form 10-Q. These certifications relate to the accuracy of the annual
report, including financial statements. The 906 certifications also cover compliance with applicable SEC
rules and the 302 certifications also cover the issuer’s internal control over financial reporting anddisclosure controls and procedures. These certifications must be filed as exhibits to such reports.
As discussed in Chapter IV (Building a Public Company Finance Organization), commencing with their firstquarterly report on Form 10-Q, issuers must submit with their periodic reports (and any current report on
Form 8-K that contains a revised version of previously filed audited annual financial statements) specified
financial information in such financial statements in an interactive data format known as eXtensible
Business Reporting Language (XBRL). XBRL consists of computer-readable tags which are used to identify
each piece of financial data with the goal of enabling more efficient retrieval and analysis of theinformation. As discussed above, as part of its efforts to modernize, the SEC may consider additional
opportunities for XBRL tagging, such as in proxy-voting disclosures.
Earnings releases. As part of the periodic process for reporting earnings, many companies will issue
quarterly earnings releases and conduct related conference calls with investors. Companies shouldcarefully consider the process they adopt for releasing earnings to ensure it comports with all applicableregulatory requirements. Among other things, earnings releases are required to be furnished on a Form 8-K
report to the SEC and must satisfy SEC rules relating to the use of non-GAAP financial measures. Particularcare should be taken with respect to the initial quarterly earnings releases and conference calls following
the IPO, as any “surprises” can be used as the basis for a lawsuit under Section 11 of the Securities Act
asserting that the IPO prospectus contained a material misstatement or omission.
Current reporting. A public company is also required to file a current report on Form 8-K (generally withinfour business days) when certain specified events occur. The quick reference guide below summarizes
these events, which many are surprised to learn do not include a “catch-all” requirement that the company

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file a Form 8-K whenever something “material” happens. Rather, the list includes a grab bag of enumerated
matters, some of which may fairly be said to be plainly not material. The list also continues to grow. For
example in July 2023, the SEC adopted rules that require current reporting of cybersecurity incidents
deemed by the registrant to be material.
Form 8-K Quick Reference Guide1
Triggering Events
Business and Operations

Financial Information‰

Execution, amendment or termination of a material definitive agreement
not made in the ordinary course of business (Items 1.01/1.02).

‰

Bankruptcy or receivership; court or governmental order confirming plan ofreorganization, arrangement or liquidation (Item 1.03).

‰

Material cybersecurity incident, defined as an unauthorized occurrence, ora series of related unauthorized occurrences, on or conducted through aregistrant’s information systems that jeopardizes the confidentiality,
integrity, or availability of a registrant’s information systems or any
information residing therein (Item 1.05).

‰

Acquisition or disposition of a significant amount of assets other than in
the ordinary course of business (Item 2.01).

‰

Public announcement or release (including any update to earlier
announcement or release) disclosing material non-public information
regarding results of operations and financial condition for a completed
quarterly or annual fiscal period (Item 2.02).

‰

Creation of a material (i) direct financial obligation or (ii) direct orcontingent obligation arising out of an off-balance sheet arrangement(Item 2.03).

‰

A triggering event causing (i) the increase or acceleration of (A) a direct
financial obligation or (B) an obligation under an off-balance sheet
arrangement or (ii) a contingent obligation under an off-balance sheet
arrangement to become a direct financial obligation, and such events
under (i) and (ii) having material consequences (Item 2.04).

‰

Committing to an exit or disposal plan or otherwise disposing of a longlived asset or terminating employees under certain plans that results in amaterial charge under GAAP (Item 2.05).

‰

Conclusion that a material impairment charge to assets is required under
GAAP (unless conclusion is made as part of a quarter/year-end process
and is disclosed in the next periodic report); includes impairments of
securities or goodwill (Item 2.06).

1 This guide is only a summary and does not include all situations under which a Current Report on Form 8-K is required to be filed.

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Triggering Events
Securities and Trading Markets

Accountants and Financial
Statements‰

With respect to a national securities exchange/association: (i) notice
therefrom of non-satisfaction of a listing rule/standard or of delisting;(ii) notice thereto of a material noncompliance with a listing rule/standard;(iii) a public reprimand letter or similar communication therefrom for aviolation of a listing rule/standard; or (iv) the taking of definitive action todelist therefrom or transfer listing to another securities exchange/
association (Item 3.01).

‰

Unregistered sales of equity securities that in the aggregate constitute 1%
or more of the outstanding shares of the class sold (Item 3.02).

‰

Material modifications, limitations or qualifications to the rights of holdersof any class of registered securities (Item 3.03).
Resignation or dismissal of an independent accountant or engagement of a
new independent accountant (Item 4.01).

‰‰

Concluding (or being advised by or receiving notice from the independentaccountant) that previously issued financial statements should no longer
be relied upon (Item 4.02).

‰

Change in control (Item 5.01).

‰

Director’s or certain executive officers’ resignation, retirement, termination
or removal or director’s refusal to stand for reelection. Election of new
director or appointment of certain new executive officers. Entry into or
adoption of a material compensatory plan, contract or arrangement towhich the principal executive officer, principal financial officer, or a named
executive officer is a party or participates; all material amendments to suchplan, contract or arrangement; or material grants or awards thereunder toany such persons. Calculations of compensation figures for named executive
officers if omitted from Summary Compensation Table (Item 5.02).

‰

Amendments to the articles of incorporation or bylaws (not disclosed in aproxy statement) or a change in fiscal year (Item 5.03).

‰

Temporary suspension of trading under an employee benefit plan (Item 5.04).

‰

Amendment to, or waiver from, a provision of the code of ethics thatapplies to the principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similarfunctions (Item 5.05).

‰

Submission of matters to a vote of security holders (Item 5.07).

‰

Shareholder director nominations (Item 5.08).

Regulation FD‰

Disclosure of information pursuant to Regulation FD (Item 7.01).

Other Events‰

Optional disclosure of other events deemed of importance to security
holders (Item 8.01).

Financial Statements andExhibits‰

Disclosure of financial statements, pro forma financial information andexhibits, if any, filed as part of the 8-K (Item 9.01).

Corporate Governance andManagement

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THIRD EDITION | IPO HANDBOOKIn addition to the obligation to file current reports on Form 8-K with the SEC, the NYSE and Nasdaq expect
listed companies to release timely to the public any information which might reasonably be expected tomaterially affect the market for their securities, except under very limited circumstances where it ispossible to maintain confidentiality of the information and immediate public disclosure would prejudice
the ability of the company to pursue its legitimate corporate objectives. In the case of NYSE-listedcompanies, when the announcement of news of a material event or a statement dealing with a rumor
which calls for immediate release is made between 7:00 a.m. and 4:00 p.m., New York time, the company
must notify NYSE’s Market Watch & Proxy Compliance team by telephone at least ten minutes prior torelease of the announcement and a copy of the press release must be submitted via email to NYSE.
Nasdaq-listed companies must notify Nasdaq’s MarketWatch Department at least ten minutes prior to therelease to the public of material information that involves certain events, including but not limited tofinancial-related disclosure, corporate reorganizations and acquisitions, new products or discoveries,
developments regarding customers or suppliers, senior management changes, independent auditor
changes, events regarding the company’s securities, and significant legal or regulatory developments, if the
public release of the information is made between 7:00 a.m. and 8:00 p.m., New York time; if theinformation is released between 8:00 p.m. and 7:00 a.m., New York time, companies must notify Nasdaq’sMarketWatch Department of the material information prior to 6:50 a.m., New York time.
Proxy statements. A proxy statement contains information provided to shareholders so they can decide
how to vote in connection with a company’s shareholder meeting. Stock exchange rules and, typically, state
law require a company to hold an annual shareholder meeting, and stock exchange rules require acompany to solicit proxies for all meetings of shareholders. In connection with such solicitation, a proxystatement must be prepared, filed with the SEC and disseminated to the shareholders. In cases where acompany’s stockholders vote or act by written consent without the solicitation of proxies, SEC rules require
the company to provide stockholders with an information statement, which contains disclosure
substantially similar to that required in a proxy statement. Certain information required to be disclosed(including the required compensation disclosures) in an issuer’s annual report on Form 10-K may beincorporated by reference to the issuer’s later-filed proxy statement as long as the proxy statement is filed
within 120 days after the end of the issuer’s fiscal year.
Internal control over financial reporting and other disclosure controls and procedures. A public company
must maintain internal control over financial reporting, which is a process designed by, or under thesupervision of, the issuer’s principal executive and principal financial officers, to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with GAAP.

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The company must include in its annual reports on Form 10-K a management’s assessment of theeffectiveness of its internal control over financial reporting. The rules provide that companies are exempt
from this requirement for their first annual report on Form 10-K, so it first kicks in with the second annual
report on Form 10-K that is filed. In addition, companies that are accelerated filers or large accelerated
filers must also, starting with their second annual report on Form 10-K (if the company is an accelerated
filer or large accelerated filer for purposes of that report), include an opinion from the issuer’s outside
auditors on the effectiveness of the issuer’s internal control over financial reporting. Notwithstanding theforegoing, however, under the JOBS Act a company that qualifies as an EGC is exempt from the requirement
to include the attestation from the issuer’s outside auditors on the effectiveness of the company’s internal
control over financial reporting until the earlier of 5 years or when an entity is no longer an EGC. Due to SEC
rule updates in 2020, a smaller reporting company with annual revenue of less than $100 million likewise
does not have to include an annual attestation report of its auditors on the effectiveness of the company’s
internal control over financial reporting, although larger companies (other than EGCs) must do so.
A public company must also disclose in its quarterly reports on Form 10-Q and annual reports on
Form 10-K any change materially affecting its internal control over financial reporting that occurred during
the issuer’s last fiscal quarter, beginning with its first periodic report following its IPO. The issuer’s principal
executive officer and principal financial officer must certify that they have disclosed to the issuer’s auditors
and audit committee all significant deficiencies or material weaknesses in the design or operation ofinternal controls.
In addition, a public company must maintain disclosure controls and procedures, which are controls andother procedures of the 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 recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms. An issuer must evaluate theeffectiveness of its disclosure controls and procedures and describe its evaluation quarterly in its quarterly
reports on Form 10-Q and annual reports on Form 10-K.
Regulation FD. Whenever a public company, or any person acting on its behalf, discloses, whether
intentionally or not, any material non-public information regarding that issuer or its securities to securities
market professionals or securityholders (if it is reasonably foreseeable that the securityholder will trade on
the basis of the information), Regulation FD requires the issuer to make general public disclosure of theinformation. Public disclosure must be made simultaneously for intentional disclosures and promptly (butin no event after the later of 24 hours or the commencement of the next day’s trading) in the case of
inadvertent disclosures. Regulation FD does not apply to disclosures made to persons who owe a duty oftrust or confidence to the issuer, persons with a confidentiality obligation or to certain offering-related

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communications. Regulation FD also does not apply to communications to employees, but for any broadlybased employee communications, a company should consider whether public disclosure is prudent under
Regulation FD.

C. Liability under the federal securities laws
Unfortunately, given the legal regime in the United States, inherent in conducting an IPO and life as apublic company thereafter is the reality that you can be exposed to, frequently frivolous, lawsuits.

Liability under the U.S. securities laws in connection with an IPO primarily arises under the Securities Act
and the Exchange Act. The SEC has broad powers to investigate public companies and their directors andofficers and to bring civil enforcement proceedings that could result in fines and monetary penalties orother sanctions, such as a bar from serving as a director or officer of a public company. In addition, apublic company and its directors and officers could also become subject to criminal liability for, among
other things, willful violations of securities laws or interference with a government investigation. Finally,
many of the provisions of the securities laws also provide for private rights of action in which investors
individually or as representatives of a class can bring a lawsuit against the company and its directors andofficers. These private class action lawsuits are the most common proceeding to which companies andtheir directors and officers are subject for alleged misstatements or omissions in connection withregistered securities offerings.
‰ Securities Act, section 11 liability: under section 11, the issuer, its directors, its principal executive,
financial and accounting officers, its underwriters and a foreign issuer’s authorized US representative
can be liable for material misstatements or omissions in the issuer’s registration statement. ‘Experts’,such as the issuer’s accountants, can also be held responsible and sued directly for
misrepresentations made on their authority. Section 11 entitles a purchaser of securities in aregistered offering, or whose securities are ‘traceable’ to those distributed in such offering, to obtaindamages for a violation. While the issuer is subject to strict liability for material misstatements andomissions in its registration statement, non-issuer defendants (i.e., all defendants, other than theissuer itself) are afforded, among other defenses, an affirmative ‘due diligence’ defense if they canshow that ‘after reasonable investigation, [they had] reasonable ground to believe and did believe’that statements made in the registration statements were not misleading.
‰ Securities Act, section 12 liability: under section 12(a)(2), the issuer, its officers and directors, its
underwriters and other persons can be liable if they sell or solicit the sale of a security by meansof a prospectus or an oral communication containing a material misstatement or omission.
Section 12(a)(2) permits a purchaser of securities in a registered offering, or whose securities are

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‘traceable’ to those distributed in such offering, to obtain rescission of the sale, or damages incertain circumstances. Non-issuer defendants similarly have an affirmative defense if they ‘did notknow, and in the exercise of reasonable care could not have known,’ of the misrepresentation.
‰ Securities Act, section 15 liability: under section 15, any person who ‘controls’ a primary violator of
section 11 or 12 can also be held liable under a theory of secondary liability. ‘Control’ exists if the
defendant has the direct or indirect power ‘to direct or cause the direction of the management andpolicies’ of the primary violator (typically the issuer) through stock ownership, contract or othermeans. Control person claims are frequently asserted against officers and directors of issuers, andcan be brought against a controlling shareholder or group of shareholders, in connection with section
11 and 12 lawsuits. Defendants have an affirmative defense if they ‘had no knowledge of or reasonableground to’ know the facts underlying the violation.
‰ Exchange Act, section 10(b) and rule 10b-5: a section 10(b) and SEC rule 10b-5 claim is the mostcommonly asserted claim against public companies, officers and directors, underwriters andaccountants and other persons. A claim can be brought for use of ‘any device, scheme or artifice todefraud’, any material misstatement or omission, or ‘any act, practice, or course of business’ that
deceives in connection with the purchase or sale of securities. A claim can be brought concerningstatements made in connection with a public offering or with secondary market trading based on
misstatements made in press releases, officer or director communications and periodic reporting,among other things. Unlike the Securities Act claims discussed above, however, in order to establish aviolation of section 10(b) a defendant must be shown to have had ‘scienter’—an intent to defraud orotherwise engage in reckless conduct. The plaintiff must also demonstrate ‘loss causation’—aconnection between the defendant’s alleged misconduct and the economic harm suffered.
‰ Exchange Act, section 20(a): similar to section 15 of the Securities Act discussed above, section 20(a) of
the Exchange Act provides for secondary liability of any person who ‘controls’ a primary violator of
section 10(b) or rule 10b-5 can also be held liable under a theory of secondary liability. Section 20(a)provides an affirmative defense for persons who acted ‘in good faith and did not directly or indirectly
induce [. . .] the violation’.

As mentioned above, section 11 of the Securities Act provides non-issuer defendants (including directors,
officers and underwriters) with an affirmative ‘due diligence’ defense if they can show that ‘after
reasonable investigation, [they had] reasonable ground to believe and did believe’ that statements made in
the registration statement were not misleading. Similarly, non-issuer defendants have an affirmative
defense to a claim under section 12 of the Securities Act if they ‘did not know, and in the exercise ofreasonable care could not have known’ of the alleged misrepresentation. Defendants in a Securities Act,section 15 or Exchange Act, section 20 ‘control person’ claim have an affirmative defense if they ‘had no90

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knowledge of or reasonable ground to’ know the facts underlying the violation or acted in ‘good faith’,respectively. A defendant in an Exchange Act, section 10(b) or rule 10b-5 claim must be shown to have had
an intent to defraud or been reckless. A non-issuer defendant that is able to establish that he or she or it
performed a reasonable investigation sufficient to establish an affirmative defense under section 11 will
typically also be thereby able to defeat claims under each of the other provisions as well. It is for the
purposes of establishing such a defense under section 11 and these other provisions that underwriters andother offering participants engage in extensive due diligence on the issuer and its business in connection
with an IPO. It should be noted that, as a procedural matter, the affirmative due diligence defense,
typically, is not available at the incipient ‘motion to dismiss’ stage of a securities litigation (when aplaintiff’s allegations must be assumed to be true), but rather only after discovery has been taken and thedefendant moves for ‘summary judgment’. An issuer arriving at this later stage of a securities litigation will
typically have already incurred significant expense, and companies accordingly have a significant incentive
to settle these actions.

D. Parting thoughts
The authors wrote this short book to answer the questions we are most commonly asked by businessowners and executives who are contemplating an initial public offering of their company. As we noted in
our introduction, however, this book is not a “how to” manual and, if you choose to move forward with an
IPO, we encourage you to add to your team experienced advisors who know all of the ins and outs andadvise companies going public for a living. It takes time to prepare a private company to go and be public,
and this process will be much more manageable if you start early, objectively assess the areas where yourcompany’s capabilities need to be enhanced and then develop and methodically implement a realistic plan
to address these.
We hope you found this book helpful and wish you the very best of luck! Please do not hesitate to contact
any of us with any questions.

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