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IPO Guide

Legal Accounting Investment bank/depositary receipts Transfer agent Investor relations

Proxy solicitor Insurance broker/risk advisor Financial printer Web-based communication tools
Timothy Dempsey

Consulting publisher
Brian Curran, NYSE Euronext

Carolyn Boyle

Consulting editors
Nicolas Grabar and Sandra L Flow,
Cleary Gottlieb Steen & Hamilton LLP

Richard Proctor
The NYSE IPO Guide
is published by
Caxton Business & Legal, Inc
27 N Wacker Drive, Suite 601
Chicago, IL 60606
United States
Tel +1 312 361 0821
Printed by Bowne & Co, Inc
The NYSE IPO Guide
© 2010 Caxton Business & Legal, Inc

Copyright in individual chapters rests

with the co-publishers. No photocopying:
copyright licenses do not apply.

This guide is written as a general guide
only. It should not be relied upon as a
substitute for specific legal or financial
advice. Professional advice should always
be sought before taking any action based
on the information provided. Every effort
has been made to ensure that the
information in this guide is correct at the NYSE
time of publication. The views expressed
in this guide are those of the authors. NYSE AMEX
The publishers and authors stress that
this publication does not purport to
provide investment advice; nor do they
accept responsibility for any errors or
omissions contained herein. NYSE ALTERNEXT

The NYSE IPO Guide contains summary

information about legal and regulatory
aspects of the IPO process and is current
as of the date of its initial publication (June
14, 2010). Although the NYSE IPO Guide
may be revised and updated at some time
in the future, the NYSE does not have a
duty to update the information contained in
the NYSE IPO Guide, and the NYSE will not
be liable for any failure to update such
information. The NYSE makes no
representation as to the completeness or
accuracy of any information contained in
the NYSE IPO Guide. It is your responsibility
to verify any information contained in the ©2009 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE
NYSE IPO Guide before relying upon it. Euronext. NYSE Euronext and its affiliates do not recommend or make any representation as to possible benefits from any securities or investments, or third-party products or services. Investors
should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its affiliates that are
based on the current beliefs and expectations of management, are subject to significant risks and uncertainties, and which may differ from actual results. All data as of September, 2009.
The NYSE IPO Guide

NYSE IPO Guide 1

Preface 3 3.2 SEC registration 35 (a) Ownership reporting by 73
Duncan Niederauer Cleary Gottlieb Steen shareholders
Chief Executive Officer, NYSE Euronext & Hamilton LLP Cleary Gottlieb Steen
& Hamilton LLP
Introduction: Advantages 5 3.3 Prospectus 37
of NYSE listing Cleary Gottlieb Steen (b) Reporting by insiders 74
NYSE Euronext & Hamilton LLP Bowne & Co, Inc

1. Why go public? 9 3.4 Underwriting, marketing 41 (c) Related party transactions 75

1.1 Advantages of executing 10 and sale Cleary Gottlieb Steen
an IPO J.P. Morgan & Hamilton LLP
J.P. Morgan
4. Communications 45 6. Managing risk 77
1.2 Potential issues 10 4.1 Investors, analysts and 46 6.1 Litigation 78
J.P. Morgan employees (a) Legal standards 78
(a) Communications with 46 Cleary Gottlieb Steen
1.3 Going public without an offering 10 the market & Hamilton LLP
J.P. Morgan FD
(b) Class actions and 79
1.4 Foreign private issuers 11 (b) Research analysts 48 derivative lawsuits
J.P. Morgan Cleary Gottlieb Steen Marsh Inc
& Hamilton LLP
2. Preparing to go public 13 6.2 Indemnification 81
2.1 Choosing advisors 14 (c) Employee communications 50 Marsh Inc
(a) Retention of advisors/service 14 FD
providers 6.3 D&O liability insurance 83
J.P. Morgan 4.2 Proxy statement and 50 Marsh Inc
annual meeting
(b) Identifying investor relations 14 Georgeson Inc 6.4 Personal risk management 87
services provider Marsh Inc
Thomson Reuters 4.3 Communication mechanics 55
(a) Investor relations tools 55 Appendices 89
2.2 Building financial reporting 15 Thomson Reuters Appendix I: NYSE listing standards, 90
infrastructure US companies
KPMG LLP (b) Other communication 57 NYSE Euronext
2.3 Preparing a communications 24 Computershare Limited Appendix II: NYSE listing standards, 92
strategy non-US companies
FD 4.4 Share ownership mechanics 59 NYSE Euronext
Computershare Limited
2.4 Designing the capital structure 25 Appendix III: NYSE Amex listing 93
(a) American depositary receipts 25 5. Obligations of a public 63 standards
J.P. Morgan company NYSE Euronext
5.1 Reporting requirements 64
(b) Anti-takeover defenses and 29 Cleary Gottlieb Steen Appendix IV: NYSE financial 94
other governance matters & Hamilton LLP continued listing standards,
Cleary Gottlieb Steen US companies
& Hamilton LLP 5.2 Listing standards 70 NYSE Euronext
NYSE Euronext
2.5 Providing for employees 30 Appendix V: NYSE Amex continued 96
Cleary Gottlieb Steen 5.3 Trading and repurchases 70 listing standards
& Hamilton LLP Cleary Gottlieb Steen
& Hamilton LLP Contributor profiles 97
3. The IPO process 33
3.1 Process timeline 34 5.4 Obligations affecting
J.P. Morgan shareholders 73

2 NYSE IPO Guide


NYSE IPO Guide 3


As you contemplate the journey from market transformation continues to more Another advantage is an increased public
private to public enterprise, the challenges closely align it with the technology sector awareness because IPOs often generate
ahead might seem daunting. The goal of as a customer, a developer and a publicity by making our products known
this guide is to demystify the initial public commercial market technology supplier. to a new group of potential customers.”
offering (IPO) process. We are grateful to For example, the March 24, 2010 IPO Listing on the NYSE, he says, also provided
our partners on the project, including our of MaxLinear, a provider of radio- “better access to the financial market and
publisher and expert contributors who frequency and mixed-signal semiconductor higher liquidity with lower volatility,
worked tirelessly on this publication. solutions for broadband communication making it possible for shareholders to
Collectively, we hope to help you applications, priced above its range and take larger positions in our stock.”
understand and navigate a complex process soared 34% on its first day of trading. “The Companies from other emerging
that will ultimately lead to a positive and tools and support the NYSE provided as markets are also finding their way to the
successful IPO experience. we headed into the IPO, and post offering, NYSE. The IPO of Longtop Financial
Crucial to that success is the decision of have proven to be incredibly valuable for Technologies Ltd, a leading software
where to list. Choosing your market is us,” said co-founder Kishore Seendripu, developer and IT services provider
a long-term decision. Your market will be who is also MaxLinear’s chairman, targeting the financial services industry in
a partner throughout your journey as a president and chief executive officer. “Our China, raised $182.6 million in October
public company well into the future. By IPO would not have been the same without 2007. “We were delighted to join the NYSE
accessing the US public equity market via the splendor and pageantry that goes with and gain access not only to US investors,
your IPO, you will stimulate job creation and being listed on the NYSE, the grandest and but to the superior services, market quality
innovation while tapping an attractive most historically rich bourse in the world.” and brand visibility that come with listing
financing option to fuel your company’s Meanwhile, the 2009 IPO of on NYSE Euronext markets,” said
growth. You will also create exciting new DigitalGlobe, a leading earth imaging and Chairman Xiaogong Jia. “As an NYSE-
investment opportunities for individuals and information company, raised $280 million listed company, we strengthened our
institutions, with whom you will need to be in gross proceeds. The stock rose 13% on ability to develop our business both inside
transparent through good times and bad. its first day of trading. Chief Financial and outside China.”
NYSE Euronext has grown to become Officer (CFO) Yancey Spruill named several Prospective listing applicants can avail
a leading marketplace for entrepreneurial reasons for choosing the NYSE: “Brand, of a free, confidential review process to
companies of all sizes and sectors. It may reputation and higher listing standards determine their eligibility and what
surprise some to learn that 40% of NYSE- that are a good filter for company quality.” additional conditions, if any, might have
listed companies are small cap (market Now that the company is listed, he says to be satisfied. A company that qualifies
capitalization below $1 billion). The that “the association with the NYSE brand for listing can normally expect its shares
adoption of a new NYSE listing standard is a strong positive with our customers to be admitted to trading within four to
in late 2008 enabled growth-stage, and other stakeholders.” Spruill’s advice six weeks of filing its original listing
venture-backed companies to list directly to those contemplating an IPO? “Get out application. And should the going
on the “Big Board,” and the acquisition ahead of the work flow early; for a CFO, subsequently get tough, NYSE Euronext
of the American Stock Exchange – re- this is an additional full-time job, and can assist further with professional advice
branded NYSE Amex and now running on there is a lot to do.” from its client-service teams and extensive
the same technology platform with the Beyond technology, the NYSE is network of professionals. It also provides
same high-tech, high-touch model – experiencing an uptick in non-US IPOs. support as an advocate on public policy
expanded our US listing venue options Investor appetite for the 2009 IPO of and regulatory issues affecting all market
to companies of all sizes and maturity. Banco Santander (Brasil) SA showed participants. For example, NYSE is working
In addition, NYSE continues to show confidence in the IPO market and Brazil. hard in Washington, DC to represent listed
leadership in listing growth-stage The offering, which raised more than $8 companies on issues including corporate
companies, especially portfolio companies billion and listed simultaneously in Brazil governance, regulatory reform, global
of leading venture-capital and private- and the United States, was the largest IPO competitiveness and tax policies.
equity firms. Since 2007, nearly 58% of ever conducted by a Brazilian company and I am excited about what the future
the technology companies that qualified the largest in the world since March 2008. holds – the creativity and entrepreneurial
to list on the NYSE chose to do so, raising Another Brazilian IPO was that spirit that will drive the capital-raising
$7.7 billion in IPO proceeds. Early in 2010 of Gafisa SA, a homebuilding and real process and help deliver untapped
NYSE listed some of the most important estate company that went public in 2007. opportunities for issuers and investors
technology companies undertaking IPOs, CFO Alceu Duilio Calciolari notes the worldwide. We look forward to working
such as Sensata Technologies, MaxLinear advantages of going public: “The financial with you through your IPO journey and
and Calix. This is in addition to many of benefit in the form of raising capital is the wish you success in obtaining this
the most visible tech IPOs of 2009, most distinct advantage. In the case of significant corporate milestone.
including Rosetta Stone, SolarWinds and Gafisa, the capital was used to develop
DigitalGlobe. Meanwhile, as an applied the company mainly through accelerated Duncan Niederauer
technology company, NYSE’s ongoing organic growth and M&A opportunities. Chief Executive Officer, NYSE Euronext

4 NYSE IPO Guide

Advantages of NYSE listing

NYSE IPO Guide 5

Introduction: Advantages of NYSE listing

One of the most important decisions in flexibility, judgment, automation and As an innovative applied technology
the IPO process is choosing the right anonymity with minimal market impact. company in the financial space, NYSE
market for listing of the company’s Floor brokers provide human expertise Euronext has built a universal trading
securities. The NYSE Euronext market and value-added service to facilitate larger- platform that is being deployed to support
model is designed to maximize liquidity, sized institutional orders (block orders). not only its global exchange operations, but
encourage market activity and help They have parity with other orders in also its customers around the world that are
participants trade more efficiently. NYSE’s allocation model and may service engaged in trading activities and operating
NYSE and NYSE Amex offer a customers using algorithms, which exchanges. Beginning in 2010, twin data
combination of cutting-edge, ultrafast accounts for one-quarter of their activity. centers in the greater New York and London
technology with the volatility buffer of Floor brokers also use their booths as an metropolitan areas, in which NYSE
human judgment, when required, and “upstairs” trading desk to send orders to Euronext has strategically invested $500
accountability. This market structure multiple markets. The NYSE is in the million, will offer one-stop access to
establishes reliable price discovery at the process of replacing the broker booths liquidity with the highest levels of resilience
opening, the closing and during periods with modern trading desks to create a and the lowest available latency (the time
of volatility, such as times of market unified trading environment for upstairs gap between trade placement and execution)
dislocation. Designated market makers and on-floor operations, with some firms to NYSE Euronext market participants.
(DMMs) add significant liquidity choosing to locate their entire operations NYSE Euronext is the only global exchange
to the market, which is further enhanced on the NYSE trading floor. operator to own its own data centers.
by supplemental liquidity providers (SLPs) Meanwhile, to expand in Asia, NYSE
and floor brokers equipped with new, 2. Global reach and visibility Euronext and its affiliates have offices in
algorithmic trading tools. Beyond market structure and market Beijing, Tokyo, Hong Kong and Singapore,
quality, a market’s size and scope should as well as equity positions in the National
1. DMMs also be considered when choosing a listings Stock Exchange of India and India’s Multi
DMMs are at the center of the NYSE venue. The historic merger that resulted Commodity Exchange. To expand in the
and NYSE Amex markets. DMMs serve in the formation of NYSE Euronext created Middle East, it acquired a 20% stake in
as a buffer against market volatility, the world’s largest cash equities the Qatar Exchange, one of the leading
increase liquidity and are obligated to marketplace. NYSE Euronext is a global stock markets in the region.
maintain a fair and orderly market. The exchange operator with listings of 4,000 Many companies use NYSE Euronext’s
NYSE features both a physical auction companies from nearly 55 countries. global facilities – located in Amsterdam,
convened by DMMs and a completely It operates six cash equities exchanges Brussels, Lisbon, London, New York and
automated auction that includes in five countries and six derivatives Paris – for analyst, investor or board
algorithmic quotes from DMMs and exchanges in six countries. Its footprint meetings, product launches, marketing
other market makers. is broader than that of any other exchange initiatives and more. The daily openings
Today, DMMs are among the most group and it offers the most diverse and closings also represent an opportunity
active trading firms on the NYSE. They array of financial products and services for companies to elevate their own brand
have strong obligations to maintain an for issuers, investors and financial visibility. Many listed companies return
orderly market, quote at the National institutions. to the NYSE multiple times a year to use
Best Bid and Offer (NBBO) and facilitate On its exchanges in Europe and the its facilities, including the NYSE trading
price discovery during openings, closings United States, NYSE Euronext trades floor, for analyst, investor or board
and imbalances. New incentive-based equities, futures, options, fixed-income meetings, as well as corporate
quoting standards by issue have further and exchange-traded products. With announcements and events.
increased the percentage of time and size about 8,000 listed issues (excluding NYSE Euronext offers a host of other
the DMMs are at the NBBO. European structured products), NYSE visibility programs for its listed companies,
Complementing the liquidity of other Euronext’s equities markets – the New including global investor conferences,
quote providers are SLPs: electronic, high- York Stock Exchange, NYSE Euronext, virtual investor forums and multimedia
volume members which are incentivized NYSE Amex, NYSE Alternext and NYSE channels.
to add liquidity. Several SLPs may be Arca – represent one-third of the world’s NYSE Euronext continues to develop
providing liquidity per issue. SLPs are equities trading, the most liquidity of any enhanced visibility services for European
trading firms deploying their own capital global exchange group. NYSE Euronext customers. For example, it created the first
using proprietary trading models. The SLP also operates NYSE Liffe, one of the international bell ceremony room, in Paris,
program began in November 2008. leading European derivatives exchanges where NYSE Euronext-listed companies
Also providing liquidity on NYSE and and the world’s second-largest derivatives can celebrate IPOs, transfers, milestones,
NYSE Amex markets are trading floor exchange by value of trading. NYSE initiatives and more.
brokers. These brokers leverage their Euronext also offers comprehensive
physical point-of-sale presence with commercial technology, connectivity 3. NYSE Market Access Center
information technologies and algorithmic and market-data products and services Another important factor to consider when
tools to offer customers the benefits of through NYSE Technologies. choosing a listing venue is customer

6 NYSE IPO Guide

Introduction: Advantages of NYSE listing

service and the quality of products the and lawmakers articulating companies’ regulators overseeing its markets in France,
marketplace offers. Successful companies views on existing or proposed rules and the Netherlands, Belgium and Portugal to
require significant resources to build regulations, particularly those designed make it easier for companies listed on its
shareholder value. NYSE Euronext’s NYSE to make markets more fair, transparent US markets to list on its European markets.
Market Access CenterSM is a full-service and efficient. It has actively encouraged A number of issuers have elected to cross-
solution including global visibility and a more flexible and principles-based list on Euronext to get closer to the
investor relations services, which enables application of the internal control European shareholder base and are
management to remain focused on its provisions of SOX, prodded the SEC to inquiring about Asia as well. To facilitate
business objectives as a public company. accept International Financial Reporting this, NYSE Euronext has established Fast-
Standards accounting standards as an Path, a process that allows companies
4. Issuer advocate alternative to US Generally Accepted listed on the NYSE and other US markets
NYSE Euronext acts as an advocate for Accounting Principles (GAAP), written to request admission for listing and trading
listed companies, championing policies comment letters to the SEC on behalf on a European regulated market. With
that are consistent with the values of fair, of non-US companies to oppose the Fast-Path, companies listed or about to be
efficient and transparent markets – from shortening of the allotted time periods listed on the NYSE or NYSE Amex can
short-sale trading issues to corporate for filing financial statements in English cross-list on NYSE Euronext’s European
governance reform; from the cost of and led the dialogue on mutual recognition markets using their filings with the SEC,
complying with the Sarbanes-Oxley Act of comparable regulatory regimes in with or without a simultaneous capital
of 2002 (SOX) to the difficulties of foreign jurisdictions. raising. Euronext regulators now accept
adhering to the United States’ intricate documentation previously filed with the
and idiosyncratic accounting rules. 5. Fast-Path listing: gateway SEC to meet the EU Prospectus Directive
For example, NYSE Euronext has sent to the eurozone requirements, so companies can now avoid
numerous recommendations to regulators NYSE Euronext has also worked with the need to draft and translate a separate

Recent Fast-Path transactions

Company Country Security Currency Listing type Purpose

PartnerRe Bermuda Common shares Euro Technical listing In connection with the company’s
(Dec 09) acquisition of NYSE Euronext-listed
Paris Re in an all-stock transaction

Weatherford Switzerland Common shares Euro Technical w/o In connection with the company’s
International capital raising redomestication to Switzerland in
(Oct 09) 2009. Provide European fund
managers with a greater access
to the company’s shares.

Cliffs Natural US Common shares Euro Technical w/o Consistent with the company’s
Resources capital raising growth and international
(April 09) diversification strategy. Increase
exposure to a broader investor

Vale Brazil ADS Euro Global offering Enlarge investor pool for global
(July 08) to qualified capital raising and attract greater
investors visibility.

Philip Morris US Common shares Euro Spin-off Create a tool for equity-based
International w/o capital compensation for European-based
(March 08) raising employees and obtain greater
visibility in Europe.

Anheuser Busch US Common shares Euro Transfer from Reduce compliance costs and
(April 08) LSE w/o capital promote liquidity.

NYSE IPO Guide 7

Introduction: Advantages of NYSE listing

prospectus to be admitted to trading in registered US and foreign (non-European

Europe. Documents filed with and Economic Area) companies already listed
reviewed by the SEC serve as the backbone or about to be listed in the US markets.
for a listing prospectus. The result is quick, A Euronext listing can occur at the same
easy and cost-effective access to listing time as a US IPO. Transaction types
and trading on NYSE Euronext, the available on Fast-Path are:
eurozone’s largest equity market. • capital raisings (Form S-1 or F-1);
Fast-Path is valuable for any company • spin-offs (Form 10); and
looking to enhance its global profile, • technical listings (Form 10-K or 20-F).
support an international business or
expand its non-US investor base. A Fast- Recent transactions are outlined in
Path listing provides a fast, easy and cost- the table on the previous page.
effective way to gain a presence in the To learn more about the NYSE and
European capital markets. NYSE Euronext NYSE Amex listing standards, please see
is the only exchange group offering a listing Appendices I, II, III, IV and V.
program with leading markets on both sides
of the Atlantic for its listed companies. A
total of 50 companies are currently cross-
listed on both NYSE and NYSE Euronext
markets (as of December 2009).
Cross-listed companies enjoy many
benefits, such as:
• a simplified way to increase their
visibility to business partners and
investors in the eurozone, the world’s
largest source of capital;
• commitment to a strategically
important region (customer proximity,
commercial opportunities);
• branding and product visibility
opportunities in all of NYSE Euronext’s
European locations (London, Paris,
Amsterdam, Brussels and Lisbon);
• media coverage which can enhance
their global profile;
• a tool for employee stock purchase
plans or equity incentive plans;
• access to European investors and a
diversified shareholder base;
• euro-denominated acquisition
currency; and
• a facility for future capital raisings
and/or M&A activity

With Fast-Path, issuers benefit from

simplified periodic reporting obligations.
SEC filings may be used to comply with
the company’s ongoing obligations with
Euronext regulators under the EU
Transparency and Market Abuse Directives.
US GAAP and post-listing filings in English
are both acceptable. The overall process
takes approximately five weeks once
documentation is available. Documentation
review by a European regulator usually takes
10 to 15 business days.
Fast-Path is available for SEC-

8 NYSE IPO Guide

Why go public?

NYSE IPO Guide 9

Why go public?

1.1 Advantages of executing an IPO (d) Public currency for acquisitions companies, including requirements relating
When considering an initial public offering Once the company is public, it can use its to accounting, corporate governance,
(IPO), the company should evaluate the common stock to acquire other public or internal controls and enhanced financial
associated pros and cons, as well as the private companies in conjunction with, disclosure. SOX compliance can be an
motivations for going public. This evaluation or instead of, raising additional capital. incredibly time-consuming and costly
process is best conducted in conjunction process for a newly public company.
with an investment bank, which can assist (e) Enhanced benefits for current employees
the company in working through the salient Stock-based compensation incentives align (d) Cost
issues. There are several advantages to going employees’ interests with those of the Going public is a relatively expensive
public, which are detailed below. company. By allowing employees to benefit process, incurring one-off and ongoing
alongside the company’s financial success, costs for legal counsel, accounting and
(a) Access to capital these programs increase productivity and auditing services, underwriting and
One of the most common reasons for loyalty to the company and serve as a key printing, as well as for additional
going public is to raise primary capital to selling mechanism when attracting top personnel to handle expanded reporting
fund organic growth, repay debt or fund an talent. Furthermore, issuing equity-based and compliance activities and investor
acquisition. Further direct results include compensation will allow the company to relations. Further, planning and executing
the following: attract top talent without incurring an IPO is a time-consuming process
• Once the company is public, it has additional cash expenses that can distract management from
access to an entirely new, incredibly the company’s core business.
deep and liquid source of capital for 1.2 Potential issues
any future needs it may have. While there are numerous advantages to 1.3 Going public without an offering
• Adding equity to the company’s going public, there are also a few It is possible to go public without
capital-raising toolkit helps equip considerations which the company should conducting a simultaneous offering,
the company with the tools to achieve evaluate prior to embarking on the IPO although this is typically not
optimal capital structure. process. The most successful companies recommended by an investment bank.
• After the company has been public with the smoothest IPO processes are those If the company does not conduct a
for one year, it will be eligible to access which begin to put in place the necessary simultaneous offering, its existing shares
the equity capital markets on demand regulatory and compliance requirements are listed on the exchange without being
via a more expeditious process through months, if not years, ahead of time. placed in the hands of new investors.
a shelf registration statement. Two examples of going public without
(a) Loss of privacy an offering are spin-offs of existing
(b) Liquidity event In order to comply with securities laws, companies and foreign issuers listing
Listing on the NYSE has numerous public companies must disclose various American depositary receipts (ADRs)
benefits, not only for the company, but forms of potentially sensitive information in the United States.
also for its shareholders. The IPO can be publicly, which regulatory agencies, as well
structured such that existing owners of as competitors, can then access. Private (a) Spin-offs
the company can exit their position and companies can operate without disclosing A spin-off from an existing company
receive proceeds for their shares. In proprietary information in a public forum. occurs when a public listed company
addition, once the company is public, the spins off a part of its business into a
existing owners have a public marketplace (b) Regulatory requirements separate public entity listed on an
through which they can liquidate their Correspondingly, public companies must exchange. Typically, that part can function
holdings in a straightforward and orderly regularly file various reports with the as a separate, standalone business, with
fashion at any time. Securities and Exchange Commission distinct characteristics from the parent
(SEC) and other regulators. In order to company. In such a transaction, each
(c) Branding event comply with disclosure requirements, existing investor in the parent company
By listing on the NYSE, the company companies often need to completely will receive shares in the spin-off entity
will receive worldwide media coverage revamp or expand their existing pro rata to its ownership in the parent.
through the financial markets, which documentation policies, which can For example, Investor A, which owns 5%
provide constant live coverage on publicly be costly and time consuming. of Parent Company A, will receive 5% of
traded companies. In addition, research the shares outstanding in SpinCo A. In
analysts at broker-dealers will begin to (c) Sarbanes-Oxley this transaction, liquidity is generally
write reports on the stock and the The Sarbanes-Oxley Act (SOX) was passed preserved for the SpinCo, but the investor
company, thus raising the profile of the in 2002 as a reaction to a number of major churn may be considerable. For example,
company. Broader coverage across various corporate and accounting scandals, which Investor A may own Parent Company A for
sources will likely enhance the company’s cost investors billions of dollars and shook its other businesses which still reside in
visibility, market share and competitive public confidence in the nation’s securities Parent Company A, and have no interest in
position. markets. SOX set new standards for public SpinCo A and sell the shares it receives. To

10 NYSE IPO Guide

Why go public?

this end, it is difficult to control the US investment in foreign equities (ADR and local shares), 1980-1Q09 ($bn)
investor base in a spin-off transaction,
whereas during an offering process

shares are strategically issued to those 5000 25%

investors known to be interested in



owning the name.



(b) Foreign issuers listing ADRs

A foreign company that is publicly traded

3000 15%


on an international exchange can list

ADRs on the NYSE without conducting



an offering. The stock is tied to the 10%


underlying international security and

traditionally trades in tandem with that

1000 5%

security. While the ADR will give the
company incremental exposure to US

investors, there are often fund limitations
on ADRs similar to international
investments, and typically the liquidity
and trading of ADRs can be subpar as Source: Federal Reserve, September 2009
compared to traditional listings.

1.4 Foreign private issuers Ready access to world’s largest equity Stock-based compensation for US
Through a US listing, foreign private market: A US listing affords ready access employees: Being dollar denominated,
issuers can significantly improve their to the world’s largest equity market, ADRs allow foreign issuers to establish
access to the US equity market. During facilitating future capital raising through stock purchase and option plans for US-
the last decade, demand for foreign follow-on, secondary and rights offerings. based employees. Absent these plans,
equities has grown appreciably among As the numerous rights offerings by both foreign issuers can be at a significant
US institutional and individual investors foreign and US issuers in 2009 have disadvantage when competing for talent
alike. This demand has been driven by a demonstrated, such access can be crucial in the US labor market. ADRs also allow
need for enhanced portfolio diversification, to a company’s capital structure. for the creation of direct purchase and
which holdings of foreign equities can dividend reinvestment plans, which
provide, and a desire to tap into the higher Diversification of shareholder base can enhance the investment appeal of
economic growth rates found in many and valuation support: By going public in a foreign issuer.
countries outside the United States – the United States and maintaining a listing
emerging markets in particular. there, US investors can more easily invest Enhanced corporate visibility in the United
The tranche of shares that foreign in a foreign issuer. For some foreign issuers States: Finally, by going public in the
issuers sell to US investors when going a US listing results in higher corporate United States, a foreign issuer can increase
public typically takes the form of ADRs. governance standards, further increasing its visibility not just in the US investment
These instruments subsequently trade its appeal. Attracting US investors helps community, but in the commercial and
just like ordinary shares on the NYSE, broaden and diversify a foreign issuer’s consumer markets that make up the
another US stock exchange or in the shareholder base, reducing the issuer’s world’s largest economy. The majority
over-the-counter market. dependence on investors in its home of US citizens own equities and tend
ADRs are often the only way that market for its capital needs. Moreover, to follow publicly traded companies.
certain institutional funds can invest the incremental demand that US investors Consequently, a US listing can raise a
in foreign issuers while complying with can bring to bear on a foreign issuer’s foreign issuer’s corporate profile as
their investment charters, which place shares helps drive its market valuation well as capital.
limitations on trading in the ordinary – and hence lowers its cost of capital –
shares of non-US companies. For both over the long term.
institutional and individual investors,
ADRs offer the convenience of dollar- US acquisition currency: Because the
based trading and dividend payments. ADRs used to raise capital in the United
States are dollar denominated, they can
(a) Advantages eventually be used to make stock-based
For foreign issuers, going public in the acquisitions of US companies. Generally,
United States has numerous advantages US shareholders are more likely to accept
beyond an initial capital raising. ADRs than foreign shares.

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NYSE IPO Guide 13

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2.1 Choosing advisors companies that are contemplating an coverage post-IPO and assist in market
IPO, there are a number of boutique making once the stock is public. Co-
(a) Retention of advisors/service providers and regional auditing firms that are well managers should be chosen based on their
A large team of professionals is typically regarded and talented. The company relationship with the company, industry
involved in the initial public offering (IPO) should consider industry expertise, expertise and market-making ability.
process, including lawyers, auditors, reputation and fit with the company,
underwriters and insurance brokers. The among other factors, when selecting (b) Identifying investor relations
company should carefully consider the an auditing firm. services provider
qualifications of all parties it hires, given In many cases the company requires Public companies have a fiduciary
the importance of the advice they will assistance in designing enhanced responsibility to their stakeholders to
provide throughout the process. The accounting processes and controls, maximize shareholder value. At the same
key advisors/service providers that the preparing financial information subject time, they must promote good corporate
company and board need to evaluate to audit and supplementing its staff during governance and implement effective
and hire are company counsel, auditors the transition to becoming a public disclosure practices. For companies that
and underwriters. company. The auditor may be unable to have filed an IPO or that have recently
perform some of these elements under gone public, understanding and complying
Company counsel: Company counsel independence requirements, so an with evolving regulations while attracting
work in concert with the company’s additional accounting advisor may be investment capital and delivering solid
general counsel to represent the company’s necessary. Accounting advisors provide results can be a challenge.
legal interests throughout the process. useful skills, experience and resources To meet this challenge, companies
They are integrally involved in diligence, to supplement the company’s accounting often rely on third parties to provide the
drafting Form S-1 and crafting lock-up and controls functions. information, tools and insight they need
and underwriting agreements, and to navigate the investor relations
generally providing legal advice to the Underwriters: The company should landscape. Any third-party investor
company throughout the process. carefully choose its bookrunner(s), also relations solutions provider selected
In selecting company counsel, it is sometimes referred to as lead manager(s), should be focused on the dual aims of
important to choose a party that has given the significant role that they play providing quick information and context
appropriate industry and sector expertise, throughout the process. As the quarterback about share developments and trends
as well as a proven track record of of the IPO, the lead bookrunner(s) advises about the company, as well as deep insight
executing the IPO process. the company on all facets of the IPO into capital markets, sectors, investors and
process, assists the company in shaping its research coverage. This will help the
Auditors and accountants: The investment thesis to be used while company accurately identify key areas of
independent accountants are involved marketing the transaction, guides the risk and opportunity, which will in turn
in performing an audit on certain of company with investors while on the road help it retain and attract long-term
the financial statements prepared by and develops the optimal pricing investors that will ensure its valuation is
management and providing comfort recommendation for the company. The closely aligned with its true economic
on certain elements derived from the bookrunner(s) are closely involved in worth. Ultimately, this will help lower the
company’s records subject to internal diligence, drafting Form S-1, crafting the company’s cost of capital.
controls over financial reporting and marketing materials, creating the roadshow When selecting a third-party investor
included in Form S-1. The underwriters schedule, pricing the transaction and relations solutions provider, the following
and lawyers will conduct in-depth supporting the stock in the aftermarket. criteria should be considered for each
diligence with the accounting firm around The bookrunner(s) should be chosen based aspect of the company’s workflow.
their relationship with the company and on their relationship with the company,
the integrity of the financials. industry expertise, expertise in executing Understanding market dynamics:
The decision to hire auditors is IPOs, distribution platform and market- • Does the provider have access to the
incredibly important, given that they will making ability. same information and analytics that
be integrally involved in the company’s The co-managers on an IPO are drive institutional investment
financial reporting for many years. typically significantly less involved in the decisions?
Auditors should be hired well in advance day-to-day advisory role for which the • Does the provider offer services in all
of launching the IPO so that the financial bookrunner(s) are responsible. They are, global regions, given the increasing
statements have consistent prior year however, involved in most (if not all) of the attractiveness of emerging markets
audits. The Securities and Exchange diligence conducted. The co-managers’ as a source of capital?
Commission (SEC) requires three years research analysts will also take part in all • Does the provider have the
of annual historical audited financials analyst diligence that is conducted. The institutional contacts to gather
for Form S-1 and it is best for one firm to primary role of the co-managers is to feedback on how the company is
have conducted all of the audits. Although underwrite additional shares in the perceived in the marketplace?
a Big 4 firm is typically recommended for offering, provide additional research • Does the provider have a team of

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analysts focused solely on the stability to continue investing in and • audited annual financial statements for
company’s sector to act as an extension developing innovative solutions recent fiscal years;
of the investor relations team? designed to help the company better • unaudited interim financial statements
• Does the provider have clients across manage its investors? for the most recently completed
the sector and industry to provide interim period and the corresponding
information on key institutional 2.2 Building financial reporting period of the preceding year;
analysts covering the sector, key infrastructure • selected financial information (usually
sector-based events and emerging summarized from the company’s
capital market trends? (a) Financial information financial statements) for the past five
An entity making an offering of securities fiscal years and most recent
Anticipating investor activity: registered with the SEC under the subsequent interim periods;
• Is the provider able to give insight only Securities Act of 1933 must file a • separate audited annual and unaudited
on trading activity that has already registration statement and distribute a interim financial statements for
occurred or can it help anticipate prospectus in connection with the offering. businesses that have been acquired or
investor risks and opportunities? The registration statement and prospectus will probably be acquired that meet
• What methodology or proprietary must contain financial statements and certain significance thresholds
algorithms does the provider use to other financial information regarding the (described below). Depending on the
accurately identify and prioritize the financial condition of the company and the significance of the acquisition, the
prospective funds to target? results of its operations. company may be required to present
• Is the provider able to provide insight The Securities Act and the related rules one to three years of audited financial
into alternative strategies employed by and regulations set out the requirements statements;
non-traditional investors such as hedge that the company must follow when • separate audited or unaudited annual
funds? Increased volume in derivative making an offer to sell securities that do financial statements for significant
markets, trading in listed options and not meet one of the limited exceptions investments accounted for under the
credit default swaps can often drive from registration. This framework includes equity method that meet certain
trading in equity and fixed income the use of forms (in particular, Forms S-1, significance thresholds;
markets. S-3, S-4 and S-11) for registrations of • financial statements of guarantors of
offers. These forms specify the securities being offered and affiliates
Communicating with investors: information that must be disclosed under whose securities collateralize the
• Does the provider have the investor Regulation S-X and Regulation S-K. securities being offered;
relations experience to provide the Regulation S-X generally deals with • pro forma financial information giving
company with proven best practices financial statement form and content, effect to certain events such as
to incorporate in its investor relations while Regulation S-K generally deals with significant business acquisitions/
communications strategy? non-financial statement disclosures in the dispositions, reorganizations, unusual
• Does the provider have a distribution body of the registration statement. Form asset exchanges and debt
network that will ensure investors S-1 is the basic registration form used for a restructurings;
receive company communications US company’s IPO. Form S-3 is generally • segment reporting for companies
without interrupting their workflow? used for the registration of securities by a that are engaged in multiple lines of
• Does the provider offer the capability company that already has securities business or with operations in more
to control the creation and distribution registered with the SEC, while Form S-4 is than one geographic area. Required
of the company’s message? generally used for the registration of debt disclosures include separate revenues
or equity securities issued in relation to a and operating data for each segment;
Measuring the impact of the investor merger or acquisition. Form S-11 may be • supplemental schedules for particular
relations program: used for the registration of securities industries and circumstances; and
• Does the provider have an integrated issued by certain real estate companies, • enhanced disclosure of financial and
IR platform that can track the impact including real estate investment trusts or operational metrics for companies in
of outreach efforts? securities issued by other companies certain industries
• Does the provider offer detailed whose business is primarily that of
reporting tools that gauge the impact acquiring and holding for investment Companies that are classified in either
of the company’s online interests in real estate. of the following categories have modified
communications and how they The SEC has specific and complex reporting requirements:
compare to those of its peers? rules regarding the financial statements • ‘Smaller reporting company’, as defined
• Will the provider help track the market and other financial information that must by Item 10(f)(1) of Regulation S-K,
sentiment created by company be presented in a registration statement for generally applies to new issuers with
communications and actions of its an IPO. Some of the significant financial an expected market capitalization of
investor relations program? statement information that may be less than $75 million when their
• Does the provider have the financial required includes: registration becomes effective.

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• ‘Foreign private issuer’, as defined by registration statement. the latest audited annual balance sheet,
Section 3b-4 of the Exchange Act of The preparation of these financial unaudited interim financial statements
1934, generally applies to companies statements often raises certain data must also be included in the registration
incorporated outside the United States collection, accounting and auditing issues, statement. Whenever updated interim
that meet certain additional criteria. such as: financial statements are included, an
• the need to re-evaluate existing interim income statement, statement of
Some additional details regarding these accounting policies and consider comprehensive income and statement of
two categories and some of the differences expanding disclosures to comply with cash flows must be included for the
in reporting requirements are outlined at reporting requirements for public corresponding period of the prior year.
the end of this chapter. The following companies (eg, segment information, Interim financial statements for the first
discussion focuses on the SEC tax-rate reconciliation, earnings per and second quarters must each be updated
requirements for companies that do not share and general compliance with after 134 days. Interim financial statements
fall into either of the above two categories. Regulation S-X and SEC Generally for the third quarter must be updated 45
Accepted Accounting Principles days after the fiscal year-end, at which
Audited financial statements: Audited (GAAP) interpretations); time audited financial statements for the
annual financial statements required to • the treatment of changes in accounting recently completed fiscal year are required.
be included in the registration statement policies or financial statement
include: presentation that arise during the most Unaudited interim financial statements:
• balance sheets as of the end of the two recent period covered by the financial Article 10 of Regulation S-X provides
most recent fiscal years. If the company statements that may have a retroactive guidance on the form and content of
has been in existence for less than one impact on the financial statements and condensed interim financial statements.
year, an audited balance sheet as of a other financial information presented Interim financial statements (also referred
date within 135 days of the date of for previous years; and to as stub-period financial statements)
filing the registration statement is • the retrospective presentation of must be included in the registration
required; and discontinued operations consistently statement if the period between the date
• statements of income, cash flows, across the periods covered by the of effectiveness of the registration
changes in shareholders’ equity and financial information presented. statement and the date of the latest audited
comprehensive income for each of the balance sheet in the filing exceeds a
most recent three fiscal years, or such Accordingly, a company with financial specified number of days. Interim financial
shorter period as the company (and its statements covering the required number statements include a balance sheet as of
predecessors – designation of an of years should revisit those financial the end of the most recent interim fiscal
acquired business as a predecessor is statements and ensure that they are quarter, statements of income,
generally required where a company compliant with SEC requirements and comprehensive income, shareholders’ equity
acquires in a single succession, or in recent SEC staff interpretations. Any and cash flows for the period between the
a series of related successions, modifications to previously issued audited latest audited balance sheet and interim
substantially all of the business (or a financial statements will likely require balance sheet and the corresponding period
separately identifiable line of business) the independent accountant to perform of the preceding year. The interim financial
of another entity (or group of entities), additional procedures. statements can be presented in a condensed
and the company’s own operations prior format, but often are presented in a non-
to the succession appear insignificant Age of financial statements: Knowing the condensed format. The interim financial
relative to the operations assumed or periods for which financial statements statements may be unaudited, but the
acquired) has been in existence. will be required to complete a particular company’s underwriters might request
financing is a critical step in planning an them to be reviewed by an independent
Audited financial statements for the IPO. Financial statements must comply accountant prior to filing as part of their
company and its predecessors must be with the SEC’s age of financial statements requested comfort letter procedures.
accompanied by an audit report issued by requirements before the SEC staff will
independent accountants that are registered commence review of a filing. Selected financial information: Item 301
with the Public Company Accounting The age of financial statements of Regulation S-K requires selected income
Oversight Board (PCAOB) and audited in included in an IPO is measured by the statement and balance-sheet data for each
accordance with PCAOB standards. If any number of days between the date of of the last five fiscal years (or, if shorter,
of the audited financial statements required effectiveness of the registration statement for the life of the company and its
to be included with the registration and the date of the latest balance sheet in predecessor entities), and the most recent
statement were audited by a predecessor the filing. The latest audited annual interim period included in the financial
independent accountant, consent may be financial statements included in the statements (together with comparative
needed from that independent accountant prospectus cannot be more than one information for the corresponding interim
to allow for inclusion of those financial year and 45 days old. period of the prior year). The purpose of
statements and their audit report in the If more than 134 days have lapsed since the selected financial data is to supply

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selected financial data which highlights General rules for acquisitions more than 75 days pre-IPO
certain significant trends in the company’s
financial condition and results of its Acquisition criteria Reporting requirement
operations. It must include:
• net sales or operating revenues; The acquisition does not exceed 20% for No audited financial statements required.
• income (loss) from continuing any of the three significance criteria.
• income (loss) from continuing The acquired business (or multiple One year of audited financial statements
operations per common share; acquisitions of related businesses) required.
• total assets; exceeds 20% but not 40% for any
• long-term obligations and redeemable of the three significance criteria.
preferred stock; and
• cash dividends declared per common There have been multiple acquisitions of One year of audited financial statements
share. unrelated businesses whose significance required for a mathematical majority of
is less than 20% individually but more the individually insignificant acquisitions.
The selected financial data may also than 50% for any of the three significance
include any additional items that would criteria when aggregated.
enhance an understanding of the
company’s financial condition and trends The acquired business (or multiple Two years of audited financial statements
in its results of operations, such as cash acquisitions of related businesses) required.
and cash equivalent balances, working exceeds 40% but not 50% for any
capital balances and summary comparative of the three significance criteria.
income statements.
The acquired business or any acquisition Three years of audited financial
Financial statements of an acquired that is probable at the time of the IPO statements required, unless the business
business: If the company has made or is exceeds 50% for any of the three has under $50 million in revenues, in
proposing to make a significant acquisition significance criteria (or securities are which case only two years of audited
of a business, an investment that will be being registered to be offered to the financial statements required.
accounted for under the equity method or shareholders of the acquired business).
multiple acquisitions of related or
unrelated businesses, it may need to
include audited financial statements of agreements, execution of letters of compared to its total assets;
the acquired business plus appropriate intent, conduct of due diligence • the total assets of the acquired
unaudited interim financial statements to procedures, approvals of the board business compared to the company’s
comply with Rule 3-05 of Regulation S-X. of directors and/or shareholders and total assets; and
Whether a proposed acquisition submission to appropriate government • the pre-tax income from continuing
requires inclusion of financial statements regulators for acquisition approval; operations of the acquired business
in a registered offering depends on the • economic and legal penalties associated compared to the company’s pre-tax
significance of the acquisition and whether with failure to consummate, including income from continuing operations
the acquisition is probable. The SEC has costs incurred to date in pursuing the (‘pre-tax income from continuing
issued no formal or informal guidance on acquisition; and operations’ is income before income
the standard of probability for business • significance of required regulatory taxes, extraordinary items and the
combinations. Generally, the determination approvals. cumulative effect of a change in
is based on the preponderance of evidence accounting principle exclusive of
supporting the conclusion that an The independent accountant that has amounts attributable to any non-
acquisition is probable. However, the SEC audited these financial statements need controlling interests). The rules should
views public announcement of a business not be registered with the PCAOB, unless be consulted as they contain specific
combination as strong evidence of a the acquired business is a public company instructions for modifying the
probable acquisition. The company must in the United States. The number of years calculation under certain
assess the probability of an acquisition by of audited financial statements required is circumstances.
considering factors such as the following, determined by the size of the acquisition
in addition to the advice of its securities and its significance relative to the The test generally is performed using
counsel: company, based on the following three the company’s and the target’s most
• progress of the negotiations, significance tests under Rule 1-02(w) of recent audited financial statements prior
considering such factors as progress of Regulation S-X: to the date of acquisition. The table
discussions among senior executives, • the amount of the company’s above summarizes the general rules for
execution of confidentiality investment in the acquired business acquisitions that occurred more than

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75 days before the offering. related party, only one year of income Financial statements of an equity method
An exception to the general statements must be provided if certain investment: If the company holds an
requirements occurs when an individual or additional textual disclosure is made. investment in unconsolidated subsidiaries
multiple acquisitions that exceed 50% of Rule 3-14(a) also requires certain or 50% or less owned entities accounted
any of the significance criteria occur, or variations from the typical form of for under the equity method that exceeds
will probably occur, within 75 days of the income statement. significance thresholds as defined by Rule
offering for which inclusion of financial • If the property is to be operated by 3-09 of Regulation S-X, separate financial
statements is required. the company, a statement must be statements for the investee company may
In addition, if audited financial furnished showing the estimated need to be filed with the registration
statements are required, applicable interim taxable operating results of the statement, including an audit for certain
financial information that would be company based on the most recent periods.
required according to the guidelines 12-month period, including such Significance of investees is evaluated
described in the “Age of financial adjustments as can be factually under Rule 1-02(w) of Regulation S-X,
statements” and “Unaudited interim supported. If the property is to be based on the following tests:
financial statements” sections above must acquired subject to a net lease, the • The company’s and its other
also be included. estimated taxable operating results subsidiaries’ investments in and
Staff Accounting Bulletin No 80 (SAB shall be based on the rent to be paid advances to the investee exceed 20%
80) provides a special interpretation of for the first year of the lease. In either of the total assets of the company and
Rule 3-05 of Regulation S-X for IPOs case, the estimated amount of cash to its subsidiaries consolidated as of the
involving companies whose operations be made available by operations shall end of the most recently completed
have been built by the aggregation of be shown. An introductory paragraph fiscal year; and
discrete businesses that remain is required stating the principal • The company’s and its subsidiaries’
substantially intact after acquisition. SAB assumptions which have been made in equity in the pre-tax income from
80 allows first-time issuers to consider the preparing the statements of estimated continuing operations of the investee
significance of businesses recently taxable operating results and cash to exceeds 20% of such income of the
acquired or to be acquired based on the pro be made available by operations. company and its subsidiaries
forma financial statements for the issuer’s • If appropriate under the circumstances, consolidated for the most recently
most recently completed fiscal year. While a table should be provided disclosing completed fiscal year.
compliance with this interpretation the estimated cash distribution per
requires an application of SAB 80’s unit for a limited number of years, If either of these tests is met, separate
guidance and examples on a case-by-case with the portion thereof reportable financial statements of the investee must
basis, this interpretation allows currently as taxable income and the portion be filed. Insofar as practicable, the separate
insignificant business acquisitions to be representing a return of capital financial statements required shall be as of
excluded from the financial statement together with an explanation of annual the same dates and for the same periods as
requirements, while still ensuring that the variations, if any. If taxable net income the audited consolidated financial
registration statement will include not less per unit will become greater than the statements required to be filed by the
than three, two and one year(s) of financial cash available for distribution per company. The required financial statements
statements for not less than 60%, 80% unit, that fact and the approximate of the investee must be audited only for
and 90%, respectively, of the constituent year of occurrence should be stated, those fiscal years in which either of the
businesses of the issuer. if significant. above tests is met; the remaining years can
The acquisition or probable acquisition be unaudited. These audited financial
of real estate operations is subject to its The SEC staff has noted that one statements may or may not be required to
own set of disclosure requirements under element used in distinguishing a real estate be audited by an independent accountant
Rule 3-14 of Regulation S-X, which operation from an acquired business subject registered by the PCAOB, depending on the
addresses income-producing real estate to Rule 3-05 of Regulation S-X is the level of reliance placed on these audited
operations such as apartment buildings predictability of cash flows ordinarily financial statements by the company’s
and shopping malls. Rule 3-14(a) requires associated with apartment and commercial principal independent accountant.
as follows: property leasing, which generally includes Under Rule 4-08(g) of Regulation S-X,
• Audited income statements must be shopping centers and malls. Nursing homes, for any unconsolidated subsidiaries and
provided for the three most recent hotels, motels, golf courses, auto 50% or less owned entities accounted for
fiscal years for any such acquisition or dealerships, equipment rental operations under the equity method that meet any of
probable acquisition that would be and other businesses that are more the three Rule 1-02(w) criteria at the
“significant” (generally, that would susceptible to variations in costs and greater than 10% but not more than 20%
account for 10% or more of the revenues over shorter periods due to market significance level, summary financial
company’s total assets as of the last and managerial factors are not considered to information as described by Rule 1-02(bb)
fiscal year end prior to the acquisition). be real estate operations. In such cases, the must be presented in the notes to the
If the property is not acquired from a Rule 3-05 requirements will apply. financial statements.

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Financial statements of guarantors and for balance sheet; and segments in annual financial statements,
collateralizations: A guarantee of a public • a condensed pro forma income requires those enterprises to report
security (eg, a guarantee of a public debt or statement for the company’s most selected information about operating
public preferred equity security) is itself recently completed fiscal year and the segments in their interim financial reports
considered a security that must be most recent interim period of the and also establishes standards for related
registered under the Securities Act, absent company, unless the historical income disclosures about products and services,
an applicable exemption. Rule 3-10 of statement reflects the transaction for geographic regions and major customers.
Regulation S-X requires each guarantor the entire period. It defines an “operating segment” as a
of registered securities to file the same component of an enterprise:
financial statements required for the Pro forma adjustments related to the • that engages in business activities from
company in the filing. If certain criteria pro forma condensed balance sheet and which it may earn revenues and incur
are met, condensed consolidating financial condensed income statement must include expenses (including revenues and
information may be provided in lieu of adjustments which give effect to events expenses relating to transactions
separate audited financial statements, that are: with other components of the same
unless a guarantor is newly acquired. • directly attributable to the transaction; enterprise);
Under Rule 3-16 of Regulation S-X, • factually supportable; and • whose operating results are regularly
audited financial statements must also • expected to have a continuing impact reviewed by the enterprise’s chief
be filed for each affiliate whose securities on the company (applicable only to the operating decision maker to make
collateralize any class of registered condensed income statement). decisions about resources to be
securities if the greater of the aggregate allocated to the segment and assess
principal amount, par value, book value or As a result, any pro forma adjustments its performance; and
market value equals 20% or more of the for expected future cost synergies or other • for which discrete financial
principal amount of the secured class of similar adjustments that are not information is available.
securities being offered. specifically supported by the acquisition
If any of the above situations is documents will generally not be allowed. Determining whether the company
applicable, Rules 3-10 and 3-16 should If a business or assets are disposed has multiple operating segments involves
be reviewed to determine the extent of of or planned to be disposed of after the an assessment of how management runs
financial information required to be latest balance sheet presented in the its business. Aggregating two or more
included with the registration statement. registration statement, but before the operating segments may be highly
effective date of the IPO, the effect of subjective and involves consideration
Pro forma financial information: Pro forma the disposal should be reflected in the of the similarities in the economic
financial information may be required to company’s pro forma financial statements characteristics and in other factors such as
assist investors in understanding the that are prepared in accordance with the nature of the products and services, the
nature and effect of significant Article 11. nature of the production process, customer
acquisitions that have occurred, type or class, distribution channels and
dispositions, reorganizations, unusual Segment reporting: For companies that applicable regulatory environment.
asset exchanges, debt restructurings or operate in multiple lines of business or The company must provide required
other transactions contemplated in the geographic regions, additional disclosure disclosure information about an operating
prospectus. In such cases, historical data may be required to be presented, which segment if it meets any of the following
financial information is adjusted in the pro includes separate revenues and operating thresholds:
forma financial information to reflect the results information for each major line of • Its reported revenue (including both
transactions and the impact of the offering business or geographic region. Financial sales to external customers and inter-
on the company’s capital structure All Accounting Standard Board Accounting segment sales) is 10% or more of the
significant assumptions must be disclosed. Standards Codification Topic 280, combined revenue (internal and
Guidance regarding pro forma financial “Segment Reporting” (ASC Topic 280) external) of all reported operating
information is provided in Article 11 of requires disclosures regarding segments for segments.
Regulation S-X. Rule 11-01 of Regulation each year for which an audited statement of • The absolute amount of its reported
S-X specifies the circumstances under income is provided. Item 101(b) of profit or loss is 10% or more of the
which pro forma financial information is Regulation S-K requires disclosure of greater, in absolute amount, of:
required in filings with the SEC and sets certain financial information about • the combined profit of all operating
forth general guidelines for the content industry segments, including revenues segments that did not report a loss;
of that information. Article 11 requires: from external customers, profitability or
• a condensed pro forma balance sheet as measures and total assets for each of the • the combined loss of all operating
of the end of the most recent period for last three fiscal years presented. segments that did report a loss.
which a consolidated balance sheet of ASC Topic 280 establishes standards • Its assets are 10% or more of the
the company is required, unless the for the way that public business enterprises combined assets of all operating
transaction is already reflected in that report information about operating segments.

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The company must disclose the factors that must be audited by the company’s subsidiaries and its 50% or less owned
used to identify the enterprise’s reportable independent accountant: equity method investees did not, in
segments, including the basis of • Schedule I – Condensed Financial aggregate, exceed one-half of common
organization and the types of products Information of Registrant must be filed shareholders’ equity of the company
and services from which each reportable when the restricted net assets of and its consolidated subsidiaries as
segment derives its revenues. The consolidated subsidiaries exceed 25% of the beginning of the fiscal year.
company must also report for each of its of consolidated net assets as of the end For purposes of this test only, the
reportable segment a measure of profit of the most recently completed fiscal proportionate share of the company
or loss, total assets attributable to that year. For purposes of this test, and its other subsidiaries in the
segment, revenues from external restricted net assets of consolidated reserves for unpaid claims and claim
customers and a reconciliation to the subsidiaries are the amount of the adjustment expenses of 50% or less
corresponding consolidated amounts. company’s proportionate share of net owned equity method investees taken
Furthermore, disclosure of items such as assets of consolidated subsidiaries in the aggregate after inter-company
interest revenue and expense, depreciation (after inter-company eliminations) eliminations shall be taken into
and related expense, equity method which, as of the end of the most recent account.
investments and capital expenditures fiscal year, may not be transferred to
may be required under ASC Topic 280 the parent company by subsidiaries in Companies in specific industries,
if such amounts are included in the the form of loans, advances or cash including insurance, may have additional
measure of segment profit or loss or in dividends without the consent of a supplemental information requirements
the determination of segment assets, as third party (eg, lender, regulatory that vary from those listed above. The
reviewed by the company’s chief operating agency, foreign government). schedule information may be provided
decision maker on a segment basis. • Schedule II – Valuation and Qualifying separately or in the notes to the audited
ASC Topic 280 also requires certain Accounts must be filed in support of financial statements.
enterprise-wide disclosures regardless valuation and qualifying accounts (eg,
of whether the company has multiple allowance for doubtful accounts, Industry guides: Item 801 of Regulation
reportable segments, if not already allowance for inventory obsolescence) S-K sets out five industry “guides”
provided as part of the reportable included in each balance sheet. requiring enhanced disclosure of financial
operating segment information. These • Schedule III – Real Estate and and operational metrics for companies in
disclosures include revenues from external Accumulated Depreciation must be certain industries:
customers for each product and service or filed for real estate held by companies • Guide 3 – Statistical Disclosure by
each group of similar products, as well as with a substantial portion of their Bank Holding Companies;
services and revenues by geographic area. business involving acquiring and • Guide 4 – Prospectuses Relating to
For interim periods, disclosure for holding investment real estate, Interests in Oil and Gas Programs;
each segment must include revenues interests in real estate or interests in • Guide 5 – Preparation of Registration
from external customers, inter-segment other companies a substantial portion Statements Relating to Interests in
revenues, a measure of profit or loss, a of whose business is acquiring and Real Estate Limited Partnerships;
reconciliation to the company’s holding real estate or interests in real • Guide 6 – Disclosure Concerning
consolidated information and material estate for investment. Real estate used Unpaid Claims and Claim Adjustment
changes to total assets. in the business is excluded from the Expenses of Property-Casualty
The time and effort required in schedule. Insurance Underwriters; and
identifying, gathering and reporting • Schedule IV – Mortgage Loans on • Guide 7 – Description of Property
financial information for operating Real Estate must be filed by certain by Issuers Engaged or to be Engaged
segments may be significant. A first-time companies for investments in mortgage in Significant Mining Operations.
issuer should carefully consider the loans on real estate.
requirements for segment reporting and • Schedule V – Supplemental New guidance for disclosures for
revisit its reporting obligations whenever Information Concerning Property- companies with oil and gas operations take
it enters into new lines of business or Casualty Insurance Operations must effect for registration statements filed on
where management begins to analyze its be filed when the company, its or after January 1 2010, superseding the
business in a new or a different way. subsidiaries or 50% or less owned guidance of Industry Guide 2 – Disclosure
investees accounted for under the of Oil and Gas Operations. The new
Supplemental schedules for certain equity method have liabilities for guidance is provided in Item 1200 of
transactions: Rule 5-04 of Regulation S-X property-casualty (P/C) insurance Regulation S-K.
requires that a number of supplemental claims. The schedule may be omitted
schedules be provided for particular if reserves for unpaid P/C claims and Smaller reporting companies: Smaller
industries and under certain claims adjustment expenses of the reporting companies, as defined by Item
circumstances. Each of these schedules company and its consolidated 10(f) of Regulation S-X, may be eligible for
contains additional financial information subsidiaries, its unconsolidated scaled reporting requirements. These

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scaled requirements streamline and of separate financial statements of in accordance with PCAOB standards.
simplify the disclosure requirements to investees as would be required under • The latest audited annual financial
make it easier and less costly for smaller Rule 3-09, but summarized financial statements included in the registration
reporting companies to comply. Under the information must be disclosed. statement must be as of a date not
rules, a company qualifies as a “smaller older than 12 months prior to the date
reporting company” if it: If the company qualifies as a smaller the registration statement is filed. The
• has a common equity float of less than reporting company in an initial registration SEC will waive this requirement in
$75 million; or statement, it must reassess this status at cases where the company can represent
• has no public float and has annual the end of its second fiscal quarter in each adequately that it is not required to
revenues of $50 million or less, upon subsequent fiscal year. If the company fails comply with this requirement in any
entering the system. to meet the test, a transition to the larger other jurisdiction outside the United
company reporting requirements States, and that complying with the
A company registering common equity commences with the first quarter of the requirement is impracticable or
securities in an initial registration subsequent fiscal year. involves undue hardship. Regardless,
statement should calculate its public float the latest audited annual financial
as of a date within 30 days of the date it Foreign private issuer: A “foreign private statements included in the filing
files its initial registration statement. The issuer” is any company (other than a cannot be more than 15 months old as
public float is computed by multiplying foreign government) incorporated or of the date the registration statement
the aggregate worldwide number of organized under the laws of a jurisdiction becomes effective.
common equity shares held by non- outside of the United States, except in • If a registration statement becomes
affiliates before the offering plus the cases where a majority of voting securities effective more than nine months after
number of common shares being offered are directly or indirectly owned by US the end of the last audited fiscal year,
in a Securities Act registration statement residents and either: the company must provide unaudited
by the estimated public offering price of • the majority of its executive officers or interim financial statements in
the common equity shares. If smaller directors are US citizens or residents; accordance with, or reconciled to,
reporting company status is achieved, the • more than 50% of its assets are located US GAAP (this reconciliation is not
registration statement may comply with in the United States; or required if the company uses IFRS as
the SEC’s scaled disclosure system. • its business is administered principally issued by the IASB) covering at least
The scaled disclosure requirements are in the United States. the first six months of the year.
integrated into Regulation S-X (Article 8 • Foreign private issuers may report in
for financial statement requirements) and The financial statement requirements any currency.
Regulation S-K (for non-financial for an initial registration statement of a • Financial statements of an acquired
statement disclosure requirements). A few foreign private issuer are found in Items 3, foreign business need not be reconciled
of the key differences in financial 8, 17 and 18 of Form 20-F and in Regulation from local GAAP to US GAAP when
statement requirements are as follows: S-X. The financial statement requirements the acquired business is below 30%
• Audited annual financial statements – differ in a number of significant ways from for any of the Rule S-X 1-02(w)
these include statements of income, those of domestic US issuers. Some of the significance tests. This reconciliation
cash flows, changes in shareholders’ key differences in the requirements are as is not required if the acquired business
equity and comprehensive income for follows: uses IFRS as issued by the IASB.
the past two years, as contrasted to • Audited financial statements are • Financial statements of a significant
three years for large companies. The required only for the most recent two equity method investment meeting the
balance-sheet requirement is the same. years if the financial statements significance threshold of Rule 3-09 of
• Financial statements for significant presented are prepared in accordance Regulation S-X need not be reconciled
acquisitions – Rule 8-04 of Regulation with US GAAP. to US GAAP (or, if applicable, IFRS as
S-X requires two years of financial • Foreign private issuers may use GAAP issued by the IASB), unless either of
statements for a business acquired by other than US GAAP, but may need to the two tests is greater than 30% as
a smaller reporting company if the reconcile to US GAAP. This calculated on a US GAAP (or, if
acquisition is greater than 50% reconciliation is not required if the applicable, IFRS as issued by the IASB)
significant. Under Rule 3-05, a third company uses International Financial basis. A description of the differences
year is required if the acquisition is Reporting Standards (IFRS) as issued in accounting methods is required,
greater than 50% significant and the by the International Accounting however, regardless of the significance
acquired business had revenues of at Standards Board (IASB). If the company levels.
least $50 million in its most recent uses GAAP other than US GAAP, the
fiscal year. audited financial statements must be Summary: Planning an IPO is a complex
• Audited financial statements for accompanied by an audit report issued undertaking that requires the compilation
significant equity method investments by independent accountants that are and collection of numerous financial
– Article 8 does not require the filing registered with the PCAOB and audited statements and related information.

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Knowing what financial statements and • documenting processes involving After the registration becomes
other information will be required to major classes of transactions; effective, the company will be subject to
complete a registration statement is a • identifying significant risk points strict SEC reporting timelines for quarterly
critical step in planning an IPO. The and key mitigating controls; and annual reporting. It will also be
company should consult the SEC rules and • providing preliminary assessment of required to file current reports on Form 8-
regulations, as well as its auditor and other effectiveness of design and operation K after the occurrence of certain specified
advisors, to determine what financial of key controls; material events within four business days
information requirements might be • remediating missing and ineffective of the occurrence of the event. Many
applicable in its circumstances to allow controls; private companies are unaccustomed to
for the planning of sufficient time and • demonstrating consideration of the formal accounting closes for interim
resources to complete the filing within regulatory risks and environment; and reporting periods and the strict reporting
manageable timeframes. • conducting final tests that support an timelines for both quarterly and annual
assertion of effective internal controls periods. In anticipation of going public,
(b) Transition to being a public company over financial reporting. the following are some actions that the
The completion of an IPO marks the start company should take in advance of the IPO:
of life as a public company. One of the first Chapter 5.1 contains a more detailed • Evaluate the current financial close
challenges for a successful transition is discussion of the SOX compliance process in light of post-IPO
adapting to the new, often more complex requirements. requirements and consider early
requirements of operating as a public implementation of an accelerated close
company. New processes may need to be Financial accounting department: The timeline that will be required of an SEC
adopted, and management must now process leading up to filing of the issuer, including the gathering of
consider how decisions affect a much registration statement requires the disclosure information for notes to the
larger group of stakeholders and be gathering of various financial information. financial statements Reducing the
conscious of ensuring regulatory The company can utilize external advisors financial close cycle time will most
compliance. Some of the transition areas to assist in gathering this information, but likely involve changes in processes, IT
that should be considered going forward once an IPO is completed, internal systems and possibly resources. The
are outlined below. resources should be in place to support transition to an established process
the ongoing reporting needs of a public can take time, but it is imperative that
Controls and procedures: The level of company. The company will need to: these modifications be in place before
investor confidence in the reliability of • prepare ongoing reports that provide the first Form 10-Q or Form 10-K is
financial disclosures can be a key factor in financial and non-financial required.
a public company’s success. To help information at a level of detail and in a • Evaluate the finance and accounting
ensure investor – and market – timeframe that generally was not departments’ organizational structure
confidence, a public company’s internal required in the past; and skill sets of key personnel in light
controls systems must comply with all • develop a public entity organizational of post-IPO reporting requirements,
regulatory requirements. These structure and recruit appropriate and identify gaps. Gaps can be filled
requirements include quarterly personnel to satisfy its public by recruiting additional staff and
certifications by executives and an audit reporting requirements; providing training for current
report on the effectiveness of internal • develop sufficient resources or personnel.
control over financial reporting required processes to perform regular and • Draft an accounting policy manual.
by Section 404 of the Sarbanes-Oxley Act consistent financial close and Many private companies have informal
of 2002 (SOX), typically as of the second reporting processes to meet reporting policies and procedures, but public
fiscal year-end after the IPO. requirements; companies should have documented
Complying with Section 404 requires • develop or enhance its accounting and accounting policies as a component
a significant investment of resources over reporting policies and procedures; of their internal control environment.
several months to move through a project • enhance the training and skills of its
plan that includes a number of phases, existing workforce involving Budgeting and forecasting: After the IPO,
such as: accounting and reporting requirements investors will expect the company to
• assessing financial statement and of public companies; implement the plans presented in the
general and specific fraud risks; • develop or enhance its budgeting, prospectus. The following are some of the
• evaluating the control environment, forecasting and financial modeling organizational changes that the company
entity-level controls, and general IT processes to reflect its operations as should consider:
controls; a standalone entity with public • Review business strategies, forecasting
• identifying significant accounts and shareholders; and processes and cost infrastructure in
disclosures; • change underlying business processes order to help ensure its
• defining significant locations and to meet appropriate metrics or best- competitiveness and meet shareholder
business units; in-class services. expectations.

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• Develop an investor relationship updated semi-annually, but more frequent operations may struggle with technology
infrastructure and resources. updates are preferable. The actual results and system limitations in meeting the
• Develop or enhance budgeting, may prompt changes in strategies, needs of a public company. This may
forecasting and financial modeling priorities and resource allocation, with require additional resources to ensure
processes. subsequent period forecasts reflecting business processes are adapted to meeting
• Determine key performance indicators the impacts of such changes. Ideally, the IT system needs. In addition, the company
which will be used to communicate subsequent year’s budgeting process may need to implement new technology
business performance to stakeholders should be embedded in the forecasting and systems or customize existing systems
that are in line with industry practices. process during the latter part of the and reports.
• Design appropriate compensation current fiscal year. The IT effort required for compliance
programs which align and incentivize with establishing, evaluating and obtaining
employee behavior and focus with the XBRL: During 2009 the SEC issued new an audit of internal control over financial
overall business strategy and key rules and related guidance that require reporting should not be underestimated.
objectives. public companies (both domestic and Information technology plays a large role
foreign private issuers) to provide their within the internal control structure and
The company’s strategic plan should financial statements to the SEC in a is an integral part of SOX compliance.
encompass both external and internal separate exhibit to certain reports and A systems embedded approach to the
factors that span the entire organization. registration statements in an interactive financial reporting process can include
The plan establishes the framework for the data format using Extensible Business automated key controls to reduce the
annual budget, providing the top-down Reporting Language (XBRL). The rules overall number of controls
direction, financial targets and key are designed to make it easier for analysts IT strategy can be a key driver in
assumptions. and investors to locate and compare data accelerating the accounting close process
The annual budget should focus on key on financial and business performance through the reduction or consolidation of
operational drivers of the business for both in a standard format across all public multiple general ledgers, charts of accounts
revenue and cost with key inputs from companies. The XBRL rules also require and reporting systems. For systems that
senior management. The budget process public companies to post their XBRL have disparate interfaces or lack real-time
should be flexible and have a short cycle filings on their corporate websites. With reporting capabilities, modifying the
time to accommodate market-driven interactive data, all of the items in a existing system’s capabilities or building
changes. financial statement are labeled with the case for an enterprise resource
Forecasting should be a periodic update unique computer-readable “tags,” which planning system may be warranted.
to the budget (and strategic plan) that make financial information more Greater use of IT systems can also
reflects changes and impacts actually being searchable on the Internet and readable enhance the budgeting and forecasting
experienced in the marketplace. Although by spreadsheet and other software. process and allow for the leveraging of
implementation of forecasting is generally The XBRL rules are being phased in information more effectively.
the domain of the finance department, over a three-year period beginning with Communication requirements to key
ownership of the process belongs with fiscal periods ending on or after June 15 stakeholders after the IPO about the
the recipients of the results, including 2009, with timing determined based on performance of the company should be
operational management. The process the size of the company’s public float. aligned with external reporting.
should involve a focused, bottom-up XBRL is not required for IPOs, but a Implementation of an integrated system
process based on specific, measurable company with an IPO that becomes providing both external and management
drivers and should closely involve effective during 2010 will be required to reporting can provide timely, quality
operational managers. comply with the XBRL rules commencing information.
If the company does not have adequate with periodic filings during 2011. The rules
sales forecasting, it may consider using key should be consulted regarding when initial (c) Summary
performance indicators, industry trends or compliance with the rule commences, as Becoming a public company often requires
other third-party data to benchmark target this will be dependent on the timing of management to make numerous
sales numbers. Similarly, external cost the IPO and the initial subsequent improvements to business processes
trends and industry averages can help measurement date for determination and the underlying systems as they react
quantify or even qualify expense forecasts. of the company’s public float. to the demands of investors, government
Creating standardized relationships regulators and other stakeholders.
between internal and external financial Technology considerations: Information Preparing for this change in status may
and operational sources can provide both technology is a critical enabler for the require considerable time and effort. To
insight and consistency in the forecasting company in creating value and achieving achieve a more seamless transition, the
process, and also identify a baseline to financial reporting and regulatory company should consider taking steps to
measure the company’s performance compliance. Companies that have not operate and report like a public company
relative to the industry. adequately invested in technology and before the IPO becomes effective, to ease
At a minimum, forecasts should be tools for financial reporting and business the post-IPO transition.

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2.3 Preparing a communications boilerplate language, updates to Additionally, they must understand
strategy executive biographies and the creation that compliance with disclosure rules
of company fact sheets, which can be and internal control requirements is
(a) Reviewing public perception and image posted to the website. Additionally, everyone’s responsibility. More
There is a strong temptation to view IPO the company should review its press detailed recommendations on
communications as a listing-day event, release strategies to maximize employee communications are included
meticulously planning for the inevitable opportunities for a consistent flow in Chapter 4.
publicity surrounding day-one trading. of announcements during the quiet
In reality, preparation should begin well period (ie, establish a baseline of new (b) Preparing for financial reporting
before the registration statement is filed product/client announcements, key Among the company’s most important
to ensure consistent messaging and a milestone updates and other news to tasks as it prepares to go public is the
strong baseline of communications avoid the appearance of “gun jumping” development of a comprehensive strategy
before the “quiet period” begins. during the registration period). to interface with a crucial new audience –
While the IPO prospectus will be the • Website – as many prospective the investment community. The way in
primary selling document for the offering, investors and covering reporters will which the company communicates to the
investors and media will look as broadly visit the company’s website, it is financial markets significantly impacts its
as possible for further insight into the important that the site reflects the status in its industry, the perceived value
company, its business and its competitive image the company wishes to convey, of its business, management credibility
position. The company should therefore that corporate information is easily and ultimately the valuation of its
conduct a thorough assessment of its accessible and that all data points are securities in the markets.
brand and reputation, as perceived by consistent with those provided in the Preparing for an IPO includes
customers/clients, employees, regulators, IPO registration statement. In addition establishing protocols for how the
industry analysts and other key to reviewing the site for accuracy, the company will engage with investors, what
stakeholders, as early as possible in the company should consider adding information it will provide, how it will
IPO process so that any remedial actions information about its mission, vision report its financial results and what
can be taken before it becomes constrained and values, an online media kit, communications channels it will use.
by quiet period rules. executive biographies, lists of historical The IPO process will place the company
In particular, the company should accomplishments and other reference under acute public scrutiny and set in
review any public commentary about its documents. These materials will be motion a whirlwind of activity. It is critical
financial results or growth prospects to important media and investor relations that preparations begin during the pre-
identify discrepancies between what tools to bridge the gap when IPO phase to allow adequate time for
previously was disclosed/anticipated and communicators are unable to speak benchmarking and planning, so the
the information that will be presented in directly with their constituents. company will be ready to go “live” by
the upcoming SEC filings. This is • Marketing materials and other the time the IPO prices.
particularly important in today’s customer communications – the Key elements of an effective financial
environment of intense speculation about company should review its marketing communications strategy include the
the intention of private equity firms to materials and customer following:
spin off their portfolio companies, and communications to ensure that • Consistency – investors will be looking
for companies that filed registration messaging and statistics are consistent for new information in every
statements before the market deteriorated, with the language in the IPO interaction with management, and any
which are now preparing amended filings. registration statement. Equally variations in messaging, content, tone
The company’s communications review important, it should train public-facing or frequency/timing of
should include the following: employees (eg, receptionists, sales communications can be seen as an
• Media relations activities – the IPO force, customer service representatives indication of changes in the business
will attract attention from an expanded and others) to respond to external or outlook that could affect the
media universe focused on inquiries within the confines of SEC company’s stock price. Consistency
performance, growth potential and regulations and to forward questions in communications is paramount, yet
other financial events. While the real outside their respective areas of the company must also allow sufficient
work in building these new media responsibility to the appropriate flexibility to adjust to business
relationships begins after the quiet communications representatives. conditions.
period, the company should ensure • Employee communications – as with • Benchmarking – an important first
that key industry reporters accurately any major change, an IPO can lead to step is establishing a framework for
understand its business strategies and employee uncertainty. Employees may how the company will communicate to
differentiators in advance of the filing. have questions about how the IPO the financial community. Key to this
Activities could include a series of will affect their jobs, what new process is analyzing and benchmarking
reporter briefings (assuming an opportunities are available and whether how industry-leading companies
appropriate news hook), a review of they will be able to purchase shares. communicate to their financial

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audiences. Investors, the media and metrics by incorporating business F-D. It is critical for executives to
other key stakeholders assign commentary, industry and segment understand the parameters of what
companies to peer groups against trends and other non-financial they can discuss.
which they evaluate the company’s information.
performance. It is therefore important • Guidance – guidance continues to Even as the company seeks to refine its
to understand thoroughly the standards be a controversial topic within the communications strategies, it is important
against which the company will be investment and corporate governance to understand that investors will look well
evaluated. communities. However, an important beyond its direct investor communications
This benchmarking study should driver of equity valuation is the ability for insight into its business prospects and
encompass a full range of materials of investors to forecast future earnings investment potential. In addition to
scrutinized by investors, including and cash flows. How the company traditional investor relations, the company
financial and regulatory filings, press provides forward-looking commentary should consider its corporate and media
releases and transcripts or webcasts through guidance can significantly communications strategy as part of an
of public events such as earnings affect the valuation of its stock. entire communications approach. This
conference calls, investor conferences Research has demonstrated that includes assessing news trends, building
and analyst events, and should include relatively frequent, accurate and relationships with reporters, influential
the timing of peer group reporting as granular guidance is associated with bloggers and industry analysts, and
well as content. As a general rule, the a lower cost of capital; yet the risk of understanding how peer companies are
company will be judged on the not meeting expectations, a possible portrayed in the media.
completeness, quality and accuracy of duty to update and potential liability Developing strategies for disseminating
the information package it provides to concerns demand careful consideration. positive announcements and managing
the financial community. To be aligned with investor difficult news will pay long-term
• Metrics – the company should identify expectations, guidance policies of peers dividends, helping build the company’s
early in the process the metrics and should be analyzed and factored into brand, enhance its reputation, build
other information it plans to provide the decision. management credibility and protect
to investors post-IPO and consider • Online communications tools – the valuation. Companies must have the
whether this information can be investor relations section of the proper response mechanisms in place
included in the registration statement company’s website is often the first to address crisis situations quickly and
to provide additional consistency. landing spot for investors seeking more effectively, including those crises that
Specific consideration should be given information about the company. As may occur while the company is still
to the metrics that peers use to such, it should be user friendly, in the IPO quiet period.
describe their businesses and provide interactive and easily accessible. Planning, vigilance and transparency
guidance on future performance, as Visitors accessing the site must be are the most effective investor relations
well as additional supporting material supplied with the information they tools a company possesses. By developing
they provide. Understanding and need to conduct initial due diligence a comprehensive communications strategy
accommodating these standards will on the company and help them advance that provides for consistent
keep the company in synch with what their investment decisions about the communications, meets (or exceeds)
investors are accustomed to receiving stock. Information that can be peer standards and provides required
from industry peers and demonstrate dynamically updated regarding the disclosures, the company can prepare,
a commitment to open and honest business, key executives and strategy pre-IPO, to thrive in a public environment
communications. Additional financial will help investors better understand and adapt efficiently to the many surprises
and operating characteristics critical to the company and its future prospects. and challenges that will inevitably arise.
understanding the nature and strength More detailed recommendations on
of the business can and should be communications are included in 2.4 Designing the capital structure
provided. Chapter 4.
• Non-financial disclosures – one of • Training – management teams without (a) American depositary receipts
the most frequent and visible public company experience should be American depositary shares, commonly
communication opportunities is the trained to communicate with investors known as American depositary receipts
reporting of quarterly financial results. within the regulatory framework. The (ADRs), facilitate foreign issuers’ access
In addition to meeting SEC disclosure market will respond favorably to to the world’s largest equity market. The
requirements, investors expect executives who are forthcoming and effectiveness of ADRs is why 158 foreign
management to interpret results and open about their businesses. However, issuers have used this instrument to raise
provide additional commentary on engaging with investors in real time nearly $55 billion in capital (IPOs only) in
business developments via the earnings subjects executives to the risk of the United States during the past decade
release and conference call. These making selective disclosures of alone. As of December 31 2009, 252 foreign
communications should go beyond the material non-public information, issuers had ADRs listed on the NYSE.
prescribed financials and the financial which is prohibited under Regulation The effectiveness of ADRs for raising

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Preparing to go public

Capital raised using ADRs (by region Capital raised using ADRs (by sector How ADRs are created: ADRs are normally
– 2000 to 2010) – 2000 to 2010) created when the shares of a foreign issuer
– either those currently trading in its local
market or newly issued shares in
connection with an offering of securities
– are deposited with a depositary bank’s
custodian in the issuer’s home market. The
depository then issues to investors ADRs
representing those shares. At any time
thereafter, an investor can sell these ADRs
in the secondary market (eg, the NYSE), or
have the sponsoring depositary bank cancel
the ADRs and receive the underlying
ordinary shares that can be sold in the
60% – Asia-Pacific (29,927) Diversified (122) foreign issuer’s local market.
27% – Europe, Middle East 29% – Communications (15,569)
and Africa (13,510) Setting up an ADR program: Once a foreign
16% – Technology (8,817)
13% – Latin America (6,444) issuer has chosen an ADR structure, it
14% – Financial (7,774) will work closely with a depositary bank to
12% – Industrial (6,775) establish and maintain the ADR program.
Timeframes and requirements for
11% – Energy (6,277)
launching a program will vary. However,
9% – Consumer, non-cyclical (4,830) certain characteristics are common to any
6% – Consumer, cyclical (3,296) ADR structure.
2% – Basic materials (1,136)
Setting the ADR-to-share ratio: Each ADR
1% – Utilities (688) issued will represent a certain number of
underlying ordinary shares held in custody
in the foreign issuer’s home market.
There is no official rule for setting the
capital in the United States is due to their In addition to facilitating capital raising ratio for ADRs. However, the share prices
appeal to investors – these instruments in the United States, ADRs offer foreign of sector peers should be taken into
are a convenient way to directly invest in issuers many other benefits, including: consideration in order to establish a ratio
international companies while avoiding • shareholder diversification; that will result in an initial price per ADR
many of the risks typically associated with • incremental investor demand that that investors will perceive to be
securities held in other countries. For US can drive market valuation; “attractive.”
investors, ADRs: • a US acquisition currency;
• are easier to purchase and hold than a • stock-based compensation for US The ratio initially selected may affect the
foreign issuer’s underlying ordinary employees; and transaction costs that a foreign issuer’s
shares; • enhanced corporate visibility in the investors will pay. For instance, since fees
• trade easily and conveniently in US United States. for issuance (and cancellation) are assessed
dollars and settle through established in cents per ADR, an ADR that is priced
clearinghouses; ADR structures: A Level III ADR program “too low” can add incremental transaction
• pay dividends in US dollars; listed on the NYSE (or on another US costs for investors.
• eliminate unfamiliar custody stock exchange) allows a foreign issuer to
arrangements; and realize all of the aforementioned benefits Parties that work with the foreign issuer:
• provide notifications of corporate of ADRs, including raising capital from Establishing an ADR program requires
actions in English. individual investors. Alternatively, capital close coordination between the foreign
can be raised from qualified institutional issuer, its chosen depositary bank and
ADRs allow institutional investors investors only via a private placement, each firm’s legal counsel. When raising
access to foreign securities without the known as a Rule 144A offering. capital in the United States, the issuer
burden of local custody arrangements or A Level II ADR program allows a also relies on other advisors, such as
having to deal in other currencies. Also, foreign issuer to list on a US stock accountants, investment bankers and
many US institutional managers are exchange, but not raise capital. Under a investor relations firms. The chart
required to buy ADRs to invest in foreign Level I program, the ADRs are not listed, opposite summarizes the roles and
issuers, due to restrictions in their trading instead in the over-the-counter responsibilities of each program partner.
investment charters. market. On page 30 is a sample timetable for the

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establishment of a Level III ADR program. Establishing an ADR program: roles and responsibilities of foreign issuer,
depositary bank and other parties
The deposit agreement: As a first step
toward establishing an ADR program, the Custodian Depositary
foreign issuer and its chosen depositary • Receive local • Provide advice/perspective on type of program, exchange or
bank negotiate a deposit agreement. This shares in market on which to list or quote.
contract details the legal relationship and issuer’s • Advise on ratio of depositary shares to ordinary shares.
obligations of the depositary bank and the home • Appoint custodian.
issuer, describes the services the country. • File Form F-6 if Level I, II or III program.
depositary and issuer will provide, and sets • Confirm • Review draft registration statement or offering memorandum,
forth the rights of ADR holders and the deposit of depending on type of program to be established.
fees they must pay the depositary bank. underlying • Coordinate with all partners to complete program implementation
While some terms are standard, deposit shares. steps on schedule.
agreement provisions may vary from • Hold shares • Coordinate with legal counsel on deposit agreement and
program to program, depending on the in custody for securities law matters.
legal requirements of the foreign issuer’s the account • Prepare and issue certificates and/or direct registration statements.
home market, the objectives of the of depositary • Solicit market makers (Level I ADR only).
depositary bank and individual issuer in the home • Announce DR program to market (brokers, traders, media,
specifications. market. retail/institutional investors via news releases and internet.
The deposit agreement includes
provisions relating to the following: Issuer Legal counsel (depositary’s
• deposit of the issuer’s shares; • Provide depositary and custodian with and issuer’s)
• execution and delivery of the ADRs; notices of dividends, rights offerings and • Prepare draft deposit agreement
• issuance of additional shares by the other corporate actions, including notices (depositary bank’s counsel) and file
issuer in compliance with applicable of annual and special shareholder meetings. required registration statements
securities laws; • Ongoing compliance with stock exchange with the SEC.
• transfer and surrender of the ADRs; and SEC regulations, including disclosure • Manage compliance with US
• setting of record dates by the and reporting (coordinating with legal securities laws, rules and regulations
depositary; counsel/accountants). and perfect any securities law
• voting of the foreign issuer’s • Execute US-focused investor relations exemptions (if Rule 144A/Regulation
underlying shares (ie, the shares plan. S program) (issuer counsel).
evidenced by the ADRs);
• obligations and rights of the depositary Accountants (Level II/III/Rule 144A/Regulation S ADRs only)
bank and the holders of the ADRs; • Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP.
• distribution by the depositary of cash • Review registration statement or offering circular.
dividends, stock dividends, rights to
acquire additional shares of the issuer Investor relations advisor/firm
and other distributions made by the • Develop long-term plan to raise awareness of issuer’s program in the US.
issuer; • Develop communications plan and information materials for launch activities
• circumstances in which reports and (roadshow and presentations to investors, meetings with financial media etc).
proxies are to be made available to ADR • Coordinate with issuer’s advertising and public relations teams on specific
holders; program plans to support and develop company image in the US.
• tax obligations of depositary receipt
holders; Investment banks/underwriters (Level II/III/Rule 144A/Regulation S ADRs only)
• fees and expenses to be incurred by the • Advise on type of program to launch and exchange or market on which to list or quote.
issuer, the depositary and ADR holders; • Advise on ratio of depositary shares to ordinary shares.
• pre-release of ADRs; and • Cover issuer through research reports/promote DRs to investors.
• protections for the depositary and the • Advise on roadshows, investor meetings, investors to target.
issuer (ie, limitations on liabilities) • Advise on capital market issues.
• Where applicable, advise on potential merger/acquisition candidates, and other
ADR certificate: The ADR certificate (see matters such as rights offerings, stock distributions, spin-offs andproxy contests.
specimen on page 31) is attached as an If concurrent public offering:
exhibit to the deposit agreement. A typical • Advise on size, pricing and marketing of offering.
ADR certificate resembles an ordinary • Act as placement agent or underwriter in offering.
share certificate and contains the general • Conduct roadshows with management/introduce issuer to institutional and
terms and conditions of the ADR other investors.
applicable to ADR holders. • Line up selected dealers and co-underwriters for offering.

NYSE IPO Guide 27

Preparing to go public

Sample timetable for establishing a Level III ADR program

Action I D L A IB IR 1 2 3 4 5 6 7 8 9 I0 11 12 13 14 Ongoing
Establish and organize transaction team. • • • • • •
Begin US roadshow and ongoing • • • •
investor relations program: create
communications materials, target
institutional investors, organize direct
purchase programs and establish
employee ownership plans. Select ratio.
Underwriter conducts preliminary due •
Prepare and submit to SEC offering • • • • •
circular/prospectus and Form F-1.
Commit to file Form 20-F within 12
months (if not already being filed in
conjunction with an existing Level II
ADR). Resolve any and all matters
involving registration and disclosure.
Negotiate deposit agreement. • • •
Submit exchange listing application • • •
and agreement. Receive approval.
Prepare Form F-6 and submit to SEC • • •
with deposit agreement.
Receive SEC comments on Form F-1 • • •
and other forms.
Complete requirements for trading and • • • •
settlement; obtain DTC eligibility, CUSIP
number and ticker symbol; and prepare
ADR certificates.
Receive SEC declarations of • • •
effectiveness on Forms F-1 and F-6.
Execute deposit agreement.
Conduct roadshow meetings with US • • •
investors (group and one-on-one).
Print final prospectus, price offering, • •
and sell ADRs. ADRs are listed and
begin trading.
Closing. Underwriter delivers cash • • •
proceeds to issuer, depositary’s custodian
receives underlying shares, and
depositary delivers ADRs to syndicate.
Distribute press release and broker • • • • •
announcements to media and
investment community
Place tombstone advertisement. • • • • •

Timeframes provided are indicative. Regulator’s involvement and issuer’s program specifics may vary and can materially affect timing. The SEC generally provides
comments on Form F-1 registration statements within 30 days of the date filed.
Key to parties involved: I = Issuer; D = Depositary bank; L = Legal counsel (for depositary and/or issuer); A = Accountant; IB = Investment bank; IR = Investor relations firm

28 NYSE IPO Guide

Preparing to go public

ADR certificate investors? Are there likely to be any hedge governance planning, particularly in light
funds or shareholder activists? Going of the current economic environment, in
forward, these characteristics of the which decreased stock prices have
shareholder base will be an important heightened concerns about hostile
element of investor relations. Governance takeovers. Achieving the right balance is
matters have become a central focus of important, as too strong a defense profile
activist shareholders, as well as investment may be disfavored by investors, which
advisory firms such as RiskMetrics and often benefit from stock price premiums
Glass Lewis, which evaluate a company’s in a takeover context; many of these
governance structure in making protections may attract negative
shareholder voting recommendations. shareholder attention and proposals for
change down the road. The defenses an
Board of directors and board committees: IPO company may consider include the
SEC registration: As a US-listed company, A public company’s board composition following:
a foreign issuer must comply with the and structure are often very different from • Poison pill (“rights plan”) –
registration provisions and continued those of a private company. A US public increasingly a focus of pressure from
reporting requirements of the Exchange company must comply with governance institutional shareholders, the poison
Act, as amended, as well as certain requirements imposed by stock exchange pill remains the most potent structural
registration provisions of this act. listing requirements and SEC rules, as takeover defense. Under a typical
For more information about the SEC well as related disclosure requirements. poison pill or rights plan, the company
registration and reporting requirements, For more information about these issues rights to the existing
please refer to Chapter 5. requirements, see Chapter 5.2. shareholders. These rights allow
In particular, the stock exchanges, holders (other than a bidder) to
(b) Anti-takeover defenses and other including the NYSE, require that the board purchase stock in the target or in the
governance matters of directors comprise a majority of acquiring company at a steep discount
Before going public, the company will need independent directors within one year (usually half price) if a hostile bidder
to ensure that its governance structure of listing. In addition, post-IPO, the acquires a certain percentage (usually
meets SEC and stock exchange company must have an audit committee 15% or 20%) of the outstanding shares.
requirements. This is the ideal time for meeting SEC and stock exchange rules on This dilutes the voting power of the
the company to consider organizational composition, independence and financial bidder and makes it more expensive
matters more generally, implement desired expertise, and under the NYSE rules must to acquire control of the target.
changes to the company’s jurisdiction of also have compensation and nominating Although their terms and
organization, subsidiary framework and committees made up of independent conditions vary considerably, the
capital structure, and put in place a strong directors. Some of these governance purpose of a poison pill is to force
board and governance structure, including requirements can be phased in following potential bidders to negotiate with the
anti-takeover defenses: the IPO, but the company generally must target’s board of directors. The rights
• Changes after the IPO will be very be fully compliant within one year. usually have redemption provisions
visible, likely requiring disclosure, “Controlled companies,” or companies that permit the company to redeem
governance document posting and with a majority shareholder, are exempt the rights at a nominal price. If the
potential filings. from most of these requirements except acquisition is friendly and the board
• Post-IPO changes may require the audit committee rules, as are foreign approves the deal, it may use this
shareholder approval, which may be private issuers. Other SEC and US tax rules feature to redeem the pill or otherwise
difficult to obtain. also typically influence the composition of exempt the transaction.
• Some governance requirements, such the compensation committee, as discussed • Controlling changes to the board of
as identifying independent directors, in Chapter 2.6, as well as “interlocking” directors – various charter or bylaw
should be initiated early in the process, relationships with other companies. provisions related to changes in
as they may take considerable time. Beyond the required structures, the directors can make it more difficult
company should carefully consider the for hostile bidders or dissidents to
It is important that the company work right mix of board member qualifications; influence and control a board of
closely with the underwriters to develop a and a larger board, with more than seven directors. For example, with a typical
properly balanced board and governance or eight members, might warrant the classified or staggered board having
structure, as certain elements may impact formation of other standing committees, three classes of directors, each elected
investor interest and ultimately pricing. such as a finance committee or a public for a three-year term, only one-third of
The company should also anticipate the affairs committee. the directors are up for renewal at each
make-up of its shareholder base. What annual meeting. The company may
percentage of shareholders are likely to be Anti-takeover defenses: Anti-takeover wish to avoid other provisions that
institutional investors compared to retail defenses are a key element of pre-IPO make it easier for an insurgent group to

NYSE IPO Guide 29

Preparing to go public

force changes in directors and thus gain company stock by an interested regarding the interpretation and
control, such as cumulative voting, shareholder. validity of certain of these provisions,
which can result in the election of a • Business combinations with interested as a contractual term that could affect
director with the support of only a shareholders – under Delaware law, an the shareholder franchise. The
small percentage of shareholders, and “interested shareholder” (generally a company should carefully consider
provisions allowing shareholders to holder of 15% or more of the voting these provisions in its existing and
remove directors without cause, stock) is generally prohibited from proposed agreements, including at
increase the number of directors engaging in a business combination the board level if they cannot be
without limit and fill board vacancies. with the company for three years after eliminated.
The company should also consider the holder became an interested
whether to adopt a plurality or majority shareholder. Although a Delaware Corporate housekeeping: In anticipation of
voting standard for director elections. corporation can expressly elect in its going public, the company should review
While plurality voting generally charter not to be subject to this and clean up documents that contemplate
increases the likelihood that “freeze-out” statute, it can be an a private company (eg, charter documents
management’s director nominees will effective anti-takeover defense. and shareholder agreements). Similarly, it
be elected, majority voting provides • Issuance of shares – the company is important for the company to review
for a more democratic process and has should ensure that it has a sufficient corporate minutes and other records, to
gained in popularity over the past amount of common and “blank check” confirm that corporate formalities have
several years, with a strong focus by preferred stock authorized under its been observed and properly documented,
activist shareholders and investment charter. In many jurisdictions, the including for the issuance of stock of the
advisory firms. company may include in its authorized company and its subsidiaries.
• Shareholder action provisions – the and unissued stock a certain amount
company can improve its defensive of undesignated preferred shares. The 2.5 Providing for employees
posture by regulating the methods by board will be authorized to issue In preparing for an IPO, the company
which a hostile bidder can call for and preferred shares in one or more series should review all of its employee
obtain a shareholder vote on director and to determine and fix the compensation and benefits arrangements
elections or other proposals that may designation, voting power, preference in light of the opportunities afforded by
facilitate a takeover. Charter and bylaw and rights of each series. The existence and the responsibilities resulting from the
provisions can be used to limit the of blank check preferred stock allows IPO. The major opportunity is the ability
ability of the hostile bidder to call the board to issue preferred stock with to compensate employees with publicly
special meetings or bypass the meeting supervoting, special approval, dividend traded stock. Among the responsibilities
requirement altogether by the use of a or other rights or preferences without a is becoming subject to tax and securities
written consent of the shareholders. shareholder vote. However, NYSE rules laws that did not previously apply,
The company may also wish to generally require shareholder approval including Section 162(m) of the Internal
consider provisions requiring by majority of votes cast before issuing Revenue Code of 1986, as amended, the
shareholders to give adequate advance 20% or more of the outstanding voting compensation disclosure rules and Section
notice and supply information before power outside a public offering. Also, 16 of the Exchange Act. The company’s
their proposals are added to the agenda if there is a poison pill, the company compensation committee might consider
of a regular or special meeting. should make sure it has sufficient hiring a compensation consultant to help
• Supermajority voting – authorized shares for the shares to structure new arrangements in light of
“supermajority” voting requirements be issued if the pill is triggered. the IPO.
may be imposed for mergers and other • Change of control provisions – a
specified transactions between the common feature of loan agreements (a) Equity compensation
company and an “interested and other significant contracts is a Incentive plans: Having publicly traded
shareholder,” which may be defined, for provision restricting a change of stock opens up new avenues for
example, as a holder of more than 10% control of the company, resulting in compensating employees of the company.
of the outstanding shares. Thus, an an event of default if breached. These In connection with its IPO, the company
80% vote might be required to effect provisions protect the lender or other should strongly consider putting into place
an acquisition of the company by a contracting party, but reduce the a new equity incentive compensation plan
major shareholder, instead of the more company’s flexibility, particularly or reviewing and revising any existing
typical 50% or 66%. A fair price in restructuring efforts or friendly plans in light of its status as a public
condition may be incorporated into the takeover transactions, as well as company. Any post-IPO plan should allow
supermajority provision, requiring a making it less attractive to a potential the company sufficient flexibility in terms
supermajority vote, for example, when acquirer. In a recent case, San Antonio of types of awards and their terms and
an interested shareholder proposes a Fire & Police Pension Fund v Amylin conditions. The plan should state the
merger at any price less than the Pharmaceuticals, Inc, the Delaware aggregate number of shares available to be
highest price paid for any share of Chancery Court raised questions issued under it. The company needs to

30 NYSE IPO Guide

Preparing to go public

consider carefully shareholder dilution both to confirm proper accounting (b) Section 162(m) of the Internal
concerns and estimated burn rates when treatment and, with respect to stock Revenue Code
determining this number. The company options or stock appreciation rights, Following the IPO, the company will be
may also wish to hire a firm specializing to confirm that they were granted with subject to Section 162(m) of the Internal
in stock plan administration to handle exercise prices equal to (or greater than) Revenue Code. Under Section 162(m), the
the logistics of its equity compensation fair market value in light of Section company may not take a deduction in its
program. 409A and Section 422 of the Internal US taxes for compensation paid to a
Any adoption of new plans or changes Revenue Code. “covered employee” to the extent it
to existing ones should occur prior to The company may wish to make exceeds $1 million for the taxable year
completion of the IPO and, if possible, equity grants in connection with the IPO (subject to certain exceptions). Covered
should be approved by the shareholders to its executives and other employees. employees include the chief executive
of the private company. A plan that has These grants would permit the employees officer and the three most highly
been adopted prior to the IPO may take to participate in the increase in value of compensated officers of the company
advantage of grandfather provisions under the company following the IPO. The (other than the chief executive officer
stock exchange listing rules, enabling it to company will need to determine the (CEO) and the chief financial officer) on
grant all of the stock reserved under the amount and the type of equity award, and the last day of the taxable year, determined
plan without seeking public shareholder may be required to disclose the aggregate in accordance with the Exchange Act’s
approval of the plan until it either runs amounts and also specific amounts with executive compensation disclosure rules.
out of shares or is materially modified. respect to its named executive officers
A plan that has been adopted and approved in the registration statement, as well Transition relief: Section 162(m) provides
by the shareholders of the company prior as a description of the plan. transition relief for a company that
to the IPO will also not require further becomes subject to Section 162(m) through
approval by shareholders after the IPO to Other plans: While not as commonly an IPO (so long as such company was not
grant employee tax-favorable “incentive adopted in connection with an IPO as previously part of an affiliated group that
stock options” pursuant to Section 422 equity incentive plans, the company included a company with common stock
of the code until the earlier of 10 years could consider adopting a stock purchase registered under the Exchange Act).
from the date of adoption or amendment plan permitting employees to purchase If compensation is paid by the
of the plan to add additional shares or stock from the company through payroll company pursuant to a plan or agreement
change eligibility for participation. deductions either at market price or at a that existed prior to the company
Pre-IPO plan adoption also provides an discount. Stock purchase plans may be becoming publicly held and was disclosed
advantage under Section 162(m) of the designed to allow for employee favorable in the IPO prospectus “in compliance with
code, as discussed below. tax treatment under Section 423 of the all applicable securities law”, the
If the company has previously granted code. Adopting a stock purchase plan compensation is not subject to the
compensation to its employees in the form prior to an IPO provides grandfather deduction limit until the earliest of the
of equity awards pursuant to exemptions benefits under stock exchange listing following:
from registration under the Securities Act rules and Section 423 of the code similar • expiration of the plan or agreement;
and Exchange Act, it should review the to those for equity incentive plans. In • material modification of the plan or
prior grants to ensure that no action is addition, if the company has a defined agreement;
required (or that any action that may be contribution plan for its employees • issuance of all employer stock and
required is taken) by the company to adjust (eg, a 401(k) plan), following the IPO, other compensation allocated under
the terms of the awards as may be the company could consider making the plan or agreement; or
necessary or appropriate. For example, if company contributions in stock or • the first shareholder meeting at which
the pre-IPO company is a limited liability adding a company stock fund as an directors are to be elected after the end
company, the awards should be amended investment option; but either action of the third calendar year following the
to refer to common stock, with any further must be very carefully reviewed prior year of the IPO.
adjustments necessary to maintain to implementation.
economic equivalency. If pre-IPO awards This transition relief also applies to
were subject to conditions common to Form S-8: The company may register any compensation received pursuant to the
private company equity (eg, a repurchase the sale of stock to employees, directors exercise of a stock option or substantial
right upon termination of employment), and certain independent contractors under vesting of restricted stock granted under
the company should consider deleting a compensatory plan on a short-form such a plan or agreement, so long as the
those provisions if they do not cease registration statement – Form S-8. Form grant occurred on or before the earliest
automatically in accordance with their S-8 incorporates by reference company of the specified events.
terms, keeping in mind potential tax and information from Exchange Act filings.
accounting issues. The company should The prospectus delivered to participants Performance-based compensation:
also carefully review its equity valuation need not be filed with the SEC and Performance-based compensation is not
methods with respect to pre-IPO grants, primarily addresses the terms of the plan. subject to the deduction limit of Section

NYSE IPO Guide 31

Preparing to go public

162(m). To qualify as performance-based, (d) Executive compensation

the compensation must be paid solely on and other arrangements
account of the attainment of one or more The company should also review its
pre-established, objective performance executive employment, severance and
goals, and the following requirements change in control agreements, if any, and
must be satisfied: consider the pros and cons of adopting or
• Certain actions are taken by a board amending those agreements in light of the
compensation committee consisting company’s changed circumstances. When
solely of two or more “outside making its decision, the company should
directors” (as defined in Section keep in mind the detailed compensation
162(m)). disclosure that will be required both in the
• The performance goal: IPO prospectus and, going forward, in its
• is established in writing by the annual proxy statements, and the intense
committee before 25% of the scrutiny that disclosure will receive. In
performance period has elapsed addition, the company should review any
and in no event later than the 90th arrangements that may be considered
day of the performance period; direct or indirect loans or other extensions
• is substantially uncertain to be of credit by it to any of its executive
achieved at the time it is officers or directors, as these must be
established; terminated prior to effectiveness of the
• is objective such that a third party registration statement filed with the SEC
having knowledge of the relevant to comply with SOX.
facts could determine whether it
is met; and
• precludes discretion to increase the
amount of compensation payable
that would otherwise be due upon
attainment of the goal.
• The material terms of the performance
goal are disclosed to, and approved by,
a majority vote of shareholders before
the compensation is paid, including
the performance goal criteria and the
maximum amount of compensation
a participant could receive during a
stated period.

Although a newly public company

will initially benefit from the IPO
transition relief, it will eventually need
its compensation committee to be
comprised of outside directors for
purposes of this performance-based
compensation exception and to conform
its plans and practices to the extent

(c) Section 16 of the Exchange Act

Upon the IPO, directors and officers (as
defined in Section 16) of the company and
10% beneficial owners of company stock
will become “Section 16 insiders” subject
to the reporting and short-swing profit
provisions of Section 16 of the Exchange
Act. For more information about Section
16 filings, see Chapter 5.4.

32 NYSE IPO Guide

The IPO process

NYSE IPO Guide 33

The IPO process

3.1 Process timeline (c) Weeks 2 to 4 • beneficial shareholder information

The process of planning and executing an Drafting: The registration statement (or detailing all current ownership of the
initial public offering (IPO) is time prospectus) that is created when going company by 5% or greater holders,
intensive and typically takes 12 to 16 weeks public is a Form S-1 filing and has the officers and executives;
from start to finish. The exact time taken dual purpose of registering the securities • related party transactions detailing
to complete an IPO can vary widely and with the SEC and acting as a marketing any material agreements in place,
depends on market conditions, the tool when selling the IPO to investors. particularly where there may be actual
complexity of the transaction, the As such, the entire syndicate is involved or perceived conflicts; and
company’s readiness prior to embarking in the Form S-1 drafting process, and the • other information:
on the IPO process and many other company relies heavily on the investment • any current or pending litigation;
factors. There is typically a large team bank to craft an appropriate marketing • taxation; and
of professionals involved in the IPO story. The document details the following: • other relevant issues of which the
process, including the company, legal • offering overview; SEC and/or investors should be
parties, auditors and underwriters. The • a description of the company, including aware.
key workstreams are drafting, diligence, its main products and services, general
other documentation (including legal and corporate developments over the past Due diligence: The purpose of due diligence
financial) and marketing. The process can few years, growth strategy and key is to ensure the accuracy, completeness and
be broken down into the following stages. strengths; truthfulness of the company’s registration
• industry overview, trends and how the statement. Due diligence is conducted by
(a) Prior to official IPO process launch company fits in; all relevant parties to ensure that all facets
Decision to go public: The company • risk factors; of the company and its marketing document
should evaluate its internal readiness, • use of proceeds for the offering; are covered.
including industry position, growth • description of the security; The investment bank will conduct
trajectory and potential use of IPO • underwriting; intensive business and financial diligence,
proceeds, to determine whether it is ready • financial statements, including: focusing primarily on the company,
to go public. • three years of audited financial operations, procedures, financials (both
statements and select financial historical and prospective), competitive
Internal controls: Once the decision has statement info for the previous position and business strategy, as well
been made to prepare for an IPO, the five years; as the management team and key board
company should select a board of directors • interim (“stub”) unaudited financial members. Within this process, the
that is appropriate to guide the company information for the current year, investment bank (including the assigned
through the IPO process, prepare audited depending on the timing of the research analyst) will have detailed
financials (with an auditor that has a IPO; and discussions with the company, customers,
national office and experience executing • capitalization table; suppliers and any other relevant parties,
IPOs), and begin establishing internal • management discussion and analysis as well as looking at documentation
controls compliant with the Sarbanes- (MD&A) of the company’s performance associated with agreements with any of
Oxley Act (SOX) and Securities and over the past three years, including: the aforementioned parties, workforce,
Exchange Commission (SEC) regulations. • analysis of historical financial creditors or other related parties.
results; The legal parties involved (both
Selection of advisors: The company should • future operational trends; company and underwriters’ counsel) will
carefully select its IPO advisors, including • successes or failures of specific conduct legal due diligence, focusing
the investment bank that will quarterback operations; primarily on verifying the company’s legal
its IPO process and its company counsel • liquidity trends; records, material contracts, any litigation
for the offering. • capital and expenditures; and compliance with local, state and
• expected sources of funding; and federal laws and regulations.
(b) Week 1 • any additional relevant information;
Organizational meeting: All key • management, governance, board Legal and other documentation: In addition
constituents of the IPO should meet to composition and committees, including: to the prospectus, the company and
discuss the offering specifics, timing, key • compensation disclosure and underwriter’s counsel will work with the
tasks, roles and responsibilities for the IPO analysis for executives and board investment bank, the company and the
process so that everyone is on the same members; and auditors to draft and complete the
page. The meeting is typically held at the • composition of audit, following documentation:
company’s headquarters or company compensation, nominating and • underwriting agreement;
counsel’s offices, with 20 to 40 people corporate governance committees; • lock-up agreements for existing
attending. The investment bank will • capital stock, including voting, pre- shareholders;
prepare an organizational book which emptive, piggyback, dividend or other • legal opinions;
details all of the aforementioned items. rights currently in place; • comfort letter; and

34 NYSE IPO Guide

The IPO process

• press releases announcing the filing, process with the SEC, which can take • The company begins publicly trading
launch and pricing of the transaction anywhere from two to six weeks, on the NYSE, rings the opening bell
depending on numerous factors. and hosts other key marketing events
Determine listing venue: Although not associated with being a public company.
required, it is advised that the company (g) Weeks 9 to 12 • Closing of the IPO, including execution
determine whether it is eligible to list • Continue filing Form S-1 amendments, and delivery of all final legal
on the NYSE or other exchange, hold responding to SEC comments, and documentation.
discussions with the exchange and reserve receiving incremental comment letters
a ticker symbol. until the SEC is comfortable with the 3.2 SEC registration
registration statement and has granted Before undertaking an IPO, the company
(d) Week 5 effectiveness. must file a registration statement with
Public filing: Form S-1 should be filed • Continue drafting legal documentation. the SEC and the SEC must declare the
publicly with the SEC. • Continue drafting the roadshow registration statement effective. The
presentation, including rehearsals with registration statement includes the
Valuation update with the investment the chief executive officer (CEO)/chief prospectus which is provided to
bank: It is prudent to have relatively financial officer (CFO). prospective investors and other material
frequent valuation updates with the • Continue valuation discussions. that is also publicly available. The
investment bank, particularly as market registration statement is the company’s
conditions change and as the company Discuss offering structure: The company, in responsibility, even if the IPO is entirely
achieves key milestones throughout the conjunction with the investment bank, secondary and the company will not sell
IPO process. This way, all parties are should determine the appropriate proceeds to any shares or receive any proceeds.
continuously aligned and the valuation raise in the IPO in order to be well capitalized The preparation of the registration
conversation immediately prior to for 18 to 24 months after the IPO. In addition, statement is a principal focus of the IPO
launching the IPO is a relatively the company should solicit interest from process. It has three different aspects:
straightforward conversation. selling shareholders on any potential shares • Regulatory – the registration
that they may want to sell as part of the IPO. statement must comply with detailed
Legal documentation: Continue drafting SEC rules governing its content and
legal documentation. Discuss marketing strategy: The company will be subject to intensive review by
and the investment bank should decide the SEC staff.
(e) Weeks 6 to 7 which regions (on a global basis) it should • Marketing – the prospectus, which is
Roadshow presentation: While the syndicate visit on the IPO roadshow, the length of part of the registration statement, is
of IPO advisors awaits comments from the the roadshow and which specific cities and the central item in the marketing of
SEC on the prospectus, it is prudent to investors to target as potential buyers of the offering, so it must effectively
begin crafting the marketing story for the the IPO. convey the arguments for investing
impending roadshow. The investment bank in the company.
will spearhead this process, while working (h) Week 13 • Liability protection – a materially
closely with the company, to create a short, • Finalize Form S-1; SEC grants misleading statement or omission
detailed PowerPoint presentation to be effectiveness on the Form S-1 can result in liability to purchasers
delivered to investors while on the road. registration statement. for the company, the underwriters
The presentation is typically 20 to 30 slides • Finalize legal documentation. and other participants, so particular
in length and details the offering, the • Finalize the roadshow presentation, care should be taken with the contents
company’s products and services, key including final roadshow presentation of the registration statement and the
selling points, industry trends and growth rehearsals. prospectus.
opportunities, competitive positioning • Finalize offering size and structure.
and financial performance. • Finalize marketing strategy. Reconciling these three aspects of the
registration statement is an important
Legal documentation: Continue drafting (i) Weeks 14 to 16 challenge for the IPO working group.
legal documentation. • File Form S-1 with price range (‘red
herring’). (a) Statutory framework
(f) Week 8 • Launch roadshow with management The IPO process can be divided into three
Initial comments on prospectus from SEC: presentations to the investment bank’s main stages based on the regulatory
The SEC takes approximately 30 days to equity sales force. framework set forth in Section 5 of the
review the registration statement, at which • Conduct eight to 12 days of investor Securities Act of 1933. The first stage is
point it will respond to company counsel meetings. the “quiet period” before the registration
with a comment letter, asking for revisions • Price the IPO. statement is filed, when no offers may be
to the document. The initial comment • Finalize the directors’ and officers’ made. The second stage is the “waiting
letter is the beginning of an iterative liability insurance program. period” between filing and effectiveness

NYSE IPO Guide 35

The IPO process

of the registration statement, when the (c) SEC review and declaration of amendment of the registration statement.
shares can be offered, but cannot yet be effectiveness The declaration of effectiveness is not
sold. Only in the third stage, after the The IPO cannot be completed until the actually required until the underwriters are
registration statement becomes effective, registration statement is effective, which ready to complete sales to investors, after
can the shares also be sold. generally requires an affirmative the marketing is complete and the IPO has
The preliminary prospectus – often declaration by the SEC staff. Before been priced. The usual practice in an IPO
called a “red herring,” because of the red providing this declaration, the staff reviews is for the registration statement to be
legend on the cover indicating its the registration statement, provides declared effective just before pricing. The
preliminary nature – is the principal comments and requires that its comments company then has up to 15 business days
instrument for marketing the shares be addressed to its satisfaction. The after effectiveness to file the final
during the waiting period. Copies of the comments are provided in written prospectus reflecting the pricing and
preliminary prospectus are distributed to comment letters. The company’s response underwriting details. Occasionally,
the sales force of the underwriting and generally takes the form of an amendment however, this final prospectus is filed in
selling syndicate members and provided to the registration statement, accompanied a “pricing amendment” just before the
to prospective buyers. It is substantially by a response letter explaining how the declaration of effectiveness.
complete, except for the key points that company has addressed the matters raised
are determined at the end of the marketing in the staff’s comment letter. (d) Contents of registration statement
period: the price, the actual proceeds, the SEC review of an IPO registration The registration statement for an IPO is
underwriting commitments and related statement is very thorough, and the process on Form S-1 for a US issuer, Form F-1 for
matters. Since the price is not yet available, of responding to the comments is a major a foreign private issuer or Form F-10 for
the preliminary prospectus includes an driver of the timing of the IPO and often certain Canadian issuers. The registration
estimated range for the final price. the content of the disclosure. The staff statement must be signed on behalf of the
The “final” prospectus, with final usually provides the first comment letter company and, in their individual capacities,
information on pricing and underwriting, within four to six weeks of filing. After by the company’s principal executive
must be filed within two business days of that, the amount of time required to reach officer or officers, its principal financial
pricing. It is often delivered to investors effectiveness can vary widely, depending officer and its controller or principal
as well, though this is no longer required. on the nature of the comments and the accounting officer. It must also be signed
work required to resolve them. Difficult by a majority of the board of directors,
(b) Gun jumping accounting comments can take months to though usually every director signs.
As this summary shows, the law regulates resolve and can substantially change the The principal sections of the
offers as well as sales. During the quiet information content of the prospectus. registration statement are a simple cover
period, no offers may be made, whether In some IPOs, it may be useful to raise page, the prospectus (called Part I in the
written or oral. During the waiting period, issues with the SEC staff before the first SEC’s forms) and Part II. The contents
no written offers may be made except by filing by requesting a pre-filing conference. of the prospectus are discussed in
means of the preliminary prospectus. This is most common where there is a Chapter 3.3.
Violations of the restrictions on offers question of accounting or financial Part II contains additional information
during each stage are sometimes referred presentation that will shape the financial that must be filed with the SEC and made
to as “gun jumping” and can result in the statements, or where an accommodation public, but need not be provided to
SEC imposing a delay or “cooling-off under the SEC’s rules will be needed. The prospective purchasers. It includes certain
period” to allow the effects of the SEC staff is willing to provide this kind of required undertakings on the part of the
impermissible offer to dissipate. guidance in advance, subject to reviewing company that are required to implement
These rules can take an IPO participant the implementation in the filing. Often a SEC policies, signatures, consents from
by surprise, particularly because of the pre-filing conference leads to an exchange auditors, counsel and other experts, and
broad definitions given to the terms of letters to document the precise contours some additional disclosures required by
“offer” and “written.” For example, under of the staff’s guidance. the SEC’s forms.
some circumstances a discussion of the The first filing of the registration The most important element of Part II
company’s business prospects could be statement in an IPO is typically a “quiet is the requirement to file exhibits. These
construed as an offer and a discussion filing,” meaning that the preliminary include charter documents, the
with a journalist who plans to publish prospectus, although publicly available, underwriting agreement, employee benefit
could be construed as a written offer. is not actually sent to investors. It may plans, a list of subsidiaries and opinions of
Because the terms are so broad, offering omit the price range, but if so it must be counsel. They also include the company’s
participants must be careful to distinguish amended to include a price range before material agreements, which can include a
between permissible communications and the marketing can begin. Only after the wide range of agreements relating to, for
illegal offers, and must not engage in SEC comment process is complete (or example, employment arrangements, joint
communications and activities that might nearly so) does the marketing of the ventures, licenses, financing, acquisitions
be viewed as impermissibly affecting the offering begin, using the preliminary and arrangements with suppliers or
market for the securities to be offered. prospectus included in the most recent customers.

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(e) Filing and confidentiality is filed. Registration fees are a major source this background, there is some limited
The company must file the registration of the agency’s funding and are established scope for innovations in organization or
statement electronically using the SEC’s by the SEC based on annual revenue targets. presentation based on the particular
electronic document system, EDGAR. In They are based on the aggregate offering circumstances or investment thesis of
order to do so, the company must have a price of the securities registered. For the the company.
central index key number, which is an SEC’s 2009-2010 fiscal year, they stood at The balance of this section discusses
account number obtained from the SEC $71.30 per million dollars, so for a $100 some of the major elements of the
for filing purposes. The financial printer million IPO they would amount to $7,130. prospectus, but space does not permit
will typically handle the mechanics of The fee must accompany the initial an exhaustive review.
filing. Although documents are filed filing, but since the price and size of the
electronically, paper “courtesy copies” are offering are not yet known, the amount is Prospectus drafting style: Under the SEC’s
usually provided to the SEC reviewing staff. based on good-faith estimates. The SEC rules, all information in a prospectus must
Once it has been filed, the registration will not refund fees if the total dollar value be presented “in a clear, concise and
statement is available to the public, as is actually offered falls short of the amount understandable manner,” and the cover
each subsequent amendment. registered, so the company should take care page, back page, summary section and risk
Correspondence with the SEC staff not to overestimate. On the other hand, if factors section must follow “plain English
concerning the registration statement is the total dollar value actually offered principles.” In its rules and elsewhere, the
also filed through EDGAR, but it is not exceeds the amount on which fees were SEC has fleshed out what these
made publicly available immediately. paid, the company must amend the requirements mean, including such
Instead, the SEC makes it all publicly registration statement and pay additional features of good expository writing as
available a short time – generally 45 days fees. It is not unusual in an IPO to pay short sentences; definite, concrete,
– after the IPO. additional fees during the process as the everyday language; use of the active voice;
The SEC will not ordinarily review an estimated dollar value is refined, but it is no legal jargon; no double negatives; and
IPO registration statement until it has important not to be surprised at the last tabular and bullet point presentations.
been filed. As a result, the back and forth minute by the need to pay additional fees. More generally, prospectus drafting
between the company and the SEC is a should avoid bullish rhetoric and “puffery”
matter of public record. There is, however, 3.3 Prospectus by using neutral language, being balanced
a longstanding exception for foreign and complete, and avoiding any factual
private issuers, under which the SEC staff (a) Required disclosures statements that cannot be substantiated.
will review a draft registration statement The prospectus constitutes Part I of the An overly cautious approach is not
and complete the comment process on a registration statement used to register an necessarily desirable either, and wholesale
confidential basis before the first filing. IPO with the SEC and is also the central repetition of risks and qualifications is
The public nature of SEC filings can document used to market the IPO to unnecessary. Discussions of the business
present problems for the company, because prospective investors. It contains disclosure outlook, or of the company’s future
sometimes the exhibits or the comment about the company’s business, operations, performance, must be handled with
correspondence includes material that the financial condition, management and other particular care. These kinds of “forward-
company would prefer to keep confidential. issues. The financial and business looking statements” are usually necessary,
If public disclosure would result in information included in the prospectus is but they are limited in scope to limit
competitive harm to the company, it may very similar in scope to what is included potential disclosure liability. They must be
submit a request to the SEC staff for in an annual report on Form 10-K for a US carefully worded, so that descriptions of
confidential treatment for portions of issuer or Form 20-F for a foreign private the company’s beliefs and expectations
material contracts included as exhibits to issuer. However, the level of detail is often will not be mistaken for statements of fact,
the registration statement. The grounds much greater in an IPO prospectus than in and they are accompanied by discussions
for confidential treatment are narrow, the periodic reports of established public of the factors that could cause actual
however, and may not cover everything the companies. outcomes to differ from those anticipated.
company considers sensitive. The SEC An IPO prospectus must meet all
staff processes confidential treatment requirements of the applicable SEC form Summary “box”: The prospectus must
requests filed with IPOs concurrently with (Form S-1 for a US issuer, Form F-1 for a include a summary. This is typically
the review of the registration statement. foreign private issuer), but it is presented presented with a border around the
All issues must be resolved and the as a freestanding document and does not margins of each page and is consequently
confidential treatment request must be include the text of the form itself or even often referred to simply as the “box.” It
complete before the acceleration of follow the order of items in the form. usually describes the offering and briefly
effectiveness of the registration statement. Instead, the organization of an IPO describes the company, with a focus on its
prospectus is typically based on a most distinctive features. The summary
(f) Filing fees combination of the SEC’s form, the description of the company is usually
The company must pay a filing fee to the expectations of the SEC staff and market treated as the most important part of the
SEC at the time the registration statement customs developed in prior IPOs. Against prospectus from a marketing point of view.

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Financial information: The prospectus of what other comparable companies have there must be a detailed comparative
must include audited financial statements covered. The forms specifically discussion of results for each of the
and, depending on the age of the audited contemplate the following topics: past three years and any subsequent
financial statements, unaudited interim • principal products produced and interim period. This discussion must
financial statements. It must also include services rendered, and methods of zero in on the major drivers of financial
selected financial information covering five distribution; performance and on the factors that
full years, if the company has been in • sources and availability of raw might cause future results to differ
existence that long. These requirements materials; from those in past periods.
are discussed in detail in Chapter 2.3. • intellectual property; • Discussion of liquidity and capital
A typical IPO prospectus provides the • dependence on single customers or resources – there must be a full
most important financial information suppliers; discussion of the company’s liquidity,
three times. In addition to the financial • competitive conditions; its funding requirements and its
statements themselves, there is a required • material effects of the regulatory anticipated sources of funds. This
section providing selected financial environment; discussion must focus on the
information going back five years and there • research and development company’s ongoing requirements
is also a summary in the summary box. In expenditures; and more than on its past performance.
the selected financial information and the • number of employees.
summary, information from the financial In addition, MD&A must address
statements is often accompanied by other Management’s discussion and analysis: several other specifically mandated
key statistics about the company’s Management’s discussion and analysis disclosures, including a table of contractual
operations or performance. (MD&A) is among the most important obligations and a discussion of any off-
The prospectus must also include a disclosures in the prospectus. It takes its balance sheet arrangements.
capitalization table. This summarizes the name from the beginning of the
company’s capitalization as of a recent date cumbersome title used in the SEC’s rules, Other matters: The following additional
and shows how the capital structure will be “Management’s Discussion and Analysis topics concerning the company must also
affected by the IPO and the application of of Financial Condition and Results of be addressed in the prospectus:
the IPO proceeds. Operations;” the corresponding item for a • dividend policy;
foreign private issuer is called “Operating • material legal proceedings;
Risk factors: A prospectus must set forth and Financial Review and Prospects,” but • directors, senior management and
under the caption “Risk factors,” right is still referred to as MD&A. advisors;
after the summary box, the most MD&A serves to provide investors with • related party transactions (see Chapter
significant factors that make the offering the information necessary to understand 5.4);
speculative or risky. Some established the company’s financial condition, changes • terms of the shares being offered; and
issuers take the position that there are no in financial condition and results of • principal property.
risk factors, but an IPO prospectus operations. Complementing the financial
invariably includes this section. It should statements, the MD&A explains the The prospectus will include a description
include a discussion of the most company’s performance and its financing of the offering, including the proposed use
significant risk factors for the company, to investors “as seen through the eyes of of proceeds, dilution resulting from the
not an exhaustive list of every conceivable management” (as the SEC has put it). In offering, underwriting arrangements and
risk. The discussion should be concise and addition to discussing performance in past selling shareholders, if any.
well organized, with headings that periods, the MD&A must address any The requirements of the applicable SEC
adequately describe each risk described, known ways in which future performance form do not limit what should be included
and should avoid boilerplate. could differ and identify trends and in a prospectus. In addition to the
uncertainties that may affect the company information expressly required to be
Business of the company: The business going forward. It should discuss each included, a general rule under the Securities
section of the prospectus sets forth a segment separately if material to an Act requires the company to include such
straightforward discussion of the understanding of the business as a whole. further material information, if any, as may
company’s business and operations. Three elements are the core of every be necessary to make the required
This section usually begins with a brief MD&A: statements, in the light of the circumstances
overview and continues with a • Overview – there should be a synthetic under which they are made, not misleading.
presentation of the company’s distinctive discussion of the most important
features, often described as its strengths issues affecting the company’s past Industry guides: The SEC requires special
and its strategy. It then goes on to describe and future economic performance. disclosures from companies in certain
the business in full. The SEC’s forms This discussion is ordinarily at the industry sectors, as set forth in five
provide broad guidance on how to do this, beginning, and it varies widely in industry guides. In particular, banks and
but most of the content of the discussion scope and breadth. bank holding companies, casualty insurers
is based on common sense and on a review • Discussion of results of operations – and mining companies must supply

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enhanced disclosure subject to the A review of comparable disclosure and using the same financial printer for future
requirements of the guides. Compiling the issues raised in comment letters can help needs is that it reduces the time required
information necessary to comply with the identify the significant disclosure issues for data collection and ensures that former
industry guides can be a substantial of relevance to the company’s offering and project knowledge is properly applied.
undertaking requiring specialized expertise may provide a roadmap for how best to
address these issues. Judicious borrowing (c) Due diligence investigation
(b) Drafting process from comparable sources provides a helpful The process of verifying that the
Drafting logistics: Primary responsibility shortcut in what can otherwise be an information in the prospectus and the
for drafting the prospectus, other than the arduous process. registration statement is materially
financial statements, usually falls to the complete and accurate is broadly referred
company’s counsel, working with company Financial printer: A financial printer to as “due diligence.” While the guiding
personnel. Underwriters and their counsel should be selected early in the IPO purpose is to limit the risk of liability,
usually draft the plan of distribution, planning stages. Drafts of the registration the accuracy and completeness of the
which describes contractual and regulatory statement will undergo several revisions prospectus are essential goals for other
aspects of the IPO. Sometimes over the course of the due diligence period reasons as well. For the company and its
underwriters and their counsel also prepare and as comments from the SEC staff are personnel, they provide the foundation
first drafts of sections that will be key incorporated into the document. At the for applying best disclosure practices
to the marketing effort, such as the beginning stages of the process, the and building the confidence of investors.
description of the company’s strengths and company’s counsel will take the lead in For underwriters, a robust due diligence
strategy that leads off the summary box. reflecting any such changes in the exercise is required under a formal internal
The core working group reviews, registration statement. However, as the approval or commitments process designed
comments and participates in drafting registration statement nears completion, to protect against reputational risks and to
sessions that include representatives of the it is the role of the financial printer to: meet other institutional goals. An
company and its auditors, the company’s • work with the company to ensure that underwriting firm has a vital reputational
counsel, the underwriters and their legal the registration statement is formatted interest in the soundness of the company’s
counsel. A foreign private issuer may in the way required by the SEC and any business plan and a disclosure document
involve both local counsel and US other regulatory institutions; that completely and accurately describes
securities counsel. These drafting sessions • process requested changes to the the risks associated with that plan. Similar
are often conducted at in-person meetings, registration statement until the final reputational concerns apply to directors
though they can also be held by draft; and shareholders. In addition, due
videoconference or conference call. In • prepare EDGAR-suitable versions of diligence can help identify business issues
addition to advancing the draft, the drafting documents that need to be submitted that need to be addressed, such as
sessions serve as a core component of the electronically to the SEC on the necessary third-party consents and waivers
due diligence process by allowing the core company’s behalf; and for the transaction.
working group to go meticulously through • print and distribute hard copies of Although these additional goals are
all content of the prospectus the preliminary prospectus and final important, the due diligence process is
After the bulk of the due diligence prospectus. driven by the risk of liability. The parties
has been conducted, the core working that may be liable if there are material
group distributes an advance draft of the In choosing a financial printer, several misstatements and omissions in the
registration statement to all directors factors should be considered. An IPO may prospectus and registration statement
and key officers and, depending on the require the participation of constituents (including documents incorporated by
circumstances, also to selling shareholders in multiple countries and time zones. The reference) include the company, its
and other key shareholders. The financial printer should have a sufficiently directors, the officers who sign the
underwriters should satisfy themselves broad and secure distribution network, and registration statement, the company’s
that the company has established adequate equipment that is accessible 24 hours a auditors, any selling shareholders and the
procedures for collecting and evaluating day. Customer service should be reliable underwriters. Controlling shareholders
comments on the document from those and capable of supporting a deal of may also be liable. A further discussion
persons to whom it has been furnished. international scope. The financial printer of the risk of liability facing directors
This is particularly important for MD&A should make use of technology tools to and officers is set out in Chapter 6.
and for any forward-looking statements that streamline delivery of the project, which The company itself faces strict liability,
are included in the registration statement. may require making use of best practices but underwriters, directors and officers
‘Benchmarking’ is an important aspect in manufacturing concepts, analytical may assert a defense if they performed a
of the drafting process. It involves techniques, process management and reasonable investigation and believed the
determining what comparable issuers standardized procedures. Following the registration statement and prospectus were
disclose in their prospectuses and periodic IPO, the financial printer should be materially accurate and complete. This
reports, and what issues the SEC staff has equipped to handle annual compliance and defense is often referred to as the “due
raised in comment letters to such issuers. future transaction needs. The benefit of diligence defense.” The applicable liability

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The IPO process

standards – and some subtleties applicable management. Specific questions about the • materials relating to intellectual
to the liability of particular IPO business should be asked. Moreover, property, including licenses,
participants – are discussed more additional information may be gleaned patents and trademarks;
specifically in Chapter 6.1. and inconsistencies identified by asking • materials relating to pending
In practice, the due diligence process different members of management the litigation, including counsel’s
requires an organized approach to verifying same questions. Back-up data for industry litigation letters to auditors;
the information in the prospectus and data and statistics should also be requested • auditors’ letters to management;
registration statement and to asking and reviewed. Specialized consultants may • D&O questionnaires; and
questions about the company. Key general be called upon to assist in the investigation • other documents that may further
questions to explore at the beginning of where the nature of the business or a the legal due diligence
the process include the following: particular issue warrants it. investigation.
• What are the strengths and weaknesses Although the investment bankers and
of the company’s business plan? Is its their staff will conduct the lion’s share of Corporate governance due diligence:
management capable of executing the the financial due diligence, it is important Underwriters and their counsel typically
plan? for the lawyers to be actively involved in review the company’s corporate
• What internal or external events or the process, to understand the financial governance policies and SOX compliance
trends could jeopardize success? status of the company and identify programs. Issues to be considered may
• What is there that, a year or two from possible problems presented in the include:
now, with the benefit of hindsight, the financial statements. • the company’s disclosure controls and
company might wish it had disclosed? procedures and internal controls;
Legal due diligence: Underwriters’ counsel • the company’s code of ethics,
Financial and business due diligence: will generally take the lead in conducting exemptions to the code and past
Financial and business due diligence legal due diligence by preparing a document waivers;
involves extensive review and discussion request list that exhaustively identifies • the independence of the board of
of the company’s historical financial materials they wish to review. During the directors;
information, operations, current business, preparation process, it may be helpful to • the company’s policy on handling
business plans, projections and other data. review document request lists for whistleblower complaints;
It is generally carried out through: companies in the same industry or from • the company’s document retention
• formal due diligence sessions with key the same country. The list should be used policy; and
members of management; as a checklist and aid to organizing the due • non-audit services provided by the
• informal meetings with key members diligence process, rather than an inflexible company’s independent auditors.
of management; set of bureaucratic requirements or limits
• drafting sessions; for the due diligence investigation. Legal opinion and negative comfort letter:
• facility visits; Legal due diligence will often involve It is typically a condition to closing the
• preparation and review of forecasts; the following: IPO that counsel for the company and the
• “sensitivity” analysis; • discussions with company personnel underwriters provide both a legal opinion
• discussions with key customers, about the company’s legal affairs; and a negative comfort letter, or Rule
suppliers, creditors and investors; • closing documents, including officer 10b-5 letter. The due diligence
• review of securities analyst reports; certificates, public authority investigation provides counsel with the
• review of industry information and certificates such as certified charters basis for these letters and the letters in
disclosure regarding comparable and good standing certificates; and turn form part of the due diligence process
companies (eg, SEC filings and annual • document review by the company’s on which offering participants rely.
reports of other companies in the same and underwriters’ counsel, including: Opinions usually cover such matters as
industry, research reports on industry • charter documents of the company observance of corporate formalities,
and competitors, trade publications); and its material subsidiaries; existence of the company and material
• meetings with auditors and auditor • minutes of meetings of subsidiaries, and matters relating to the
comfort letters; shareholders, the board of directors securities themselves. They may also
• third-party reports, where appropriate; and key committees, and materials address compliance with material
and prepared for board and committee contracts, among many other matters.
• involvement of specialized counsel, meetings; The negative comfort letter generally
where appropriate (eg, issues of • material contracts, including says that nothing has come to the
intellectual property, mining rights or shareholders’ agreements and joint attention of counsel that would cause
regulatory matters). venture agreements, and forms of counsel to believe that the registration
contracts; statement or prospectus is false or
In carrying out business due diligence, • filings, correspondence and other misleading in any material respect.
underwriters and their counsel should communications with supervisory
conduct extensive interviews with and regulatory authorities; Identifying potential problems: The due

40 NYSE IPO Guide

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diligence process also aims to identify confidentiality is paramount, as is the is required and users can quickly find
potential impediments to the transaction. provider’s ability to understand the documents.
Examples include contractual rights of transactional business environment • Expanded rights management – this
another party that the IPO could trigger or and assign project managers that are should be robust enough that the data
modify, because it results in a change in the educated and experienced in the room owner can administer the site for
company’s share ownership. Provisions of specific transaction at hand. those seeking complete control.
this kind may exist in financing • Global production facilities – choosing
documentation, agreements with or among a provider with document-scanning 3.4 Underwriting, marketing and sale
the company’s shareholders (eg, pre-emptive facilities in cities around the world will
or registration rights), or other important ensure that accelerated document (a) Underwriting
contracts or governmental authorizations. capture is quick and efficient. Advising the company: There are many
The process should also identify risks to • User support – it should be possible to complexities in an IPO process, including:
future financial performance or competitive make changes and address questions • IPO sizing, including primary versus
position and limitations on operational or immediately, for all users and in secondary component;
financial flexibility. Examples include multiple languages. • leverage levels and overall capitalization
upcoming expiration or renewal dates, or • Security – security processes on structure post-IPO;
early termination provisions, in customer or application, staff and infrastructure, • co-manager selection;
supplier contracts, government SAS 70 Type II, multi-location data • comparable company selection;
authorizations, or IP licenses. hosting with zero-downtime network • valuation;
guarantee, database replication at • exchange selection;
Paper data room v virtual data room: A multiple locations and a core • roadshow presentation and investment
secure repository for the documents to be competency in handling sensitive thesis development; and
reviewed during the due diligence process is financial and business information are • marketing strategy and roadshow
critical. The company’s legal firm may host a critical. (A SAS 70 Type II service logistics.
“paper data room.” It is in this room or auditor’s report includes the service
rooms that hard copies of proprietary auditor’s opinion on the fairness of the Shaping the investment thesis: Perhaps the
business documents and financial data are presentation of the service most important contribution that the
made available for inspection. The paper organization’s description of controls bookrunner(s) make during the IPO
data room has obvious limitations, given that had been placed in operation, the process is helping the company shape its
that participants may be spread across suitability of the design of the controls investment thesis. From the Form S-1 that
several cities, states or countries. Not only is to achieve the specified control is filed with the SEC to the roadshow
inspection limited to the hours of operation objectives, and the service auditor’s presentation that is delivered to investors,
of the host, but review of documents for opinion on whether the specific the marketing message that the company
out-of-town participants is inconvenient. controls were operating effectively uses during the IPO is critical to its initial
The “virtual data room” provides an during the period under review.) success as a public company. Through
excellent solution to the challenges • Rapid deployment – top-tier providers intensive diligence and drafting sessions,
presented by a traditional paper data room. should be able to provide the tools to the bookrunner(s) will become well versed
Virtual data rooms can offer secure, web- create indexes in minutes, not days, in the company’s strategy and key selling
based access documents, particularly in and enable document review in real points, and will assist the company in
convenient PDF format, and parallel access time as documents are captured, effectively communicating those messages
for each of the review groups. Moreover, processed and posted. to investors. The Form S-1 and the
the use of a virtual data room eliminates • Simplified user rights – management roadshow presentation are the two most
the need for travel and increases of user rights should allow for easy important marketing documents, allowing
efficiencies by making documents available restriction and access functionality investors to quickly absorb the equity story
around the clock. quickly and easily. and evaluate their investment decision.
The following points can be important • Data management – multiple file
factors in selecting a virtual data room uploads should be possible, to save time. Marketing the transaction: While
provider: • Collaboration tools – tools such as developing the marketing materials, the
• Established track record – the provider email alerts, document notes and Q&A bookrunner(s) will also develop a cohesive
should have proven technology and a capabilities enhance the collaborative investor marketing strategy for the
strong customer-focused background. efforts of reviewer groups. company. In order to maximize the success
• Leading technology – the ideal • Site customization – there should be of the offering, the bookrunner(s) will
solution should integrate leading enough flexibility to customize the site determine the most important regions to
technology, support industry standards to the owner’s specific requirements visit with the goal of reaching the largest
and work with globally accepted data and to integrate corporate branding. number of high-quality investors which
formats. • Intuitive interface – this should be will become meaningful long-term
• Project management expertise – simple enough that next to no training shareholders for the company.

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The IPO process

Developing the price: Prior to being concerns, developing the roadshow and on the size of the IPO, the scope of the
mandated and throughout the IPO marketing strategy, and ultimately business and the desires of the
preparation process, the bookrunner(s) will assisting in a pricing recommendation. management team, among other things.
keep the company apprised of market • The sales force act as the front line of The roadshow typically consists of
conditions and trading valuations of its the investment bank in dealing with some combination of the following
key comparables, as well as the subsequent investors, calling clients in order to cities/regions globally:
implications for the proposed company’s schedule meetings, soliciting feedback • New York;
IPO valuation. The bookrunner(s) will use on the transaction (both qualitative and • Boston;
a combination of comparable companies’ quantitative), and ultimately entering • Mid-Atlantic (Philadelphia, Baltimore);
values, broad market conditions and recent orders. They work closely with the • Mid-West (Chicago, Minneapolis,
IPO value to determine the appropriate traders in order to determine supply Kansas City, Denver);
value for the company. Once the appropriate and demand and execute trades for the • Texas (Dallas, Houston);
equity value range is determined, the investors. • West Coast (San Francisco, Los
bookrunner(s) will advise whether the Angeles, Salt Lake City, Seattle);
company should execute a reverse stock Role of the co-managers: The co-managers • London;
split to come up with an IPO price range, on an IPO are typically significantly less • Frankfurt/Milan; and
which typically falls in the high teens. involved in the day-to-day advisory role for • Hong Kong/Singapore.
which the bookrunner(s) are responsible.
Key players in the investment bank: They are, however, involved in the majority A typical roadshow day involves:
• The investment banking coverage team (if not all) of the diligence conducted. The • five to seven one-on-one meetings
consists of industry experts who co-managers’ research analysts will also and/or conference calls;
typically own the client relationship. take part in all analyst diligence that is • a group breakfast and/or lunch; and
This team will be the key point of conducted. The primary role of the co- • travel to the next day’s city
contact for the company throughout managers is to underwrite additional shares
its lifecycle for any investment banking in the offering, provide additional research Each investor meeting typically lasts
advice or assistance it may need, coverage post the IPO and assist in market approximately 45 minutes, and can take the
including on the IPO, mergers and making once the stock is public. format of either a formal management
acquisitions, debt, capital structure presentation of the roadshow slides with
and many other issues. As such, the (b) Roadshow subsequent Q&A or simply informal Q&A,
team will be or become experts on the The roadshow is the pivotal portion of depending on the investor’s familiarity
company, its needs, its strengths and the IPO process, where the company with the prospectus and/or the roadshow
areas for development, as well as its (accompanied by representatives from the slides. Investors have access to the
overall vision and strategy. The bookrunner(s)) conducts a series of one-on- management presentation (audio and
coverage team will act as a liaison one and group meetings with investors that video), as well as the roadshow slides, via
with the company and the equity will potentially purchase the shares being NetRoadshow, a system by which the
capital markets professionals, who offered in the IPO. Several weeks prior to investment bank makes these documents
will be the captains of the IPO process, launching the roadshow, the bookrunner(s) available to relevant investors utilizing a
as well as any subsequent equity will work with the company to determine password-protected system. It is also
issuance that is desired. the length and scope of the roadshow, and required by the SEC to make similar
• The equity capital markets team sits to identify specific investor targets. information available to retail investors via
between the investment banking team Once the prospectus has been filed retailroadshow.com, where only the
and the syndicate, sales and trading, with the price range on the cover, the management slides are available. Both
and research functions, acting as a roadshow typically launches with a systems make the management slides
liaison between the private and public management presentation to the available during the marketing period only;
sides. This team advises the company bookrunner(s) sales force. The upon pricing, all materials are taken down
on all of the execution-related bookrunner(s) will also create an internal and no longer accessible by any parties.
decisions, liaises with research to sales force memo that will be used by the After each investor meeting, the sales force
collect public-side feedback, and sales team. The memo is used as a “cheat person responsible for covering each
coordinates with the sales and trading sheet” by the salesperson when speaking respective account will follow up with the
functions on market and investor color. to investors and gives him or her sufficient investor to get feedback on the meeting,
• Within most equity capital markets background to answer general questions the company, modeling/valuation and
groups lies a syndicate function, which before moving on to more in-depth whether it is inclined to place an order.
is the main point of contact during the questions that will require the assistance
roadshow. The syndicate coordinates of the research analyst. (c) Book-building process
with sales in entering investor orders The bookrunner(s) handle all roadshow The goal of the investment bank is to
into the book, speaking directly with logistics for the company. The roadshow convert accounts into the order book as
investors regarding questions or typically lasts eight to 12 days, depending early as possible. Europe is generally the

42 NYSE IPO Guide

The IPO process

first region met during a roadshow and bank will look to allocate is known as to the market open the day after pricing
European accounts can come into the order allocable demand. and allocations are communicated to each
book early in the process. When the book of the individual investors.
begins to build, investors will fall into two (d) Pricing, trading and closing On the first trading day, the NYSE
camps: those without a price limit (“market The pricing meeting which takes place on will coordinate a time at which the newly
order”) and those that have scaled orders at the last day of the roadshow typically public stock will officially open. The
various prices. For example, if the IPO filing includes the company and key selling designated market maker is responsible for
range is $16 to $18 per share and Investor A shareholders, as well as the investment opening the stock at that time. In addition,
has a market order of 1 million shares, the bank. In advance of the offering, the board the stabilization agent is the investment
order stands at 1 million shares at $16, $17, establishes a pricing committee to formally bank chosen to open the trading in the
$18 and potentially even above the filing approve the offering. When pricing a deal, stock post the offering and to provide
range. A scaled order by Investor B, in numerous factors that occurred over the support to the stock price. The market
contrast, would indicate 1 million shares at roadshow are taken into account. Market will look to the stabilization agent as the
$16, 750,000 shares at $17 and 500,000 conditions during the roadshow and the syndicate bid in trading support for the
shares at $18, for example. The goal of the performance of the overall market and the offering. The stabilization agent may
investment bank is to get as many market company’s peers will affect how much commit capital to provide liquidity in the
orders as possible in order to maximize demand and what price investors will come common stock market if the stock or
price for the company, while still balancing in at. market comes under pressure immediately
appropriate value for the investors and Additionally, new issuance activity after the offering, and can also utilize the
achieving a first day trading “performance” and the performance of recent precedent greenshoe option granted by the company
of approximately 15%. Retail orders are also transactions will have an overall effect on to stabilize the offering in the aftermarket.
important to the order book, but typically the company’s IPO price, either positively The greenshoe provides the stabilization
the retail component is not relevant to the or negatively. After reviewing the roadshow agent with immediate capacity to buy in
overall pricing mechanics as retail investors summary – which includes an overview of the secondary market up to 15% of the
do not drive pricing. accounts with which management met, the shares offered if the stock price should
Key points are emphasized to investors hit ratio/success rate from these meetings fall below the offer price, thus helping to
throughout the roadshow in order to and key feedback themes, as well as gross stabilize the price in the aftermarket.
indicate the strength of the order book demand, allocable demand and price The IPO will officially close three
and therefore the success of the IPO. Key sensitivity in the order book – the days after the first trading day of the
terms include “level of subscription” or investment bank will communicate the stock (T+3). At that point, all of the funds
“subscription rate,” which details the price/share recommendation to the will be wired, the stock will officially be
number of shares in the order book versus company and give the pricing committee transferred, the legal documentation will
the number of shares being offered. When time to deliberate on the recommendation. become official and the IPO will officially
the offering is oversubscribed, investors The ultimate goal of the pricing be closed.
will know that the demand for the offering recommendation is to achieve the best
is high and that their order will likely be possible price for the company while
cut back. The amount of price sensitivity allocating to the highest-quality
in the book is another key benchmark. shareholder base and ensuring that the
Another key metric of success for the investor base is achieving attractive
company is the “hit ratio,” which is the valuation and will receive an IPO first day
percentage of investors with which the trading performance on the first and
company held a roadshow meeting that subsequent days of trading. It is in the best
converted into orders. The goal of the interests of the company, key beneficial
company and the investment bank is to shareholders and the investment bank that
achieve as high a hit ratio as possible, the stock trades well in the aftermarket.
indicating that the management team has Once the company and its pricing
successfully told a compelling story to committee have formally agreed on an IPO
investors on the road. price with the investment bank, the
For most IPOs, the majority of orders investment bank begins the allocation
will come in the last two to three days of process overnight, determining exactly
the roadshow. On pricing day, the which accounts to allocate stock to and how
investment bank will “scrub” the demand much. The goal of the allocation process is
to identify which orders are “real” versus to create a high-quality, long-term focused
those that have been placed to “game” the shareholder base for the company. Once
allocation process. The overall demand in allocations to each account have been
the order book is known as gross demand, agreed upon by the investment bank and
while the actual shares that the investment the company, the syndicate “breaks” prior

NYSE IPO Guide 43

44 NYSE IPO Guide

NYSE IPO Guide 45


4.1 Investors, analysts and employees outcomes. Furthermore, Regulation F-D These messages should build on those
(Fair Disclosure) provides that if developed in the pre-IPO phase to dispel
(a) Communications with the market management discloses material non-public any lingering concerns or misperceptions
While an initial public offering (IPO) information to some investors, it must about the company’s positioning in the
marks a significant milestone in a make the same information available to market, its performance within the current
company’s history, it is only the beginning all investors. In practice, this requires economic climate and the issues
of an ongoing process of building value for management to provide access to material surrounding the industry as a whole.
its shareholders. information simultaneously to all In developing this message platform, it
The company’s operating performance investors, necessitating careful attention is imperative that the company accurately
will be an important driver of value to the timing, content and delivery understands investors’ perceptions.
creation. However, financial markets in their mechanism of each communication. Specifically, the company should conduct
role as a discounting mechanism assign One key example of how Regulation research that:
value to the company’s future earnings F-D affects financial communications is • ascertains the investment community’s
and cash flows supported by, among other the decision by many companies to instate current views of the company,
things, intangible factors such as investors’ an earnings “quiet period” in the weeks management team, strategy and
confidence in the business model, their leading up to the reporting date, during prospects;
belief in management’s ability to execute which they will not meet with or talk to • identifies areas of potential
the stated strategy and their perceptions of investors. This quiet period mitigates the misunderstanding of the company’s
the company’s credibility, transparency and risk of inadvertently communicating positioning/prospects; and
corporate governance structure. All these sensitive or non-public information – • compares its own communications
intangibles are greatly influenced by how through body language, tone of voice or efforts with those of the peer group to
the company communicates to the the inability to respond directly to a identify areas that may require further
financial community. question – at the awkward time when explanation going forward.
From management’s perspective, the the company’s results are known by
goals of investor communications are to: management, but not yet reported publicly. Based on these findings, the company
• optimize the value of the company’s When companies have reported results can tailor messages – and, in some cases,
equity (or conversely, minimize the and are ready to resume meeting with the actual financial disclosures – to move
cost of equity capital) over time within investors, they generally not only file the perceptions closer to the desired state.
the context of both the company’s earnings information with the Securities Once refined, key messages should
performance and macro-economic and Exchange Commission (SEC), but also permeate all communications targeted
and industry trends; and post it to their investor relations websites to investors.
• protect management’s credibility and to ensure equal access for all interested
reputation within the financial parties. If an inadvertent disclosure of Disclosure guidelines and processes: As
community. material non-public information does the visibility and sponsorship of the
occur, it is important for the company to company increase, the volume of incoming
Since investors have no role in the make that information public promptly. inquiries and demands on management
operations of the company, they rely on Regulation F-D defines “promptly” to time and attention will likely escalate. It is
management to protect their investment mean as soon as reasonably practicable, but important to understand that all audiences
and keep them informed on the status of in no event after the later of 24 hours or are interconnected and information flows
the business. This requires a commitment the commencement of the next day of freely among them, and that investors may
of management to engage the financial trading. (Regulation F-D is discussed act on information or perceptions that
community in a credible, honest dialogue. further in Chapter 4.1(b).) exist in any domain. This argues for close
coordination between all people charged
Regulatory parameters for communicating Developing a strong platform: Essentially, with speaking to the public.
to investors: Communications strategies the company’s shareholders are placing a To ensure consistency of message and
must accommodate not only the bet on its future success. Accordingly, ideal protect against improper disclosure, it is
information that must be filed with the communications provide a roadmap to the strongly recommended that management
Securities and Exchange Commission future and then maintain an ongoing flow establish at the very beginning a formal
(SEC) under securities regulations, but also of information about the company’s disclosure policy and protocols to manage
broader communications “best practices” progress in achieving its goals. Developing incoming inquiries about financial and
that can be more complex and demanding. and maintaining a core message platform investment topics, as well as the flow of
In particular, management must determine that clearly communicates the company’s outgoing information. This policy should
whether a development or change in goals, market opportunities and growth include guidelines on when the company
outlook is material and must be reported; strategies is critical for ensuring that the will speak to investors, what information
this determination can be difficult when value drivers are well articulated and is allowed to be communicated and which
there is uncertainty about the future or a consistently delivered across its members of management or the investor
wide range of variability around potential communication vehicles and channels. relations team are authorized to speak for

46 NYSE IPO Guide


the company. All employees should be for conveying the company’s investment team and company facilities.
made aware of these guidelines, and of and business propositions and maintaining Companies are increasingly using
their obligations to maintain the an ongoing dialogue with investors: webcasts to expand the live and on-
confidentiality of material non-public • Quarterly earnings – reporting demand global attendance at such
information. The guidelines should be earnings to investors is perhaps the events.
reviewed regularly. most important medium for providing Regardless of the format, these
Importantly, disclosure policies should commentary about the business to the meetings provide valuable
be designed not only to manage the flow of financial community. The typical opportunities to contextualize financial
information, but also to ensure its quality, earnings process includes a press results, explain growth strategies and
accuracy, consistency and timeliness. In release with financial data, or an develop relationships with investors.
addition to ensuring reliable, rigorous advisory directing investors to the Yet even under the best conditions,
communications, this will help to reduce company’s website for details, as well management cannot meet with all the
the risks of liability that can arise from any as a conference call and Q&A with best firms and the best contacts at any
materially false, misleading or incomplete institutional investors. The related SEC one event. As investor relations teams
public disclosures. filing – Form 10-Q or Form 10-K – is work to establish the meeting schedule
more formal and much more extensive; for the period immediately after the
Setting expectations: The company’s some companies make it concurrently IPO quiet period is lifted, the priority
success will be measured by execution with the earnings release, while others should be to meet underweighted
against expectations. These expectations make it later (particularly for year-end current investors and “on the fence”
need to be sufficiently ambitious so as to results). These important targets which did not buy at the
demonstrate a robust business, yet communications provide an offering. These targets should then be
achievable and realistic so they can be opportunity to demonstrate openness supplemented with appropriate long-
met consistently. Expectations can be and candor through the way that term investors that did not participate
established by providing quantitative and management speaks to the company’s in the roadshow. Building these
qualitative guidelines such as growth successes and challenges, how its relationships creates a new level of
targets, margins and market share over strategy is succeeding and what potential buyers of the stock when
varying timeframes, depending on the investors can expect in terms of future “bridge” institutions or insiders want
visibility into and predictability of the performance. Effective preparation is to sell their shares.
business. Once these parameters are critical to ensure that management has • Press releases– even routine company
established, the company must carefully anticipated investor questions and can announcements have the ability to
consider whether a variance from either proactively or reactively address impact the company’s stock price, and
expectations is material enough to warrant issues, as appropriate. all press releases should be developed
proactive disclosures and, if so, what For many IPO companies, the initial with an eye toward what the content
constitutes the proper timing of the earnings period brings unique means for the business and how the
announcement and the forum for challenges as they find themselves news will be perceived by the
discussing it. reporting results for the first time investment community. Whenever
It is important for newly public while still in a quiet period. It is critical possible, press releases should tie news
companies to understand that results to effectively balance quiet period events to the company’s stated strategy
outside the anticipated ranges – be it on restrictions with the desire to set a and demonstrate momentum and
the upside or the downsides – can strong precedent for transparency and progress against its long-term
significantly impair management good corporate governance. objectives. If the announcement will
credibility for effectively communicating • Investor meetings – there are multiple impact the company’s expectations
with The Street and potentially lead to a forums in which management can for the quarter or year, these issues
misperception that the company’s results personally engage investors: also should be addressed in the
will be unpredictable or volatile, neither • non-deal roadshows, where the announcement.
of which is constructive for the stock’s company meets with institutions • Depending on the importance and
valuation. While many companies in one-on-one or group meetings; complexity of the announcement, it may
mistakenly believe that earnings that beat • sell-side brokerage firm and also be necessary to hold a conference
expectations will propel their stock price investment bank investor call or webcast for the investment
forward, the benefits are often short lived, conferences, often with a group community. These allow management
as they encourage shorter-term investors presentation, followed by one-on- to provide additional color on the event
to bet on the company’s ability to beat one or small group breakout that prompted the announcement,
Street estimates, rather than focusing on meetings for more detailed discuss how it will affect the company
the long-term strategy and value creation. discussions; and going forward and respond to questions.
• company-sponsored events such Clearly explaining complicated
Forums for communicating with investors: as analyst/investor days on-site to information and, when possible,
There are a number of important forums showcase the broader leadership allowing investors to pose questions

NYSE IPO Guide 47


that can be addressed in real time natural attrition of shareholders as securities markets, and publicly held
bolsters management’s credibility and portfolio managers shift assignments and companies regularly brief them and answer
mitigates the risk of misunderstandings. market conditions change. Ongoing their questions to help them understand
• Financial, business and trade media – diligence is required to identify the most company results and business trends.
print and broadcast media allow the important holders, monitor changes in the However, these communications present
company to communicate information composition of the shareholder base and potential legal risks that must be managed
to a much wider audience, while also engage holders in dialogue to help keep in order to preserve the benefits of
bolstering credibility through them informed about the business and dialogue with analysts.
commentary by objective third parties. anticipate their future actions. Good relations with analysts are very
Whether it is positioning financial Beyond these efforts, there is an important, and open communication with
results or underscoring themes related ongoing need to replenish the pipeline by the market is encouraged by exchange rules
to management strength and market identifying and courting new investors. and, as a practical matter, unavoidable. It
position, effective media relations The ideal target group consists of long- is, however, not legally required.
strategies can influence investment term investors that have a track record for If the company does disclose corporate
decisions and provide a reputational investing in the company’s industry and information (voluntarily or otherwise),
cushion in difficult times. whose portfolio holdings have business Rule 10b-5 of the Securities Exchange Act
• Social and online media – media and financial characteristics similar to of 1934 requires that those disclosures
influence has been extended further as those of the company. While there will neither contain misleading statements of
social media takes a more prominent likely be interest from the company’s material information nor omit material
role in companies’ communication covering analysts to market the company facts necessary to make the statements
strategies – and particularly in the to prospective investors, management made not misleading.
investor relations strategies of should take responsibility for managing Management should not participate
companies in technology-centric the investor base and targeting potential in the preparation of analysts’ reports,
industries and those with larger retail new holders. because there is potential Rule 10b-5
investor bases. Each day, more than 5 In order to increase visibility among liability if company officials become so
million people participate in live, the buy side, the company should develop “entangled” with a report that the report
passionate, authentic conversations sell-side sponsorship to generate can be attributed to the company.
via social media forums and blogs. independent financial models, determine Finally, when divulging material non-
These communications channels allow an appropriate multiple that will help drive public information, company officials may
companies to engage directly with the long-term valuation of the company not disclose it selectively – for example,
stakeholders, but they also come with and market the investment story to the exclusively to securities analysts – but
serious responsibilities in terms of buy-side investment community. Once rather must make the information available
disclosure requirements and the public, management should strive to secure to the general public, if those officials
assumption that companies will research coverage by non-syndicate could be found to have gained a personal
continue to communicate through good analysts, who will be viewed as more benefit from the selective disclosure.
times and bad. It is essential that impartial. An ideal mix of analysts would Selective disclosure can lead to liability
online media strategies are executed include quality bulge-bracket firms that for the company and for company officials
with the same level of foresight and add credibility and cache to the company’s themselves for insider trading by persons
legal supervision as traditional media profile, combined with strong tier-two receiving the disclosure.
strategies. regional firms that take a more active role
in analyzing and covering the company. Regulation F-D: In August 2000 the SEC
Managing the shareholder base: Since adopted rules that prohibit US issuers
investors have differing perspectives on Conclusion: An investor once said, “We from selectively disclosing material non-
what creates value in the markets, it is don’t shoot the messenger, we shoot the public information to market professionals
crucial to ensure that the investment style, cheerleader.” The financial community can and generally to security holders. All US
holding period and industry focus of the be remarkably perceptive and insightful; issuers that file periodic reports with the
company’s shareholder base are aligned information – especially that which is SEC under the Exchange Act are subject to
with, among other things, its business market moving – flows through it rapidly the regulation. Although Regulation F-D
model and the investment proposition. and it has a long institutional memory. does not apply to foreign issuers, many of
Managing the company’s shareholder Regular, consistent and open them look to Regulation F-D for guidance
base is an active process. Investors that are communications with investors are as a matter of best practice and because it
poorly informed about the company or instrumental in achieving an appropriate reduces their risk of potential liability
whose investment style is at odds with the valuation and high regard for the under Rule 10b-5.
investment thesis are more prone to sell company’s management. The key provisions of Regulation F-D
their positions, creating downward are as follows:
pressure on the stock price and increased (b) Research analysts • The regulation applies to
market volatility. Furthermore, there is a Financial analysts play a key role in communications with market

48 NYSE IPO Guide


professionals (broker-dealers, non-exclusionary distribution of the material non-public information may

investment advisors and managers, information to the public.” The most be discussed.
and investment companies), and with common method is by press release. • Refrain from responding to analysts’
security holders that will reasonably Posting information to the company inquiries in a non-public forum unless
foreseeably trade on the basis of the website is also sufficient for most it is certain that the response does not
disclosed information. It focuses on companies if they regularly use the website include material non-public
what the SEC believes to be the core for that purpose, the information is posted information.
problem – selective disclosure to those in a manner calculated to reach investors • If asked about a matter that has not
that will trade on that information or and it remains posted for a reasonable previously been disclosed, simply say,
prompt others to do so. The regulation period of time so that it can be absorbed “No comment.”
does not apply to communications by investors. If the company wishes to • If requested by an analyst to review
with, among others, media make public disclosure of material non- a research report, do not comment
representatives, advisors in a public information by means of a except to correct errors of fact. Do not
relationship of trust or confidence with conference call or webcast, it must give comment in any way on an analyst’s
the company (eg, legal advisors and adequate public notice, including the date, forecasts or judgments, including by
investment bankers), rating agency time, subject matter and dial-in saying you are “comfortable” with
representatives, employees and information for the call. Disclosure at a them, that they are “in the ballpark”
government officials. shareholder meeting, even one that is open or other words to similar effect. To
• The regulation applies to to the public, is not sufficient if the avoid entanglement, be cautious about
communications by senior officials and meeting is not webcast or broadcast by distributing analysts’ reports or
officers, employees or agents of the electronic means, and the presence of the including hyperlinks to them on the
company who regularly communicate press at an otherwise non-public meeting company’s website
with market professionals or security does not render the meeting public. • Avoid favoring one analyst over
holders. The SEC has aggressively investigated another.
• The regulation applies to selective cases under Regulation F-D, resulting in • Review public statements to identify
disclosures of material non-public several enforcement proceedings. SEC any non-Generally Accepted
information. “Materiality” is not personnel have indicated that they look Accounting Principles (GAAP) financial
further defined in Regulation F-D, but for egregious violations involving the measures. If disclosure contains non-
it is the subject of extensive case law intentional or reckless disclosure of GAAP financial measures, include a
and SEC guidance in other contexts. unquestionably material information. presentation of the most directly
• Whenever the company makes an The enforcement actions also confirm comparable financial measure
“intentional” disclosure of material that the SEC will look to market reaction calculated and presented in accordance
non-public information, simultaneous as an indicator of the materiality of with GAAP and a quantitative
public disclosure is required. A selective disclosure. One significant reconciliation of the two measures.
disclosure is intentional if the company similarity among the enforcement actions To avoid reconciliation of non-GAAP
knows or is reckless in not knowing is that visible and sometimes dramatic financial measures in public
that the information being disclosed is changes in stock trading price and volume presentations given orally,
both material and non-public. occurred in the aftermath of the selective telephonically, by webcast or broadcast,
Whenever the company learns that it disclosures, and the SEC has stated that or by similar means, provide the most
has made a non-intentional selective a very significant market reaction to directly comparably GAAP financial
disclosure, it must make public selectively disclosed information requires measure, with the required
disclosure of that information public disclosure of that information. reconciliation, on the company’s
promptly (generally within 24 hours). Some practical guidelines are as website and include the location of
• Violations of Regulation F-D are follows: the website in the presentation. If
subject to SEC enforcement actions, • Designate one company executive to materials distributed (electronically
but do not give rise to Rule 10b-5 communicate with analysts. or in hard copy) during a public
liability or private causes of action. • Make each presentation to analysts presentation contain non-GAAP
They also do not result in ineligibility on the basis of a prepared text that financial measures, provide the most
for short-form registration or the Rule has been reviewed by senior executives directly comparable GAAP measures
144 safe harbor for resale of securities. and by counsel. and provide the required
• Do not disclose material non-public reconciliations in close proximity to
Public disclosure for purposes of information to analysts unless the the non-GAAP financial measures.
Regulation F-D can be made by filing or information is disclosed to the public • Do not make specific forward-looking
furnishing Form 8-K or by disseminating at the same time; this can be done by statements, unless:
the information through a method or permitting the public, on reasonable • you set out the assumptions on
combination of methods that is advance notice, to participate in any which the forecast is based;
“reasonably designed to provide broad, call with analysts during which • you indicate the factors that could

NYSE IPO Guide 49


prevent the forecast from being online chat rooms, blogs and other social responsibility to protect sensitive data,
realized; media channels that accelerate the speed including client/customer information,
• you make the statements to the with which employee comments can reach performance statistics and any other
public at the same time; and a seemingly endless universe of potential information not available to the general
• you are always prepared to evaluate recipients. public.
the need to update the statement Key considerations that affect how the
when circumstances change. company interacts with its employees 4.2 Proxy statement and annual
during the IPO period and beyond include meeting
The steps contemplated in the first two the following:
points above can be effected by referring to • It is critical for employees to (a) Annual meeting requirements and
a filed document that contains the relevant understand securities laws and SEC preparation
information. regulations prohibiting insider trading Holders of common stock, by virtue of
or tipping – particularly if they are their ownership interest in a corporation,
(c) Employee communications given opportunities to participate in are generally entitled to one vote per share
Employees are the company’s most valued the offering. Employees need to on certain corporate matters on policy
ambassadors. Engaging them as part of the understand there will be a zero- decisions. To allow shareholders to cast
IPO process creates a culture of tolerance policy on these issues. their votes, all US states require that
understanding that helps ensure clear and • To maintain consistency in their issuers hold annual shareholder meetings
consistent communication with all other communications with the market and where shareholders can cast their vote
stakeholder groups. avoid any inappropriate disclosure of either in person or via proxy. Annual
Unfortunately, IPOs are potentially material non-public information, the meetings offer a once-a-year opportunity
disruptive from a cultural standpoint. company should designate and train a to communicate with shareholders face to
Executives and staff of private companies very limited group of spokespersons, face and to approve certain corporate
often are accustomed to receiving financial whose role is to discuss business and actions and company changes critical to
and operational data that can no longer be financial results with the public. the company.
shared under SEC regulations after the Employees should be instructed to The company will determine when an
company goes public, and some employees forward all external inquiries to these annual meeting should be held based on its
will be asked to take on modified roles. trained communicators and investor fiscal year end. Depending on the state of
To manage this transition, the relations representatives. incorporation notice, requirements for an
company must realign its people around • In compliance with Regulation F-D, annual meeting will vary. The annual
its go-forward strategies and growth US public companies must provide meeting requires considerable planning,
prospects, while simultaneously preparing the financial community with equal preparation and coordination with several
them for new communications constraints. and timely access to financial and parties: the transfer agent, the SEC, the
Employees should be educated about the operational data. The company will Depository Trust Company (DTC), the
rationale for a public listing, how it can now issue quarterly and annual broker distributor/proxy solicitor and the
benefit them (eg, new career opportunities, financial reports, and even more financial printer.
employee stock purchase plans), and – routine corporate announcements
perhaps most critical – what new will assume increased importance. (b) Timeline
responsibilities the company must assume However, many companies can no A number of important events in the
as a publicly traded entity. longer provide employees with the preparation for and lead-up to the annual
Compliance with SEC and exchange same level of access to financial and meeting require compliance with state
rules needs to be a company-wide effort, operational data they might have laws, government regulations and other
and employees must understand that even received in the past. Employees need to regulatory agency policies.
casual comments made to outside parties understand this new reality, know they The annual meeting responsibilities
(eg, “I made a big sale today” or “Business are still important and valued members flowchart overleaf outlines the primary
has been picking up lately”) can take on of the team, and have confidence that functions that should be performed during
additional meaning for the company’s new the company will continue the annual meeting season, as well as the
financially minded stakeholders. Under communicating with them as openly parties responsible for those functions.
the watchful eye of investors, financial and honestly as possible going forward. Scheduling diagrams show the major
analysts, regulators and financial and • Sarbanes-Oxley regulations require regulatory requirements, starting at the
business media, employee actions have the public companies to maintain end of the fiscal year through the annual
potential not only to affect the company’s transparency and accountability in meeting date.
corporate reputation, brand and stock documenting financial controls. In
price, but also to subject both the company many instances, these processes will be (c) Phase one: preparation
and employees to risk and liability from established well ahead of the IPO. The Notification: To ensure a smooth annual
inappropriate disclosures. This risk has listing provides an opportunity to meeting, all parties – the company, its
been exacerbated as employees engage in remind employees of their transfer agent and its broker

50 NYSE IPO Guide


Suggested action items and timeline before record date distributor/proxy solicitor – must clearly
communicate with each other. Below are
Days before record date Action item some of the initial steps that should be
100 Begin design, copywriting and printing/posting of annual taken for the annual meeting:
• Submit letter of instruction to DTC.
• If the company is a current registered
90 Decide whether you will need a proxy solicitation campaign user of security position reports via the
based on vote projections. DTC website, re-authorize third-party
60 Review first draft and cover design of annual report. agents (broker distributor, proxy
solicitor) to electronically receive the
30 Conduct broker search. reports from DTC.
25 Print annual report.
20 Notice and inquiry – work with proxy solicitor to discuss Street search: The street search is an SEC-
mandated process and should be initiated
printing and EDGAR requirements for proxy statement,
at least 20 business days prior to the
proxy card and Form 10-K. record date. A broker distributor/proxy
15 Receive preliminary search results from banks and brokers. solicitor is typically responsible for this
10 Confirm annual meeting material transportation logistics. function. It is recommended that the
company work with a proxy solicitor to
Notify stock exchange of record date.
perform this search. During the street
5 Begin typesetting and EDGAR conversion of proxy search process, the broker
statement, proxy card and Form 10-K. distributor/proxy solicitor will contact
Order NOBO and registered tape. Broadridge and other institutional holders
to determine how many annual reports and
Begin shareholder composition and contact list. proxy statements will be printed for the
Day 0 Record date. proxy mailing.
+5 days post record date Mail notices for notice and access option.
Analyze the need for a proxy solicitor:
+7 days post record date Mail date.
With recent changes to NYSE regulations,
+45 days post record date Annual meeting. achieving successful voting percentages
may become more difficult. A professional
Suggested action items and timeline post record date solicitation firm can help navigate the
maze of tactics, procedures and challenges
Days after record date Action item involved in soliciting proxies. Keep in mind
some of the current issues, such as
0 Begin shareholder composition and contact list.
increased influence of activists and third-
5 Receive final search results from banks and brokers. party advisory firms, multiple levels of
5 Receive NOBO and registered tape. share ownership and ever-changing
5 Deliver materials to proxy solicitor. regulations, which have made proxy
solicitation more complex and hence more
5 Begin phone number look-up.
crucial in addressing these controversial
5 Mail notices for notice and access option. issues. Companies with non-routine ballot
10 Mail proxy materials. items (ie, equity plans or shareholder
10 Complete shareholder composition and contact list. proposals) should especially consider
retaining a professional proxy solicitation
20 Begin phone calls. firm to help negotiate the proxy process.
30 Conduct reminder mailing.
30 Receive first ADP vote. Web hosting of materials: Since January
2009 all companies soliciting proxies
30 Proxy advisor report issued.
under SEC rules are required to post
35 Prepare draft of meeting script. annual meeting materials to the Internet
35 Broadridge daily voting begins. and notify shareholders of availability.
40 Finalize master ballot, meeting ballot and affidavit of Ensure that the transfer agent provides a
web hosting service that meets all SEC
requirements for shareholder privacy
45 Conduct annual meeting. protection and accessibility of materials.
50 Receive final inspector of election report.

NYSE IPO Guide 51


Annual meeting responsibilities flowchart

Issuer Issuer or Transfer agent DTC Broker distributor Broker/nominees

transfer agent proxy solicitor Broadridge

Declaration of
meeting and
record date.

Determine Arrange for

whether to web hosting of
utilize the notice annual meeting
and access materials
proxy mailing (required for all
alternative. issuers Jan 1

Notify all Arrange for Print proxy Provide security Mail broker
applicable printing of proxy cards with position report search card.
parties of statement and company text and omnibus
meeting dates. annual report. and shareholder proxy listing.
information, and
documents if
notice and
access mailing
alternative is
being used.

Deliver proxy Mail proxy Collect search Respond to

material to all material and information. broker search
mailing agents. notice and request.
documents (if
notice and
access mailing
alternative is
being used) to

Coordinate with Receive voted Supply proxy Send proxy

employee plan proxies from materials to materials to
providers and registered brokers/ beneficial
trustees for file shareholders for nominees to shareholders.
and voting tabulation. Broadbridge.

Annual Provide voting Collect and

shareholder results to client. count from
meeting. beneficial

52 NYSE IPO Guide


Electronic distribution of materials: The brokerage firms may vote their clients’ • record date shareholder file –
SEC allows for issuers to electronically undirected shares, was amended to prevent a report that lists shareholders
distribute annual meeting materials to brokers from voting their clients’ shares on holding shares as of the record
shareholders that have consented to such board of director elections unless specific date that are entitled to vote at
delivery. direction (a proxy card) is given by their the meeting;
client. This now makes the vote on • affidavit of mailing – a document
Consent to electronic document delivery: directors a non-routine item. attesting to the date on which the
Shareholders are offered the opportunity mailing commenced from the mail
to access their documents electronically. (d) Phase two: proxy mailing house; and
Consents may be promoted via hard-copy Form preparation and printing: There are • proxy committee ballot – a form
communications such as the proxy card, design specifications for proxy forms. For that allows the proxy committee to
proxy statement and annual report. example, the location of the voting boxes formally vote the shares for which
Shareholders can also sign up for electronic on the proxy card must be in the correct proxies have been submitted.
delivery of materials when they vote space so that the transfer agent’s scanners Have available after the meeting:
online, which offers printing and postage can accurately read the voting marks. The • certificate of vote tabulation –
cost savings (SEC Release Nos 33-7233, transfer agent or proxy solicitor will assist a document that shows the final
34-36345, 33-7288, 34-37182, 33-7289 and with the design and printing of the proxy vote results.
34-37183; and 33-7856, 34-4278). card to increase accuracy and reduce the
risk of non-compliance with the print Vote tabulation and reporting: In general,
Notice and access: The SEC allows issuers specifications. the majority of the company’s outstanding
that have posted proxy materials to the shares are held by beneficial holders in
Internet to send holders a simple notice Mailing: See Chapter 4.2(f). “street” name. Thus, the mailing and
providing information on how to access voting services provided by Broadridge are
the materials – without prior consent for (e) Phase three: annual meeting and vote critical to the voting results. Broadridge
electronic delivery. The SEC requires that tabulation mails and votes proxies on behalf of almost
a notice of the internet availability of Annual meeting: Some important logistics all banks and brokers. The first vote
materials be sent, either separately or as part concerning the annual meeting should be tabulation from Broadridge is typically
of the proxy materials. Issuers must provide borne in mind in order to avoid potential submitted electronically to the transfer
hard-copy sets of materials on request (SEC problems: agent 10 to 15 days prior to the annual
Release Nos 34-55146 and 34-56135). • Annual meeting script review – provide meeting.
a copy of the script to the transfer The transfer agent tabulates the shares
Electronic voting option: Check with agent and inspector of elections a few voted by registered holders directly. The
the transfer agent to ensure it provides days before the meeting. This ensures voting percentage may appear low until the
electronic voting services to complement that all parties understand their roles first votes from shares held in street name
the traditional method of paper proxy at the meeting. It is also recommended are received from Broadridge. To remain on
voting. Internet and telephone-based that written rules of conduct and an target for achieving the desired quorum
voting affords shareholders convenience agenda be established at this time. percentage, it is recommended that a vote
and the immediate recording of votes. • Results review – prior to the meeting, review be conducted approximately two
Electronic voting also reduces the postage review with the transfer agent and/or weeks prior to the annual meeting. If
costs associated with proxy voting by proxy solicitor the specific types of approximately the same vote return is
eliminating the need to return the voted numbers/voting results that will be received as in prior annual meetings, it is
proxy card. read during the meeting. reasonable to assume that a similar return
• Required documents – have available will be obtained for this meeting. If the
Householding: To further reduce the before the meeting: voting results appear to be lagging, a more
number of printed annual reports and • inspector’s oath – a statement by proactive effort by a proxy solicitation
proxy statements required, the SEC the inspector of election that he firm may be warranted.
permits issuers to mail one set of materials or she will perform the duties See Chapter 4.4 for more detail on
when two or more shareholders with the impartially and to the best of his beneficial versus registered holders.
same last name live at the same address. or her ability. The transfer agent or other proxy
Implementing this process also requires Have available during the meeting: service provider selected by the company
a consent mailing to shareholders • shareholder ballot – the form that will tabulate the votes of registered and
60 days prior to the proxy mail date allows a shareholder to vote his or beneficial shareholders. The company may
(SEC Rule 14a-3 under the Exchange Act her shares at the meeting. While be able to view real-time vote tabulation
for proxy materials). shareholders infrequently vote by online if the transfer agent offers this
ballot, this form should be available service and is asked to perform the final
Changed regulations: On January 1 2010 at all times in the event the need tabulation.
NYSE Rule 452, which governs how arises; Votes of beneficial shareholders are

NYSE IPO Guide 53


tabulated by the street-side proxy services house and printer, proxy agents (eg, banks performing below industry peers
provider, which may transmit the and brokers holding shares for holders in financially. This needs to be done well
beneficial vote count directly to the street name), and employee equity plan before the messaging on the proxy
company’s transfer agent. If the transfer management provider will each have a role. statement: it should be done on a continual
agent tabulates the final votes, voting To determine whether an issue is basis as the company’s and market
percentage may appear low until the first controversial or to obtain a vote projection, situations change. Meeting with investors
votes from shares held in street name are the corporate secretary and corporate legal regularly to understand their priorities
received from beneficial holders. The first counsel should confer with a proxy and concern will help address potential
vote totals for beneficial holders are solicitation firm. With recent changes to conflicts before the annual meeting.
typically submitted electronically to the regulations and the growing influence of
company’s transfer agent 10 to 15 days proxy advisory firms, achieving successful Third-party proxy advisory firms: Third-
prior to the annual meeting. If the voting percentages is becoming a more party proxy advisory firms provide
company has received approximately challenging task. guidelines to institutional investors on
the same vote return as in prior annual how to vote their shares. Because Rule
meetings, it is reasonable to assume that Targeting: Where a proxy solicitation 30b1-4 of the Investment Company Act
the company is on track for a similar campaign is launched, the proxy requires that most registered management
return for this meeting. If the voting solicitation firm will need to determine investment companies disclose how they
results appear to be lagging, a proactive the composition of the shareholder base, vote their proxies, following the guidelines
effort by a proxy solicitation firm may also known as a shareholder analysis, so of proxy advisory firms alleviates the
be warranted. it can efficiently reach the largest number research burden and provides clear
Registered and beneficial holders’ vote of holders and target those most likely to reasoning on voting practices. The three
totals are provided by proxy service firms be persuaded to vote favorably. major proxy advisory firms are
to the inspector of election for reporting Persons and entities entitled to vote RiskMetrics Group, Glass, Lewis, & Co,
at an annual meeting. at a shareholder meeting are those whose LLC and PROXY Governance, Inc. For some
names appear on the company’s books as institutional investors, the advisory firm
(f) Proxy statement and solicitation registered holders or beneficial holders of will also vote their proxy along with their
Approximately less than 30% of voting securities at the close of business published recommendations.
shareholders vote in response to initial on a specific date declared by the board of
proxy material distributions. With the directors (the “record date”). Because most “Notice and inquiry”: This is essentially
increasing influence of activist elements, shares are held in nominee names (banks, the beginning of the shareholder outreach.
high-profile individuals, multiple levels brokers, proxy agents), the process of Rule 14a-13(a) of the Exchange Act requires
of share ownership and ever-changing locating and reaching the actual holders is that the company send a “notice and
regulations, proxy solicitation is becoming best managed by a proxy solicitation firm. inquiry” or “search card” to all agents and
more complex and more necessary. As with any voting campaign – participants known to be holding shares of
witness recent successful political record of the company’s voting securities.
Professional proxy solicitation firm versus campaigns – it is important to identify The notice and inquiry includes questions
in-house: Most public companies in the the target and focus resources accordingly so the proxy materials can be managed in
United States work with professional to maximize the likelihood of a positive compliance with SEC rules and regulations.
proxy solicitors, whether it is to manage outcome. A proxy solicitor can analyze the Not all exchanges have the same timelines
one aspect of the solicitation or to manage shareholder base, then drive the campaign for the notice and inquiry, but the NYSE
the complete proxy solicitation campaign. efforts accordingly. requires listed companies to furnish the
A solicitor may simply consult on best notice and inquiry at least 10 calendar days
practices of corporate governance that lead Executing an effective campaign: With a prior to the record date for an annual or
to favorable vote outcomes or may manage shareholder analysis, the corporate special shareholder meeting. That said,
the entire solicitation and outreach to all secretary can help position the messaging with all the different layers and complexity
holders: broker, bank and individual on the proxy statement – not just an SEC of ownership, the company should send
accounts. requirement, but essentially a public out the notice and inquiry as soon as
company’s most broad and direct investor practical. The proxy solicitor can assist in
Proxy solicitation team: Whether using relations communications tool. providing the correct content and format
a proxy solicitation firm or managing Today, corporate governance practices for the notice and inquiry.
the shareholder outreach in-house, the are top of mind for most shareholders and
members of the company generally there are few indications this will change Proxy statement: The SEC requires that
responsible for the solicitation are the any time soon. This means that governance the company send shareholders a proxy
corporate secretary, the corporate legal practices should align with holders’ (as well statement prior to a shareholder meeting.
counsel and the corporate financial, as proxy advisory firms’) expectations, The information contained in the
investor and public relations staff. The especially if there is a contentious proposal statement must be filed with the SEC
transfer agent, proxy material mailing or issue at stake or the company is before soliciting a shareholder vote on the

54 NYSE IPO Guide


election of directors and the approval of Companies interested in all the details has also found that 75% of institutional
other corporate action. Proxy statements and rules of a solicitation should obtain investors access investor relations websites
must disclose all important facts about the “The Manual of Solicitation of Proxies” at least on a weekly basis, while 90% of
issues on which shareholders are asked to published by the Society of Corporate institutional investors find that a
vote, such as: Secretaries & Governance Professionals. company’s website influences their
• the time, date and location of the perception of that company. To help
meeting; 4.3 Communication mechanics establish a positive perception, here are
• the issues to be voted on at the annual a few guidelines to follow:
meeting; (a) Investor relations tools • Keep the website current and accurate.
• the positions on the board of directors As the company transitions to a public • If hyperlinks to outside information
to be voted on and background entity, it is even more important for the are included, make sure they are clearly
descriptions of director candidates; and investor relations team to: labeled.
• compensation of directors and • comply with regulations; • Don’t promote some outside
auditors. • provide the investment community information sources over others.
with increased transparency into the • Add summary information, clearly
The company’s proxy solicitor will organization; labeled, to provide investors with a
usually assist in the preparation of the • analyze competitive and industry quick overview.
proxy statement. intelligence; • Confirm that the website can handle
• monitor what analysts are saying a considerable amount of traffic.
Web hosting needs: Because shareholder about the company and its peers;
material must be available on a publicly • communicate the company’s story Because an effective disclosure program
accessible website other than the SEC’s to employees and the investment should not be limited to what is required by
EDGAR, company materials must be hosted community; and law, here are a few best practices to address
in accordance with SEC regulations. The • measure the effectiveness of outreach the most common needs of visitors to the
transfer agent or proxy solicitor should be and communications efforts. investor relations website:
able to provide solutions that meet with • Use the investor relations home page
the notice and access requirements. To succeed, the company should to tell investors why they should invest
leverage the information, analytics and in the company. Emphasize what the
Solicitation of banks, brokers and proxy workflow solutions designed to increase company does that is valuable from an
agents: Banks, brokers and proxy agents the effectiveness of its investor investor’s point of view, as well as how
may vote all securities registered on the management program. With best-in-class it differs from key competitors. Include
books of the company at the close of investor relations tools, the company can links to other sections of interest
business on the record date in their own monitor and understand factors impacting directly from the investor relations
name or nominees’ names (for brokers and its share price, anticipate investor behavior, home page. Many companies use this
proxy agents, not beneficially owned by communicate with key stakeholders and real estate to highlight recent news,
them), and all securities for which voting measure the impact of its investor upcoming webcasts, broker conference
authority has been properly assigned to relations program. presentations and their current stock
them by another. price.
The transfer agent or proxy solicitor Be transparent and compliant: Prior to the • Use a vanity URL to make the investor
will provide assistance on the proper way Form S-1 filing, a dedicated investor relations website easy to find and
to transmit materials and record votes relations section should be created on the remember. And link to the site from
from this group. corporate website. With this investor the company’s corporate home page.
relations website, the company can gain To make the website easy to use,
Solicitation of individual holders: global reach, meet regulatory requirements remember the little details such as
Individual holders are entitled to vote all and provide a rich multimedia experience offering printer-friendly functionality,
securities registered on the books of the to investors looking to access up-to-date offering a section dedicated to
company at the close of business on the information about the company. Consider disclosure information, breaking out
record date in their own name(s) and all outsourcing the development, hosting and press releases by year, categorizing SEC
securities for which voting authority has maintenance of the investor relations filings and making them searchable.
been properly assigned to them by another. website to a third-party provider with the • Include the prospectus, filings
Individuals may vote securities in person experience and investor knowledge to information (eg, Form 10-K, Form 10-
or by proxy. While some holders will incorporate best practices and the ability Q, Form 8-K, Section 16 filings),
attend the shareholder meeting and vote to distribute website updates to the analyst estimates, online investor kits,
by ballot, the overwhelming majority of investment community. ownership information and company
securities voted by individual holders will According to the SEC, 80% of retail fundamentals on the investor relations
be voted by proxies returned in proxy investors now have access to the Internet site.
return envelopes. in their homes. Thomson Reuters research • As an IPO, set up a separate section

NYSE IPO Guide 55


on the investor relations website for Promote the investor relations website company is saying and what the
historical information that may not be as the main source of investor information institutional investment community is
included in the prospectus. Ensure the by including the URL in all press releases, hearing.
historical information is clearly dated. webcasts and periodic reports. In addition Company fundamentals should be
• Create a dedicated corporate to ensuring that the company is meeting analyzed to determine how the company’s
governance section of the investor regulatory disclosure requirements, financials compare with those of its peers.
relations website to promote corporate posting information online will help save To facilitate such comparisons, use
integrity and regulatory compliance, on printing and mailing costs. If investors “standardized,” summary fundamentals,
and maximize investor confidence. are sought from various global regions, meaning that the financials are presented
The information posted on this section ensure that the site can accommodate all in the same format across the company.
should include the governance languages. Once the company is public, it will also
guidelines, committee charters and To further reinforce the company’s become important to identify current
code of conduct. commitment to corporate integrity, also investors at risk of selling their shares in
• Establish a web page dedicated to proxy offer an anonymous web-based forum for the company. Work with a provider that
information where interactive, HTML employees to submit suggestions, ask offers a proven and back-tested ownership
and PDF versions of all proxy materials questions or report an issue. To be model incorporating key factors that will
can be posted. Ensure that the section effective, it should be possible to view all help accurately identify both risks and
on which the proxy materials are posted submissions, converse anonymously with opportunities across the investor base. The
does not infringe on the anonymity of the submitter and maintain a record of model should be transparent and proven,
those accessing it through cookie each exchange. facilitating an understanding of why
postings or other ways of virtually specific funds are likely to buy or sell the
collecting user information. Shareholder Gather intelligent information company’s shares, and should be dynamic
email addresses obtained for As the company’s corporate story and the to adjust to evolving market conditions.
distributing proxy materials should be key messages to communicate to the To deepen knowledge of the company’s
used solely for such purpose. Also offer investment community are developed, it is industry and sector, tap into experts and
investors a way to order hard copies of important to understand the competitive information sources that can provide:
the proxy materials through the landscape and key developments across • timely and accurate news on market-
investor relations website or toll-free the industry and sector. View unbiased moving developments within the
number. summaries and transcripts of competitors’ sector;
• Disclose compensation information earnings and conference calls to learn how • updates on upcoming events within the
found in the Form 10-K and proxy they are guiding analysts. The transcripts sector – analyst days, earnings reports
filings on the investor relations can also help to anticipate questions from or industry conferences;
website. To be fully transparent, analysts and investors. Most companies • qualitative feedback about company
highlight the key disclosures in the post their call transcripts on their website, presentations made during industry
corporate governance section of the but searching through individual sites can conferences;
investor relations website as well. be time consuming and inefficient. To • monthly, sector-focused feedback from
• Include corporate debt information accelerate knowledge gathering, work with the institutional community which
and give fixed income analysts the a provider that consolidates transcripts on could highlight recent trading patterns,
benefit of rich information and easy a single platform. valuation metrics, expectations for
access, just as equity analysts are given. Also understand how peers are performance, interpretation of earnings
Consider including credit ratings, debt perceived by the sell side. Access broker results and more;
analyst coverage, debt maturity research and estimates to learn what the • intelligence on institutional money
schedule and information pertaining sell side is saying about the company and flows within the sector to help
to asset-backed securities, such as its competitors – although research on understand how current buying and
pending transactions, CUSIP look-up, the company may not be available until selling patterns may impact the stock’s
prospectus and more. coverage is initiated by one or more value and trading dynamics; and
• Take active steps to immediately brokers. In such cases, a partnership with • information about sector specific sell-
distribute updates and new a third-party provider which has the side analysts and institutions obtained
information posted on the site to the institutional contacts to conduct detailed from daily interactions with the
investment community. Utilize RSS interviews may help to reveal how the institutional community.
feeds and email alerts so investors can company is perceived in the marketplace.
be alerted when new content is The interview should be customized to Communicate the company’s story to
available. Also partner with a third allow stakeholders’ perceptions of the internal and external stakeholders: Armed
party which has the distribution company’s value creation strategy and key with unparalleled insight into competitors,
network to make updates available to messages to be benchmarked. This industry and sector, the company should
investors on the platforms they use as information can also be used to identify communicate key messages and
part of their daily workflow. any disconnects between what the competitive differentiators to the

56 NYSE IPO Guide


investment community. To ensure an effective means of communicating the leverage message analytics that can help
compliance with Regulation F-D (Fair corporate strategy to employees, further track and monitor investor feedback and
Disclosure), use webcasting as the means empowering them to be the brand stewards sentiment related to the announcement.
of communication. Webcasting offers a of the company. A Watson Wyatt study Use the detailed reports and metrics
cost-effective, engaging and measurable found that firms with highly effective to modify the message as needed and to
means of reaching a global audience. communications delivered a 47% higher develop follow-up communications plans.
To maximize viewership of the total return to shareholders. In another This information can also help to shape
webcast, publish all planned disclosures study, Towers Perrin highlighted that outreach efforts to actively target
to the online calendar and enable visitors companies with high employee prospective investors, while mitigating
to the site to download these events engagement had a 19% increase in any selling pressures.
into their own planners or to receive operating income and almost a 28%
email reminders of these events. To growth in earnings per share. (b) Other communication mechanics
accommodate different time zones, archive The SEC requires that all US public
the webcast and transcribe the content. Measure the impact of communications: companies provide proxy materials prior
Post both the archive and transcript on the In addition to knowing who attended the to a shareholder meeting. While foreign
investor relations website, making them live webcast and who downloaded the private issuers are not subject to the SEC’s
easy for investors to view at their archive from the investor relations website, proxy rules, foreign private issuers listed
convenience. measure the impact of communications on the NYSE are required to solicit proxies
To introduce senior executives to the through detailed analytics. Work with a from their US shareholders. Proxy
investment community, include a video or webcast provider that can generate a report materials may include:
photos of the presenters within the following the webcast with answers to key • a proxy statement (described in
webcast. Also provide viewer-controlled questions such as the following: Chapter 4.2(f));
PowerPoint slides that reiterate the key • How did the webcast attendance • a proxy card for registered holders or
messages being presented. Research shows compare with those of the company’s a voting instruction form for beneficial
that people remember only 10% of what peers? owners;
they read and 20% of what they hear, but • What has been the impact of the • a notice of internet availability; and
they remember 50% of what they see and webcast on the price and coverage of • the annual report/Form 10-K
hear. Links within the webcast to the company’s stock and that of its
supporting material such as press releases peers? The company’s transfer agent often
and financial information further reinforce • Of those who attended the webcast, distributes and collects the necessary
the key messages. Where global investors which are current owners of company proxy materials for the company and sends
are sought, include subtitles or translate stock? them to registered shareholders directly.
the content into multiple languages. • Did any bulls, bears or rotators attend The company provides materials to
To ensure that the communication is the webcast? proxy service providers selected by
efficient, productive and successful, work • What was happening in the market brokers, which then subsequently
with a webcast provider that offers a on the day of the webcast? distribute them to beneficial holders.
platform which allows easy control of who • How was the company’s message The company may mail either a full set
can attend the webcast. Also leverage the perceived by the investment of proxy materials, a notice-only mailing
polling, Q&A and survey functionality of community? What sentiment did it or a combination. If the company elects to
the webcast player to gather audience generate? send a full set of proxy materials, it must
feedback. When selecting a webcast • What action(s) are investors likely both file with the SEC and send out to
provider, inquire about its proprietary to take in response to the company’s shareholders a complete set of proxy
distribution networks. The ideal provider message? materials approximately five weeks
can further expand the reach of the before the shareholder meeting, to
company’s message by distributing the Coupled with comprehensive analytics allow sufficient time for shareholders
webcast directly to the desktops of on attendees – such as when individual to review and act.
institutional and retail investors. attendees signed on and off the webcast – To determine which shareholders
But the investment community is not it is possible to effectively gauge how well should be sent proxy materials, the
the only audience that should be targeted; the company’s message resonated with the company should refer to a list of the
communicating with employees is just as internal and external audiences. If a shareholders that held stock on a certain
important. In a study conducted by the perception study was conducted ahead of date. This “annual meeting record date”
Corporate Executive Council, employees the communications, interviews with the is also referred to when determining
cited the most important driver to their institutional investment community which holders should receive dividends.
commitment to the firm as a company’s following the webcast will help identify For investors holding shares through
ability to lay out a clear vision of its any change in market perceptions of the an intermediary such as a broker, the
strategy and direction that is linked to company. In general, when announcing key company must provide the proxy package
their day-to-day lives. Webcasting offers corporate actions and developments, to the intermediary in sufficient time to

NYSE IPO Guide 57


ensure that the intermediary can meet the meetings in person unless they obtain a information on how clients can provide
35-day target for sending shareholder legal proxy from their broker or bank. voting instructions to the intermediaries.
mailings. The company must reimburse See Chapter 4.4 for more detail The company must thus provide the other
intermediaries for associated costs. regarding beneficial versus registered notice information to these intermediaries
To help reduce the number of printed holders. or their agents in advance of the 40-day
annual reports and proxy statements mailing deadline. For companies
required, the SEC permits the company to Notice and access: As of January 1 2009, the incorporated in a state, such as California,
mail only one set of materials to a single SEC’s “Internet Availability of Proxy where the record date may be not more than
address when two or more shareholders Materials” rules – commonly known as 50 days before the event, there will be a very
with the same last name live at that the “notice and access” or “e-proxy” rules tight window for beginning the process.
address. Implementing this process, known – require that issuers and registered The notice-only option is not allowed
as “householding,” also requires a mailing investment companies soliciting proxies for proxy votes regarding business
to shareholders 60 days prior to the proxy provide access to an electronic version combinations, such as mergers or
mail date. of their proxy materials on a public website acquisitions, as defined by the SEC.
and send notice of the materials’ availability While the SEC requires the company
Proxy voting: The proxy materials also with the URL to access the materials. to provide a method of voting as of the
include a proxy card or, in the case of street The website providing access to proxy date when the notice is sent, it prohibits
voters, a voter instruction form, which materials – which must be different from the inclusion of a proxy card with the
allows shareholders to vote their shares. and in addition to the SEC’s EDGAR notice. Instead, the company may choose
By checking the appropriate boxes and website – must meet certain requirements to perform a second mailing containing
then signing, dating and returning the for accessibility of materials, as well as for the same notice and a proxy card 10 days
proxy card, registered shareholders can shareholder privacy protection. The or more after the first mailing.
cast their votes. privacy requirements stipulate that the The company must provide full sets
For beneficial holders, the voting materials must be hosted “in a manner that of proxy materials upon request to
process is more complex. Voting rights for does not infringe on the anonymity of a shareholders, free of charge. The proxy
beneficial holders are assigned to DTC, as person accessing that Web site,” including materials must be sent via first-class mail
street-side holdings are recorded on the prohibiting the website from installing within three days of receipt of the request.
company register in DTC’s nominee “cookies” that may be used to identify the Effectively, the company will have to
account, Cede & Co. DTC passes on the shareholder and requiring that tracking estimate to how many shareholders will
voting rights to the brokers and banks features on the website be disabled. This want to receive paper copies – the
through an omnibus proxy. The brokers may require segregating those pages from “fulfillment rate” – with the decision based
and banks retain voting rights, but reach the rest of the company’s regular website on historical data, if available. Based on the
out to beneficial holders to find how they or creating a new website. last two years, shareholders asking for paper
want their shares to be voted via a voting The company may elect to send a one- copies has been in the 1% to 3% range.
instruction form. Beneficial shareholders page notice document to holders – the The company can also choose to
then return the voting instruction form “notice-only” option – informing them of include the notification of internet
to inform their brokers to vote their the online location of the proxy and annual availability with a traditional proxy mailing
shares as indicated. meeting materials. Notice-only mailings to holders – the “full-set delivery” option
In addition to the voting methods save the print and mail cost of sending full – informing them of the online location of
outlined above, internet and telephone- proxy materials in hard-copy format, and the materials. This notice can be a separate
based voting may be provided to benefit the environment by eliminating item or can be included in the proxy
shareholders for added convenience and paper used in printing and energy package mailing.
quick tabulation of votes. Internet and resources used in shipping. However, on The company may choose to send a
telephone voting also reduce the postage average, fewer shareholders vote if they full set of paper materials to some holders
costs associated with proxy voting by receive a notice-only mailing rather than and use the notice-only option for others
eliminating the need to return the proxy a full-set mailing. for the same meeting. This approach may
card or voting instruction form. Security If the company selects the notice-only allow the company to reap some of the
features for the electronic voting site, such option, it must create and file a Notice of cost-saving and environmental benefits
as authentication and encryption, should Internet Availability of Proxy Materials of using a notice-only mailing, while
be reviewed in detail when assessing (DEFA14A) at least 40 days before the maximizing the rate of shareholders voting.
solutions from vendors. annual meeting. This notice must also be
As an additional option, registered mailed to shareholders at least 40 days SEC-required content: In addition to the
shareholders present at the meeting may before the meeting date. requirements above, current SEC
also be able to vote from a handset, if Because the notice contains essential regulations require that all notices contain
available, to cast their vote during the information on how to vote, intermediaries a prominent legend containing the exact
course of the meeting, or with a physical such as brokers must prepare their own language specified by the SEC.
ballot. Beneficial holders cannot vote at the notices and customize them to provide The SEC allows companies to include

58 NYSE IPO Guide


supplementary materials with the notice other routine communications to its in “book entry,” or with printed
that provide additional information about shareholders, including: certificates. All beneficial shareholders’
proxy materials and voting. • statements with details of holdings and shares are held in book entry. Registered
or/transactions; shareholders’ holdings may be in book
Delivery preferences and electronic • tax forms, including W9,W8BEN and entry or certificated form.
delivery: The notice and access rules 1099; Book entry has many advantages: it
require that shareholders be offered an • letters confirming other transactions, allows for a faster and more efficient
opportunity to indicate a future preference such as address-change confirmations; transfer of shares, and mitigates the risks
for email or internet communication, as and of holding and losing paper certificates.
well as paper copies, and shareholders will • company information. Book entry is also necessary for
continue to receive information via the “dematerialization” – a movement, long
method they choose until they change 4.4 Share ownership mechanics supported by the SEC, toward the
their preferences. Over time, the company reduction of paper certificates.
can use this information to fine-tune its (a) Beneficial and registered shareholders As of 2002, the company also has the
printing and mailing requirements to more There are two types of shareholders: option of producing print-on-demand
specifically match shareholder preferences. “registered” and “beneficial.” A beneficial certificates: physical certificates that can
This can be expected to help reduce the shareowner has stock held in the name of cost effectively be printed with low print
costs associated with printing and an intermediary such as a broker, bank volumes, eliminating the need to store
warehousing more materials than needed nominee or other third-party nominee. pre-printed engraved certificates.
or with rush printing of additional copies When shares are kept in this manner, it is
to meet fulfillment needs. often referred to as keeping the shares in Recordkeeping and the transfer agent:
If a shareholder consents to receive “street name.” The vast majority of Transfer agents maintain a record of
materials electronically for future mailings, shareholders are beneficial shareholders. ownership, including contact information,
the company may send annual meeting A registered shareholder, also known as of the company’s registered shareholders,
materials via an email with hyperlinks to a “shareholder of record,” is a person, while brokers maintain the records of
view the company’s annual report and group or other entity that holds shares beneficial shareholders.
proxy statement online. Other company directly in its own name on the company Transfer agents’ responsibilities also
communications, such as statements, tax register. The company, or its transfer agent, include the transfer, issuance and
forms and press releases, can also be then keeps the records of ownership for cancellation of the company’s shares.
delivered to shareholders via electronic the shareholder and provides services such Although transfer agents are commonly
delivery. as transferring shares, paying dividends associated with the transfer of shares of
Electronic delivery allows for quick and coordinating shareholder common stock, they may also handle other
access to voting materials for shareholders communications. types of securities whose ownership is
and also provides for significant cost Additionally, beneficial owners are also registered, such as bonds
savings in comparison to the printing designated as objecting beneficial owners One of a transfer agent’s primary
and mailing of paper documents. If the (OBOs) and non-objecting beneficial duties is assisting registered shareholders
company wishes to maximize shareholder owners (NOBOs). By “objecting,” OBOs and fulfilling their requests for transferring
enrollment in electronic delivery, shield their identity from the company their shares. Other core duties of a transfer
shareholder consent for electronic delivery and may be contacted by the company agent include:
may be promoted via hard-copy only via a third party, such as the holder’s • dividend payments;
communications such as the proxy card, broker. NOBOs waive this right and may • tax reporting;
proxy statement and annual report. be contacted directly by the company, • annual meeting services;
Consent may also be solicited through including shareholder communications • direct stock purchase/dividend
other means, such as during an online such as proxy statements and reinvestment plan administration;
voting process or via email campaigns to annual/quarterly reports. Lists for an • escheatment and lost shareholder
shareholders with email addresses on file. company’s NOBOs may be requested search and report filing;
The company must receive positive from an intermediary. • issuance for secondary offerings;
consent from the shareholder to send When a shareholder opens a brokerage • stock option issuance;
proxy materials to the shareholder account and has its securities put in street • restricted stock transfers; and
electronically, and must not use an email name, the broker is required to give it the • communication with shareholders on
address provided by a shareholder for any opportunity to designate itself as an OBO behalf of the company, including sending:
purpose other than to send a copy of proxy or NOBO. If it does not elect to be a • proxy materials;
materials to that shareholder. NOBO, it will often by default be listed • statements with details of holdings
as an OBO. and or/transactions;
Additional shareholder communications: • tax forms, including Forms W9,
In addition to proxy-related Printed certificates and book entry: W8BEN and 1099-DIV, 1099-B;
communications, the company may send Shares can be held either electronically, and

NYSE IPO Guide 59


• letters confirming other Transfer agents are also subject to the Transfer agents in most cases act as
transactions, such as address- laws of the states of incorporation for both the company’s paying agent for dividends,
change confirmations the company and its shareholders, receiving and holding funds from the
including those pertaining to abandoned company and then disbursing the funds.
Transfer agents may also provide property and privacy. Transfer agents are Registered shareholders are then sent their
additional services for shareholders and additionally required by Internal Revenue funds by the transfer agent, by either
issuers, including online account access, Service (IRS) regulations to track and electronic funds transfer or check. Funds
employee equity compensation services report the dividend income and share sale for dividends paid to beneficial holders are
and corporate action services. activity they facilitate on behalf of issuers first sent by the company to the transfer
Transfer agents additionally act as a via Form 1099 reporting. Transfer agents agent, which then distributes the funds to
registrar, to help ensure that the company must also work with the IRS to work to DTC, which in turn forwards the funds
does not issue more shares of stock than resolve incorrect taxpayer identification electronically to the brokers for
have been authorized. While previously the numbers and begin/cease tax withholding distribution to the shareholders.
duties of a registrar were segregated from as directed by the IRS where appropriate. If it is a stock rather than a cash
those of a transfer agent, today these duties The duties of a transfer agent and dividend, the transfer agent will generally
are frequently performed by the transfer registrar may be performed in-house. issue shares in book-entry form and send
agent alone. In this capacity, transfer agents However, in most companies with widely statements to the shareholders. Issuance in
maintain records of the total authorized held share ownership, keeping track of stock paper certificate form is still an option, but
shares outstanding and track the issuance issuance and ownership is a considerable is rare in today’s environment. Payment
and cancellation of shares. task in today’s increasingly complex agents may also make other distributions
Transfer agents and registrars are regulatory environment. As a result, more on the company’s behalf, such as paying
appointed by resolution of the board of than 90% of issuers outsource this function out interest to bondholders.
directors. to a commercial transfer agent. The company may choose to sponsor
Since the mid-1970s, transfer agents a dividend reinvestment plan, so that
have been subject to federal regulation by (b) Dividends and other corporate actions shareholders’ dividends may be
the SEC in accordance with the Exchange Dividends: Dividends are payments automatically applied to the purchase of
Act. Transfer agents must comply with all representing a portion of the company’s additional shares of stock of the
applicable rules of the SEC and other profits paid to shareholders out of the corporation, with fractional shares applied
regulators, including strict requirements company’s current or retained earnings. to the holders account in book entry form.
for the accuracy and timeliness of Alternatively, capital dividends may also be The dividend reinvestment plan can
processing shareholder transactions. Given paid out of return on capital. Dividends are either be sponsored through a transfer
wide fluctuations in trading volume and typically paid on an annual, semi-annual or agent program, which does not require SEC
shareholder inquiries, transfer agents must quarterly basis. Dividends must be registration, or be registered directly with
be prepared to handle associated periods of declared by the board of directors each the SEC. Which method the company
peak transfer volume. Activities that are time they are paid. Dividends may be paid should choose depends on the respective
governed by these regulations include: in cash or in equity (shares of stock). importance of various factors, such as the
• turnaround times for processing; When the company declares the flexibility to use original issue shares or
• prompt response to inquiries; dividend, it sets both: treasury shares to raise capital, the ability
• accuracy of recordkeeping; • a “payable date” – the date on which to market to specific groups, or the option
• retention of records; holders are paid the dividend; and to offer easy and inexpensive access to the
• posting, transportation and destruction • a “dividend record date” – the date on company’s shares. Dividend reinvestment
of certificates; which shareholders must be on the plan shares may be purchased through the
• safeguarding of funds and securities; company’s books as a shareholder to plan on the open market or issued by the
• evaluation of internal accounting receive the dividend. company from treasury or reserve,
controls; and depending on the plan design.
• searches for “lost” shareholders. Once the record date is set, the stock Dividend reinvestment plans allow
exchanges or the National Association registered shareholders to purchase
Securities industry participants, such of Securities Dealers, Inc fixes the “ex- additional shares without having to go
as transfer agents, must also comply with dividend date,” normally two business through a broker, in addition to enabling
regulations designed to prevent fraud in days before the record date. Holders that them to reinvest their dividends. Some
connection with missing, lost, counterfeit purchase a stock on its ex-dividend date agents provide advanced purchasing
and stolen securities, in addition to other or after – with the trade settling post- options for shareholders to buy shares,
data security requirements. These data record date – will not receive that dividend such as purchasing shares on a regular
security requirements also extend to payment; the seller will receive it instead. schedule utilizing electronic fund transfers.
industry participants’ employees, who Holders that acquire stock before the ex-
must be fingerprinted and undergo dividend date will be entitled to receive the Share issuance: In addition to shares
background checks. dividend. issued during an IPO, the company may

60 NYSE IPO Guide


choose to issue additional stock, pre-determined price; transfer agent and the company must
subsequent to an IPO. Post-IPO mass • a subscription agent, inviting equity meet specific DTC criteria in order to
issuances are known as secondary security holders of the company to utilize FAST.
offerings: proceeds go to the company subscribe to new issuance of additional • Deposit or Withdrawal by Custodian
and dilute the ownership position of debt or equity; (DWAC) – DTC’s DWAC program is
shareholders for existing shareholders. • a paying agent, paying proceeds due; used to transfer shares for company
Companies may also issue shares • a conversion agent, converting debt holdings such as for stock options and
through a direct stock purchase plan. securities into equity securities; or employee plan shares. The company
Through a direct stock purchase plan, • an escrow agent, holding an asset on may perform DWAC transactions by
shareholders can cost-effectively purchase behalf of a first party for delivery to a providing instructions to the broker,
shares directly from the transfer agent second party upon specified conditions which initiates the transaction, and the
instead of opening a brokerage account. or events. transfer agent, which matches up the
Prior to the advent of direct stock purchase instructions and accepts the DWAC
plans, if an investor wanted to buy shares (c) Transferring shares and voting transaction. DWACs offer the
in a company and enroll in a dividend procedures advantage of real-time share movement
reinvestment plan, the investor first had Transferring shares: The Depository Trust but are manually intensive to process.
to buy shares from a broker. & Clearing Corporation, through its • Direct Registration System (DRS) –
A waiver plan, in most cases in subsidiary DTC, is a repository through DTC’s DRS system, established as an
conjunction with a direct stock purchase which stocks are transferred electronically addition to the FAST system in 1996,
plan, offers a controlled opportunity for between brokers and agents and which enables shares to be held on records of
raising capital without the costs of provides electronic storage and the transfer agent in book-entry form.
traditional underwriting. Normally, a direct clearinghouse services. Previously, book-entry shares could be
stock purchase plan has a set limit on the DTC was established to reduce the held only in the name of the broker on
maximum dollar amount per investment. volume of physical stock certificate DTC’s FAST system or through a
The limit allows the company to control transfers necessary for the trading of dividend reinvestment plan.
the investment in new shares. However, in securities. DTC holds eligible securities DRS also enables shares to be
instances where capital is needed, the for financial institutions such as brokerage transferred electronically to and from
company may waive the dollar limitation – firms and banks, collectively referred to the transfer agent and the broker
hence the term “waiver” plan. The as “participants.” Participants then may community, resulting in debits and
company may also offer a discount to the request a debit and corresponding credit to credits to FAST accounts, through the
shares’ current market price to entice their DTC accounts to enact a transfer. In following methods:
additional share purchases. this manner DTC facilitates share transfers • transfers of shares to street name
The company controls the key on behalf of shareholders, via their brokers from a transfer agent account; and
elements of the program, including the or transfer agents. • transfers of shares to a transfer
minimum price the market shares must Transfers can be accomplished through agent account from street name.
meet or exceed before new shares are the following three DTC systems: All new issuers must be “DRS eligible”
issued, who may participate and the • Fast Automated Securities Transfer as of January 2007. To do so, they
purchase limit. (FAST) system – in 1975, DTC must:
Other activities by the company may introduced the FAST system, which • have bylaws authorizing the use
require issuance, such as employee stock enables agents to provide electronic of book-entry shares;
purchase plans, stock options and company transfer, deposit and withdrawal services • arrange for their securities to be
awards. more quickly and efficiently. For the on the DTC’s FAST and PROFILE
FAST system, DTC establishes an systems; and
Corporate actions: In the case of a account with the transfer agent for each • if employing a transfer agent,
corporate action such as a merger, issue. This account is registered to Cede employ one that is a “limited
acquisition or capital reorganization, & Co, DTC’s nominee, and represents, participant” of DTC and operates in
exchange agents must receive and replace on the transfer agent’s books, the sum the DTC Direct Registration System.
the stock of the new or acquiring company total of shares for that issue held by the To process transactions and to
and replace it with the stock of the new or broker. Brokers maintain corresponding “participate” in DRS, issuers must:
acquiring company or cash, as applicable. books representing their shareholder • participate in a surety program to
The exchange agent function is often accounts. The transfer agent or broker initiate DRS Profile Modification
performed by the company’s transfer agent. can then use deposit and withdrawal-by- System transactions through DRS;
In addition, the transfer agent may act transfer orders to debit/credit these and
in many different roles, including as: accounts: the balance on the transfer • default all withdrawal-by-transfer
• a tender agent, collecting shares agent’s books is increased and decreased requests to “S” for statement,
surrendered from shareholders and by on a daily basis, and broker accounts unless specifically requested
making payments for the shares at a are adjusted accordingly by DTC. The otherwise by the investor.

NYSE IPO Guide 61


Processing paper certificates: If a of holding, such as an abandoned bank

shareholder loses a stock certificate, the account. The information provided in
old certificate must be cancelled and new this section refers specifically to the
shares issued, in either certificated or escheatment of stock and the associated
book-entry form. The shareholder must cash of registered shareholders, such as
pay a fee to the transfer agent and present for dividend payments.
an open-penalty surety bond, which Some states also require that, prior to
indemnifies the company and transfer escheatment of property, the shareholder of
agent, in order for the transfer agent to the property also be considered to be “lost,”
issue new shares. Most transfer agents defined by the SEC as having two
facilitate the bond purchase process for the successive pieces of mail returned.
shareholder for convenience, utilizing a In all cases shareholders’ property may
third-party surety provider. The lost be escheated only after a period of
certificate is reported to the Securities inactivity passes on the account or asset.
Information Center, which maintains a This “dormancy period,” as well as the type
database on behalf of the SEC. Brokers can of shareholder action that constitutes a
then reference this database when a valid contact, varies in length by each state.
certificate is presented to ensure the The company and its transfer agent
certificate is valid. must conduct various due diligence
A “transfer” is the industry term for a mailings and database searches prior to
change in the registered owner of stock. the property being escheated, as required
When a stock certificate is presented for by the states or the SEC, per SEC Rule
transfer, the transfer agent must determine 17ad-17.
that the registered owner has properly A more in-depth “deep search” to find
assigned the ownership of the security lost shareholders and the owners of
presented for transfer and that the abandoned property may also be
certificate is authentic. The certificate undertaken prior to escheatment, at the
presented must be secured by a medallion discretion of the company, usually by third-
guarantee, which is a guarantee by the party vendors for shareholder-paid fees.
transferring financial institution that the After due diligence requirements have
signature is genuine and that the financial been satisfied, the company and its transfer
institution accepts liability for a forgery. agent file unclaimed property reports with
Medallion guarantees protect shareholders the states and the property is turned over
by preventing unauthorized transfers and to the states.
potential investor losses. They also limit Records must be kept carefully by
the liability of the transfer agent that the transfer agent to comply with lost
accepts the certificates. shareholder and escheatment regulations,
Other types of transactions that do and to ensure either that shareholder
not result in a change in ownership include property is not turned over to the state
combining or splitting certificates into larger unnecessarily or that the applicable
or smaller denominations, consolidating like property is escheated as required. Some
accounts and converting shares held via agents make preliminary reports for
certificate to book-entry form. common stock dividends, returned stock
certificates, un-cashed checks and returned
Lost shareholders, abandoned property checks available for review prior to the
and escheatment: The United States, escheatment deadline. In order to keep
Puerto Rico, Washington, DC and other records as up to date as possible, some
US territories require that financial transfer agents may choose to perform
institutions, issuers and their transfer regular database searches for changed
agents report when property is deemed to addresses, such as with the national change
be “unclaimed” or “abandoned.” This of address product of the US Postal Service.
property may be considered unclaimed After property has been escheated,
based on the age of on outstanding check or records must be maintained in case an
unissued credit or due to inactivity on an individual shareholder, at a later time,
account. Escheatment – the process of attempts to retrieve the property. The
transferring abandoned property to the shareholder can reclaim the assets by
state or territory – can apply to any type contacting the individual state directly.

62 NYSE IPO Guide

Obligations of a public company

NYSE IPO Guide 63

Obligations of a public company

5.1 Reporting requirements exit these reporting categories are different For more information about the financial
from those used for the initial statements that are required for the
(a) Ongoing reporting requirements determination. company’s various reports, see Chapter 2.2.
After the initial public offering (IPO), the The periodic reports contemplate a
company must file regular “periodic” and system of “integrated disclosure,” in which (b) Reporting for US companies
other reports with the Securities and portions of the various reports may be A US company must file an annual report
Exchange Commission (SEC) in accordance incorporated by reference into other on Form 10-K with the SEC after the end
with the requirements of the Securities reports to avoid repetition. This of each fiscal year. A non-accelerated filer
Exchange Act of 1934. The reports required incorporation by reference is not required, must file Form 10-K no later than 90
for a US company differ somewhat from but is very common in US company days after the end of the fiscal year.
those required for a foreign private issuer, reports, particularly Form 10-K and the This deadline shortens to 75 days for
as shown in table 1 below. proxy statement. Incorporation by an accelerated filer and 60 days for a
The timing and some of the required reference is also a concept that permits large accelerated filer. As noted above,
content of these reports will depend on the more streamlined disclosure for securities following an IPO, the company will be a
company’s reporting category, which is offerings, in particular after the company non-accelerated filer for the first year.
largely based on the size of its worldwide has been public for at least a year and is The contents of Form 10-K are largely
“public float,” or the market value of the eligible to use a registration statement similar to the IPO prospectus, with several
voting and non-voting common equity held on Form S-3 or F-3 for public offerings. important differences, outlined below.
by non-affiliates, as of the last business day Existing and future reports that the
of the most recent second fiscal quarter. company files with the SEC will be Internal control over financial reporting:
This is illustrated in table 2 below. incorporated into Form S-3 or F-3, keeping Beginning with the second Form 10-K filed
In many cases a non-accelerated filer the information current and eliminating by the company, Form 10-K must include
will also qualify as a smaller reporting the need to include detailed disclosure a management report on the effectiveness
company, with scaled-back information about the company in a prospectus for of internal control over financial reporting
requirements. The thresholds to enter and an offering. (ICFR) and a related auditors’ attestation,
as described in more detail below.

Table 1 Disclosure controls and procedures:

Disclosure about management’s evaluation
US company Foreign private issuer of the effectiveness of disclosure controls
and procedures, as described in more detail
Periodic reporting: below, is also required, without any
• Annual reports on Form 10-K • Annual reports on Form 20-F transition period.
• Quarterly reports on Form 10-Q or Form 40-F
Certifications: The company’s chief
Current reporting: executive officer (CEO) and chief financial
• Current reports on Form 8-K • Current reports on Form 6-K officer (CFO) must certify Form 10-K, as
described in more detail below.
Shareholder meetings and
proxy solicitations: Unresolved SEC staff comments: An
• Proxy statements accelerated or large accelerated filer must
• Rule 14a-3 “glossy” annual report include disclosure of any unresolved SEC
staff comments on its periodic or current
reports that the company received at least
Table 2 180 days before the end of the fiscal year.

Reporting category Public float Stock repurchases and use of proceeds:

The company must disclose its stock
After at least 12 calendar repurchases (for more information, see
months of reporting, including Chapter 5.3), as well as the use of the
at least one Form 10-K: proceeds from the IPO.

• Large accelerated filer $700 million or more Incorporation by reference from proxy
• Accelerated filer $75 million or more (but less than statement: Most of the required disclosure
$700 million) about the company’s management and
Non-accelerated filer All others governance arrangements, including the
detailed disclosure of executive

64 NYSE IPO Guide

Obligations of a public company

compensation arrangements, is typically If the agenda includes the election of CFO certifications, as well as information
incorporated by reference from the proxy directors, the proxy statement must be about risk factors, legal proceedings and
statement. accompanied or preceded by an annual company stock repurchases, among other
report. This can be Form 10-K, but more things. In contrast to any interim financial
XBRL: The financial statements contained typically is a separate “glossy” report with statements included in the IPO prospectus,
in Form 10-K must also be filed in an pictures and other investor-friendly unaudited interim financial statements
exhibit using the Extensible Business information, which is also often used for included in quarterly reports on Form
Reporting Language (XBRL) interactive other investor relations purposes. Some 10-Q must be reviewed by an independent
data format (see Chapter 2.2). companies choose to combine the two, accountant prior to filing. As for Form 10-
creating a “wrap” for Form 10-K to create K, the financial statements must also be
Proxy statement: Following the IPO, a US the “glossy.” included in XBRL format.
company will be subject to the proxy rules For proxy solicitation purposes, the
under the Exchange Act. The company annual report (also known as the “Rule Current reports on Form 8-K: The US
must furnish a proxy statement to 14a-3 annual report”) must contain audited securities laws generally do not require
shareholders before soliciting voting financial statements, management’s current reporting of all material company
authority for a matter submitted to discussion and analysis (MD&A), selected events, unlike in some other jurisdictions,
shareholder vote. The stock exchange financial data and disclosure about market unless the company is buying or selling
listing rules typically require a listed risk, stock prices and dividend payments, securities or makes other disclosure for
company to hold a regular annual as well as a brief description of the which information about the material
shareholder meeting, for which the company’s business, a stock performance event is needed to make that disclosure
company will solicit proxies, so most graph and a list of the directors and complete and accurate. Instead, a US
companies prepare an annual proxy executive officers. company must file a current report on
statement. Until recently, the proxy statement Form 8-K with the SEC only for certain
The proxy statement must contain and annual report had to be mailed to all specified events and generally within four
information about the shareholder shareholders; however, recent SEC “e- business days. The more common, day-to-
meeting, the matters to be considered proxy” rules permit the company to post day events that trigger this reporting
(including shareholder proposals, if any) proxy materials on a publicly accessible include:
and voting procedures. The company website and mail only a notice to • an earnings release or other
should be sure to consider any shareholders. This process is known as information about historical results
requirements imposed by its charter, “notice and access.” The stock exchanges of operations and financial condition;
bylaws or state law, in addition to SEC also used to require a physical mailing of • the entry into or amendment or
and stock exchange requirements. an annual report to shareholders, but now termination of a material definitive
The most common item on the permit website posting, and the NYSE agreement;
meeting agenda is the election of directors. recently eliminated the need for a press • a significant acquisition or disposition
In this case the proxy statement will release about the posting in most cases. of assets (which may also require pro
contain much of the same disclosure about Although e-proxy procedures are less forma financial information);
the company’s management and expensive, many companies still choose • the creation of a material direct
governance arrangements that was to physically mail these documents to financial obligation or a contingent
included in the IPO prospectus, including shareholders, primarily for investor off-balance sheet obligation or a
the detailed disclosure of executive relations purposes. related triggering event;
compensation arrangements and the • costs associated with exit and disposal
compensation discussion and analysis. Quarterly reports on Form 10-Q: A US activities, or material impairments;
There are also several items that were not company must file quarterly reports on • unregistered sales of equity securities
included in the IPO prospectus, including Form 10-Q with the SEC after the end of or material modifications of the rights
officer and director compliance with each of the first three quarters of each of security holders; and
Section 16 filings (for more information, fiscal year. A non-accelerated filer must • various governance items, such as the
see Chapter 5.4), and information about file Form 10-Q no later than 45 days after departure or election of directors and
code of ethics compliance and waivers. the end of the fiscal year. This deadline executive officers, results of
Other typical agenda items include the shortens to 40 days for accelerated and shareholder votes, amendments to
approval or ratification of the company’s large accelerated filers. charter documents and amendments
auditors, which requires disclosure about Form 10-Q largely consists of interim to or waivers of the code of ethics.
fees paid to the auditors, and the adoption financial statements and the related
or amendment of equity compensation MD&A. It also includes disclosure about Form 8-K is also used for information
plans, for which the material terms must effectiveness of disclosure controls and disclosed to ensure compliance with
be described together with a table procedures, changes in internal control Regulation F-D (Fair Disclosure), as well
summarizing all of the company’s equity over financial reporting (but not a full as for other information the company
compensation plans. assessment as in Form 10-K), and CEO and considers important for investors.

NYSE IPO Guide 65

Obligations of a public company

Press releases: In addition to SEC Sample summary annual reporting cycle for US large accelerated filer
reporting requirements, the stock (calendar year end)
exchanges impose reporting requirements
on listed companies. It was these rules January July
that in part drove the issuance of press • Press release announcing Q4 earnings • Press release announcing Q2 earnings
releases to announce annual and quarterly call/webcast (c 1 week in advance). call/webcast (c 1 week in advance).
results, which most companies do • Q4 earnings release and Form 8-K. • Q2 earnings release and Form 8-K.
generally as a matter of good investor • Q4 earnings call/webcast. • Q2 earnings call/webcast.
relations (see Chapter 4.4).
Stock exchange rules typically require February August
timely disclosure of material events • Submit SEC no-action requests to • File Q2 Form 10-Q (no later than 40
beyond those covered by Form 8-K. For exclude shareholder proposals from days after quarter end – that is, by
example, under NYSE rules, a listed proxy (at least 80 calendar days before August 9).
company is expected to: definitive proxy filed).
• release quickly to the public any news • File Form 10-K (no later than 60 days after
or information that might reasonably fiscal year end – that is, by March 1 or 2).
be expected to materially affect the • File “glossy,” if incorporated by
market for its securities; and reference into Form 10-K, and print/
• act promptly to dispel unfounded post on website.
rumors that result in unusual market
activity or price variations. March September
• File preliminary proxy with SEC (unless • September 30 – Q3 quarter end.
Examples of events that NYSE expects contains only certain specified matters),
would result in prompt disclosure include at least 10 calendar days before
annual and quarterly earnings, dividend definitive proxy filed, but review may
announcements, mergers, acquisitions, take up to 30 days).
tender offers, stock splits, major • March 31 – Q1 quarter end.
management changes and any substantive
items of an unusual or non-recurrent April October
nature. These announcements may be • Press release announcing Q1 earnings • Press release announcing Q3 earnings
made by any method that constitutes call/webcast (c 1 week in advance). call/webcast (c 1 week in advance).
compliance with Regulation F-D • Q1 earnings release and Form 8-K. • Q3 earnings release and Form 8-K.
(discussed below), although the NYSE • Q1 earnings call/webcast. • Q3 earnings call/webcast.
encourages use of a press release. The • File and post/mail definitive proxy (no
company may generally exercise judgment later than 120 days after year end if
as to the timing of a public release on incorporated into 10-K; at least 40 days
corporate developments where disclosure before annual meeting if using e-proxy
would endanger the company’s goals (eg, “notice and access”).
in the M&A context) or provide
information helpful to a competitor. May November
• File Q1 Form 10-Q (no later than • File Q3 Form 10-Q (no later than 40
(c) Reporting for foreign private issuers 40 days after quarter end – that is, days after quarter end – that is, by
The primary report for a foreign private by May 10). November 9).
issuer is the annual report on Form 20-F. • Notify shareholder proposal
(Canadian companies may also use Form proponents of eligibility or procedural
40-F.) Foreign private issuers are not defects in proposal (within 14 days
subject to the proxy rules and need not of receiving proposal).
prepare a proxy statement, although
they often choose to publish a “glossy” June December
annual report in addition to Form 20-F. • Annual shareholders’ meeting. • Deadline for shareholder proposals
Foreign private issuers also need not • June 30 – Q2 quarter end. (120 days before date of prior year’s
file Form 10-Q or Form 8-K, but can proxy statement).
instead submit reports on Form 6-K to • Send directors’ and officers’
provide information that they provide questionnaires to board members and
to investors under their home country executive officers (for proxy preparation).
rules or otherwise. • December 31 – year end.

66 NYSE IPO Guide

Obligations of a public company

Annual report on Form 20-F: Form 20-F must Duty to update: If the company discovers presents certain financial information in a
be filed with the SEC within six months of that a public statement was inaccurate or way that is different from the financial
the close of each fiscal year. In 2012, this misleading when made, it must promptly statement presentation. Information that
period will be shortened to four months. correct the statement. Even if accurate triggers these SEC rules is referred to as
As with Form 10-K, the contents of when made, forward-looking statements “non-Generally Accepted Accounting
Form 20-F are very similar to the IPO may need to be updated if circumstances Principles (GAAP) financial measures.”
prospectus. Many of the key differences change and the statements become Use of non-GAAP financial measures in a
are the same as for Form 10-K: disclosures inaccurate or misleading. Currently, the public statement (whether written or oral)
about controls and CEO and CFO US courts are split on whether a duty to is subject to Regulation G, which requires
certifications, as well as information about update exists. In any event, the company that the disclosure be accompanied by:
stock repurchases and use of the proceeds should be careful about making forward- • a presentation of the most directly
from the IPO. XBRL requirements are also looking statements and consider whether comparable financial measure
being phased in for the financial they may need to be updated over time. calculated and presented in accordance
statements contained in Form 20-F. Other with the company’s generally accepted
differences from the IPO prospectus Selective disclosure and Regulation F-D: accounting principles (GAAP); and
include items that a US company reports The company should take care to avoid • a reconciliation (by schedule or other
on a current basis on Form 8-K, such as selective disclosure of material non-public clearly understandable method) of the
material modifications of the rights of information to market professionals and to differences between the non-GAAP
security holders and changes in investors under circumstances in which it is financial measure and the most directly
accountants, or in the proxy statement, reasonably foreseeable that the recipient will comparable GAAP measure.
such as information about the code of trade on the basis of the information, both
ethics and other governance information. because of potential insider trading liability More stringent requirements apply if
(see Chapter 6.1), and because of Regulation the company uses non-GAAP financial
Current reports on Form 6-K: A foreign F-D. As a result of these concerns, the measures in a report filed with the SEC or
private issuer must submit current reports company must be very careful when it in an earnings release. Although Regulation
on Form 6-K with any material communicates with individual investors G may not apply in some cases to
information that is, or is required to be: and research analysts (see Chapter 4.1). disclosures by foreign private issuers that
• made public in its home country; Regulation F-D requires that if the do not use US GAAP, the more stringent
• publicly available as a result of a filing company discloses material non-public requirements for a report filed with the
with any stock exchange on which its information, it must make general public SEC apply to foreign private issuers.
securities are listed; or disclosure of that information at the same
• distributed to shareholders. time. This disclosure may be made by (d) Disclosure controls, internal controls
Form 8-K, press release, public webcast and certifications
Unlike Form 8-K, Form 6-K does not (announced in advance) or other means One of the most significant challenges
have a specific deadline, but instead must designed to provide broad, non- for the company after going public is the
be filed “promptly.” Form 6-K is a very exclusionary access to the information; required control framework and related
simple form, consisting simply of a cover but mere posting on the company website disclosures. Perhaps the best-known
and signature pages to which the relevant often will not suffice. element of that framework, often
information is attached. The information Regulation F-D does not apply to accompanied by considerable cost, is
need not be in English, but a full English communications with media management’s report on the effectiveness
translation is required for press releases, representatives, advisors in a relationship of ICFR and a related auditors’ attestation.
annual or interim financial information of trust or confidence with the company This requirement was imposed as a result
and information sent directly to security (eg, legal advisors and investment bankers), of Section 404 of the Sarbanes-Oxley Act
holders. For other information, an English persons who expressly agree to keep the of 2002 (SOX) and is often referred to as
summary will suffice. information confidential, rating agency “Section 404 reporting,” or even “SOX
Foreign private issuers are also representatives, government officials and reporting” (although the act provided for
generally required to comply with the stock employees. It also does not apply to much more than this). Separately,
exchange rules requiring prompt disclosure communications made in the context of management is also required to report on
of material events discussed above. a registered public offering of securities, the effectiveness of disclosure controls
although it does apply in the private and procedures, and the CEO and CFO
Rule 12b-20 under the Exchange Act: As offering context. Foreign private issuers are required to certify the company’s
noted above, the company’s public are not required to comply with Regulation periodic reports.
disclosures must include any additional F-D, although many do so voluntarily or
information “as may be necessary to make look to it for guidance as a “best practice.” ICFR: ICFR is a set of processes designed
the required statements, in light of the to provide reasonable assurance of the
circumstances under which they are made, Non-GAAP financial measures: Special reliability of financial reporting and the
not misleading.” disclosure rules apply when the company preparation of financial statements in

NYSE IPO Guide 67

Obligations of a public company

accordance with GAAP. These procedures As for ICFR, disclosure controls and report contains no material
must be designed by, or under the procedures must be designed by, or under misstatements or omissions;
supervision of, the CEO and the CFO, who the supervision of, the CEO and the CFO, • based on his or her knowledge, the
must include statements about them in who must include statements about them financial statements and other financial
their certifications (discussed below). in their certifications (discussed below). information fairly present in all
Once Section 404 reporting is required, Management must evaluate and disclose material respects the financial
the company’s Form 10-K or Form 20-F the effectiveness of disclosure controls and condition, results of operations and
must include a management report procedures regularly (US companies must cash flows of the company as of and for
containing: do so quarterly and foreign private issuers the periods presented in the report;
• a statement of management’s annually). • the CEO and the CFO are responsible
responsibility for establishing and Disclosure controls and procedures for establishing and maintaining
maintaining adequate ICFR for the should generally be documented in writing disclosure controls and procedures and
company; and tailored to reflect the operations of the ICFR for the company, and have:
• a statement identifying the framework company and its particular risk profile. • properly designed the disclosure
used by management to evaluate the The starting point for creating a system of controls and procedures, or caused
effectiveness of ICFR; disclosure controls and procedures should such disclosure controls and
• an assessment by management of the be an inventory of the company’s existing procedures to be designed under
effectiveness of ICFR as of the end of practices. The company should develop its their supervision;
the most recent fiscal year, including disclosure controls and procedures in • evaluated the effectiveness of the
a statement as to whether ICFR is consultation with its auditors and outside disclosure controls and procedures
effective; and counsel, and ensure their compatibility as of the end of the period covered
• a statement that the auditors of the with the company’s internal controls and by the report;
financial statements included in the other compliance policies and procedures. • presented in the report their
report have issued an audit report on Many companies choose to create a conclusions about the effectiveness
the effectiveness of ICFR. disclosure committee as part of their of the controls and procedures
disclosure controls and procedures. This based on that evaluation; and
The auditors’ report must also be committee is responsible for considering • disclosed in the report any change
included in Form 10-K or Form 20-F. the materiality of information and in the company’s ICFR that
Any material weaknesses in ICFR must determining disclosure obligations on a occurred during its most recent
be disclosed, and management and the timely basis, and typically includes: fiscal quarter (the fourth fiscal
auditors may not conclude that ICFR is • the principal accounting officer or quarter in the case of an annual
effective if there are one or more material controller; report) that has materially affected,
weaknesses. US companies must also • the general counsel or other senior or is reasonably likely to materially
disclose material changes in ICOFR in legal officer with responsibility for affect, the company’s ICFR; and
Form 10-Q. disclosure matters; • the CEO and CFO, based on their most
A newly public company typically need • the principal risk management officer; recent evaluation of ICFR, have
not comply with the Section 404 reporting and disclosed to the audit committee and
requirements until its second Form 10-K • the chief investor relations officer. the company’s auditors:
after the IPO. Currently, a non-accelerated • all significant deficiencies and
filer need not provide the auditors’ report, CEO and CFO certifications: As a result of material weaknesses in the design
but will be required to do so starting with SOX, the company’s periodic reports must or operation of ICFR which are
its first Form 10-K for a fiscal year ending include two types of CEO and CFO reasonably likely to adversely affect
on or after June 15 2010. certifications: Section 302 certifications the company’s ability to record,
and Section 96 certifications. These process, summarize and report
Disclosure controls and procedures: The certifications must reproduce the required financial information; and
company must also maintain disclosure statements exactly – they may not be • any fraud (whether or not material)
controls and procedures. These are changed in any respect, even if the change involving persons having a significant
controls and procedures designed to ensure appears inconsequential in nature, although role in the ICFR of the company.
that information required to be disclosed certain portions of the certifications will
in the reports that the company files or not be required until the company is Under Section 906, each periodic
submits under the Exchange Act subject to Section 404 reporting. report containing financial statements filed
(discussed above) is recorded, processed, Under Section 302, each Form 10-K, by the company must be accompanied by a
summarized and reported in a timely and Form 10-Q or Form 20-F must include statement by the company’s CEO and CFO
accurate manner. They will overlap with statements by the CEO and CFO, or persons (or equivalent thereof) certifying that:
ICFR, but disclosure controls and performing similar functions, certifying that: • the report fully complies with the
procedures cover both financial and non- • he or she has read the report; requirements of the Exchange Act; and
financial information. • based on his or her knowledge, the • the information contained fairly

68 NYSE IPO Guide

Obligations of a public company

presents, in all material respects, the The SEC has adopted two rules indicating that the prohibited conduct is
financial condition and results of intended to promote compliance with the substantially certain to occur. Conscious
operations of the company. FCPA. The first rule prohibits all persons disregard or deliberate ignorance of known
from directly or indirectly falsifying any circumstances that should reasonably
(e) Foreign Corrupt Practices Act book, record or account of any company alert one to the high probability of a bribe
A significant source of new compliance subject to the FCPA. The second rule can lead to liability. If the company ignores
requirements for the company following an generally bars the company’s directors and warnings or “red flags” indicating that its
IPO is the Foreign Corrupt Practices Act officers from making material funds were being used to bribe foreign
(FCPA). The FCPA comprises two sets of misstatements, or omitting material facts officials, the company may be subject to
provisions. One set, the accounting from statements they make, to accountants prosecution. The nature of those red flags
provisions, requires the company to keep in connection with audits of the company varies depending on the circumstances, but
accurate books and records, and to or examinations of the company’s financial enforcement authorities likely will expect
maintain a system of internal accounting statements or SEC filings, and bars companies to be particularly vigilant when
controls. These procedures are designed directors, officers and persons acting under active in industries (eg, the oil business) or
to eliminate the ability of companies to their control from coercing, manipulating, geographical areas (eg, certain countries in
conceal unlawful payments (although the misleading or fraudulently influencing the Africa) known for corruption, or with parties
accounting provisions can be violated if auditors if the person engaging in the that have a history of ethical problems.
no bribery is involved). The other set of conduct knew or should have known that The anti-bribery provisions apply to
provisions, the anti-bribery provisions, doing so could render the company’s any acts of the company involving US
prohibits the bribery of non-US financial statements materially misleading. interstate commerce. If the company is
government officials, who include: The accounting provisions also apply located or has its principal place of
• officers and employees of a foreign to subsidiaries when the company owns or business in the United States, it is subject
government, or of any government controls more than 50% of the voting to the anti-bribery provisions regardless
department, agency or instrumentality power of the subsidiary. of any other tie to the United States.
(eg, a state-owned enterprise), or of a Individual directors or employees of the
public international organization (eg, Anti-bribery provisions: The FCPA company that are US citizens or residents
the World Bank); or prohibits the company from using US are subject to the anti-bribery provisions
• any person acting in an official capacity interstate commerce to corruptly make an regardless of any other connection with
for or on behalf of any such offer, pay, promise to pay or authorize the the United States.
government department, agency or payment of any money, gift or anything of
instrumentality, or for or on behalf of value to a foreign official, a foreign political Exclusions from FCPA: The FCPA contains
any such public international party or an official thereof. It further an important exception: it permits so-called
organization. prohibits candidates for foreign office from “grease” payments. A grease payment is a
doing any of the following to obtain or payment whose purpose is to facilitate or
Accounting provisions: The FCPA requires retain business for or with, or direct expedite “routine governmental action.”
the company to maintain books, records business to, any person: Examples of such actions include obtaining
and accounts that, in reasonable detail, • influence any official act or decision; permits, processing visas and providing
accurately and fairly reflect the • fail to perform their official duties or police protection. “Routine government
transactions and dispositions of the assets secure any improper advantage (eg, a action” does not include a decision by a non-
of the company, and to devise and maintain tax rate lower than one allowed by law); US official to award new business or to
an adequate system of internal accounting or continue business with a particular company.
controls. This system must be sufficient to • use their influence with a foreign The FCPA also has two affirmative
provide assurances that: government or instrumentality thereof defenses:
• transactions are executed in accordance to influence any act or decision of that • The payment at issue was lawful under
with management’s authorization and government or instrumentality. the written laws of the foreign country;
recorded as necessary to permit the or
preparation of financial statements in The types of payments described above • The payment was made for a reasonable,
conformity with the applicable criteria cannot be made or offered through a third bona fide business purpose, such as
and maintain accountability for assets; party if the payor knows that all or a portion travel and lodging expenses, for the
• access to assets is permitted only in of the payment would be made or offered promotion, demonstration or
accordance with management’s to a non-US official. The company may be explanation of a product (eg, paying the
authorization; and deemed to “know” of improper payments reasonable expenses of a non-US official
• recorded accountability for assets is to intermediaries even without actual who comes to the United States for a
compared with the existing assets at knowledge of a bribe. A person is demonstration of a company product).
reasonable intervals and appropriate considered to “know” of improper
action is taken with respect to any payments if circumstances exist, or if the Enforcement and penalties: The FCPA is
differences. person has a firm belief that they exist, enforced by the US Department of Justice

NYSE IPO Guide 69

Obligations of a public company

and the SEC. Penalties can be severe: to return to compliance. Please see the and other obligations, including opening
• Accounting provisions – if convicted appendices for more details, including the the tender to all holders of the class of the
of knowing violations, individuals may alternative listing standards for non-US securities sought in the offer and paying
be sentenced to up to 20 years’ companies included in Appendix II. the same price to all holders whose
imprisonment and fined up to $5 securities are purchased. The company can
million for each violation, while (b) Governance requirements avoid the tender offer rules by conducting
companies may be fined up to $25 In addition to these quantitative listing repurchases of its equity securities either
million for each violation. standards, the company must meet NYSE through customary market transactions or
• Anti-bribery provisions – convicted or NYSE Amex corporate governance listing in individually negotiated private
individuals may be sentenced to up to standards, as applicable. The company must transactions (in either case, in accordance
five years’ imprisonment and up to a comply with corporate governance with the provisions of Rule 10b-18
$250,000 fine for each violation. The requirements at the time of listing and discussed below).
company employing the individual may throughout the life of its listing. As with
not pay this fine on the employee’s the quantitative standards, different (b) Stock repurchase programs
behalf. Convicted companies may be standards are applicable to different types Another concern when the company
fined $2 million or twice the applicable of issuers. In addition, for a company repurchases its stock is that this will be
gross gain or loss, whichever is greater, listing in conjunction with an IPO, certain viewed as market manipulation (see
for each violation. of the corporate governance requirements Chapter 6.1 for further discussion about
can be phased in. Governance requirements market manipulation and related liability).
When settling FCPA cases in recent for NYSE Amex listed companies, designed Rule 10b-18 under the Exchange Act
years, the Department of Justice has to accommodate smaller companies, differ provides a safe harbor from this liability.
frequently required companies to hire an from NYSE requirements. As a result, companies generally adhere to
FCPA compliance monitor that periodically To learn more about the NYSE and the provisions of Rule 10b-18 when
reports to the government on the NYSE Amex financial, distribution and repurchasing stock, and in particular
company’s efforts to improve its anti- governance requirements, please refer to when conducting a program of repurchases
corruption policies. the complete requirements outlined in the over a period of time. Rule 10b-18 requires
In the past few years, the size of the New York Stock Exchange Listed Company the following:
penalties imposed for FCPA violations has Manual, the comprehensive rulebook for • Single broker or dealer – on a given
significantly increased, including a $44 listed companies, which can be accessed day, the company must make all
million penalty against Baker Hughes in online at http://nysemanual.nyse.com/lcm, repurchases either through one broker
2007, $800 million against Siemens in or to the NYSE Amex Company guide, or from one dealer.
2008, $579 million against KBR and which can be referenced at • Timing – no repurchase should be
Halliburton in 2009, and $400 million http://nyseamexrules.nyse.com/amex/com effected at the opening of the stock
against BAE Systems in 2010. panyguide. Alternatively, contact the NYSE exchange on which the stock lists or
or NYSE Amex directly. within the last half-hour of trading
5.2 Listing standards on that stock exchange.
When a company’s shares are listed on the 5.3 Trading and repurchases • Maximum price – no repurchase
NYSE or NYSE Amex, investors can expect Many public companies repurchase their should occur at a price exceeding the
compliance with ongoing financial shares from time to time – for example, higher of the last sale price for the
standards, disclosure policies and to offset dilution from stock option securities and the current bid price
corporate governance practices designed exercises or generally to return value to for the securities.
to promote integrity and accountability. shareholders. These repurchases, as well as • Volume – the total volume of
sales of the company’s stock by directors, repurchases by the company or any
(a) Financial and distribution standards officers and other affiliates, should be affiliated purchaser on any given day
The NYSE and NYSE Amex have carefully structured so as not to give rise must not exceed 25% of the trading
established quantitative and qualitative to potential liability under the US volume for the security. However, once
standards for initial listing of US and non- securities laws. each week, the company may instead
US companies. The financial standards for effect a single purchase of a “block”
operating companies listing on the NYSE (a) Tender offers of securities.
or NYSE Amex are summarized on the Any tender offer by the company for its
chart on page 73. Standards reflect the equity securities is subject to Section 13(e) The SEC recently proposed some
different types of issues and issuers. Listed of the Exchange Act and Rule 13e-4 relatively technical adjustments to these
companies must meet continued listing thereunder. Whether a stock repurchase requirements, but they have not yet been
standards on an ongoing basis. These too constitutes a tender offer depends on a finalized. The safe harbor provided by Rule
are outlined on page 74. Once companies complex, fact-specific inquiry. If the 10b-18 is not available at any time during
fall below continued listing standards, company does conduct a tender offer, it which the company is engaged in a
generally they are afforded a period of time must comply with extensive disclosure “distribution” of its securities in the

70 NYSE IPO Guide

Obligations of a public company

NYSE original listing standards* NYSE continued listing standards*

Standard 1 $10 million aggregate pre-tax earnings (as adjusted) A company falls below compliance if its global market
Earnings for the last three fiscal years, with at least $2 million cap falls below a $50 million 30-day average and at the
in each of the most recent two fiscal years and same time it has less than $50 million in shareholders’
positive amounts in all three years. equity.
$12 million aggregate pre-tax earnings (as adjusted)
for the last three fiscal years, with at least $5 million
in the most recent fiscal year and $2 million in the
next most recent fiscal year.

Standard 2 $500 million global market cap. A company falls below compliance if:
Option A • its global market cap falls below a $250 million 30-day
Valuation/ $100 million revenues over the most recent average and at the same time it has less than $20
revenue with 12 months. million revenues over the most recent 12 months;
cash flow or
$25 million aggregate cash flow (as adjusted) for • its global market cap falls below a $75 million 30-day
the last three fiscal years, all years positive. average.

Standard 2 $750 million global market cap (IPO valuation or A company falls below compliance if:
Option B three-month average). • its global market cap falls below a $375 million 30-day
Pure valuation/ average and at the same time it has less than $15
revenue test $75 million revenues in the most recent fiscal year. million revenues for the most recent fiscal year;
• its global market cap falls below a $100 million 30-day

Standard 3 $500 million global market cap. A company falls below compliance if the parent/affiliate
Affiliated no longer “controls” the company or such parent/affiliate
company 12 months’ operating history. falls below continued listing standards and the company’s
global market cap falls below a $75 million 30-day
Parent or affiliated company is a listed company average and at the same time it has less than $75 million
in good standing. in shareholder’s equity.

Standard 4 $150 million global market cap. A company falls below compliance if its global market
Assets/equity cap falls below a $50 million 30-day average and at the
$75 million total assets. same time it has less than $50 million in shareholders’
$50 million shareholders’ equity.

*The company must have an IPO stock price or a public market price at the time of initial listing of $4.00 per share and will fall below continued
listing requirements if its stock price falls below $1.00 on a 30-day average. At the time of original listing the company must have:
i) 400 round-lot holders (ie, holders of 100 shares) and 1.1 million publicly held shares; and ii) a market value of publicly held shares of $40 million
(in the case of an IPO, spin-off or company listing under the affiliated company standard) or $100 million (all other listings). Shares held by
directors, officers or their immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publicly
held shares. The company is subject to immediate delisting proceedings if its global market cap falls below a $15 million 30-day average.

NYSE IPO Guide 71

Obligations of a public company

NYSE Amex original listing standards

Requirement Standard 1 Standard 2 Standard 3 Standard 4

Section 101(a) Section 101(b) Section 101(c) Section 101(d)

Stockholders’ equity $4 million $4 million $4 million n/a

Pre-tax income $750,000 in last fiscal n/a n/a n/a

year or in two of the last
three fiscal years

Market capitalization n/a n/a $50 million • $75 million;

• total assets and total
revenue of $75 million
each (in most recent
fiscal year or two of
last three fiscal years).

Minimum stock price $3 $3 $2 $3

Market value of publicly $3 million $15 million $15 million $20 million
held shares

History of operations n/a Two years n/a n/a

Public Option 1 – 800/500,000

shareholders/publicly Option 2 – 400/1,000,000
held shares* Option 3 – 400/500,000

*Public shareholders and public float do not include shareholders or shares held directly or indirectly by an officer, director, controlling
stockholder or other concentrated (ie.,10% or greater), affiliated or family holdings. Option 3 requires a daily trading volume of 2,000 shares
during the six months prior to listing.

United States, and does not protect against

NYSE Amex continued listing standards liability under Rule 10b-5 if the company
repurchases its securities while in
A company will be below continued listing requirements if it has: possession of material non-public
• Stockholders’ equity less than: The company will often disclose planned
• $2 million and losses in two out of the three most recent fiscal years; repurchase activity in its periodic reports or
• $4 million and losses in three out of the four most recent fiscal years; or earnings releases and may be required to
• $6 million and losses in the five most recent fiscal years. disclose significant repurchase transactions
by press release. The company’s periodic
A company that falls below any of the above will continue to be deemed in reports must also include specific disclosure
compliance with listing standards if it meets the following requirements: about all of its stock repurchases over the
• Market capitalization of $50 million; OR total assets AND total revenue of $50 period covered by the report.
million each in most recent fiscal year or two of the three most recent fiscal years.
• 1.1 million shares, a market value of publicly held shares of $15 million, 400 Accelerated share repurchase plans:
round-lot shareholders. The company may use accelerated share
repurchase plans to buy back shares from
• Less than 200,000 publicly held shares. the market. A typical accelerated share
repurchase involves the combination of
• Less than 300 public shareholders. a buyback of common stock from an
investment bank, which typically borrows
• A market value of publicly held shares of less than $1 million (over 90 consecutive days). the shares from investors, and a forward
contract with the investment bank on the

72 NYSE IPO Guide

Obligations of a public company

company’s common stock. Settlement of shareholders that directly or indirectly controlling or principal shareholder will
the forward contract is indexed to the control management or policies of the often monitor that shareholder’s
company’s common stock. Accelerated company, are considered “restricted,” and compliance with these requirements.
share repurchase plans allow the company resales must either be registered with the Second, filings under these requirements
to exchange a fixed amount of money for SEC or be effected pursuant to an occasionally provide important information
shares of its stock immediately, exemption. Securities acquired by a non- about transactions by major shareholders.
transferring the risk of changes in the affiliate in a private transaction are also
share price to the investment bank and considered restricted securities for a Schedule 13-D filers: Pursuant to Sections
generally permitting immediate accounting period of up to one year. 13(d) and 13(g) of the Exchange Act, and the
recognition of the repurchase for earnings Rule 144 under the Securities Act is a related SEC regulations, each person (or
per share purposes. common exemption used by affiliates to group of persons acting together) acquiring
The company cannot benefit from the resell their company securities, with the any voting equity securities registered
Rule 10b-18 safe harbor when using following requirements: under the Exchange Act as a result of
accelerated share repurchase plans, because • Holding period – the affiliate must which such person or group beneficially
the rule protects only traditional open- hold the shares for at least six months owns more than 5% of such securities
market stock repurchases and not the before resale. One exception is for must file with the SEC, within 10 days of
forward contracts upon which such plans shares obtained pursuant to a written the 5% threshold being crossed, a report
are based. compensatory plan or contract. In that on Schedule 13-D, and must send copies to
case, Rule 701 under the Securities Act the company and relevant exchanges. As
(c) Rule 10b5-1 plans allows resale under Rule 144 without discussed below, some shareholders may
As discussed in Chapter 6.1, insider any holding period. This resale must be able to file instead on Schedule 13-G,
trading liability is triggered by the sale occur at least 90 days after the which requires less information.
or repurchase of a company’s shares by a effective date of the IPO. Schedule 13-D requires disclosure of:
party that trades while aware of material • Volume limitation – in any three- • the identity of the acquirer (or each
non-public information about the month period, sales by the affiliate may member of the group), including its
company. This liability could apply to a not exceed the greater of 1% of the management, directors and controlling
transaction by the company or its officers, company’s total outstanding shares or entities;
directors or other insiders. One way to the average weekly reported volume in • the source and amount of funds used
conduct trades in the company’s securities the securities on the exchange during to acquire the securities;
during a “blackout” window (eg, in advance the four weeks preceding the sale. • the purpose of the acquisition,
of the company’s earnings release), • Current public information – the including any plans or proposals the
without risking violation of the company must have timely filed all acquirer may have for future purchases
prohibition against insider trading, is to required reports with the SEC. or sales of target stock or for any
enter into a Rule 10b5-1 plan. • Manner of sale – the sale must be changes in the target management or
A Rule 10b5-1 plan is a contract to made through a broker-dealer or in board of directors, or any major
purchase or sell securities established prior certain other specified transactions corporate transaction affecting control
to any trades. The plan must have been through a stock exchange. of the target, such as a tender offer or
adopted in good faith during an open business combination;
trading window and without knowledge In some cases when using Rule 144, an • the amount and percentage of target
of material non-public information. It affiliate must file Form 144 with the SEC securities held by the acquirer and
may also be modified only at those times, and the stock exchange on which the details about transactions in such
although it can be terminated at any time. securities trade. securities during the 60 days prior
The insider may not influence the person or to filing of the Schedule 13-D (or, if
entity responsible for executing the 5.4 Obligations affecting shareholders shorter, for the period since the most
plan, which is generally an investment bank. recent Schedule 13-D filing); and
Anyone that is routinely exposed to (a) Ownership reporting by shareholders • the nature of any arrangements to
material non-public information that a After the IPO, the company’s major which the acquirer is a party relating
reasonable investor would use to buy, shareholders (or groups of shareholders to the target’s securities.
sell or hold shares of company stock is a acting together) will be required to comply
candidate for a Rule 10b5-1 plan. This with certain reporting and other Documents relating to the financing of
includes the company itself, directors, requirements under the Exchange Act. the acquisition and any contemplated
officers and other employees, and large These requirements are in addition to those extraordinary transaction involving the
shareholders. applicable to officers, directors and 10% company must be filed as exhibits to the
shareholders under Section 16 of the Schedule 13-D filing.
(d) Resales by affiliates Exchange Act. The company’s management Schedule 13-D filings can be quite long
Company securities held by affiliates, usually encounters these requirements in and complex. In the event of a contest for
including officers, directors and large two ways. First, a company with a control, there can be litigation challenging

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the accuracy of the filing, and especially of Schedule 13-G; (b) Reporting by insiders
statements describing the acquirer’s • the amount and percentage of target Certain “insiders,” including executive
purpose and plans. Filers often try to securities that it holds; and officers, directors and investors owning
preserve as much flexibility as possible by • the identity of the persons on whose over 10% of the shares of the company, will
describing a wide variety of options. behalf it owns the securities or that generally be required to file disclosure
A report on Schedule 13-D must be compose an acquiring group. reports under Section 16(a) of the Exchange
amended “promptly” (which can mean Act regarding changes in their beneficial
almost immediately in some A qualified institutional investor ownership of the company’s shares within
circumstances) in the event of a material generally need not file its Schedule 13-G two days of the transaction on the SEC’s
change in the information disclosed in the until 45 days after the end of the calendar EDGAR system. The reports must also be
schedule, including a change in – or, in the year in which the acquisition occurred, and available on the company website. They will
view of the SEC, the selection of one only if it remains above the 5% threshold also be subject to the “short-swing profit
particular purpose from – the previously at the end of the calendar year. Thereafter, recapture” provisions under Section 16(b)
disclosed options. Any acquisition or the filing must generally be amended of the Exchange Act designed to limit their
disposition of 1% or more of the relevant annually. It must also be amended within ability to reap profits from any purchases
class of securities is deemed material for 10 days of the end of the first month in and sales within six months of each other.
this purpose, while a lesser change in which the qualified institutional investor’s Section 16(c) of the Exchange Act and the
holdings may be material, depending on direct or indirect beneficial ownership rules thereunder generally prohibit such
the circumstances. interest exceeds 10% of the class, and insiders from effecting short sales and
thereafter within 10 days of the end of any taking short positions in derivative
Schedule 13-G filers: An existing month in which its interest increases or securities with respect to the company’s
shareholder that already owns more than decreases by more than 5% of the class. shares. In connection with the IPO, the
5% of the company at the time the shares A non-qualified passive investor must company should determine who, in its view,
are initially registered is required to file a file its Schedule 13-G within 10 calendar are its “executive officers” for Section 16
report on Schedule 13G within 45 days of days of crossing the 5% threshold. It must and proxy purposes.
the end of that calendar year. Thereafter, the also amend its filing “promptly” if it It can be challenging to manage all of
shareholder must amend its report within acquires beneficial ownership of more than the moving parts included in filing Forms
45 days of the end of each calendar year to 10% of the subject class of securities. 3, 4 and 5 with the SEC. The company can
reflect any changes, as of that year-end, in After it exceeds the 10% threshold and take complete control of the filing process
the reported information. It must convert to so long as its percentage of beneficial by utilizing a web-based filing solution
reporting on Schedule 13-D within 10 days ownership remains below 20%, an which allows it to file the forms directly
of its ownership percentage increasing by additional amendment to the non- from its own computers. Alternatively, it
more than 2% in any 12-month period, but qualified passive investor’s report on can outsource the filings to a financial
it need not amend its Schedule 13-G or file Schedule 13G must also be filed printer that has the resources and
a Schedule 13-D merely by reason of a “promptly” to reflect any increase or experience necessary to ensure that these
change in its intentions or plans. decrease in beneficial ownership of more filings meet the tight SEC deadlines.
There are two other types of investors than 5% of the class of subject securities.
that may report on Schedule 13-G instead If a non-qualified passive investor Summary of Section 16 for foreign private
of Schedule 13-D, provided that they have increases its ownership above 20%, it must issuers: Directors and officers of a US
acquired shares in the ordinary course of file a Schedule 13-D within 10 days, and is company with a class of equity securities
business without the purpose or effect of prohibited from purchasing any additional registered under the Exchange Act, and
changing or influencing control of the shares or voting the securities subject to beneficial holders (whether or not US
company: the Schedule 13-D filing until 10 days after holders) of more than 10% of any class of
• a “qualified institutional investor” that the filing. Similarly, both a qualified equity securities of such company,
falls within certain specified categories institutional investor and a non-qualified generally must file reports regarding their
of institutions; and passive investor must convert to a ownership of such securities. They are also
• a “non-qualified passive investor” that Schedule 13-D within 10 days of their subject to short-swing profit recapture
does not fall within the specified intentions being no longer passive and are provisions designed to recapture for the
categories but beneficially owns less prohibited from purchasing any additional benefit of the company profits realized on
than 20% of the shares. shares or voting the securities subject to purchases and sales of equity securities
the Schedule 13-D filing until 10 days after registered under the Exchange Act within
Schedule 13-G requires much more the filing. any six-month period. These requirements
limited information than Schedule 13-D. Comparable non-US institutions may do not apply to directors, officers and large
The principal disclosures required by be permitted to report their beneficial shareholders of foreign private issuers.
Schedule 13-G include: ownership on a short-form Schedule 13-G
• the identity of the holder; to the same extent as their US Excerpts on other Section 16 information:
• the basis for its eligibility to use counterparts, subject to certain conditions. A number of transactions in securities in

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which an insider has a pecuniary interest reporting obligation under Section 13(d) number of reasons:
are exempt from reporting under Section with respect to the underlying securities. • It makes good business sense – related
16(a). For example, an increase or decrease If such derivative securities are, within 60 party transactions may involve terms
in the number of securities held as a result days, convertible into or exercisable for that are not as competitive as might
of a stock split or stock dividend applying more than 10% of a security, such holder otherwise be achieved, preventing the
equally to all securities of a class and an will also be deemed an insider of the company from best accomplishing its
acquisition of securities pursuant to a company of such security subject to the financial or strategic goals.
dividend or interest reinvestment plan are reporting obligations under Section 16(a). • Some related party transactions are
exempt from reporting under Section 16(a), prohibited – under the securities laws,
subject to certain conditions. In addition, (c) Related party transactions the company is prohibited from making
changes in beneficial ownership pursuant It is not uncommon, pre-IPO, for the loans to directors or executive officers.
to transactions that are exempt from company to do business informally with Any such loans would have to be
short-swing profit recapture under Section family members or without giving due unwound prior to the company’s IPO.
16(b) are generally reportable on Form 5 consideration to whether certain • Shareholders care – related party
rather than Form 4 (although certain of transactions are done at an arm’s-length transactions signal a possible conflict
such transactions must be reported on distance. Once the company conducts its of interest to investors. They can call
Form 4, pursuant to Rule 16a-3(f)). IPO, however, it needs to be careful about into question whether the company
To the extent that an exemption exists so-called “related party transactions” puts the best interests of the company
from the reporting requirements of Section because they can present potential or actual and its shareholders first, tarnishing
16(a) in respect of any transaction in a conflicts of interest and create the the legitimacy of management and
security, the short-swing profit recapture appearance that decisions are based on damaging valuation of the company’s
provisions of Section 16(b) likewise do not considerations other than the best interests securities.
apply to such transaction (see Rule 16a-10). of the company and its shareholders. • The SEC cares – the SEC identifies
Rule 16a-10 does not apply in the reverse; disclosure regarding related party
an exemption from the short-swing profit Definition: The SEC defines a “related transactions as integral to a materially
recapture provisions of Section 16(b) party transaction” as: complete picture of financial
does not automatically provide an • any individual or series of transactions, relationships with the company. As a
exemption from the reporting including any financial transaction, result, securities regulations require
requirements of Section 16(a). arrangement or relationship; detailed disclosure on these
An insider must file Form 4 with the • in which the company participates; transactions in proxy statements,
SEC and with each national securities • where the amount involved exceeds annual reports and registration
exchange on which any security of the $120,000; and statements, including Form S-1.
company is listed within 10 days of the • in which any related person had or The disclosure must cover such
end of each month in which any reportable will have a direct or indirect material information as the name of the related
change in position occurs with respect to interest. person and the basis on which the
any security as to which it has a direct or person is a related person, the related
indirect pecuniary interest. Every A “related person” includes: person’s interest in the transaction
transaction during such month must be • any director or executive officer of with the company, the approximate
reported, even if acquisitions and the company; dollar value of the transaction and any
dispositions during such month even out. • any nominee for director, if the other information regarding the
For purposes of beneficial ownership, a information is being provided in a transaction that is material to investors
person can be deemed to own beneficially proxy statement; in light of the circumstances of the
not only securities owned directly by such • any beneficial owner of more than 5% particular transaction.
person, but also securities underlying of any class of the company’s voting • Stock exchanges care – the listing rules
derivative instruments convertible into or securities; and of the various stock exchanges require
exchangeable for securities. For example, • any immediate family member of the the company to think carefully about
the holder of an option convertible into people listed above (ie, any child, step- related party transactions. For example,
securities within 60 days will be deemed, child, parent, step-parent, spouse, NYSE-listed companies must adopt a
for the purposes of Section 13(d) (and sibling, mother-in-law, father-in-law, code of business conduct for officers
determining a person’s status as an insider son-in-law, daughter-in-law, brother- and employees that address conflicts
under Section 16(a)), to indirectly in-law, or sister-in-law of such people, of interest.
beneficially own the underlying securities, and any person (other than a tenant or • Auditors care – auditors are obligated
whether or not the option has been employee) sharing the household of to have sufficient understanding of the
exercised. Thus, derivative securities such people). company’s business activities to assess
owned by an insider which are, within 60 whether the company’s disclosures on
days, convertible into or exercisable for Reasons for concern: The company should related party transactions are adequate.
more than 5% of a security will create a care about related party transactions for a Accounting requirements dictate

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certain disclosures about related party who are responsible for applying such • Review both existing related party
transactions. Audit rules set forth policies and procedures – the company arrangements and any plans for new
specific auditing procedures on how should consider the board committee ones as soon as possible. Consider the
to determine the existence of related responsible for administering the impact of such arrangements on
parties and transactions with them, policy. Usually the audit committee is disclosure and governance standards.
how to examine identified related party charged with this task, but it may also • Identify arrangements between officers,
transactions and how to respond to make sense for the nominating and insiders and their close relatives on the
management’s representations that a corporate governance committee to be one hand, and the company on the
transaction was consummated at arm’s responsible for matters relating to other; these arrangements will
length. These audit procedures are directors. Also, the company should generally have to be disclosed.
quite detailed and can involve a review establish when the responsible persons • Confirm that the compensation
of the company’s board minutes, proxy will review related party transactions. committee approves all elements
information and other material filed Although subsequent review may be of compensation paid to executive
with the SEC, shareholder listings and acceptable, best practice mandates officers. Compensation exceeding
other potential sources of information. prior review. $120,000 paid to executive officers
must be disclosed if not approved
How to deal with the issue: The company In order to enable board members or (or recommended for approval) by the
should develop policies and procedures for delegates to make informed advance compensation committee or a group
the review, approval or ratification of decisions on related party transactions, of independent directors performing
related party transactions. The securities company procedures need to ensure that that function.
laws require the company to have a related the information presented to them is • Unwind loans to directors and officers
party transaction policy and describe it in sufficient in scope and quality: before the initial IPO registration
certain filings. Clear policies are also • Sources of information – the first statement is filed with the SEC.
essential to provide directors and officers source of information should be the • Develop written related party
with guidance on related party transactions related parties themselves. For transaction policies and procedures.
and how the company will deal with them. example, the directors’ and officers’ If the company already has a code of
Although the securities laws do not questionnaire should capture basic conduct or other policies addressing
mandate the specific features of the policy, information about transactions this issue, it may be preferable to
they do suggest that it may be appropriate between directors and officers, their integrate related party transactions
to include the following: family members and the company. policies with such existing policies.
• Types of transactions covered by the Furthermore, directors and officers Although the securities laws do not
policies and procedures – the company should have an ongoing obligation to require that policies and procedures
should consider what makes most inform the company in advance of any be in writing, best practice mandates
sense given its business requirements, potential related party transaction and written policies.
corporate structure and operating style. to provide updates of parties related
Also, it pays to be aware of “hot- to them, their employment and
button” issues when describing the relationships with charitable
types of transactions covered. For organizations. The company may also
example, the SEC is especially sensitive consider instituting independent
about transactions involving family information-gathering procedures,
members, so the company may which may include periodic review
consider developing a nepotism policy. of news articles or internet searches.
• Standards to be applied pursuant to the • Application of information – the
policies and procedures – policies company may consider developing
should hold all related parties to the a related party master list to be
same standards as third parties. distributed, with any updates, to the
Although there may be situations where relevant members of management such
a limited market makes it difficult to as the CFO and business unit and
establish what the terms and manner of department leaders responsible for
settlement of a particular transaction purchasing or selling. The company
would be with a third party, the may also develop a “watch list” of
company should nevertheless attempt potentially related persons, using the
to set forth objective business criteria sources of information described above
against which the related party to check whether their status changes.
transaction can be reviewed.
• The persons (or groups of persons on Tasks: In preparing for IPO, the company
the board of directors or otherwise) and its lawyers should do the following:

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6.1 Litigation is required to make and keep books, the company will be protected by the
records and accounts which, in “business judgment rule.” Generally,
(a) Legal standards reasonable detail, accurately and fairly officers owe similar fiduciary duties as
Sources of liability: The main potential reflect the transactions and directors. Officers also may owe a duty
sources of liability for public companies dispositions of its assets. The SEC to keep the board informed. Officers with
and their officers, directors and other regularly uses this as a basis for greater knowledge and involvement may
employees are the federal securities laws, enforcement proceedings, and the be subject to a higher standard of scrutiny
state securities laws and state corporate company, its officers and directors and and liability.
law of fiduciary duty. other parties who control the company Directors and officers can be held liable
The principal areas under which may be subject to civil or criminal to the company for violations of these
litigation arises under the federal penalties, including fines and duties. The shareholder derivative suit
securities laws are as follows: imprisonment, if they are found to provides a means by which a private
• Disclosure liability provisions – have violated this provision. litigant can enforce duties on behalf of
several specific provisions of the • Market manipulation – transactions the company.
federal securities laws impose liability in the company’s own securities could
for written or oral statements about raise concerns about the possible Types of proceedings: Remedies and
the company or its securities that manipulation of the market price. sanctions for improper securities activities
contain a material misstatement or Manipulation would expose the can be sought in three basic ways:
make a material omission. The precise company to a variety of civil and • Civil (including class actions and
liability standard and burdens of proof potentially criminal liabilities. derivative suits) – private parties seek
vary among statutes, as do the available to recover losses allegedly suffered as a
defenses based on the defendant’s The individual states have securities result of the defendant’s conduct, or
exercise of reasonable care or the statutes that are analogous to the federal request relief to compel or to stop
plaintiff’s non-reliance on the securities law statutes. Federal law pre- certain actions. Government agencies,
disclosure. Depending on the specific empts state law to a degree in certain areas such as the SEC, may also bring civil
provision, the Securities and Exchange (eg, registration of offers and sales, class actions to force the defendant to give
Commission (SEC) may bring criminal actions), but generally not with regard to up illegally obtained profits or pay
or civil penalties against the company, securities fraud or misrepresentation. monetary penalties, or to compel or
its directors and officers; and private All US states (other than New York) have stop certain actions.
parties may also rely on these laws to statutes that allow investors to sue to • Administrative – government agencies
assert claims for damages or rescission. rescind transactions or recover damages bring administrative proceedings before
• Anti-fraud provisions – the company when securities are sold by means of administrative judges, who follow the
and others may face liability under materially misleading offering documents. rules promulgated by the applicable
broadly worded statutes and In approximately 35 states, including a agency. For certain violations of the
regulations addressing fraud in the number with a significant investor base, federal securities laws, the SEC may
securities markets. The most sellers must show they exercised bring administrative proceedings to
important of these are Section 10(b) reasonable care to avoid liability. However, impose civil penalties or an order to
of the Securities Exchange Act of 1934 state securities laws are unlikely to provide bring immediate halt to allegedly
and Rule 10b-5 thereunder, which apply a basis for the nationwide class actions or improper conduct.
in connection with purchases and sales other large-scale proceedings that have • Criminal – only the Department of
of securities. Rule 10b-5 broadly marked securities litigation under the Justice can institute federal criminal
prohibits fraudulent and deceptive federal securities laws. proceedings. Defendants who are
practices and untrue statements or Finally, the corporate laws of the convicted in criminal proceedings face
omissions, both written and oral, of individual states impose basic “fiduciary” substantial fines and, in the case of
material fact in connection with the duties on directors and officers, with these individuals, terms of imprisonment.
purchase and sale of any security. Rule duties being owed to the company itself
10b-5 applies not only to documents and its shareholders. Directors have two None of these mechanisms is exclusive
filed with the SEC, but also to any fundamental fiduciary duties: the duty of and a party may be forced to defend against
information released to the public by care and the duty of loyalty. Directors must more than one type of proceeding.
the company, including press releases act in good faith, with the care of a prudent
and annual reports to shareholders. person and in the best interest of the Liability for corporate disclosures: The
This catch-all anti-fraud provision company. They must refrain from self- security laws do not impose a general duty
has been widely used in securities dealing, usurping corporate opportunities to disclose material information about the
litigation by private parties and the and receiving improper personal benefits. company. Rather, such disclosure is
SEC alike. Decisions made on an informed basis, in required only when there is a legal duty to
• “Books and records” requirements – good faith and in the honest belief that the do so. This duty arises in connection with
under the Exchange Act, the company action was taken in the best interests of the purchase and sale of securities,

78 NYSE IPO Guide

Managing risk

whether in registered or private offerings • Trade only in “window periods” in employees, allowing the company
or in secondary market trading. The compliance with any internal to set standards in advance and
company and its directors and officers procedures, after all important facilitating termination of employees
can be liable for material misstatements corporate developments have been for misconduct when rules are not
and omissions in public disclosures. This disclosed to the market. followed.
liability risk is mitigated by conducting • Trade pursuant to a Rule 10b5-1 plan
appropriate due diligence prior to the (see Chapter 5.3). (b) Class action and derivative lawsuits
initial public offering (IPO) and Imagine the shock if the newly public
establishing robust internal reporting Sarbanes-Oxley provisions: The Sarbanes- company were to be served with a federal
and disclosure controls and procedures Oxley Act of 2002 (SOX) enhanced the securities class-action lawsuit within 10
in connection with ongoing reporting SEC’s enforcement powers, expanded areas days of the IPO. This happened to a new
obligations. of personal exposure for directors and issuer in July 2008. In fact, most securities
executive officers and created new criminal claims are filed within three years of an
Liability relating to insider trading: Insider provisions. These provisions include: IPO and there is a significantly higher
trading liability arises under Rule 10b-5 • giving the SEC the authority to freeze probability that a class action will arise if
when a party trades the company’s possible “extraordinary payments” to an IPO is involved. So when managing risk
securities (or “tips” others to do so) while directors, officers, agents and in a newly public company, it is critical to
aware of material non-public information. employees during the course of an understand the primary civil liability
The number of insider trading investigation involving “possible” exposures faced by directors and officers.
enforcement actions by the SEC has violations of the federal securities laws;
increased steadily over the last five years • mandating forfeiture of certain chief Direct class actions: The primary exposure
and it is expected that this aggressive executive officer (CEO)/chief financial for directors and officers of US-listed
enforcement trend will continue. To reduce officer (CFO) bonuses and profits in companies continues to come from federal
the risk that trading by those parties in its connection with restatements; securities laws, in particular sections of
securities may be claimed to violate the • giving the SEC the authority to seek the Securities Act of 1933, the Exchange
prohibition against insider trading, the equitable relief for the benefit of Act and SOX. Claims made against
company should observe the following investors, which it has invoked to seek directors and officers under these statutes
guidelines: disgorgement of all compensation are frequently brought as class action
• Only trade during “window periods” received after alleged occurrence of litigation, where damage and settlement
tied to the release of the company’s fraud, not just bonuses and incentive proceeds go directly to shareholders
interim and annual earnings reports compensation; allegedly harmed. There are also statutes
and other material information and the • giving the SEC the authority to bar that may have industry-specific
public filing of such information with persons from serving as directors or application.
the SEC and the relevant securities officers of public companies in cease The intent of the Securities Act is to
exchange. and desist proceedings; and prevent fraud in securities offerings and to
• Develop and promote a written policy • creating civil and criminal penalties assure that investors receive full disclosure
and code of ethics with clear guidelines for false certifications by officers of in connection with the offer and sale of
prohibiting insider trading and periodic reports. securities by the company. As such, it
addressing general standards of imposes a high standard of conduct on
conduct, protection of confidential Corporate compliance programs: A directors and officers of the company.
information and whistleblowing. corporate compliance program is a written Section 11(a) of the act states that a person
• Develop robust compliance programs. and operational commitment to company- that purchased a security covered by a
• Conduct periodic training on wide compliance with all applicable laws. A registration statement (eg, an IPO and
contemporary regulations, compliance program protects the company secondary public offering of equity or
requirements and developments for and management in three major ways: debt) may recover damages from, among
all employees, including directors, • It reduces the chance that employees others, the company and its directors and
officers and other management. will engage in criminal misconduct. officers who signed the registration
• If employees do break the law, it can statement if the registration statement:
Meanwhile, directors, officers and help mitigate the consequences for the • contained a misstatement of material
employees should observe the following company. The Department of Justice, fact; or
guidelines: the SEC and many other agencies are • omitted to state a material fact that
• Do not trade when aware that a more lenient on companies with either was required to be stated or was
material event or trend is developing effective compliance programs when necessary in order for the registration
or will occur, but is not yet ripe for making charging decisions and statement not to be misleading (this
disclosure. assessing penalties. includes anyone who has consented to
• Do not selectively disclose material • It establishes behavioral and be a director of the company and is
non-public information to others. professional expectations for named as a director in the registration

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Managing risk

statement, not just those who have 15 provides that any person who is deemed with settlements exceeding $50 million.
signed the registration statement). to control any person found liable under When monetary settlements or damages
Section 11 or 12 will share liability for the are involved, such awards generally go to
While the company is strictly liable damages imposed on the controlled person. the benefit of the company itself and not
for violations of Section 11, directors and Companies undergoing an initial public directly to shareholders. Shareholder
officers may avoid liability if they are offering might seek such affirmative derivative lawsuits usually settle in tandem
successful in establishing their own coverage, in particular companies whose with outstanding class action litigation and
defense. If the misstatement or omission director and officers might be deemed to are often called “companion” or “tagalong”
occurred in a part of the registration be control persons following the IPO. cases. Shareholder derivative suits can be
statement not passed upon by an expert Turning to the Exchange Act, the brought in multiple jurisdictions and may,
(eg, an auditor’s report), the director or objective of this legislation is to increase at times, involve inconsistent outcomes (In
officer must demonstrate that he or she the information available to public Re Oracle Corp Derivative Litigation, 2003
had, after reasonable investigation, company investors through the WL 21396449 (Del Ch June 17 2003)). The
sufficient grounds to believe that the implementation of disclosure requirements two broad bases of shareholder derivative
disclosure statements were true or that and to prevent unfair practices in US liability include the duty of care and the
material statements were not omitted. If securities markets. As discussed earlier, duty of loyalty, discussed in more detail
the misstatement or omission occurred in Rule 10b-5 involves broad liability and below, but may also include excessive
a part of the registration statement passed includes statements or omissions in the officer compensation, proxy violations,
upon by an expert, a director or officer company’s Exchange Act filings (eg, Forms option plan violations, related party
need merely show that he or she had no 10-K, 10-Q and 8-K). The rule makes transactions, misappropriation of corporate
reasonable grounds to believe that that illegal any practice to defraud investors, opportunities and corporate waste:
portion was materially untrue or omitted including making any untrue statement of • Duty of care – directors and officers
to state a material fact. There is no material fact or omitting a material fact in owe the company and its shareholders
requirement under Section 11 to show the company’s filings. Actions may be a duty of care. They must act on an
that directors and officers intended to brought against the company and/or its informed basis and in a manner that
defraud investors. officers or directors by private parties, they reasonably believe to be in the
A series of related court decisions the SEC or the Department of Justice. company’s best interests, exercising
have been the subject of controversy and In general, Rule 10b-5 liability is broader the degree of care that an ordinarily
discussion related to whether a directors’ than Section 11 liability as applied to the prudent person in a similar position
and officers’ (D&O) liability insurance directors and officers of the company. would exercise. The duty of care
policy covers certain losses as a result of Moreover, plaintiffs’ lawyers must focuses on the decision-making
violations of Section 11 (Level 3 demonstrate “scienter,” which is an processes. When directors are accused
Communications, Inc v Federal Insurance Co, intention by a defendant director or officer of breaching their duty of care,
272 F3d 908 (7th Cir 2001); Conseco, Inc v to defraud. generally the “business judgment rule”
National Union Fire Insurance Company, shields their decision by presuming
Case No 49D130202CP000348, Marion Shareholder derivative suits: Another that in making the decision, the
Circuit Court, Marion County, Indiana frequent source of liability and expense is directors and officers were informed,
(December 31 2002)). Taken together, the what is commonly called a “derivative acted in good faith and honestly
decisions have generally been interpreted suit.” These are lawsuits by shareholders believed that the decision was in the
by some practitioners of D&O liability to on behalf of the company against best interests of the company and its
distinguish between coverage for the individual directors and officers for shareholders. To help avoid liability,
company (or issuer) and coverage for violations of state and common law directors and officers generally should
individual directors and officers. D&O fiduciary duties owed to the company and be proactive and attentive, regularly
insurance coverage for individual other wrongdoing. Most shareholder attend board meetings, meaningfully
defendant officers and directors is derivative suits are resolved through evaluate alternatives and deliberate as
generally viewed not to be endangered by payment of fees to plaintiff’s counsel and a board with adequate and complete
these decisions; however, the effect of the by the company’s adoption information. To the extent appropriate,
collective decisions may affect the nature of certain corporate governance and the board of directors should retain
and breadth of D&O insurance coverage management reforms negotiated between financial advisors, counsel and other
afforded to the company and such coverage the company and the plaintiffs, the experts to provide input and guidance.
may require modifications to assure purposes of which are to strengthen • Duty of loyalty – directors and officers
affirmative coverage for potential protections for investors and enhance owe the company and its shareholders
violations of Sections 11 and 12. shareholder value. a duty of loyalty. Again, they must act
A related but separate issue is whether Until recently, derivative actions rarely in good faith and in the reasonable
D&O insurance policies should also resulted in substantial monetary recoveries. belief that their actions are in the best
include affirmative coverage for violations However, within the last two years there interests of the company. Loyalty issues
of Section 15 of the Securities Act. Section have been a number of derivative actions arise when a director has a conflict of

80 NYSE IPO Guide

Managing risk

interest or lacks independence with decisions concerning directors’ and under $10 million, and 2009 was no
regard to a particular business decision officers’ liability (D&O) insurance, exception. Through November 30 2009 the
or personally profits from an including the appropriate limits to median settlement was $9 million, an
opportunity at the expense of the purchase and the nature of coverage to seek increase of $1 million on the 2008 median.
company. In evaluating claims of and can add insight into premium trends. Typically, plaintiffs’ attorneys’ fees and
breaches of fiduciary duty, the court (Note: The information that follows is expenses make up approximately one-third
will inquire into the decision-making provided by NERA Economic Consulting, of the settlement value.
process, but may at certain times also an affiliate of Marsh Inc and a unit of Excluding settlements of $1 billion and
evaluate the substance of the business Oliver Wyman Group, an MMC company.) the 309 IPO laddering suits, the average
decision to determine fairness to the In 2008 federal securities class-action settlement value for the year was also $42
company and its shareholders. To help filings hit a five-year high, increasing 37% million, an increase from $31 million in
avoid liability, interested directors to 259 – the highest level since 2002 – 2008. After the passage of SOX in 2002,
should disclose conflicts and driven by the surge in litigation related to the average settlement has been almost $29
opportunities to other directors and the credit crisis. Through November 30 million, compared to an average of $12
abstain from deliberations and voting 2009 there were 215 federal securities class million in the pre-SOX period.
on such decisions. action filings. Annual filings on average
over 2008 and 2009 are on pace to be 6.2 Indemnification
Frequency and severity of securities class above the average level of 230 over the Generally, indemnification of officers and
action suits: The average public company 1997 to 2004 period. Sixty one of the 215 directors is governed by the law of the
faces a 6.4% probability that it will face a filings to November 30 2009 – state of incorporation. All 50 states
securities class action lawsuit in a given approximately 30% – involved allegations provide for corporate indemnification and
five-year period. And if an IPO is involved, related to the credit crisis. That represents address situations where the company may
class action lawsuits settlements are on a slight decrease on 2008, where indemnify its officers and directors, and
average 35% higher. approximately 40% of the total filings situations where the company must
It is important to note recent trends related to the credit crisis. indemnify its officers and directors. To
in securities class action litigation. For Settling securities class actions can be understand when indemnification is
example, in 2007 18% of securities class costly. Since the enactment of the Private permitted by the company, look to the
actions involved an IPO. An understanding Securities Litigation Reform Act of 1995, company bylaws or charter.
of such trends ultimately impacts median settlement values have remained In Delaware, for example, the statute

Percentage of federal filings by sector and year (Jan 1 1996 – Nov 30 2009) Allegations in federal filings
(Jan 1 2007 – Nov 30 2009)

Other cases

500 “Ponzi” scheme cases

Cases related to credit crisis

Options backdating cases

Number of federal filings

Standard cases

26.2% Product/operational defects
4.0% Customer/vendor issues
200 1.8% Merger integration issues
10.1% Other
12.2% Insider trading
100 7.0% Breach of fiduciary duty
3.5% “Ponzi” scheme
20.9% Accounting
0 12.2% Company-specific
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 earnings guidance
Note: Other cases include IPO laddering, mutual fund timing and analyst cases. 2.3% Industry-related

NYSE IPO Guide 81

Managing risk

merely authorizes indemnification, meaning Delaware General Corporation Law requires companies in their charters to limit or
a director or officer is not necessarily a corporation to indemnify a director or eliminate the personal liability of directors
entitled to indemnification unless the officer when the person to be indemnified for damages in claims by the company and
company charter or bylaws contain has prevailed with respect to a claim its shareholders (Section 102(b)(7) of the
necessary authorizing language against him or her. In other words, if the Delaware General Corporation Law).
to permit indemnification. Delaware director or officer defends the claim on the Notably, the Delaware statute does not
corporations may structure their certificates merits and is vindicated of any wrongdoing, eliminate liability for conduct not taken in
of incorporation to limit the liability of it is mandatory that the company good faith or for breach of a director’s duty
their directors to situations involving: indemnify that individual for the costs and of loyalty.
• breaches of their duty of loyalty expenses, including attorneys’ fees,
(including improper personal benefit) incurred in connection with the claim. From whom does a director or officer seek
to the company and its shareholders; indemnification? In short, it depends.
and What is the nature of the conduct required Indemnification is never self-
• acts or omissions not in good faith or for the company to indemnify its directors executing. The company bylaws, charter
that involve intentional misconduct or and officers? Under Section 145(a) of the and any corporate indemnification
a knowing violation of the law. Delaware General Corporation Law, a agreement between a director or officer
corporation may (but need not) indemnify and the company will govern:
It is important for directors and a director or officer only “if such person • who evaluates and approves requests
officers of public and non-public acted in good faith and in a manner for indemnification; and
companies to seek counsel on and reasonably believed to be in or not opposed • whether a director or officer may be
understand the indemnification provisions to the best interest of the corporation.” In indemnified in a particular case and,
and/or indemnification agreements to the criminal context, a director or officer if so, whether such director or officer
which they will be subject. Review of the must also have had no reason to believe his may receive an advancement from the
provisions and/or agreements should occur or her conduct was unlawful in order to be company to pay for expenses incurred
not simply prior to an IPO, but on a indemnified. The company may, and often in defending oneself.
periodic basis as well. does, provide broader indemnification
Be mindful of features in the company protections, such as authorizing language In the absence of specific provisions
bylaws, charter or corporate permitting indemnification to the related to who evaluates and approves
indemnification agreements (or the maximum extent permitted by law. requests for indemnification, the decision
absence of features) that impair one’s Even if a director’s or officer’s conduct is generally made by a majority vote of
rightful claim to indemnification proceeds. is of the type that can be indemnified, the disinterested (non-defendant) directors,
Three examples of hostile provisions are: ability of the company to indemnify him or a committee of disinterested (non-
• a provision that fails to obligate the her may be limited or prohibited by state defendant) directors or independent legal
company to reimburse a director’s or statute. The Delaware statute authorizes counsel in a written opinion.
officer’s claim for costs and expenses the company to indemnify directors and If the company is either unwilling or
for enforcing the company’s obligation officers only for expenses incurred by unable to indemnify a director or officer
to indemnify; them in defending shareholder derivative for expenses, damages or settlement
• a provision that forces a director or suits brought by or on behalf of the amounts, the director or officer may be
officer to bear the burden of proof to company. The Delaware statute does not able to seek payment directly from
demonstrate entitlement to authorize indemnification of settlements insurers, depending on the nature and
indemnification; and or judgments in such actions. The rationale breadth of insurance coverage under the
• a provision which limits is that if the company indemnified the company’s directors’ and officers’ liability
indemnification to actions to which directors or officers for amounts they insurance policy under insuring agreement
the indemnified party is a defendant, owed to the company, the result would be A of such policy (commonly called “side
which would prevent directors and a return of funds back to the company, A”). Notably, the ability of a director or
officers from being indemnified for rendering the debt owed to the company officer to seek timely reimbursement
fees and expenses incurred by them meaningless. directly from insurers may differ
in successfully prosecuting any significantly, depending on the exact
indemnification action (see Cochran v To what extent is an individual’s liability terms, conditions, exclusions and limits
Stifel Financial Corp, No CIV A17350, limited as a matter of law? The state in that are purchased by the company.
2000 WL 286722 (Del Ch 2000). which the company is incorporated will
determine the extent to which a director’s Does the company have to advance the
Several common questions that arise or officer’s liability is limited as a matter costs and expenses required to defend
regarding indemnification follow. of law. Almost all states have adopted against a claim made against a director or
statutes that limit the liability of directors officer? This is one of the most important
When must the company indemnify its – and, in some instances, officers – under issues to understand and with which to be
directors and officers? Section 145(c) of the state law. Like Delaware, many states allow comfortable. The ability of the company to

82 NYSE IPO Guide

Managing risk

advance defense costs in a timely manner What is the structure of the D&O policy post-IPO – typical “ABC” policy example
to its directors and officers is critical in
attracting independent directors because
Covered claim Covered claim
the cost of defending a lawsuit is
against directors against corporate
immediate and substantial, and may and officers entity
directly influence both the nature and
quality of the defense presented by
directors and officers.
Rights to advancement are governed
under a combination of state law and Side C
bylaws of the company, and are separate No Yes
and distinct from the obligation of
indemnification. For example, a right to
advancement of defense costs may be Side A Side B
broader and less restrictive than an
individual’s right to indemnification.
Because the determination as to whether Insured corporate entity
an officer’s or director’s conduct is Insureds Insureds as a defendent
Directors and officers Corporate balance sheet (securities claims only)
indemnifiable generally cannot be made
until the end of a claim or proceeding,
Section 145(e) of the Delaware General
Corporation Code permits (but does not Personal assets Corporate assets Corporate assets
require) a corporation to advance defense
costs, including attorneys’ fees, to defend
against a claim for something that, if true,
would be an indemnifiable claim; but only D&O insurance D&O insurance
D&O insurance
if the claimant submits to the company a Insuring agreement B: Insuring agreement C:
Insuring agreement A:
corporate reimbursement corporate entity coverage
written undertaking to repay the amounts individual insureds
of individual insureds (for securities claims only)
advanced if it should be determined that he
or she is not entitled to indemnification.
Specific attention needs to be paid to other
conditions that may have to be met in
order to receive timely advancement. consent of the director or officer. officers must be aware that at certain
A note of caution: in light of the recent times, their interests and those of the
Delaware court decision in Schoon v Troy 6.3 D&O insurance company may diverge, particularly if claims
Corp (948 A 2d 1157 (Del Ch 2008)), it is It is clear that companies and their boards are made that may approach or exceed the
important for companies that are relying of directors may well face lawsuits at some shared limits of liability for all the insureds
on indemnification bylaws to make certain point. While most boards take their taken as a whole. Directors and officers
that: responsibilities seriously and try to need to understand the basic coverage and
• the bylaws include language stating execute them properly, that intent does limits of their particular policies.
that the rights of directors and officers not confer immunity. Shareholders and D&O policies are generally written on a
to advancement of legal expenses vest other stakeholders – often prompted by “claims-made” basis. Under such policies,
upon commencement of service; an aggressive plaintiffs’ bar – will sue the making of a claim against the insured
• these rights are contract rights; and when they see themselves as having been during the term of the policy – not the
• the bylaws cannot be amended wronged. Thus, in addition to doing occurrence of injury or damage – is the
retroactively to impair those rights. everything possible to execute their operative threshold event to which the
responsibilities properly and effectively, policy responds. Some policies also require
Although Delaware has since amended those charged with corporate governance that the insured report the claim to the
its corporations code to reverse the effect must also protect themselves with D&O insurer within the policy period (or within
of Schoon v Troy Corp, it serves to highlight insurance. a brief window of time thereafter). Most
the potential importance for directors and Most D&O insurance policies for D&O insurance policies have one or more
officers to consider separate public companies provide financial of the following three basic insuring
indemnification agreements with the protection to more than just individual agreements:
company that specifically address directors and officers. They also afford a • Side A: personal asset protection for
advancement of expenses, including significant degree of protection for certain officers and directors – insuring
provisions that prohibit modifications to financial obligations of the company. As a agreement A, also called “side A,”
such an agreement without the written result of this dual protection, directors and covers a loss incurred by individual

NYSE IPO Guide 83

Managing risk

directors and officers resulting from rescinding coverage. Rescission results by insurers that the application was
claims for which the company has not when the insurer voids coverage under materially false or misleading. As a result,
indemnified them. Generally, a director the policy for all insureds and returns the accounting restatements – depending on
or officer need not pay a retention or premium paid by the company. Rescission their nature, scope and magnitude – may
deductible in the event side A of an insurance policy by an insurer may provide insurers with increased leverage to
insurance proceeds are sought if the result in severe consequences for the rescind a D&O insurance policy.
company is unable to indemnify the company and its directors and officers.
individual director or officer directly. A successful rescission results in all or a Conduct exclusion: Almost all D&O
• Side B: corporate reimbursement portion of the D&O insurance policy being policies contain exclusions barring
insurance – insuring agreement B, also null and void and, ultimately, results in a coverage for certain “bad conduct” by
called “side B,” protects the company loss of coverage for all named insureds on directors or officers. Generally, they
against a loss incurred by the company the policy, including innocent directors include:
in indemnifying an officer or director and officers. Certain D&O policies today • intentionally dishonest acts or
for claims made against him or her. can be negotiated to make certain insuring omissions;
A deductible or retention applies for agreements non-rescindable. • fraudulent acts or omissions;
claims made under side B. • criminal acts;
• Side C – insurance agreement C, also Severability of the application: Rescission • willful violations of any statute, rule
called “side C,” protects the company raises the concept of severability. In this or law;
against a loss resulting from securities context, severability simply relates to the • an insured’s obtaining an illegal profit;
claims made directly against it. A question of whether the knowledge of a and
deductible or retention also applies for limited number of covered officers or • an insured’s obtaining an illegal
claims made under side C. directors will result in a loss of coverage remuneration.
for all the insureds named in a policy
A number of different structural (including the company itself). Severability Each exclusion can, and ideally should,
variations in building a policy may meet imposes a limit on the extent to which the be limited as much as possible. For
the particular demands of a public knowledge of one individual insured is example, it is important to consider
company and its officers and directors. imputed to the company and other insured enhancements to a policy so that the
Many companies, however, commonly individuals. For example, sometimes the conduct of any one insured director or
purchase a D&O insurance policy where a knowledge of specific officers (eg, the CEO officer will not be imputed to any other
single limit of liability is shared equally and CFO) may be imputed to all other insured. This should limit the elimination
among all three insuring agreements. The insured individuals and to the company of coverage to the individual directors or
effect of this is that a single policy limit itself. This remains a critical issue for officers who actually committed the
protects both the personal assets of directors and officers because coverage for excluded conduct, while maintaining
directors and officers and certain financial all insured persons (including innocent coverage for innocent insureds.
obligations of the company. Companies insureds) could be rescinded if the It is also important to clarify the point at
also frequently purchase additional, specified officer had knowledge of facts which coverage exclusions apply or are
dedicated limits of side A coverage in not disclosed in an application for D&O triggered. Certain policies state that the
addition to the shared limits. Companies insurance, depending on the structure of exclusions apply if the excluded conduct “in
purchase these additional limits for a the program. As a result, a D&O insurance fact” occurred. This can be troublesome
number of reasons, including policy often contains a provision which because of the ambiguity involved in
considerations related to premium pricing, states that no insured person’s knowledge interpreting what “in fact” actually means.
philosophical predispositions, balance- will be imputed to any other insured and Insureds should consider seeking a more
sheet strength and the broader protection limits the identified individuals whose clearly defined parameter for determining
afforded individual officers and directors. knowledge will be imputed to the company when a conduct exclusion may apply. Policies
(as an insured itself). As another – and stating that the exclusions apply only if the
(a) D&O policy provisions perhaps better – alternative, the company excluded conduct occurred in connection
Certain provisions in a D&O policy may should seek a policy that is not rescindable with a “final adjudication” of the underlying
affect the extent to which the policy for any reason. claim generally better protect directors and
responds favorably to protect individual Frequently, the company’s periodic officers. However, although “pure” final
directors and officers. Some of the key securities filings and financial statement adjudication language provides broad
concepts are discussed below. under the Exchange Act and registration protection for individual directors and
statements under the Securities Act are officers, it could result in the depletion of
Rescission: Material misrepresentations or expressly made part of the application for limits, leaving less in available limits to
non-disclosure of material information in D&O insurance. Claims of inaccurate or protect non-defendant directors and officers.
the course of the application process for a incomplete disclosure in such filings
D&O insurance policy may result in the incorporated into the application for Priority of payment provisions: Unlike
insurer seeking the drastic remedy of insurance may be the basis for claims made many other types of insurance, traditional

84 NYSE IPO Guide

Managing risk

D&O policies protect two distinct sets of a deductible) that under ordinary the premium. As a result, insurance may
beneficiaries: the company and the circumstances would not apply. This is respond to protect individual directors and
company’s individual directors and sometimes called a “presumptive officers in such circumstances where
officers. Because there is a limit of liability indemnification” requirement. Under this indemnification from the company is
for D&O insurance programs, situations circumstance, the self-insured retention prohibited as a matter of public policy.
may arise in which insurance proceeds may would have to be paid by an officer or
have to be prioritized among the insured director prior to accessing any proceeds Conduct not in “good faith” and
parties. Typically, a priority of payments of a D&O policy. In some cases, the self- “reasonable belief”: The company may
provision requires that the claims against insured retention may be substantial. indemnify a director or officer only if such
the individual directors and officers be Directors and officers should seek person acted in good faith and in a manner
satisfied first, before claims against the clarification from their insurance brokers that he or she reasonably believed to be in,
company are satisfied. and counsel on the extent to which their or not opposed to, the best interests of the
However, sometimes this provision D&O insurance policies allow directors and company. As a result, acts that do not
may have unintended consequences. For officers to access the policy proceeds in the satisfy the “good faith” and “reasonable
example, a situation may arise in which a event the company is able but unwilling to belief” standard may not be indemnified
number of concurrent claims are made indemnify them. by the company. In such circumstances,
against the company and its individual A properly constructed D&O policy claims made against an individual director
directors and officers. This could include generally is meant to provide a level of or officer may be insurable so long as the
shareholder derivative suits (settlements protection for individual directors and conduct of such individual also complies
of which may not be indemnifiable by the officers in the event the company’s with the limitations and exclusions of the
company) and securities class actions indemnification obligation inadequately insurance policy.
(settlements of which are indemnifiable). protects them. Outlined below are some
If the securities class action suits are specific circumstances where an individual Refusal by board to indemnify: If the
settled before the shareholder derivative officer or director may expect such board or other authorized designee either
actions, insurers may delay payment of any protection. declines in writing to indemnify an
proceeds under the policy for a securities individual or fails to make or initiate a
claim until settlement of the shareholder Derivative suit judgments or settlements: determination to indemnify an individual,
derivative action. A delay in payment may The ability of the company to indemnify insurance may respond to protect
adversely affect timing or funding of a its officers and directors for judgments or individual directors and officers, but it
settlement of such a claim. settlements resulting from a shareholder may be subject to a retention or deductible
derivative action may be significantly depending on the structure of the program.
“Insured v insured” exclusion: Many D&O limited or prohibited by statute in the To avoid a circumstance where an
policies contain a so-called “insured v company’s state of incorporation. For individual insured might be personally
insured” exclusion, which bars coverage example, Delaware generally does not responsible to pay a retention, many public
for a claim brought by one insured against allow indemnification of settlements or companies today purchase a variation of
another. Since the company and the judgments in an action brought by or on Side A insurance often referred to as Side
individual directors and officers are behalf of the company unless the court A DIC (the “DIC” refers to the “difference
“insureds” under a D&O policy, a suit permits such action. In such in conditions” provisions that are
brought by an individual director against circumstances, side-A coverage may contained in this type of insurance policy).
the company or by the company against apply as long as the conduct of individual Side A DIC insurance provides broader
individual officers or directors may be directors and officers also complies with coverage and is often purchased in addition
excluded. the limitations and exclusions of the to and in excess of the traditional D&O
insurance policy. (Sides A, B and C) insurance described
(b) D&O insurance and indemnification above. In a circumstance where the board
Directors and officers no doubt find it Public policy prohibition against or other authorized designee declines to
especially troubling when the company is indemnification: Indemnification for indemnify an individual as described
financially able to indemnify them, but claims related to registration of securities above, Side A DIC insurance could be
chooses not to or simply ignores their and anti-fraud provisions of the federal called upon to provide directors’ and
request. Many directors and officers securities laws (and other federal statutes officers’ coverage.
incorrectly assume that in such a such as the Racketeer Influenced and
circumstance, the company’s D&O Corrupt Organizations Act and antitrust Near insolvency: Should the company
insurance policy would respond. However, laws) may be precluded by public policy. approach insolvency, it will approach the
in a traditional D&O policy, if the company The SEC’s view is that such “zone of insolvency,” where officers and
is permitted to indemnify an officer or indemnification is against public policy. directors may owe certain fiduciary duties
director, but chooses not to, the insurer However, the SEC does not regard the to creditors. Although not yet insolvent,
often will first seek the application of a maintenance of D&O insurance as against the company might choose not to
“self-insured retention” (in other words, public policy, even where the company pays indemnify a particular director or officer

NYSE IPO Guide 85

Managing risk

for fear that such act may be a breach of lawsuit, what might it cost to settle? tax, regulatory and coverage issues
fiduciary duty owed to creditors of the • What limits and structures do the associated with D&O exposures outside
company or may be the subject of an order company’s peers purchase? the United States to ascertain whether
by a bankruptcy trustee to return such • How can the balance between coverage, exposure exists. There are a number of
proceeds. Insurance may respond if limits limit and price be optimized? solutions to address such exposure,
of the policy are not otherwise eroded. • What is the overall financial stability depending on location and magnitude,
of each insurer on the program? some of which may impact the company’s
Actual insolvency or bankruptcy: The • How can the program address exposure choice of primary insurer.
company either may be insolvent or, in the for foreign directors and officers?
context of US bankruptcy laws, may be (c) Timing the D&O liability insurance
unable or unwilling to indemnify an officer Constructing a D&O liability program purchase for an IPO
or director if the bankruptcy trustee leading into an IPO is a dynamic process. A D&O policy for a newly public company
determines that such indemnification is The goal is to understand the choices and becomes effective on the date of the
either unwarranted or improper. Moreover, tradeoffs, and to achieve an optimal company’s securities trade. The process
assuming that such indemnification of an balance that properly reflects the values of and timeline leading up to the
officer or director was warranted and the company and its directors and officers. commencement of the policy period differ
proper, the proceeds of the policy may be For example, many companies purchase depending on the situation, and can be
deemed an asset of the “estate” and policies that protect both the company and tailored to meet the specific needs of the
subject to an automatic stay. The the individual directors and officers for company. The following is a suggested
obligation to indemnify may be deemed an non-indemnifiable claims. This structure timeline for meeting key milestones in
unsecured obligation, placing the affected involves a shared limit of liability that the process of obtaining D&O coverage.
officer’s or director’s interest behind the protects the company and its directors
interests of secured creditors and on par and officers. If a very large claim is made D&O strategy meeting: In the month
with other unsecured creditors awaiting against the company, it may exhaust the leading into filing of Form S-1, it is
payment or settlement. limits made available to individual recommended that the company meet with
If there is some risk that the company directors and officers. One potential its insurance brokers and outside counsel,
may avail itself of the protection of US solution is to purchase additional limits if needed, to strategize on D&O program
bankruptcy laws, it will be useful to seek of coverage dedicated solely to protect design options, selection of carriers,
an explanation from the company’s individual directors and officers. coverage issues, limit analysis, timeline
insurance broker and counsel as to how Alternatively, dedicated coverage may and cost. Being beneficiaries of D&O
the company’s D&O insurance policy may also be purchased solely for independent insurance, the entire board of directors
respond to a number of potential issues. directors of the board, excluding non- or certain key members may need to be
Key issues to understand would include independent board members and officers. engaged.
identifying any issues related to: Selecting the right level of limits is
• how limits in the policy are either now more science than art. Peer Filing of Form S-1: Once the company’s
allocated or prioritized to coverage benchmarking data is one thing to consider registration statement is filed, a
other than coverage of claims made in choosing the right amount of insurance. submission can be made to the
against a director’s or officer’s personal Analysis of the company’s susceptibility to underwriters, which would include the
assets; securities class actions and projections of draft Form S-1. The submission, combined
• whether the design of the company’s realistic settlement amounts can provide with calls and/or face-to-face meetings
D&O insurance program is such that greater confidence in limit decisions. with the underwriters, will allow the
directors or officers will not be subject Recent turbulence affecting the insurers to assess the company’s D&O
to a retention or deductible if the financial condition of insurers has raised risk profile.
company is permitted to but fails to concerns regarding insurer stability,
indemnify such an individual; and making the decisions on which insurers Meetings with underwriters: It is generally
• what – if any – language exists in the to partner with more challenging. An in- expected that representatives of the
policy to waive an automatic stay as depth comparative analysis of an insurer’s company will meet with the underwriters,
regards the company’s policy. creditworthiness and financial strength is either in person or by teleconference,
a precursor to an assessment of the before a premium quotation will be given
Choosing a D&O policy structure, limits, company’s counterparty risk. Just as for a D&O policy. It is an opportunity for
retention and insurers: The company important is the ongoing monitoring of the insurers to better understand the
should consider several questions before the financial condition of the company’s company’s financial and operating
selecting the limits and structure of its partner insurers. condition and its prospects, and to speak
D&O policy, including the following: One of the more complex and evolving directly with management about corporate
• How susceptible is the company to a areas of D&O coverage involves governance issues and concerns. These
class action lawsuit? subsidiaries located outside the United meetings typically take place during the
• If the company suffers a class action States. It is important to understand the roadshow detailed in Chapter 3.

86 NYSE IPO Guide

Managing risk

Timeline loss of high-value items such as

jewelry, art and other collectibles.
-45 to 0 days 0 days 30-40 days 35-50 days 45 to 60 days 60-75 days
Specialized coverage can help properly
Initial Comments Amended Roadshow IPO protect these assets and investments.
S-1 filed from SEC S-1 filed

Benefits of a broker: When wealthy

individuals accumulate new property and
D&O strategy Initial feedback Underwriter Bind public
non-liquid assets, protection for each is
meeting Information to from client Narrow field calls and company often purchased as needed with a local
underwriters of underwriters meetings D&O policy agent. However, working with various
Underwriter agents or brokers in different states
calls and generally leads to gaps or overlaps in
meetings coverage. Additionally, the distinctive
aspects of high-value items require
specialized solutions that often are not
are among everyday activities that can available through local agents. By working
Analysis: Once quotes have been submitted expose you to legal liability. Your increased with a broker that specializes in addressing
to the insurers, insurance brokers – public prominence may lead some to the risks associated with the high-net-
sometimes working in concert with believe you have “deep pockets,” making worth lifestyle, you will benefit from
outside counsel – provide the company’s you a target for expensive lawsuits. expertise, comprehensive coverage,
management and/or board with detailed A personal excess liability insurance innovative solutions and access to broad,
comparative analysis to allow the company policy is designed to protect against customized coverage.
to ultimately make a number of decisions multimillion-dollar settlements resulting
on the nature of its D&O program, from personal injury, bodily injury or Protecting yourself and your business:
including the appropriate structure, limits, property damage lawsuits. There’s no doubt that you are now looking
retentions, coverage and insurers. Consider a recent example, in which to the future with the anticipation that
the teenage son of a wealthy business your business and family will long benefit
Binding of insurance: Once decisions have owner was involved in an automobile from all of your hard work. Now is the
been made by the company, insurance accident with a bicyclist. Although there time, however, to consider the effects that
brokers will execute those decisions to was no indication that the driver acted events beyond your control – such as
build the D&O program and bind the irresponsibly, the court awarded a $20 death and disability – may have on your
insurers in time for the company’s million judgment to the bicyclist. The business. It is critical to evaluate the risks
securities to begin trading. insured carried only $5 million in excess inherent in your business and in your
liability insurance, meaning his family’s estate plan. Coordination of the two will
6.4 Personal risk management financial situation may be severely harmed help protect the business and ensure
An IPO will certainly have an impact on for years to come. continuity of the legacy you have created.
your professional life, but it will also have Consulting with a personal risk
a considerable effect on your personal management expert can help you set Wealth transfer: It is important to evaluate
lifestyle. The complexity of a high-net- appropriate liability limits for your the IPO’s impact on your estate plan,
worth lifestyle requires a new way of lifestyle. including the risks in transferring wealth
thinking about risk and customized to succeeding generations. Those risks
solutions to help address it. Many ultra- Personal property: As you acquire wealth, come from:
wealthy individuals and families find they it’s likely you will acquire high-end • significant taxes at your death; and/or
benefit by working with a personal risk property and assets. Key areas of risk to • unwise dissipation by heirs, their
manager that can provide comprehensive consider include the following: divorcing spouses and creditors.
resources to properly align protection for • Homeowners – high-value homes are
their property, liability, family and lifestyle. often built with unique materials and Properly drafted and executed wills and
And because you and your company features. Not all insurance policies trusts can protect your assets from taxes
will now be more prominent, it is provide for appropriate replacement and creditors. Many wealthy individuals
imperative to have total coordination costs in their loss settlement choose to fund trusts with assets as well
between your business estate plans. provisions. as with life insurance.
• Automobiles – luxury, exotic or Owned by a trust outside the estate,
(a) Protecting yourself and your assets collector vehicles require specialized life insurance can supply an income-tax-
Personal liability: Entertaining guests at insurance. free benefit to the trust free of estate tax.
your home, letting your teenage child drive • Valuables – most standard insurance Careful planning in this manner can allow
your car and serving on a board of directors polices have low dollar limitations for wealth and assets you’ve created to pass to

NYSE IPO Guide 87

Managing risk

your family intact and free from risk of

liquidation for the payment of estate taxes.

Key person: You may be the “brains behind

the business,” but you also may have
irreplaceable employees. If something
unexpected happened to a key employee,
would your business suffer? Key person
insurance helps you cover additional costs
when such a situation arises. You even may
be able to combine protection for your
business with an agreement designed to
reward a vital employee for continued
These are just some of the concerns
that may arise as a result of your new
wealth. Again, you may benefit greatly by
working with a personal risk manager to
design the right protection for your family
and your business.

88 NYSE IPO Guide


NYSE IPO Guide 89


Appendix I: NYSE original listing standards, US companies

Domestic listing requirements call for minimum distribution of the company’s shares within the United States, as well as minimum financial
criteria. Distribution of shares can be attained through US public offerings, acquisitions made in the United States or other similar means.
This chart is to be used for an initial evaluation only. For a more complete discussion of the minimum numerical standards applicable to US
companies, see Section 102.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

Distribution and size criteria Alternative #2b – Pure valuation/revenue test

Must meet all three of the following:
Global market capitalization(c) $750 million
Round-lot holders(a) 400 US
Revenues (most recent fiscal year) $75 million
Publicly held shares(b) 1,100,000
Alternative #3 – Affiliated company
Market value of publicly held shares:(b) For new entities with a parent or affiliated
company listed on the NYSE
IPOs, spinoffs, carveouts, affiliates $40 million
Global market capitalization(c) $500 million
All other listings $100 million
Operating history 12 months
Stock price criteria
All issuers must have a stock price or IPO Parent or affiliate is a listed company in good
price of at least $4 at the time of listing standing. Parent or affiliate retains control of the
entity or is under common control with the entity
Financial criteria
Must meet one of the following standards: Alternative #4 – Assets and equity

Alternative #1 – Earnings Global market capitalization(c) $150 million

Aggregate pre-tax income for the last Total assets $75 million
three fiscal years $10 million
Stockholders’ equity $50 million
Minimum in each of the two most
recent fiscal years $2 million Real estate investment trusts
Positive amounts in all years
Stockholders’ equity $60 million
Closed-end funds and business
Aggregate pre-tax income for the last development companies (BDCs)
three years $12 million
Market value of publicly held shares(b) $60 million (also
Minimum in the most recent year $5 million require a total
market cap of $75
Minimum in the next most recent year $2 million million for BDCs)

Alternative #2a – Valuation/revenue (Continued opposite)

with cash flow
(a) The number of beneficial holders of stock held in “street name” will be
considered in addition to the holders of record.
Global market capitalization (c) $500 million (b) Shares held by directors, officers or their immediate families and other
concentrated holding of 10% or more are excluded in calculating the number of
Revenues (most recent 12-month period) $100 million publicly held shares and market value of publicly held shares.
(c) Global market capitalization for existing public companies is represented by the
Adjusted cash flow: most recent three months of trading history in the case of the pure valuation/
revenue test. For all other standards, the measurement is at a “point in time” for
Aggregate for the last three years $25 million
an existing public company. For IPOs, spinoffs and carveouts, it is represented by
All three years must be positive the valuation of the company as represented by, in the case of a spinoff, the
distribution ratio as priced, or, in the case of an IPO/carve-out, the as-priced
offering in relation to the total company’s capitalization.

90 NYSE IPO Guide


Appendix I continued

Special purpose acquisition companies Additional considerations

The NYSE will consider, on a case-by-case basis, the In addition to meeting the minimum numerical standards listed
appropriateness for listing of special purpose acquisition above, other factors must necessarily be considered. The
companies (SPACs) with no prior operating history that conduct company must be a going concern or be the successor to
an initial public offering if the following criteria are met: a going concern.
The NYSE has broad discretion regarding the listing of a
Proceeds held in trust upon IPO 90% company. The NYSE is committed to listing only those companies
that are suited for auction market trading and that have attained
Fair market value of acquisitions 80% of net assets the status of being eligible for trading on the NYSE. Thus, the
NYSE may deny listing or apply additional or more stringent
Aggregate market value $250 million criteria based on any event, condition, or circumstance that
makes the listing of the company inadvisable or unwarranted
Market value of publicly held shares $200 million in the opinion of the NYSE. Such determination can be made
even if the company meets the standards set forth above.

NYSE IPO Guide 91


Appendix II: NYSE original listing standards, non-US companies

The NYSE offers two sets of standards – worldwide and domestic – under which non-US companies may qualify for listing. Both standards
include distribution and financial criteria. A company must qualify for both the distribution and financial criteria within that particular
This chart is to be used for an initial evaluation only. The NYSE will work with each company to determine which standards are best
suited to that entity.
For a more complete discussion of the minimum numerical standards applicable to non-US companies, see Section 103.01 of the Listed
Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

Criteria Requirements Worldwide Domestic

Distribution Round-lot holders May satisfy either A, B or C:

Total stockholders

5,000 A – 400 US round-lot shareholders

B – 2,200 total stockholders and 100,000
shares monthly trading volume (most
recent six months)
C – 500 total stockholders and one million
shares monthly trading volume (most
recent 12 months)

Publicly held shares 2.5 million 1.1 million

Market value of publicly held shares $100 million

IPOs, carveouts and spinoffs n/a $40 million

All other listings n/a $100 million

(Continued opposite)

92 NYSE IPO Guide


Appendix II continued

Criteria Requirements Worldwide Domestic

Financials Earnings

Aggregate pre-tax income for last three fiscal $100 million $10 million

Minimum pre-tax income in each of two most $25 million $2 million (positive amounts in all three
recent fiscal years years)


Aggregate pre-tax income for last three years n/a $12 million

Minimum in the most recent fiscal year n/a $5 million

Minimum in the next most recent fiscal year n/a $2 million

Valuation/revenue test
May satisfy either A or B

A – Valuation/revenue with cash flow test

Global market capitalization $500 million $500 million

Revenues (most recent 12-month period) $100 million $100 million

Aggregate cash flow for last three fiscal years $100 million $25 million (positive amounts in all three

Minimum cash flow in each of two most $25 million n/a

recent fiscal years

B – Pure valuation/revenue test

Global market capitalization $750 million $750 million

Revenues (most recent fiscal year) $75 million $75 million

Affiliated company
For new entities with a parent or affiliated
company listed on the NYSE

Global market capitalization $500 million $500 million

At least 12 months of operating history Yes Yes

Affiliated listed company is in good standing Yes Yes

Affiliated listed company retains control of the Yes Yes


NYSE IPO Guide 93


Appendix III: NYSE Amex original listing standards

NYSE Amex has established certain quantitative and qualitative standards for initial listing of US and foreign companies, as follows.
To learn more about NYSE Amex quantitative, distribution and governance requirements, please refer to the complete requirements
outlined in the NYSE Amex Company guide, which can be referenced at http://nyseamexrules.nyse.com/amex/companyguide.

Criteria Original listing standards

Standard 1 Standard 2 Standard 3 Standard 4

Pre-tax income1 $750,000 n/a n/a n/a

Market capitalization n/a n/a $50 million $75 million

At least $75 million in
total assets and $75
million in revenues

Market value of publicly $3 million $15 million $15 million $20 million
held shares

Minimum stock price $3 $3 $2 $3

Operating history n/a 2 years n/a n/a

Stockholders’ equity $4 million $4 million $4 million n/a

Distribution 800 public shareholders and 500,000 shares publicly held; OR

400 public shareholders and one million shares publicly held; OR

400 public shareholders, 500,000 shares publicly held and average daily trading volume of 2,000 shares for
previous six months.

Required in the latest fiscal year or two of the three most recent fiscal years.

94 NYSE IPO Guide


Appendix IV: NYSE financial continued listing standards, US companies

The NYSE has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, the NYSE will review
the appropriateness of continued listing. The following is a summary of the NYSE’s financial continued listing standards. For a more
complete discussion of the NYSE’s continued listing standards, as well as the procedures followed when a company falls below any of the
continued listing criteria, see Section 802.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

Price criteria For companies that listed under the pure

valuation/revenue test
Average closing price of a security is less than
$1.00 over a consecutive 30 trading-day period Average global market capitalization
over a consecutive 30 trading-day period
Numerical criteria for capital and common stock is less than $375 million

For companies that listed under the “earnings” standard and

or “assets and equity” standard
Total revenues for the most recent fiscal
Average global market capitalization over year are less than $15 million
a consecutive 30 trading-day period
is less than $50 million or

and Average global market capitalization

over a consecutive 30 trading-day period
Total stockholders’ equity is less than $50 million is less than $100 million

or For companies that listed under the affiliated company test

Average global market capitalization over The listed company’s parent/affiliated company ceases to
a consecutive 30 trading-day period control the listed company or such parent/affiliated company
is less than $15 million itself falls below the numerical criteria; and average global
market capitalization over a 30-day trading period is less than
For companies that listed under the pure valuation $75 million.
with cash flow/revenue test
The NYSE has separate criteria for closed-end funds, real
Average global market capitalization estate investment trusts, special-purpose acquisition companies,
over a consecutive 30 trading-day period bonds and preferred stocks. See Section 802.01B of the Listed
is less than $250 million Company Manual.


Total revenues for the most recent 12 months

are less than $20 million


Average global market capitalization

over a consecutive 30 trading-day period
is less than $75 million

NYSE IPO Guide 95


Appendix V: NYSE Amex continued listing standards

NYSE Amex continued listing standards

A company will be below continued listing requirements if it has:

• Stockholders’ equity less than:

• $2 million and losses in two out of the three most recent fiscal years.
• $4 million and losses in three out of the four most recent fiscal years
• $6 million and losses in the five most recent fiscal years

A company that falls below any of the above will continue to be deemed in compliance with listing standards if it meets
the following requirements:
• Market capitalization of $50 million; OR total assets AND total revenue of $50 million each in most recent fiscal year
or two of the three most recent fiscal years.
• 1.1 million shares, a market value of publicly held shares of $15 million, 400 round-lot shareholders.

• Less than 200,000 publicly held shares

• Less than 300 public shareholders

• A market value of publicly held shares of less than $1 million (over 90 consecutive days)

96 NYSE IPO Guide

Contributor profiles

NYSE IPO Guide 97

Contributor profiles

Bowne & Co, Inc Cleary Gottlieb Steen & Hamilton LLP
55 Water Street One Liberty Plaza
New York NY 10041 New York NY 10006
United States United States
Tel +1 212 924 5500 Tel +1 212 225 2000
www.bowne.com www.clearygottlieb.com

Anne Barber Nicolas Grabar of companies on issues relating to financial

Director of Marketing Partner statement restatements. Based in the
Anne.Barber@Bowne.com ngrabar@cgsh.com New York office, Ms Flow became a partner
in 2004. She is a member of the Bar in
Anne Barber is the director of marketing at Nicolas Grabar focuses on international New York.
Bowne & Co, Inc, where she is responsible capital markets and securities regulation,
for the marketing and business as well as the representation of large Cleary Gottlieb associates Catherine
development efforts in Canada and the reporting companies, leading Latin Skulan, Femi Austin, Colleen Harp, Nicole
US central region of Bowne’s Capital American companies, Fortune 100 Puppieni and Carsten Fiege provided
Markets and Compliance Division. Based companies and global investment banks. invaluable assistance in preparing materials
in Vancouver, BC, Ms Barber joined Bowne He has extensive experience in for this guide. All of the associates focus on
in 1986 and has also held various sales international financings in public and corporate and financial matters, and are
and customer service positions throughout private markets, including US securities based in New York.
her career. In recent years Ms Barber law applicable to foreign issuers and
coordinated the publication of Bowne’s reporting regulations. He specializes in
Canadian guidebook series covering the telecommunications and natural
securities laws and compliance regulations resource sectors, and has advised on
in Canada. Ms Barber received her sales acquisitions and restructuring. IFLR1000,
and marketing management diploma Chambers Global, Chambers USA and
through the Sauder School of Business Chambers Latin America recognize him as
at the University of British Columbia. one of the world’s best capital markets
lawyers. Mr Grabar chairs the annual PLI
Susan Flattum program on foreign issuers and US
Director of Marketing securities regulation, and is the chair of
Susan.Flattum@Bowne.com the Financial Reporting Committee of the
New York City Bar Association. Based in
Susan Flattum is the director of marketing the New York office, he became a partner
of Bowne & Co, Inc, where she is in 1991. Mr Grabar is a member of the Bar
responsible for the marketing and business in New York and has been admitted to
development efforts of the western region practice in France.
of Bowne. Prior to working at Bowne,
Ms Flattum was a vice president in the Sandra L Flow
wealth management group at Alliance Partner
Bernstein. Prior thereto, Ms Flattum was sflow@cgsh.com
an attorney at Latham & Watkins in Los
Angeles specializing in corporate finance, Sandra Flow’s practice focuses on capital
primarily representing bulge-bracket markets transactions and corporate
investment banks in initial public offerings governance, including the representation
(IPOs) and high-yield deals. Ms Flattum of US and international issuers, as well as
received her JD from Georgetown underwriters, in a variety of Securities and
University Law Center and her BS in Exchange Commission (SEC) registered
business from the University of Southern and private securities offerings, and
California. domestic and cross-border listings. Her
corporate governance practice includes
advising companies on their disclosure
obligations and governance matters,
including compliance with SEC
requirements, the Sarbanes-Oxley Act
and listing standards of the NYSE and
Nasdaq. She has also advised a number

98 NYSE IPO Guide

Contributor profiles

Computershare FD
250 Royall Street A Member of FTI Consulting, Inc
Canton, MA 02021 Wall Street Plaza, 88 Pine Street
United States New York NY 10005, United States
Tel + 1 781 575 2000 Tel +1 212 850 5600
www.computershare.com www.fd.com

Jay McHale the stock transfer industry. He is the Gordon McCoun

President, Equity Services current president of the Securities Transfer Vice Chairman
jay.mchale@computershare.com Association, which is a member of the gordon.mccoun@fd.com
Shareholder Communications Coalition.
Jay McHale is president of Equity Services, He is also an active member of the Gordon McCoun is vice chairman of FD,
the largest of Computershare’s businesses industry’s Joint DRS Committee and is with a focus on the firm’s North American
in the United States. As a member of the a past president, director and national Capital Markets Communications Practice.
US leadership management team, he is representative of the Northeast Securities He spent more than 20 years as an equity
charged with building on Computershare’s Transfer Association. research analyst and portfolio manager
excellence in the transfer agent industry. before joining FD in 1998.
To date, he has introduced several Mr McCoun has published white papers
innovative service offerings amid a and client memoranda on topics relevant
challenging regulatory and financial to capital markets issues such as the
environment, and continues to position increasing importance of cash dividends,
the business as the premier service the impact of Financial Accounting Standard
provider in the marketplace. 123(R) on valuation models and portfolio
Throughout his 29 years of experience decisions, Regulation F-D, emerging trends
in the financial services industry, in sell-side research coverage and financial
Mr McHale has presided over numerous disclosure and corporate governance.
complex business integration projects, Prior to joining FD, Mr McCoun was a
including significant acquisitions, vice president in the equity research
divestitures and reorganizations. Prior to department at Brean Murray & Co. He was
joining Computershare in August 2007, also a portfolio manager with The Bank of
he was the chief operations officer for New York, Citibank, Prudential and Mutual
Harris Investment Management, where in of America. He received an MBA in finance
addition to ongoing operations, he was from New York University’s Stern School of
responsible for portfolio accounting, trade Business and a BA in sociology from the
processing and systems. Mr McHale’s roles University of Pennsylvania.
also included direct management of the
shareholder services and trust divisions at Shannon Stucky
Bank of Montreal/Harris. He earned a BS Vice President, Special Situations Practice
in finance from DePaul University and shannon.stucky@fd.com
an MBA in finance from the University
of Chicago. Since joining FD in March 2007, Shannon
Stucky has been instrumental in developing
Charles V Rossi and executing communications programs
Executive Vice President, Client Services supporting clients’ efforts to raise capital,
charles.rossi@computershare.com restructure, manage their corporate
reputation, overcome crises and emerge
Charlie Rossi is the executive vice as thought leaders.
president of Client Services at Ms Stucky has supported the initial public
Computershare Investor Services. offerings of Sensata Technologies, MF
Mr Rossi’s role at Computershare includes Global and RiskMetrics Group; represented
a focus on client relationships, prospects Constellation Energy, Teva Pharmaceutical
and industry issues. He has over 25 years Industries and the Chicago Board of Trade
of experience in corporate stock and in M&A assignments; managed
mutual funds operations management communications for the Chapter 11
at Boston Financial, Shawmut Bank, bankruptcy filings of Fairfield Residential LLC
BankBoston and EquiServe. and Tropicana Entertainment; and supported
Mr Rossi maintains a high profile in AIG Worldwide Life during the announcement

NYSE IPO Guide 99

Contributor profiles

FD continued Georgeson Inc

199 Water St, 26th Floor
New York NY 10038-3650
United States


of AIG’s plan of restructuring, among David Drake Harbinger Capital Partners; Value Act
others. Additionally, she oversees FD’s President Capital v Acxiom Corporation; Image
training and professional development ddrake@georgeson.com Entertainment, Inc v Lions Gate
program across the Americas and assists Entertainment Corp and PeopleSoft Inc
with thought leadership activities emanating David Drake is president of Georgeson, v Oracle Corp. He also represented Bank
from the Special Situation Practice. a pre-eminent proxy solicitation firm. One Corp in its $55 billion merger with
Previously, Ms Stucky worked with the Mr Drake supervises a staff of seasoned JPMorgan Chase; Aetna Inc in its $8.8
Torrenzano Group, driving ongoing thought professionals, many with more than 20 billion merger with US Healthcare; and
leadership and transaction communications years of experience. He also works directly First Data in its $7 billion merger with
programs for industry-leading clients. A 2003 with clients to help them obtain favorable Concord EFS, among others.
graduate of Ohio University’s EW Scripps shareholder vote results on friendly mergers Mr Spedale was president and chief
School of Journalism, Ms Stucky holds a BS and acquisitions, unsolicited takeovers, operating officer of Kissel-Blake, a proxy
in journalism, magna cum laude, from the proxy contests, restructurings, shareholder solicitation firm that was acquired by
University’s Honors Tutorial College. proposals, compensation plans and other Georgeson in 1998. Prior to that, he was a
corporate governance matters. vice president at DF King & Co for 10 years.
Scott Kozak Prior to joining Georgeson in 1997,
Vice President, Capital Markets Mr Drake served as vice president and
Communications Practice director of US research and senior analyst
scott.kozak@fd.com for Institutional Shareholder Services (now
renamed as RiskMetrics). He led a team of
Scott Kozak joined FD in 2004 and currently research analysts producing proxy research
serves as a vice president based in the reports for institutional clients, advising
Chicago office. He has extensive capital them on corporate transactions, proxy
markets and financial communications contests and other shareholder issues.
experience, with particular emphasis in the Mr Drake is a frequent speaker and
industrials, basic materials, business writer on proxy fights, investor activism,
services, real estate and healthcare sectors. corporate governance and compensation
Mr Kozak also contributes significantly to issues. He earned a BA in political science
FD’s Thought Leadership Committee, which from George Washington University and
drafts capital markets-related white papers an MBA in finance from The American
on emerging industry trends, and has University in Washington, DC.
extensive responsibilities designing and
implementing internal training and Joseph F Spedale
development programs, as well as firm-wide Executive Vice President and
knowledge share collaboration initiatives. Chief Operating Officer
Prior to joining FD, Mr Kozak worked as jspedale@georgeson.com
a financial analyst at RCM Capital
Management, where he contributed to the Joseph Spedale is a senior member of
firm’s financial planning and analysis function. the Georgeson M&A Advisory Group.
He graduated cum laude from American He specializes in special situations,
University in Washington, DC with dual including friendly mergers and acquisitions,
degrees in economics and international unsolicited takeovers, proxy contests,
relations. Mr Kozak also received a restructurings and corporate governance
certificate in finance, earned with honors, consulting.
from the University of California, Berkeley. During his 30-year career, Mr Spedale
has done extensive work in developing
successful campaign strategies in
communicating with security holders.
He has worked on numerous contested
campaigns, including Openwave Systems

100 NYSE IPO Guide

Contributor profiles

J.P. Morgan & Co 1 Chase Manhattan Plaza, 58th Floor 560 Mission Street, 20th Floor
383 Madison Avenue, 28th Floor New York NY 10005-1401 San Francisco, CA 94115
New York NY 10179 United States United States
United States

David Topper across all industry sectors. He has Michael Millman

Vice Chairman, Investment Banking, managed many of J.P. Morgan’s most Managing Director, Head of Technology,
New York (Madison Ave) important equity financing mandates, Media and Telecommunications Equity
david.j.topper@jpmorgan.com including the $19.7 billion IPO Capital Markets, San Francisco
of Visa; the $12.6 billion equity offering michael.millman@jpmorgan.com
David Topper joined J.P. Morgan in 2005 for Wells Fargo in connection with its
as co-head of equity capital markets and acquisition of Wachovia; GE’s $12.2 billion Michael Millman is a managing director
is a vice chairman of investment banking equity offering in 2008; and CVRD’s $12.2 and head of J.P. Morgan’s Technology,
and chairman of the Equity Commitment billion equity offering. In 2008, J.P. Media and Telecom (TMT) Equity Capital
Committee. Since joining J.P. Morgan, Mr Morgan’s Equity Capital Markets Group Markets Group. Mr Millman spearheads
Topper has worked on a long list of high- was named “Global Equity House” and the firm’s equity capital-raising services
profile financings across many sectors, “Americas Equity House” by International for TMT clients globally. Mr Millman joined
including technology, financial institutions, Financing Review. J.P. Morgan in 1996 and oversees a variety
retail and energy. Prior to joining J.P. Morgan, of equity mandates including structuring
Mr Topper spent 22 years at Morgan Stanley, Ivan M Peill and executing IPOs, follow-on offerings,
where he was co-head, managing director Vice President, Investor Relations, convertible security offerings and equity
and chairman of the Equity Commitments New York (Chase Manhattan Plaza) private placements. He has managed
Committee from 2001 to 2005. Prior to that, ivan.m.peill@jpmorgan.com many of J.P. Morgan’s most important
Mr Topper was responsible for equity equity financing mandates. He has
capital markets coverage of the media and Ivan M Peill is a vice president in the strategic relationships with buy-side
telecommunications sectors. Before joining investor relations advisory services team institutions, financial sponsors and
the Equity Capital Markets Group, he held of J.P. Morgan’s Depositary Receipts venture firms. Mr Millman holds a BA
senior leadership positions in fixed-income Group. He has 14 years of investor relations in economics/statistics from Rutgers
derivatives, corporate coverage, mergers experience. Prior to J.P. Morgan, Mr Peill University and an MBA from Columbia
and acquisitions and high-yield capital was an advisor at Georgeson & Co, University.
markets. Mr Topper holds a BA from Thomson Financial and Capital MS&L,
Duke University and an MBA from where he counseled issuer clients from a
Stanford University. variety of industries and of varying market
capitalizations. His expertise also includes
Kevin Willsey financial media relations.
Head of Global Equity Capital and Derivative Mr Peill advises J.P. Morgan depositary
Markets, New York (Madison Ave) receipt clients on various aspects of
kevin.d.willsey@jpmorgan.com investor relations, such as investor relations
strategy, investor communications,
Kevin Willsey began his career with targeting and institutional ownership.
J.P. Morgan in 1989 working in the firm’s In addition, he is the editor of J.P. Morgan’s
Mergers and Acquisitions Department, DR Advisor Quarterly, a publication focused
before moving to the Equity Capital on investor relations and other issues
Markets Group in 1994. He was named important to DR issuers. He also writes
managing director in 1997 and in 1999 papers on regulatory developments.
was named head of equity capital markets Mr Peill holds an MBA with honors
for J.P. Morgan. Mr Willsey’s capital from Fordham University and is a member
markets career has involved capital-raising of the National Investor Relations Institute.
assignments for clients in the United
States, Europe, Asia and Latin America.
He has managed a wide range of financing
mandates for clients, structuring and
executing IPOs, follow-on equity offerings,
convertible security offerings and
structured derivative solutions for clients

NYSE IPO Guide 101

Contributor profiles

KPMG LLP 303 East Wacker Drive 500 East Middlefield Road
345 Park Avenue Chicago IL 60601-5212 Mountain View CA 94043
New York NY 10154-0102 United States United States
United States Tel +1 312 665 1000 Tel +1 650 404 5000
Tel +1 212 758 9700

Aamir Husain reporting areas. Mr Meara received

Partner, New York his BBA from the University of Texas at
ahusain@kpmg.com Austin and his MBA from Thunderbird.
He is a member of the American Institute
Aamir Husain is a partner in the firm’s of Certified Public Accountants.
New York office, where he is the leader
of the IPO advisory practice. He has more Brian Heckler
than 17 years’ experience providing capital Partner, Chicago
markets advisory services to global private bheckler@kpmg.com
equity funds, investment banks and other
strategic investors. Mr Husain provides Brian Heckler leads KPMG’s Transaction
technical and project management advice Advisory Services Group and is a partner
on complex accounting and finance in the firm’s Chicago office. He specializes
reporting issues associated with the SEC in financial accounting and reporting
registration process, IPOs, Rule 144a debt matters for public companies registered
offerings, carve-outs and conversions to with the SEC. Mr Heckler provides services
and from international financial reporting for IPOs, spin-offs, sales of minority
standards (IFRS) and US Generally interests, joint venture formations and debt
Accepted Accounting Practices. He has financings. He formerly was a partner in the
extensive experience in cross-border firm’s Department of Professional Practice
transactions and has assisted major and was a professional accounting fellow
international institutions in the United at the SEC.
States, Europe and Asia list on the NYSE.
Mr Husain has worked on over 20 IPOs. David Hori
He received his BA from Boston University Managing Director, Silicon Valley
and is a member of the American Institute dhori@kpmg.com
of Certified Public Accountants and the
Institute of Chartered Accountants in David Hori is a member of KPMG’s
England and Wales. Transaction Accounting Services Group
and a managing director in the firm’s
Michel Meara Silicon Valley office. Mr Hori specializes
Director, New York in transaction or special event-based
mmeara@kpmg.com advisory services, including IPOs,
business combinations, spin-offs, financial
Michel Meara is a member of KPMG’s restatement assistance, IFRS conversions
Transaction Accounting Services Group and technical on-call accounting. Mr Hori
and a director in the firm’s New York office. advises companies on a variety of SEC
He has worked on a variety of equity reporting matters. He formerly was a senior
offerings, including IPOs and other SEC- manager in the firm’s Department
registered offerings. Mr Meara regularly of Professional Practice.
advises public companies on financial
reporting and regulatory issues, including
SEC filings, restatements, IFRS
conversions, post-merger integration
and the redesign of financial reporting
processes. Prior to joining the Transaction
Accounting Services Group, he held
financial management positions in Fortune
1000 companies, where he was responsible
for SEC reporting and corporate financial

102 NYSE IPO Guide

Contributor profiles

Marsh 99 High St 345 California Street, Suite 1300

1166 Avenue of the Americas Boston, MA 02116 San Francisco, CA 94104-2679
New York NY 10036 United States United States
United States

Stephen Dascole David Hong liability insurance), and private equity

Senior Vice President, Private Client Managing Director, Financial & insurance products. She also serves
Services Practice, New York Professional Practices Group, as growth leader for Marsh’s FINPRO
steve.dascole@marsh.com San Francisco products for the Western United States.
david.hong@marsh.com In this capacity she works with clients,
Stephen Dascole leads the asset protection prospects and Marsh offices, leading and
consulting and insurance services offered David Hong is the Bay Partnership practice coordinating the growth efforts of FINPRO
to high-net-worth individuals and families leader of Marsh’s FINPRO. He is a senior for a variety of solutions including D&O,
throughout the Private Client Service client advisor specializing in directors’ and employment practices liability and personal
Practice’s Western region. Mr Dascole has officers’ (D&O) liability. He advises clients liability insurance. Ms Sampson earned
more than 30 years of experience in the on D&O insurance design, coverage and degrees in economics and political science
insurance industry. He spent the first 20 related corporate governance issues. from the University of Massachusetts,
years of his career with Marsh Private Mr Hong joined Marsh in 2004, prior to Amherst.
Client Services and rejoined Marsh in 2007. which he was a securities attorney for nine
He holds a bachelor’s degree in marketing years in New York and San Francisco,
from St John’s University. specializing in mergers and acquisitions,
public and private debt and equity
Eugene C “Tripp” Sheehan placements, corporate governance and
Managing Director, US D&O Practice securities compliance. In his nine years
Leader, Boston as a securities lawyer, Mr Hong has been
eugene.c.sheehan@marsh.com the general counsel for a software and
communications company and was an
Eugene “Tripp” Sheehan is responsible for attorney with Morrison & Foerster LLP.
the directors’ and officers’ liability product He acts as an advisor and broker for
line for Marsh in the United States. companies in a variety of industries,
Previously, he led the New York Metro including technology, manufacturing,
Financial and Professional Practices Group transportation and aerospace and defense.
(FINPRO) division. He began his career Mr Hong graduated with a JD from
with Marsh in 1993. The FINPRO product Georgetown University Law Center and is
lines include directors’ and officers’ liability admitted to practice law in New York and
(D&O), pension trust liability, fidelity, California. He earned a BA from Columbia
employment practices liability, internet/e- University.
commerce liability, intellectual property,
litigation buy-outs, merger and acquisition Kate Sampson
facilitation products and related Senior Vice President, FINPRO,
professional liability coverage for San Francisco
commercial and financial institutions. kate.sampson@marsh.com
Mr Sheehan is a founding member and
current chairman of Marsh’s Global D&O Kate Sampson joined Marsh in 1996 and is
Advisory Board and a member of the a senior D&O client advisor in Marsh’s San
FINPRO Operating Committee. Mr Sheehan Francisco office. Her clients include both
began his insurance career in 1986 as a public and private companies and large
D&O underwriter for Chubb & Son, Inc in private equity firms. Ms Sampson routinely
San Francisco. Before that, he spent a advises private equity and venture-backed
year as a marketing manager for the Los companies on D&O liability issues and
Angeles Clippers and was a basketball risk associated with initial public offerings.
training site manager for the 1984 Summer She is recognized as an industry expert
Olympics. He received a BA in economics regarding transactional risk insurance
from the University of California in 1984. products (representations and warranties
insurance, tax insurance and contingent

NYSE IPO Guide 103

Contributor profiles

NYSE Euronext Thomson Reuters

11 Wall Street 3 Times Square
New York, NY 10005 New York NY 10036
United States United States
Tel +1 212 656 2400

Scott Cutler Eric R Warner

Executive Vice President and Co-head Vice President – Investor Relations
of US Listings and Cash Execution Services; Corporate Services
scutler@nyx.com eric.warner@thomsonreuters.com

Scott Cutler is responsible for the Americas Eric Warner is the commercial manager
listing business and manages the NYSE’s of the investor relations business offered
relationship with over 2,100 companies in by the Corporate Services division of
Canada, Latin America and the United Thomson Reuters. In this role, Mr Warner
States. He is also responsible for the is responsible for commercial strategy and
NYSE’s relationship with the investment policy, strategic alliances, partnerships and
banking, private equity, venture capital and operational execution related to services
legal communities to attract new listings. and solutions targeted to investor relations
In addition, he oversees the capital markets professionals in the Americas.
business, including IPOs for operating Prior to his current role, Mr Warner
companies, structured products, closed- was head of the global business
end funds and real estate investment trusts development team within the Corporate
listing on the NYSE or NYSE Amex. Mr Services business. He has also held a
Cutler has an extensive background in variety of management positions focused
investment banking and corporate on delivering sales results, forging strategic
securities law. Before joining NYSE alliances, implementing training and
Euronext, he was an investment banker integrating acquired companies.
focused on technology at SG Cowen & Co Mr Warner holds a BA from the University
and Thomas Weisel Partners. He was also of Massachusetts at Amherst and an MBA
a corporate securities lawyer at Cooley from Northeastern University.
Godward, focused on mergers and Thomson Reuters is the world’s leading
acquisitions, IPOs, venture fund formation source of intelligent information for
and venture capital representation. He businesses and professionals, with
graduated with a BS in economics from operations in 100 countries. The Corporate
Brigham Young University and earned a JD Services business of Thomson Reuters
from the University of California, Hastings provides more than 6,000 companies –
College of Law. including 90% of the Fortune 500 – with
solutions that increase the efficiency and
effectiveness of business decision-making
across the investor relations, business
intelligence, public relations and corporate
communications functions.

104 NYSE IPO Guide






©2009 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE
Euronext. NYSE Euronext and its affiliates do not recommend or make any representation as to possible benefits from any securities or investments, or third-party products or services. Investors
should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its affiliates that are
based on the current beliefs and expectations of management, are subject to significant risks and uncertainties, and which may differ from actual results. All data as of September, 2009.

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