It’s important to fully understand how the SEC will scrutinize your company’s equity compensation, valuations, and compliance. Issues in these areas could lead to subsequent accounting changes and financial statement corrections that will delay the IPO process and possibly have negative tax repercussions for option holders.
As part of its review of filings for an IPO, the SEC will analyze a company’s awards and valuations from a 12-month period prior to the IPO date.
The lookback period can be two or three years in certain circumstances, such as large stock option grants before the 12-month time frame and changes in calculation technique or model chosen.
Authoritative Guidance
During this review, the SEC will typically focus on what’s known as cheap stock, which are stock-based awards given as compensation.
It will then address rules and regulations regarding valuation of share-based payments for public companies in Topic 14, Share-Based Payment, of the SEC’s Codification of Staff Accounting Bulletins—created by Staff Accounting Bulletin (SAB) No. 107 and updated by SAB No. 110. The interpretations of this guidance are applicable to companies seeking an IPO.
The SEC will also analyze previously performed valuations and how well they comply with authoritative guidance on valuing stock of private companies—such as the American Institute of Certified Public Accountants (AICPA) guide on the Valuation of Privately-Held-Company Equity Securities Issued as Compensation (AICPA Guide).