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Welcome to IPO Planner
Are you ready to take your company public? Identifying select public company issues in advance while your company is still private can streamline the process and save time and money while increasing the likelihood of a smooth and successful initial public offering. The Goodwin IPO Planner serves as your step-by-step guide to prepare for your journey.
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Welcome
Make Sure You’re Ready to Go
Financial Statements & Accounting
Organizational Meeting
Draft Registration Statement
Underwriting Documentation
Board Matters
Roadshow
Pricing & Closing
Build Your Team
By failing to prepare, you are preparing to fail.
BENJAMIN FRANKLIN
Welcome to IPO Planner!
IPO Readiness Memo IPO Readiness Memo for Foreign Private Issuers Gun-Jumping Memo NYSE Listed Company Manual Nasdaq Initial Listing Guide
Financial Statements Requirements Memo Summary of IPO Process, Director Liability, Due Diligence Defense and Gun-Jumping Rules Memo Presentation to Board Serving as a Director of a Public Company Memo
The downloadable resources below can help you think through the critical areas of focus as you prepare for your IPO:
To prepare for what’s ahead, you’ll need to establish a tentative timetable for your offering and assign responsibilities.
Charting the Course
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Internal Team and Officers Underwriters Outside Legal Counsel Independent Auditors Critical Component: Board Composition
OR JUMP TO:
Board of Directors The Importance of Board Committees Choosing a Stock Exchange
Taking a company public is a team effort and you’ll need a high quality team to get a high quality result. Here are the key players in an IPO working group:
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| Build Your Team
Choosing Your Internal IPO Team & Identifying Executive Officers
Taking a company public is a challenging and time-consuming task and the internal team that you assemble will have to take on a lot of new responsibilities in addition to doing their “day jobs”. Typical IPO teams include the Chief Executive Officer, Chief Financial Officer, General Counsel, Controller and the rest of the finance team, as well as key operations, human resources, sales and regulatory personnel. This is also a good time to fill any critical gaps in your executive team, including building up legal and finance teams. Among this group a select few will be considered “executive officers” and “Section 16 officers” under SEC rules. These rules apply a special designation to any executive who is in charge of a principal business, unit, division, or function and who performs a policy-making function. This determination can be very company-specific and you should consult with counsel when doing so. Any individuals considered to be “executive officers” will need to be prepared for:
The public disclosure of their stock ownership information; The public disclosure of any of their purchases or sales of company securities;
Additional limitations, including pre-clearance, of any transactions in company securities under the company’s insider trading policy;
The potential public disclosure of their compensation information such as salary, bonus, equity grants and perks, as well as the public filing of their employment or other agreements with the company; and
A strict prohibition on taking any personal loans from the company.
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How to Choose Your Underwriters
Selecting the right underwriter is critical to the successful structuring and execution of an IPO. In addition to leading the selling efforts, the lead underwriter is responsible for coordinating the efforts of the underwriting syndicate, assisting the company in preparing the registration statement (which is the main document that most U.S. companies file when registering their shares under the Securities Act of 1933, as amended), and conducting extensive due diligence. In selecting the lead underwriter, companies consider a number of factors including:
The expertise of the underwriter and their track record with offerings for comparable companies; The underwriter’s ability to market and sell the company’s stock to a diverse group of target investors; The underwriter’s ability to provide ongoing strategic advice before, during and after the IPO process; and The quality of the underwriter’s research analysts.
Ultimately, the board and management team must feel comfortable with the underwriter and have confidence in their experience and advice. We recommend consulting with counsel for a list of questions for prospective underwriters as well as selection criteria for you to consider.
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Picking the Right Legal Team
Choosing the right legal counsel to guide you through your IPO is critical. Firms that match your industry focus, financial position and internal culture are important factors. Yet, in addition to providing sound legal advice along each step of the journey, it is the role of your outside legal team to identify and mitigate potential land mines and thoroughly prepare you for each of the many decisions that must be made along your IPO journey. You need lawyers with in-depth knowledge of the economic and regulatory factors specific to your industry. Lawyers that know the sorts of questions that the SEC is going to ask, understand the employment and compensation structure that will best suit your company, and identify potential intellectual property risks are ideal additions to your IPO team. Experience representing underwriters in IPOs is also a plus as your lawyers will leverage that experience to help you navigate through the relationship with your underwriters. At the end of the day – and you’ll experience many very long days throughout your IPO journey – you need outside counsel that will help you appropriately deal with all of the hurdles that will come up. [Learn more about the Goodwin team and our IPO experience.] [Link to a curated page on goodwinlaw.com with intro and IPO lawyers bios]
Independent Auditors
One of the most difficult and time-consuming aspects of an IPO is the preparation of audited financial statements. The company should select a public accounting firm that is registered with the Public Company Accounting Oversight Board (the “PCAOB”) and otherwise admitted to practice before the SEC. In the event that the company needs to change its public accounting firm, care should be taken in the process. A registration statement filed with the SEC will require audited financial statements for each of the two previous years in the case of emerging growth companies and audited financial statements for each of the three previous years in the case of other companies. Therefore, the company will need to receive both audit reports and consents from each accounting firm that issued the reports on the required financial statements. If a prior audit firm will not consent to the use of its reports and name in the registration statement, the new auditor will need to re-audit the relevant years, adding time and expense to the registration process. In addition to the audit, the auditor will also be required to provide a “comfort letter,” which is an assurance that the financial data contained in the IPO registration statement is not inaccurate or misleading.
Access more information on financial statements requirements.
Critical Component: Board Composition
The Company’s Board of Directors plays a significant role in the IPO process. Amongst other things, the Board provides pivotal guidance on the initial decision to proceed with the IPO and the engagement of underwriters. Stuart Cable, Vice Chairman, Global Chair of M&A at Goodwin, further explains the board of directors’ function.
Learn more about what to expect from a director of a public company.
Video with Stuart Cable
FPO
Board of Directors
In order to trade on the NYSE or Nasdaq markets, a majority of the members on your board of directors must be independent, subject to limited transition rules. The NYSE and Nasdaq independence rules specify certain factors that would prevent an individual from being considered independent. For example, board members cannot be employees of the company or have been employed by the company within the past three years. In addition, the individual cannot have received compensation in excess of specified thresholds other than fees related to their board service. Learn more about NYSE and Nasdaq governance on director independence:
NYSE Director Independence Memo NYSE Listed Company Manual – Director Independence (Section 303A.01 and Section 303A.02) Nasdaq Director Independence Memo Nasdaq Director Independence Rules Nasdaq FAQs
The Importance of Board Committees
Board Committees play a critical role in the review and oversight of your company’s internal controls, executive compensation, governance, succession, and other key areas. Private companies planning to list their shares on the NYSE or Nasdaq should consider creating the following committees to prepare for life as a public company:
Audit Committee Compensation Committee Nominating and Corporate Governance Committee
For more information on these committees and the related NYSE and Nasdaq requirements, please visit Board Matters.
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Choosing a Stock Exchange
In most cases, companies going public in the United States will consider whether to list their securities on either the NYSE or Nasdaq. The requirements for listing on these stock exchanges should be reviewed carefully to ensure compliance prior to submitting a listing application. Applications for listing a security are reasonably straightforward but should be included in the timetable as it may be time-consuming and may affect other matters. Issues of concern to the stock exchanges include quantitative criteria such as the company’s size and profitability, the anticipated shares outstanding, and compliance with corporate governance requirements.
Reserve ticker symbol
Confirm quantitative and qualitative requirements are met
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NYSE Ticker Symbol Reservation
Nasdaq FAQs on Ticker Reservation
Nasdaq Symbol Reservation
NYSE
Nasdaq
Prepare in Advance
While much of the due diligence effort is conducted after the organizational meeting, your company can prepare the following items in advance.
Determining Filing Status What does it mean to be an EGC? Prepare for a Rigorous Due Diligence Process Corporate Housekeeping Reviewing Your Current Communications Strategy
Staying Ahead of Cybersecurity Understanding FCPA Issues U.S. Export Control Rules Creating Transparency: Executive Compensation
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| Make Sure You're Ready to Go
Determining Filing Status
There are several classifications for potential IPO companies. You may be an Emerging Growth Company (EGC), a Foreign Private Issuer (FPI) or controlled company. Each of these designations impacts reporting and corporate governance requirements and simplified definitions of each are included below: EGC – Under the Jumpstart Our Business Startups (JOBS) Act of 2012, an emerging growth company is a company with annual gross revenues of less than $1.07 billion during its most recent fiscal year. FPI – Under the Securities Act of 1933, a foreign company will qualify as a foreign private issuer if 50% or less of its outstanding voting securities are held by United States residents; or if more than 50% of its outstanding voting securities are held by U.S. residents and none of the following three circumstances apply: the majority of its executive officers or directors are U.S. citizens or residents; more than 50% of the issuer’s assets are located in the U.S.; or the issuer’s business is administered principally in the U.S. Controlled Company – Under NYSE and Nasdaq rules, a controlled company is a company in which more than 50% of the voting power for the election of its directors is held by a single person, entity or group. We recommend reviewing these classifications carefully with counsel prior to embarking on the IPO process. Your status should be assessed continuously throughout both the IPO process and your life as a public company to ensure compliance with relevant standards.
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What does it mean to be an EGC?
Your company qualifies as an emerging growth company if it has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and has not sold common equity securities under a registration statement. You will continue to be an emerging growth company for the first five fiscal years after you complete an IPO, unless:
Your total annual gross revenues are $1.07 billion or more; You have issued more than $1 billion in non-convertible debt in the past three years; or You become a “large accelerated filer,” as defined in Exchange Act Rule 12b-2.
If you are an emerging growth company, you are able to:
Provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years;
Use test-the-waters communications with qualified institutional buyers and institutional accredited investors;
Include less extensive narrative disclosure than required of other reporting companies, particularly with respect to executive compensation;
Defer complying with certain changes in accounting standards; and
Not provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b).
Preparing for Due Diligence
Thorough and comprehensive due diligence is critical to a successful IPO because it helps to ensure that the information in the registration statement used to sell company stock to investors is accurate and complete in all material aspects. It also enables certain parties, such as underwriters and directors (but not the company), to benefit from the “due diligence defense”, which allows those parties to avoid liability if they can show that they conducted a reasonable investigation prior to commencing the offering. Whether or not a particular person or entity is able to successfully assert a due diligence defense requires a case-by-case determination, but consensus has been established as to what is a reasonable and appropriate level of due diligence in an IPO for underwriters and directors. In addition to the meticulous review of all of the organizational documents, contracts, minutes, intellectual property and other key written documentation, a significant amount of due diligence defense is conducted during the drafting of the registration statement. During the drafting sessions, your working group and members of your company’s senior management carefully review, revise and discuss each sentence of the registration statement to ensure that it is accurate, complete, not misleading and in language that is readily understandable to investors. There will also be diligence calls with the company’s key customers or partners, auditors, management and employees with subject matter expertise in key areas such as regulatory, cybersecurity, legal and intellectual property.
Introspection and Inspection: Corporate Housekeeping
We strongly advise preparing for the due diligence process well in advance. To avoid surprises, we recommend building an electronic data room using a due diligence list from your counsel and organize your data room based on that list. This exercise will help identify any gaps in the company’s records, outstanding or pending legal issues, and/or any compliance areas that have not yet received sufficient attention, such as FCPA or cybersecurity. There are several key areas of focus for companies preparing for an IPO. For a comprehensive checklist, please access our Corporate Housekeeping Considerations guide.
Corporate Housekeeping Considerations
IP Portfolio
Finance & Accounting Agreements
Material Agreements
Corporate Governance
Employee Matters
Stockholder & Equity Considerations
Regulatory Concerns
Reviewing Your Current Communications Strategy
Public communications during the IPO process are subject to SEC rules, including what are referred to as “gun jumping” rules. These rules are intended to prevent companies from “jumping the gun” and selling or promoting the offering outside of the required SEC process. Prior to your IPO, you should coordinate with outside counsel to review all recent and upcoming articles, press releases, interviews, public appearances and other communications to identify any gun-jumping issues.
Video with Inez Friedman-Boyce
Staying Ahead of Cybersecurity
When it comes to data privacy and cybersecurity breaches, the stakes have never been higher. Hackers cause serious implications as they target proprietary information and intellectual property. This sophisticated threat environment is compounded by aggressive and continually changing regulatory enforcement. Given the increased publicity and public scrutiny for companies during the IPO process, it is common to attract additional attention from hackers and other bad actors.
Video of Brenda Sharton
Understanding FCPA Issues
The Foreign Corrupt Practices Act (FCPA) and other anti-bribery regulations make it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Government investigations and enforcement actions resulting from alleged violations of the FCPA can be a financial liability and place an unwelcome public spotlight on a company’s management. Goodwin’s Foreign Corrupt Practices Act team, which includes a number of former federal prosecutors, has extensive experience investigating and defending against FCPA allegations. Jennifer Chunias, Goodwin Partner in the Securities Litigation & White Collar Defense group, discusses the importance of understanding FCPA and how it applies to your company.
Video of Jennifer Chunias
Reviewing Export Control Regulations
The global nature of business today makes it imperative for management teams, boards of directors and investors to have a solid understanding of the U.S. export control laws. Through various government agencies, the U.S. government monitors the shipment or transfer of sensitive equipment, software and technology to protect national security. Gaps in understanding export control laws can divert management time and company resources, resulting in unfavorable publicity, impeding transactions, civil fines, denial of export privileges and even criminal penalties. For more details access Key Considerations for Entrepreneurs and Investors on the U.S. Export-Control Laws. Rich Matheny, Goodwin Partner and head of the firm’s Global Trade practice, discusses the importance of reviewing export control regulations and how they apply to your company.
Video of Rich Matheny
Creating Transparency: Executive Compensation
Certain executives and all directors of public companies are required to disclose their compensation, including incentives, performance targets, equity awards, deferred compensation, projected severance and more. Alexandra Denniston, a Goodwin Partner specializing in advising public companies on executive compensation as it relates to SEC requirements, talks about the details of executive compensation disclosure.
To help navigate these rules, view our Executive Officer and Director Compensation Worksheet to facilitate the collection and disclosure of executive compensation.
Video of Alex Denniston
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Overview of Financial Statement Requirements Consider the Financial Statement “Staleness” Consider Non-GAAP Measures and Other Key Performance Metrics
Companies considering an IPO should make sure that the all of the required financial statements are accurate and updated and that key performance metrics are identified.
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| Financial Statements & Accounting
Overview of Financial Statement Requirements
The disclosure item most likely to adversely impact the timing of the IPO is the availability of required financial information. The JOBS Act permits emerging growth companies to file IPO registration statements that only include two years of audited financial statements and selected financial data in addition to any required unaudited interim financial statements, with a correspondingly reduced MD&A section. For other companies, the registration statement filed in connection with an IPO generally will need to contain audited financial data for the three most recent years, two additional years of unaudited financial data and unaudited interim financial data for the current year. Companies contemplating an IPO should make sure that the required financial statements and related auditor consents are available in a timely manner. If your company has recently acquired (or been acquired by) another company or jointly-owned business, it is important to evaluate whether it is necessary to include the financial statements of that entity in the registration statement.
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Consider the Financial Statement “Staleness”
Navigating the financial statement requirements of federal securities laws requires understanding not only the scope of the financial statements but also the timing requirements for the provision of the statements. Registration statements and prospectuses for all registered offerings must contain certain annual and quarterly financial statements. If too much time passes after the date of a set of financial statements, those statements go “stale.” In this case, the issuer must update their financial statements from the most recent quarter (or year-end, in the case of third quarter financials).
Any non-GAAP (Generally Accepted Accounting Principles) financial measures used in the registration statement or other SEC filings and press releases must be accompanied by the most directly comparable GAAP measure, as well as a discussion of the differences between the GAAP and non-GAAP financial measure. In addition to GAAP and non-GAAP financial measures, many companies use other “non-financial” business metrics, also known as KPIs (key performance indicators), to demonstrate their value to investors and show the progress of the company over time. The most valuable KPIs track to your business goals and demonstrate actual impact on your company’s growth. Your executive team should discuss which KPIs track to your specific business goals and, if measured, would complement your financial reporting to tell your company’s growth story.
Consider Non-GAAP Financial Measures Other Key Performance Metrics
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Planning the Organizational Meeting Will Any Existing Stockholders Sell in the IPO?
The “kick-off” meeting should gather all of the participants in your IPO, including key company personnel as well as outside counsel, underwriters and auditors.
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| Organizational Meeting
Planning the Organizational Meeting
The first step in the IPO process is to gather the key participants for an organizational or “kick-off” meeting. The key working members such as the CEO, CFO, general counsel and other officers along with the underwriters, company’s counsel, the underwriter’s counsel and the company’s independent auditors should be in attendance. Ideally, the organizational meeting will cover the following topics:
Introduction of the participants; Presentation by management that provides an overview of the company and its financial results; Discussion of the size of the offering and expected use of proceeds, the anticipated schedule and the areas of responsibility for each team; Identification of potential business, legal, accounting, and disclosure issues; Any concerns related to prefiling publicity; and The strategy for marketing the issuer relative to its industry peer group (e.g., positioning, growth strategy, competitive outlook, etc.).
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Will Any Existing Stockholders Sell in the IPO?
Addressing the involvement of any selling stockholders in an offering is an important discussion point at the organizational meeting. In previous transactions or financings, your company may have granted registration rights to stockholders. Under the terms of the registration rights agreement, it is typically provided that shares may be excluded if no other stockholder participates and if the underwriter deems the inclusion of such shares would be detrimental to the success of the offering. Factors to be considered include the amount of capital that a company needs to raise in the offering, whether the additional shares are needed to increase the number of shares outstanding, and whether the exit of long-term investors and insiders will send a negative signal to the market. If there are selling stockholders in the offering, they will be asked to make representations in the underwriting agreement outlining the nature and size of their holdings. Additionally, they will agree to provisions that restrict their right to sell shares outside the offering for a period of time and deliver a power of attorney or custody agreement to ensure the smooth execution of the offering.
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Preparing a registration statement is a long and arduous process, however, many companies find that developing a complete and articulate description of their business is a valuable use of time and resources.
Putting Your Story Together Registration Statement SEC Review Process
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| Draft Registration Statement
Putting Your Story Together
Drafting your registration statement is primarily the responsibility of the company and its counsel, but each of the working group members will have a role in the drafting process. Your underwriter and their counsel will act as probers — asking questions that help define the strengths, strategies, risks, trends and other issues that emerge in drafting — to produce a document that accurately addresses these issues. Your accountants are responsible for preparing audited and unaudited financial statements, reviewing the registration statement, and acting as a resource for the company in drafting the MD&A. The resulting document should protect your company, underwriters and other relevant parties against any material misstatements and omissions. It should also be cohesive with enough “sizzle” to serve as a selling tool. To help prepare your story, use our Drafting Time and Responsibility Checklist.
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The most difficult tasks in drafting a registration statement are creating your “story”, sizing your addressable market and identifying your KPIs.
Registration Statement
Video of S-1 overview featuring Stephanie Richards
Risk Factors Featuring Jared Fine
MD&A factors featuring Barbara Bispham
Business factors featuring Sarah Ashfaq
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SEC Review Process
A registration statement filed by your company is subject to review by the SEC. Typically, within thirty days of filing, the SEC will send to the company a “comment letter” containing comments and questions on the registration statement. The SEC comments will be focused on improving the clarity and balance of the disclosure and its compliance with the SEC’s disclosure rules. The comments take time to resolve so it is important to be aware and be as prepared as possible. The SEC comment process could potentially delay an IPO or even cause a postponement if market conditions deteriorate. Often there are multiple rounds of SEC comments, with additional comments made by the SEC staff to the company’s responses or to new disclosures in an amendment to the registration statement (e.g., updates to financial statements). Occasionally, a call between the company, its counsel and the SEC staff is needed to resolve difficult issues.
Focus Areas for the SEC Comment Process
Below are several topics that have been recent areas of focus, especially for venture and private equity-backed companies.
Cheap Stock: The valuation of equity securities (including stock options) issued to employees as compensation prior to the IPO continues to be an area of SEC attention. The SEC will often challenge the underlying valuations, as well as the related financial statement and MD&A disclosures.
Warrants and Convertible Securities: The SEC focuses on the classification and measurement of warrants and conversion features found in convertible debt and convertible preferred stock. They typically ask companies that have outstanding convertible securities that may be settled in common stock to address "beneficial conversion feature" concepts.
Third-Party Support: The SEC generally requires that you disclose the basis for such claim and provide independent, objective and verifiable third-party support if you wish to make a competitive claim regarding its market share, products or technology.
Key Metrics: GAAP and/or non-GAAP are key metrics by which your company operates and measures your business and are a key focal point for the SEC. They will most likely ask you to explain how investors should use those metrics to evaluate your company.
Revenue Recognition: There are several revenue recognition topics that continue to draw the SEC’s attention including requirements describing vendor-specific objective evidence, software elements in post-contract support agreements and other revenue arrangements.
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Understanding the Underwriting Process Lock-Ups Satisfying FINRA Requirements Prepare Selling Stockholder Documents (if necessary) Test the Waters Guidelines
In addition to the underwriters’ commitment to purchasing your company stock, the underwriting process also addresses other covenants relating to overall company health, operations and registration.
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| Underwriting Documentation
Understanding the Underwriting Process
The underwriting agreement is a contract stating your underwriters’ commitment to purchase your company stock at the offering price less the underwriting discount. It also outlines other covenants relating to the condition of your company, your operations and the registration process. As part of the underwriting agreement process, you should be prepared to expect the following as part of the negotiation:
To help stabilize the market post-IPO, underwriters regularly ask for an option to purchase additional shares (up to 15%) to satisfy “over-allotments” of stock to purchasers. The typical contract allows the underwriter to exercise this option for up to thirty days after the closing.
Underwriters also request that your company’s directors, officers, and stockholders execute lock-up agreements, pursuant to which they agree not to engage in any transactions involving the company’s securities following the initial public offering. These lock-up agreements are negotiated and executed by at least the directors, officers, and 5 percent stockholders, prior to the initial filing of the registration statement.
In the agreement, underwriters typically request the termination of its obligations in the event of extraordinary external market factors such as suspension of all trading on a major exchange, declaration of war or other significant developments.
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Lock-Ups
As part of the IPO process, lock-up agreements are put in place to prevent company insiders such as your company directors, executive officers and certain stockholders, from selling company stock for a specified time after the IPO closing. Lock-ups are set prior to the initial filing of the registration statement and typically last 180 days from the date of the final prospectus. The lock-up is a mechanism deployed by the underwriters to:
Prevent the flooding of the public markets post-IPO by existing stockholders which would otherwise drive the price of the stock down; and
Help to maintain market confidence for the period of time immediately following the IPO.
Assist with market stabilization following the IPO and minimize trading volatility;
Prior to the roadshow, as close to 100% of your company’s stockholders should be locked-up. Stockholder agreements and option plans typically include a lock-up provision binding stockholders in a similar manner in instances where you are unable to secure a lock-up agreement from 100% of your stockholders in your IPO.
Satisfying FINRA Requirements
Within a day of filing the IPO Registration Statement, the underwriters’ counsel makes a submission to the Financial Industry Regulatory Authority (FINRA). FINRA reviews the terms of the underwriting arrangements primarily focusing on compensation to the underwriters and any related interested parties. While FINRA has no authority over your company, the SEC will not move forward with your company’s registration statement until receiving FINRA clearance. It is therefore advantageous to consider any issues that may arise with FINRA early in the registration process. To help with FINRA requirements, please refer to the FINRA rules. Peter LaVigne, Goodwin Partner in the Financial Industry and Fintech practices, helps clarify FINRA’s role in IPOs and provides guidance on model questionnaires.
Video of Peter LaVigne talking about the most common FINRA issues raised in IPOs
Prepare Selling Stockholder Documents (if necessary)
Your company’s stockholder agreements should typically include registration rights or contractual rights made available to certain stockholders. More specifically, registration rights allow stockholders to force your company to file a registration statement granting them the right to sell their shares. There are two types of registration rights: demand registration rights and piggyback registration rights. Under demand registration rights, the stockholder can require you to register the offer and sale of stockholders’ shares under the Securities Act. Piggyback registration rights, on the other hand, allows a stockholder to register their securities on behalf of themselves or other selling stockholders. Heading into an IPO, you will need to consider whether to allow the participation of selling stockholders. If not, you will need to secure waivers of registration rights from the requisite number of stockholders. If selling stockholders are in an offering, they will be asked to disclose the nature and size of their holdings, agree to provisions that restrict their right to sell shares outside the offering period, and deliver a power of attorney or custody agreement to ensure the smooth execution of the offering.
A determination will need to be made on whether selling stockholders are required to indemnify the underwriters for all information in the prospectus or for only the information they provide. It will also need to be determined whether the amount of liability will be capped at the proceeds they receive in the offering.
Test the Waters Guidelines
Unlike the process for regular companies going public, emerging growth companies are allowed to engage in communications with potential investors at any time before or after the initial filing of a registration statement. This enables emerging growth companies to openly discuss a potential IPO with investors to test the waters (“TTW”) prior to incurring the expense in filing a registration statement or determining an official price range for the IPO. If your company is an emerging growth company, you cannot solicit or accept offers during TTW but can build a book of non-binding expressions of interest. There are only a few legal requirements that apply to TTW:
The communications must be made by the issuer or a person authorized to act on behalf of the issuer; They must be limited to qualified institutional buyers and institutional accredited investors; They are not solicitations of a binding order; and They are free of material misstatements and omissions.
In addition to the legal requirements, most investment banks have their own guidelines on TTW communications. For example, they often have guidelines on when the TTW meetings will be held, which stakeholders will attend, the number of prospective investors that can participate, what presentation materials are permitted, and general process points for scheduling and organizing the meetings.
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Preparing to Be a Public Company Board Charter and Bylaws Audit Committee Charter Compensation Committee Charter Nominating and Corporate Governance Committee Charter Disclosure Committee Charter
D&O Indemnification Agreement Code of Business Conduct and Ethics Audit Complaint Procedures FCPA and Anti-Corruption Policy Related Party Transaction Policy Insider Trading Policy and Procedures
A board of directors comprised of experienced, connected business people can help fast-track your growth, but there are many considerations in this process.
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Preparing to Be a Public Company Board
In addition to requiring that a majority of a public company’s directors be ‘‘independent’’ within a short period of time following the IPO, the SEC, NYSE and Nasdaq rules contain additional requirements that impact the composition, roles, responsibilities and conduct of boards of directors. These should be reviewed with counsel and the board well in advance of going public. In particular, you should evaluate whether your board has sufficient public company experience as well as the right mix of skills and qualifications for each of the required board committees. The director search process can be a time-consuming process, so we recommend identifying any needs (e.g., an independent Audit Committee chairperson) as soon as possible.
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Charter and Bylaws
Post-IPO, your amended certificate of incorporation and bylaws will include a range of takeover protections for your company. This includes a classified board, blank check preferred stock, the elimination of stockholder action by written consent, and supermajority voting requirements.
Video of Lisa Haddad
For more information on setting up your charters and bylaws, access our Takeover Provisions Guide.
Audit Committee Charter
The audit committee assists the board of directors in overseeing the integrity of your company’s financial statements; the compliance with legal and regulatory requirements; the qualifications, independence and performance of your auditors; and the performance of your internal audit function. Additionally, the committee prepares your company’s annual report that is required to accompany your annual proxy statement. The audit committee must be comprised of at least three members who meet the “independence” criteria as defined by the SEC and the exchange you choose to list on. They cannot be a member if they helped prepare your company financial statements at any time during the past three years. Each member of the audit committee must be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement. At least one member of the audit committee should have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience such as being a CEO, CFO or other senior officer with financial oversight responsibilities. For more information on the Audit Committee, visit the below resources:
SEC Standards Relating to Listed Company Audit Committee NYSE Rules – Audit Committee Nasdaq Rules – Audit Committee
Code of Business Conduct and Ethics
In connection with NYSE or Nasdaq corporate governance rules, as applicable, a listed company is required to adopt a code of business conduct and ethics. The code includes legal and ethical standards of conduct for directors, officers, and employees of the company. The code is intended to deter wrongdoing and promote the conduct of all company business in accordance with high standards of integrity and in compliance with all applicable laws and regulations. Typically, the code of business conduct and ethics covers compliance with laws, rules, and regulations; conflicts of interest; insider trading; confidentiality; honest and ethical conduct and fair dealing; protection and proper use of corporate assets; gifts and gratuities; international trade controls; accuracy of books and records and public reports; concerns regarding accounting or auditing matters, securities laws, and similar concerns; dealing with independent auditors; and reporting and compliance procedures.
Compensation Committee Charter
The compensation committee develops and implements compensation policies and plans that ensure the attraction and retention of key management personnel. The committee motivates management to achieve the company’s goals and strategies, and aligns the interests of management with the long-term interests of the company’s stockholders. The committee discharges the board of directors from responsibilities relating to director and executive compensation. For NYSE-listed companies, a compensation committee is required and should be comprised of independent directors. While Nasdaq does not currently require a compensation committee, Nasdaq-listed companies are required to assign a separate committee or a majority of independent directors on the board to determine executive compensation. Compensation committee members must be “non-employee directors” and “outside directors” in order to allow for equity grants that provide flexibility for officers to sell stock later and for the company to deduct compensation. These directors cannot be employees of the company and generally cannot enter into related party transactions with the company. Compensation committee members may also serve on the nominating and audit committees, although many companies split committee membership to evenly distribute workload among directors. Under both NYSE and NASDAQ rules, the CEO’s compensation must be determined outside of the presence of the CEO.
Disclosure Committee Charter
The disclosure committee is not a board committee, but rather a group of executives who have responsibility for the timely filing of SEC reports. The committee ensures that all disclosures made by the company to its stockholders or the investment community are accurate and complete in all material respects and compliant with all of the securities laws of the United States. The committee also ensures that financial statements and other financial information disclosed by the company fairly present in all material respects the financial condition, results of operations, and cash flows of the company for the period(s) presented. Additionally, the committee typically reports to and assists the CEO and CFO of the company in designing, establishing, maintaining, reviewing and evaluating the company’s disclosure controls.
D&O Indemnification Agreement
The purpose of the D&O Indemnification Agreement is to provide the company’s directors and executive officers with specific contractual assurance of their rights to full indemnification against litigation risks and expenses. Carl Metzger, Goodwin Partner and Chair of the firm’s Risk Management & Insurance practice, explores issues around D&O indemnification and related insurance requirements.
VIDEO: Carl Metzger Explores Issues Around D&O Indemnification and Insurance Requirements
Audit Complaint Procedures
The audit complaint procedures policy outlines the procedures established by the audit committee with respect to the receipt, treatment, and retention of complaints received by the company regarding accounting, internal accounting controls, or auditing matters. These complaints include confidential and anonymous submissions by employees of concerns regarding questionable accounting or auditing matters.
FCPA and Anti-Corruption Policy
Any United States company conducting business around the world must comply with all applicable U.S. laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and all laws of the foreign jurisdictions in which the company does business. This obligation extends to all company personnel, contractors, and agents, both within and outside the U.S. The FCPA and Anti-Corruption Policy is designed to familiarize the company and all company personnel, contractors, and agents with the FCPA and similar anti-corruption laws. The policy simply builds on the company’s code of business conduct and ethics and provides additional guidance to ensure that company personnel, and the company’s agents and business partners, do not knowingly or unknowingly compromise company values or violate the FCPA or similar anti-corruption laws. Failure to comply with the FCPA and other laws may result in civil and/or criminal fines to the company, as well as significant harm to the company’s reputation. Civil and/or criminal penalties may also be imposed against the employees involved. Click here for additional information about FCPA diligence, and to watch a video of Jennifer Chunias, Goodwin Partner in the Securities Litigation & White Collar Defense group, discussing the importance of understanding FCPA and how it applies to your company.
Related Party Transaction Policy
The related party transaction policy governs the company’s review and oversight of related person transactions. A “related person” is any director or executive officer of the company; any director nominee; and security holders known to the company to beneficially own more than 5% of any class of the company’s voting securities. Immediate family members of any of these persons are also considered “related persons,” including children, stepchildren, parents, stepparents, spouses, siblings, mothers-in-law, fathers-in-law, sons-in-law, daughters-in-law, brothers-in-law, sisters-in-law, or any other person (other than a tenant or employee) sharing the household of the related person. A “related person affiliate” is any entity of which any related person is an employee, acts as a director or executive officer (or other comparable position), or maintains (directly or indirectly) a 5% or greater ownership interest. A “related person transaction” is any transaction involving over $120,000 in which the company is a participant and a related person has a direct or indirect interest.
Insider Trading Policy and Procedures
In connection with your IPO, your company should adopt an insider trading compliance program and policy to prohibit insider trading and restrict securities transactions by directors, executive officers and certain other employees. United States federal securities regulations restrict the purchase or sale of securities by these individuals while in possession of “material non-public information” about the company. It is in the interest of both insiders and the company to avoid even the appearance of impropriety in connection with trading by insiders as the government routinely prosecutes insiders for trading while in possession of this information. Typically, the insider trading policy will establish a window period beginning a few days after each public announcement of the company’s quarterly and annual earnings and lasting 30-45 days depending on the nature of the company’s business and industry. Insider trading policies are generally drafted broadly to cover a wide range of transactions, including gifts, pledges, use of company stock to pay an option exercise price, use of company stock to satisfy tax withholding obligations, elections under company retirement plans that are invested in company stock, and elections under employee stock purchase plans and other employee benefit plans. As a director of a public company, you should consider the fact that you will not have the unfettered ability to buy, sell or engage in other transactions in the company's securities. Instead, you generally will have to plan your transactions carefully and consult with the company in connection with any proposed transaction.
Go to Step 9
You’ve made many of the key decisions and you’re almost there. Now it’s time to take it on the road.
Launch Step 9
Step 9
| Roadshow
Time to Hit the Road
A roadshow is a series of live and/or electronic presentations organized by the underwriters with prospective buyers of the company stock, during which the company’s senior management (usually the CEO and CFO) will provide an overview of the company, its industry, and its management, usually with slides and other projected material. These presentations are intended to stimulate interest in the offering and allow participating broker-dealers and potential investors to evaluate the company. Prior to the effectiveness of the registration statement, written offers of company stock may only be made by means of a “preliminary prospectus,” sometimes referred to as a “red herring prospectus,” that is part of the registration statement filed. Additionally, verbal offers may be made and verbal presentations to solicit indications of interest are permitted. However, final sales may only be made by means of a prospectus contained in an effective registration statement, or a “final prospectus.” The company and the underwriters work together to draft slides to accompany the roadshow presentations. The slides are for presentation purposes only and are typically not distributed in hardcopy form. These slides are reviewed by the working group to ensure that all factual assertions, market projections, market estimates, or other “forward-looking” statements are also disclosed in the preliminary prospectus. Roadshow presentations, while not treated as written “prospectuses,” are subject to the antifraud provisions of the federal securities laws, and must not contain any misstatements of a material fact or any omission that would make the statements in the road show and prospectus misleading.
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Go to Step 10
You’re almost there! Once the SEC declares your registration statement effective, It’s time for a pricing call and the release of your shares to the underwriters.
Launch Step 10
Prepare for Pricing Pricing and Closing Ding, Ding, Ding!
Step 10
| Pricing & Closing
Prepare for Pricing
Provided that sufficient indications of interest are received and market conditions are strong enough for the offering to take place, the company and the underwriters will schedule a pricing call. Before a pricing call can be convened and the parties can execute orders for company stock, the SEC must declare the registration statement effective. Each of the following must occur prior to the SEC declaring a registration statement effective:
The company must have addressed all of the SEC’s comments; FINRA must have cleared the application submitted by the underwriters; and The stock exchange on which the company stock will be listed must have approved the company’s listing application.
In order to be declared effective after the close of the markets on the day of the pricing call, the company must request acceleration of effectiveness of the registration statement two days prior to the desired date. The lead underwriter(s) must also join in this request. Requests for acceleration are typically submitted for the earliest possible target pricing date and then are withdrawn or extended. Close communication with SEC staff will help in obtaining repeated extensions if the offering is delayed more than once.
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Pricing and Closing
Once the registration statement has been declared effective, the members of the pricing committee and representatives of the underwriter will have a conference call (typically referred to as a pricing call) to establish the price per share and the number of shares to be offered. The syndicate or selling department of the underwriters should also join to provide a detailed description of the quantity and price of the orders, the identity of the prospective investors, and an analysis comparing the per share price, pricing and effectiveness ratio, and other information to that of other companies in the same industry or of similarly sized companies, or to other data points. The underwriter will then offer a recommendation as to the price per share and the total number of shares to be offered and will give reasons for its recommendation. Once a decision to proceed is made, the pricing committee named by the board of directors, or the board itself if no committee was designated, will vote to approve the offering of a certain number of shares at a given price and authorize the execution of the underwriting agreement. Two days following pricing, once the working group confirms that all closing deliverables are in hand, the wires to the company and any selling stockholders are initiated and the shares, in the quantity and at the price set at pricing, are released to the underwriters.
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Ding, Ding, Ding!
You’re now ready to begin the process of taking your company public.
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