Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

IPO Readiness

2,793 views

Published on

Explores:
-IPO Process
-Impact of JOBS Act
-Quiet Period
-Management
-Board of Directors
-Corporate Governance
-Corporate and Capital Structure
-Equity Incentives
-Financial and Audit Matters
-Getting Started
-SEC Review
-Life as a Public Company

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

IPO Readiness

  1. 1. IPO Readiness September 5, 2012 Attorney Advertising
  2. 2. Contents  IPO Process (slides 3-6)  Impact of JOBS Act (slides 7-18)  Quiet Period (slides 19-24)  Management (slide 25)  Board of Directors (slides 26-40)  Corporate Governance (slides 41-49)  Corporate and Capital Structure (slides 50-54)  Equity Incentives (slides 55-56)  Financial and Audit Matters (slides 57-58)  Getting Started (slides 59-66)  SEC Review (slides 67-74)  Life as a Public Company (slide 75)  For More Information (slide 76) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 2
  3. 3. IPO Process  Begin corporate housekeeping and IPO preparations  Pick underwriters and assemble team  Enter “quiet period”  Org meeting  Underwriter due diligence (ongoing)  Prepare and file Form S-1  Clear SEC comments  Road show  Price IPO and sign Underwriting Agreement  Closing © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 3
  4. 4. IPO Process Relationships Among IPO Participants © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 4
  5. 5. IPO Process Overall Timeline  Preparation should begin 3-6 months before org meeting  Generally 4-6 weeks from org meeting to filing (assumes strong draft of “Business” section circulated prior to org meeting)  Filing to closing requires 3-4 months But all subject to company readiness, SEC review process, market conditions and numerous other factors © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 5
  6. 6. IPO Process Illustrative Timeline © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 6
  7. 7. Impact of JOBS Act  JOBS Act enacted on April 5, 2012  Intended to spur job creation and economic growth by improving access to the capital markets for startup and emerging growth companies  Many provisions potentially of interest to pre-IPO companies and recent IPO companies  Provisions applicable to IPOs are immediately in effect  All provisions, except crowdfunding, available to foreign issuers © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 7
  8. 8. Impact of JOBS Act “Emerging Growth Company”  An "emerging growth company" (EGC) is any issuer that had total gross revenues of less than $1 billion during its most recently completed fiscal year, other than an issuer that completed its IPO on or before December 8, 2011  Note that EGC status is available to companies that went public after December 8, 2011  EGCs have up to five years following an IPO to come into full compliance with certain disclosure regulations and accounting and auditing standards that are otherwise applicable to all U.S. public companies © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 8
  9. 9. Impact of JOBS Act Termination of EGC Status  A company that is an EGC on the first day of its fiscal year will no longer qualify as an EGC upon the earliest of – the last day of the fiscal year during which it had total annual gross revenues of $1 billion (indexed for inflation), – the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities in a public offering, – the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt, or – the date on which it becomes a "large accelerated filer" (a company that has been public for at least twelve months, has filed one Form 10-K and has a public float of at least $700 million) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 9
  10. 10. Impact of JOBS Act Reduced Financial Statement and MD&A Requirements  EGCs are required to provide audited financial statements for only two years (instead of three)  Maximum time period for separate financial statements of acquired business is also two years  EGCs need not present selected financial data for any period prior to the earliest audited period  An EGC’s MD&A must cover only the fiscal periods presented in the required financial statements © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 10
  11. 11. Impact of JOBS Act Exemptions from Audit and Accounting Requirements  EGCs are not required to obtain audits of their internal control over financial reporting (ICFR)  EGCs are not subject to accounting standards that are adopted or revised on or after April 5, 2012 until these standards are applied to “non-issuers” (companies that have not filed a Form S-1) – an EGC must choose whether it will avail itself of this exemption at the time the EGC is first required to file a registration statement, periodic report or other report with the SEC – an EGC is not permitted to choose to comply with some but not all of the non-issuer accounting standards © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 11
  12. 12. Impact of JOBS Act Exemptions from Audit and Accounting Requirements (con’t)  EGCs are exempt from any future audit firm rotation and "auditor discussion and analysis" requirements adopted by the Public Company Accounting Oversight Board (PCAOB)  EGCs are exempt from other new PCAOB auditing standards unless the SEC determines that application of the new rules to audits of EGCs is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition and capital formation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 12
  13. 13. Impact of JOBS Act Relaxed Disclosure Requirements  EGCs are not required to provide a CD&A  EGCs are permitted to provide the “scaled” executive compensation disclosures previously available only to “smaller reporting companies” (generally, companies with a public float of less than $75 million, regardless of revenue or assets)  EGCs are exempt from several executive compensation requirements imposed by the Dodd-Frank Act – say-on-pay, say-when-on-pay and say-on-parachute votes – pay ratio and pay-for-performance compensation disclosures © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 13
  14. 14. Impact of JOBS Act Acceptance of EGC Standards  Except for the extension of time to comply with new and revised accounting standards (which must be adopted on an “all or nothing” basis), an EGC may pick and choose among the exemptions and relaxed standards available to EGCs  The extent to which EGC standards will be adopted by EGCs is uncertain © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 14
  15. 15. Impact of JOBS Act Impact on Marketability?  The extent to which EGC standards will be accepted by the market is uncertain  An EGC should discuss with its IPO underwriters the impact of adopting EGC standards on marketability of the offering  Acceptance of EGC standards by underwriters and investors may be affected by the fact that the overwhelming majority of all IPO companies (approximately 90% based on historical data) will qualify as EGCs © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 15
  16. 16. Impact of JOBS Act Conduct of Offerings  EGCs and their representatives may engage in oral and written communications with “qualified institutional buyers” and “institutional accredited investors” to determine their interest in investing (“test the waters”) both before and after the filing of a registration statement  Research analysts have greater ability to communicate with investors and with the EGC's management  Underwriters participating in an EGC’s IPO have more latitude to publish research reports regarding the EGC  Existing FINRA rules remain relevant, and market practices still developing © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 16
  17. 17. Impact of JOBS Act Confidential Review of Form S-1  EGC can submit “draft” Form S-1 for confidential SEC review, enabling EGC to maintain its IPO plans and disclosures in secrecy until much later in the process  Form S-1 must be substantially complete, including all required financial statements and audit reports, but need not be signed by the company or include consents from auditors or other experts  SEC review process unchanged  Confidential filing will delay any perceived benefits of filing, such as attraction of potential acquirers  Form S-1 and amendments must be publicly filed on EDGAR not later than 21 days before road show © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 17
  18. 18. Impact of JOBS Act Other Changes  The Act directs the SEC to permit general solicitation and advertising in private placements by all companies (not just EGCs) so long as all purchasers in Rule 506 private placements are “accredited investors” and all purchasers in Rule 144A offerings are “qualified institutional buyers”  The Act increases the threshold for mandatory SEC reporting to 2,000 stockholders or 500 non-accredited investors, in either case excluding securities issued pursuant to exempt employee compensation plans  “Crowdfunding” permitted by private companies but subject to registration, reporting and other requirements (crowdfunding exemption not yet in effect) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 18
  19. 19. Quiet Period  During the quiet period, company must avoid all public communications that have the intent or effect of promoting the company to prospective investors, or otherwise arousing public interest in the company or its securities  Statements in press releases, media interviews, website postings or social media touting the company or its prospects may violate the quiet period rules  Generally understood to begin at the time of the org meeting or the selection of underwriters  Ends 25 days after the offering date © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 19
  20. 20. Quiet Period Sanctions for Violations  Second SEC is judge and jury – “cooling-off” period – corrective disclosure – rescission risk disclosure – civil penalties  Notable examples – Google, Groupon, salesforce.com, Webvan © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 20
  21. 21. Quiet Period Safe Harbors  Rule 163A – No communication made more than 30 days prior to initial Form S-1 filing is an offer (provided it does not mention the offering and the company takes reasonable steps to control re-distribution)  Rule 169 – Can continue regular release of factual business information intended for use by persons, such as customers or suppliers, other than in their capacity as investors or potential investors – does not permit forward-looking information © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 21
  22. 22. Quiet Period Safe Harbors (con’t)  “Test-the-Waters” – EGCs may engage in oral and written communications with “qualified institutional buyers” (as defined in Rule 144A) or institutions that are “accredited investors” (as defined in Regulation D) to determine whether such investors have an interest in a contemplated securities offering, either before or after filing a registration statement  Rule 135 – Permits a limited public announcement that a company is planning a public offering of securities, prior to filing the Form S-1 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 22
  23. 23. Quiet Period Recommendations  In general, do not increase historic level of public communications  Develop calendar of anticipated pre-IPO public communications  Structure all public communications to fall within one of the safe harbors  Review all press releases and other public communications with counsel in advance  Prior to filing the Form S-1, restrict knowledge of the IPO within the company on a “need to know” basis © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 23
  24. 24. Quiet Period Recommendations (con’t)  Avoid public disclosure of the company’s IPO plans, except to customers, suppliers and other third parties with whom there is a legitimate business need to share the plans  Designate company representatives who are authorized to communicate on behalf of the company with the media, the financial community and the public at large, and instruct all employees to refer inquiries to the designated persons  Avoid giving interviews or otherwise being the subject of stories, articles or other media coverage  Social media present special challenges © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 24
  25. 25. Management  Management team should be in place early in IPO process  IPO and public company experience helpful  Adopt indemnity agreements  Consider employment and/or CIC agreements  Confirm officers and titles  Identify executive officers and Section 16 officers  Consider need for personal tax or estate planning © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 25
  26. 26. Board of Directors  Majority must be independent within one year (most companies target immediate compliance)  Generally want at least five independent directors for reasonable sharing of board committee duties  Adopt indemnity agreements  Procure adequate D&O insurance © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 26
  27. 27. Board of Directors Independence  General Nasdaq/NYSE definition of independence: – director can’t be “independent” if he or she does not satisfy six bright-line tests – assuming no disqualification under the “bright-line” tests, in order to be “independent” Board must affirmatively determine that director does not have a relationship which, in its opinion, would interfere with exercise of independent judgment in carrying out responsibilities of a director  Stock ownership, regardless of level, is generally not viewed as an impediment to independence (except for audit committee purposes, if over 20% post-IPO) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 27
  28. 28. Board of Directors Independence (con’t)  Bright-line tests: – director may not be a current employee or have been an employee during past three years – director may not have a family member who is, or has been during past three years, an executive officer of the company – director, or a family member, may not have accepted payments from the company in excess of $120,000 in any 12-month period within past three years (not including director fees) – director, or a family member, may not be an executive officer of an entity of which any of the company’s executive officers was a compensation committee member during past three years © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 28
  29. 29. Board of Directors Independence (con’t)  Bright-line tests (con’t): – director, or a family member, may not have certain specified relationships with another entity that received payments from or made payments to the company in the past three years in excess of (1) in the case of Nasdaq, the greater of $200,000 and 5% of the recipient’s gross revenues for that year, or (2) in the case of NYSE, the greater of $1 million and 2% of the other company’s gross revenues for that year – director, or a family member, may not be a current partner of the company’s outside auditor or have worked on the company’s audit during past three years © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 29
  30. 30. Board of Directors Board Committees Three key committees: Audit Committee  three “super independent” directors (phase-in permitted)  need one “Audit Committee Financial Expert”  many responsibilities prescribed by SEC and Nasdaq/NYSE Compensation Committee  need for Nasdaq/NYSE, tax and securities law reasons  importance has increased with focus on executive compensation  will soon need to be “super independent” Nominating and Corporate Governance Committee  need for Nasdaq/NYSE, SEC disclosure and IR reasons  serves as governance “cop” © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 30
  31. 31. Board of Directors Audit Committee  At least three members, all of whom are “super independent” – must satisfy general Nasdaq/NYSE independence definition – cannot, directly or indirectly, receive any consulting, advisory or other compensatory fee from company (other than for service as a director or committee member) – must not be an “affiliated person” of company – must not have participated in preparation of company’s financial statements during past three years  Phase-in permitted: one independent at effectiveness; majority independent within 90 days; all independent within one year (but many companies target immediate compliance) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 31
  32. 32. Board of Directors Audit Committee (con’t)  Nasdaq/NYSE rules require all members be able to read and understand fundamental financial statements  Nasdaq requires at least one member have “financial sophistication” from past employment or experience in finance or accounting, or professional accounting certification  NYSE requires at least one member have accounting or related financial management expertise  Full board of directors must determine and disclose whether at least one audit committee member qualifies as an “audit committee financial expert” (as defined by the SEC) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 32
  33. 33. Board of Directors Audit Committee Financial Expert  SEC definition: A person with the following five attributes: – understanding of GAAP and financial statements – ability to assess general application of GAAP in connection with accounting for estimates, accruals and reserves – experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to breadth and complexity of issues that can reasonably be expected to be raised by the company's financial statements, or experience actively supervising one or more persons engaged in such activities – understanding of internal controls and procedures for financial reporting – understanding of audit committee functions © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 33
  34. 34. Board of Directors Audit Committee Duties  Must have a charter  Rule 10A-3 (SEC requirements): – must be directly responsible for appointing, setting compensation of, and overseeing work of auditor – must adopt procedures for receiving and handling accounting and auditing complaints – must have power to engage advisors – must have funding authority  Review and approve “related-party transactions” (required by Nasdaq and recommended by NYSE) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 34
  35. 35. Board of Directors Compensation Committee  Nasdaq requires that executive compensation be determined, or recommended to board, by: – a majority of independent directors; or – a Compensation Committee comprised solely of independent directors  NYSE requires Compensation Committee consisting solely of independent directors  Other reasons for Compensation Committee – tax and securities law advantages – investor expectations  Should have a charter © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 35
  36. 36. Board of Directors Compensation Committee “While there may be instances in which a board may act with deference to corporate officers’ judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction.” — Vice Chancellor Noble, Delaware Court of Chancery August 24, 2004 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 36
  37. 37. Board of Directors Nominating/Governance Committee  Nasdaq requires that director nominations be made, or recommended to board, by: – a majority of independent directors; or – a Nominations Committee comprised solely of independent directors  NYSE requires Nominating/Governance Committee consisting solely of independent directors  Other reasons for Nominating/Governance Committee – SEC disclosure requirements – institutional investor standards  Should have a charter © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 37
  38. 38. Board of Directors Controlled Companies  Definition: a company of which more than 50% of the voting power is held by an individual, a group or another company  Exempt from many (but not all) corporate governance requirements: – majority of directors need not be independent – need not have separate compensation committee – need not have separate corporate governance and nominating committee  Audit committee requirements still apply © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 38
  39. 39. Board of Directors Leadership Structure  SEC rules require public companies to discuss their board leadership structure in annual proxy statement: – whether and why the board has chosen to combine or separate the CEO and board chair positions – why the chosen structure is appropriate given the company’s specific characteristics or circumstances  Above disclosure not required in Form S-1, but appointment of “lead director” viewed as best practice when CEO is also board chair  Majority of IPO companies now separate the roles of CEO and board chair © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 39
  40. 40. Board of Directors Compensation  Mix of stock and cash is typical  Additional fees often paid for chair and committee roles  Increased public company demands have increased director compensation  Directors affiliated with venture capitalists or other institutional investors often forego board compensation, as a matter of policy or appearance rather than any legal requirement © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 40
  41. 41. Corporate Governance  Code of Business Conduct and Ethics  Corporate Governance Guidelines  Insider Trading Policy  Related Person Transaction Policy  Disclosure Policy  Disclosure Controls and Procedures  Other Policies © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 41
  42. 42. Corporate Governance Code of Business Conduct and Ethics  SEC – disclosure requirement regarding code for senior executives  Nasdaq/NYSE – require for all employees and directors  Code must be publicly available  Amendments and waivers are publicly reported  Code must include enforcement mechanisms © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 42
  43. 43. Corporate Governance Code of Business Conduct and Ethics  Conflicts of interest  Full, fair, timely and understandable disclosure  Compliance with laws  Corporate opportunities © 2014 Wilmer Cutler Pickering Hale and Dorr LLP  Confidentiality  Fair dealing  Protection and proper use of company assets  Encouraging reporting of illegal or unethical behavior WilmerHale 43
  44. 44. Corporate Governance Corporate Governance Guidelines  Director qualification standards  Director responsibilities  Director access to management  Director access to independent advisors  Director compensation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP  Stockholder access to independent directors  Director orientation and continuing education  Management succession  Performance reviews  Annual meeting attendance WilmerHale 44
  45. 45. Corporate Governance Insider Trading Policy  Prohibit trading while aware of material nonpublic information  Prohibit tipping  Blackout periods (quarterly and special)  Pre-notification / clearance of transactions  10b5-1 plans  Limits on short selling, derivative transactions and margining company stock © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 45
  46. 46. Corporate Governance Related Person Transaction Policy  Policy advisable because SEC rules require disclosure of related person transactions and of company’s policies and procedures for reviewing, approving or ratifying these transactions  Typically requires transactions between company and “related persons” to be reported to the General Counsel and reviewed and approved by the Audit Committee in advance  Exceptions based on SEC rules often help make policy workable © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 46
  47. 47. Corporate Governance Disclosure Policy  What does company plan to disclose?  Handling of material nonpublic information – authorized spokespersons – no comment policy – limiting internal distribution  Disclosure Policy often supplemented by disclosure guidelines that provide more detailed guidance for senior executives, legal personnel and investor relations personnel © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 47
  48. 48. Corporate Governance Disclosure Controls and Procedures  Designed to ensure that information required to be disclosed in SEC reports is recorded, processed, summarized and reported within required time periods  Designed to ensure that information required to be disclosed is accumulated and communicated to company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure  Disclosure Committee is key component  CEO and CFO certification requirements © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 48
  49. 49. Corporate Governance Other Policies  Clawback Policy (after SEC rules mandated by Dodd-Frank Act are adopted)  Equity Grant Policy  Investment Policy  Document Retention Policy  Attorney Conduct Policy (requiring attorneys to report material violations of securities laws and fiduciary duties “up the ladder” within the company, per SEC rules) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 49
  50. 50. Corporate and Capital Structure  Delaware reincorporation, if necessary  Evaluate current corporate structure  Make sure preferred stock converts in IPO  Authorized shares – generally should be at least 3-5x the number of fully-diluted shares outstanding upon completion of IPO  Stock split / reverse stock split – used to right-size price range (pre-road show) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 50
  51. 51. Corporate and Capital Structure Corporate Charter and Bylaws  Pre-IPO charter and bylaws will not be adequate for public company  Public company charter and bylaws should: – eliminate preferred stock and other private company provisions – authorize adequate number of shares of common stock for postIPO use – provide for indemnification of directors and officers – implement any desired takeover defenses  Consider corporate opportunity and exclusive forum provisions © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 51
  52. 52. Corporate and Capital Structure Takeover Defenses  Generally disfavored by ISS and institutional investors  Modest package is feasible in IPO – classified board – prohibition on written consents of stockholders – limitation of stockholders’ right to call special meetings – advance notice requirements for director nominations – blank-check preferred stock – Section 203 of Delaware statute  More aggressive techniques – multi-class voting – poison pill (can adopt post-IPO if needed)  Put in place prior to IPO (when stockholder approval is easy) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 52
  53. 53. Corporate and Capital Structure Takeover Defenses — Prevalence in IPO Companies  Classified board – 68%  Supermajority voting – 59%  Prohibition on written consents of stockholders – 79%  Limitation of stockholders’ right to call special meetings – 87%  Advance notice requirements for director nominations – 92%  Section 203 of Delaware statute – 81%  Blank-check preferred stock – 91%  Poison pill – 3%  Multi-class capital structure – 5% Based on all U.S. IPOs, 2007-2011 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 53
  54. 54. Corporate and Capital Structure Stock Exchange Listing  Most IPO companies with major underwriters can satisfy the quantitative listing standards of Nasdaq or NYSE  Listed companies must also adhere to a comprehensive set of corporate governance standards  Should reserve ticker symbol in advance (Nasdaq permits reservation for up to 24 months)  Nasdaq is traditional home for technology and growth companies  NYSE is viable alternative for many companies, as NYSE has loosened listing standards to compete with Nasdaq © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 54
  55. 55. Equity Incentives  Pre-IPO Section 409A compliance very important  Omnibus equity incentive plan – usually need new “public company” plan – Section 162(m) compliance – “evergreen” feature useful  Employee stock purchase plan – fallen out of favor due to accounting rules  Director grants – usually made on formulaic basis – separate director plan not required © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 55
  56. 56. Equity Incentives Cheap Stock  For 12-18 months preceding Form S-1 filing, price options based on independent, contemporaneous valuations  In Form S-1, include robust stock compensation disclosure that is clothed in the language of the AICPA “Practice Aid”  Make supplemental “cheap stock submission” to SEC examiner once preliminary price range known  Be extra attentive to exercise price determinations for grants made after Form S-1 filing (and especially as road show approaches) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 56
  57. 57. Financial and Audit Matters  Confirm auditor independence (note that pre-IPO and postIPO independence rules are different)  Confirm availability of all required financial statements  Consider impact of M&A deals on financial statements and IPO timing  Assess accounting issues  Develop necessary controls and procedures – SOX 404 in the wings (second Form 10-K) – EGCs can skip ICFR audits for up to five years © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 57
  58. 58. Financial and Audit Matters Financial Statement Requirements  Three years of audited financial statements (two years for EGCs)  Must conform to “SEC GAAP”  Consider need for segment disclosures  Separate financial statements (and pro forma combined financial statements) required for completed or probable acquisitions or dispositions that satisfy significance tests under SEC Regulation S-X  XBRL data format not required until first 10-Q © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 58
  59. 59. Getting Started  Assemble internal team  Select external advisors  Corporate housekeeping / diligence  Legal compliance  Governance / public company preparation  Choose underwriters  Begin Form S-1 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 59
  60. 60. Getting Started Internal Team  Management – CEO, CFO, General Counsel, Controller – additional finance and accounting staff – investor relations professional  Board of Directors – determine willingness of current directors to continue – plan for possibility that VC/PE directors will leave Board following IPO – consider skillsets, industry and public company experience, diversity – provide adequate time to recruit new directors © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 60
  61. 61. Getting Started External Advisors  Independent auditor – continuity of audit firm helpful – consider timing of audit partner rotation  Company counsel – IPO, public company and SEC experience essential – Incumbency helpful  Others – compensation consultant – investor relations firm – financial printer – transfer agent © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 61
  62. 62. Getting Started Corporate Housekeeping/Diligence  Ensure board, committee and stockholder minutes and consents are complete  Clean-up stock, option and warrant records  Identify notice, consent and waiver requirements  Confirm investor agreements terminate in IPO  Review financing transaction documents  Review M&A documentation  Review other corporate records  Consider intellectual property “audit”  Assess legal compliance © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 62
  63. 63. Getting Started Legal Compliance  Securities laws – employee grants (Rule 701) – financing transactions  Privacy and information security  Employment  Sales and use taxes  Export controls  FCPA  Pending and prospective litigation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 63
  64. 64. Getting Started Governance/Public Company Preparation  Begin to develop governance practices and policies that satisfy SEC and stock exchange requirements, meet business needs, and are consistent with company culture  Become familiar with IPO and public company topics: – potential liability – responsibilities of directors and officers – corporate governance requirements – periodic reporting and public disclosure obligations – officer certification requirements – insider trading and reporting obligations – post-IPO stock sales © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 64
  65. 65. Getting Started Underwriters  Company should begin to cultivate underwriting relationships 6-12 months before organizational meeting  Multiple bookrunners now commonplace  Co-managers used to round out underwriting team  Consider each candidate’s track record, team members (including research analysts), commitment to the company, industry experience, distribution capabilities, aftermarket support, reputation and financial strength  If seeking discount below the 7% norm, should discuss up front, when banks are competing for the engagement © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 65
  66. 66. Getting Started Form S-1  Identify “comps”  Stage the drafting – Business – MD&A / financial disclosures – Management / compensation disclosures – Risk Factors  Selling stockholders  Related person transactions  Material contracts and confidential treatment  Consider JOBS Act relief © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 66
  67. 67. SEC Review  Initial comments in 27-30 days  Total of 4-5 comment letters, with quicker turnaround each time  SEC comments typically focus on financial statements (17%), business (10%), MD&A (14%), risk factors (10%), summary (10%) and executive compensation sections (8%)  Company-specific comments based on staff review of filing and other public disclosures  Time from initial filing to pricing is typically about four months © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 67
  68. 68. SEC Review JOBS Act  Disclose EGC status on prospectus cover  Describe how and when EGC status may be lost  Describe exemptions that are available to the company  Indicate whether taking advantage of extended transition period for complying with new or revised accounting standards – If yes, provide risk factor indicating that financial statements may not be comparable to those of other public companies – If no, indicate that decision is irrevocable © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 68
  69. 69. SEC Review Non-GAAP Financial Measures  Revised SEC interpretive guidance (January 2010) more tolerant of use of non-GAAP financial measures, including in IPOs  Staff insists on compliance with applicable rules  Staff will object to non-GAAP financial measures it considers misleading, such as Groupon’s short-lived “Adjusted Consolidated Segment Operating Income”  Exclusion of recurring operating expenses viewed with skepticism © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 69
  70. 70. SEC Review MD&A  Key metrics used by management to monitor and evaluate company’s financial condition and operating performance  Known trends and uncertainties  Revenue recognition  Segment disclosures  “Cheap stock” disclosures (including FMV determinations in past 12-18 months and justification of step-up from most recent FMV determination to mid-point of price range)  Acquisition accounting © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 70
  71. 71. SEC Review Executive Compensation Disclosures  More analysis in CD&A of reasons that specific compensation decisions were made  Description of CEO’s role in determining compensation of other executive officers  Identification of peer companies used for benchmarking  Disclosure of quantitative performance targets for incentive compensation  CD&A not required for EGCs © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 71
  72. 72. SEC Review Related Person Transactions  SEC staff is very attuned to nature and placement of related person disclosures  Basic rule requires disclosure of all company transactions in excess of $120,000 in past three years in which any executive officer, director or 5% stockholder had or will have a material interest  Material relationships between company and underwriters or selling stockholders also need to be disclosed © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 72
  73. 73. SEC Review Stockholder Rights  Staff’s longstanding requirement to disclose impact of antitakeover provisions is extending to new techniques affecting stockholder rights  If company has multi-class capital structure, staff will require prominent summary of differential voting rights on prospectus cover and elsewhere  If company has “exclusive forum” provision in charter or bylaws (requiring all stockholder claims against company or its directors to be brought in designated court), staff may ask company to address provision’s enforceability © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 73
  74. 74. SEC Review Recurring Drafting Comments  Condense summary and make it more balanced  Make risk factors specific to the company  Eliminate industry and technical jargon  Substantiate leadership claims and other assertions  Reconcile inconsistencies within prospectus and when compared to company website  Remove disclaimers and mitigating language  Provide staff with industry research reports cited in prospectus and file consents for reports that are not publicly available  Add explanations provided in response letters to prospectus © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 74
  75. 75. Life as a Public Company (in a nutshell)  SEC reporting (10-Ks, 10-Qs, 8-Ks)  CEO and CFO certifications (10-Ks, 10-Qs)  Intense focus on corporate governance and executive compensation  Disclosure duties and rules (Regulation FD)  Financial reporting (“SEC GAAP,” acquisition financials, nonGAAP financial measures)  Insider trading reporting and liability (Section 16)  Insider sales (lockups, 10b5-1 plans, Rule 144)  Investor relations (annual meetings, proxy statements, earnings calls, financial guidance) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 75
  76. 76. For More Information Lisa Firenze Lisa.Firenze@wilmerhale.com +1 212 937 7263 Brian Johnson Brian.Johnson@wilmerhale.com +1 212 937 7206 Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/codeof-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 76

×