Corporate Practice Series Portfolio No. 60-2nd, Initial Public Offerings, examines the transactional aspects and regulatory requirements of an initial public offering of securities. It discusses how to prepare an initial public offering, the internal “housekeeping” steps an issuer must take beforehand to ensure a successful offering, negotiating the terms of the offering, the potential liabilities involved with an IPO, and alternative financing options that are available for small businesses.

 

Portfolio 60-2nd: Initial Public Offerings

I. Scope and Content of the Portfolio 
    A. Summary of the IPO Transaction 
    B. Overview of the IPO Regulatory Framework 
    C. Other Securities Regulatory Considerations 
    D. Corporate Housekeeping 
    E. Negotiating and Documenting the Terms of the IPO 
    F. Preparing for the IPO 
    G. Potential Liabilities in the IPO Process 
    H. Alternatives for Small Businesses

II. Summary of the IPO Transaction 
    A. Preliminary Preparations 
        1. Introduction 
        2. Relationship between issuers and underwriters 
        3. Organizational meeting 
        4. Timetable and responsibility checklist 
        5. Counseling management regarding ‘pre-offering' activities 
        6. Due diligence—collecting information regarding the issuer 
        7. Comfort and opinion letters 
        8. Securities sold by stockholders 
    B. Allocating the Responsibilities in the IPO 
        1. Introduction 
        2. The issuer 
        3. The underwriters 
        4. Issuer's in-house counsel 
        5. Issuer's outside counsel 
        6. Underwriter's counsel 
        7. The accountants 
        8. The financial printer 
    C. Preparing the Registration Statement 
    D. Regulatory Review of the Registration Statement 
    E. Marketing Activities 
    F. ‘Going Effective' and Closing the Offering 
    G. Financing Alternatives to the IPO

III. Overview of the IPO Regulatory Framework 
    A. Introduction 
    B. The Securities Act 
        1. Generally 
        2. Registration scheme 
    C. Securities Exchange Act of 1934 
    D. The SEC 
    E. Statutory Parties to the Registration Process 
        1. The issuer 
        2. The underwriters 
        3. The experts 
    F. The Mechanics of SEC Securities Act Registration—The Registration Statement 
        1. Introduction 
        2. The integrated disclosure system under the federal securities laws 
            a. Overview 
            b. Regulation C 
            c. Outline of Form S-1 
            d. Outline of Regulation S-K applicable to an IPO 39 
            e. Overview of Regulation S-X 
        3. SEC review procedures 
        4. ‘Going effective' and closing the offering 
    G. State Regulation of Securities Offerings 
        1. Overview of Blue Sky review—state preemption by NSMIA 
        2. Disclosure states 
        3. Merit review states 
        4. Blue Sky review process 
        5. The NASAA coordinated review process 
        6. Going effective 
    H. Preparing for the IPO: Restrictions on Corporate Communications During the Pre-filing and Quiet Periods 
        1. Overview 
        2. Regulation of corporate communications 
            a. Regularly released factual business information 
            b. Thirty-day bright line exclusion from prohibition on offers prior to filing registration statements 
            c. Communications dealing with the proposed offering 
                i. The pre-filing period 
                ii. The quiet period 
                    (a). Rule 134 written communications regarding the offering 
                    (b). The free writing prospectus 
                    (c). Road shows 
                    (d). Issuer Web site 
                    (e). Media publications and broadcasts 
                    (f). Research reports 
                    (g). Term sheets 
        3. A communication strategy 
    I. ‘Quiet Period' Activities 
        1. Prospectus delivery requirements during the offering 
        2. Prospectus delivery requirements during the post-effective period 
        3. Manner of delivery of prospectus 
        4. Post-effective amendments and supplements 
        5. Regulation M: restrictions on market activities 
            a. Introduction 
            b. Activities by distribution participants and their affiliated purchasers 
            c. Activities of issuers, selling stockholders, and their affiliated purchasers 
            d. Nasdaq passive market-making 
            e. Stabilization and other syndicate activities 
            f. Short sales in connection with an offering 
            g. Recent Regulation M developments

IV. Other Securities Regulatory Considerations 
    A. Other Regulators 
    B. FINRA Review 
        1. Corporate Financing Rule 
        2. FINRA considerations affecting the underwriting arrangement 
            a. Conflicts of interest and affiliate offerings 
        3. FINRA Rule 5130 
        4. Offering proceeds to the underwriter 
    C. Exchange Markets and Listing 
    D. Sarbanes-Oxley Act 
        1. Introduction 
        2. Overview of relevant statutory provisions and SEC rules 
            a. Audit committee requirements 
            b. Auditor independence 
            c. Officers' certification 
            d. Disclosures and procedures 
            e. Enhanced financial disclosures 
            f. Disclosure of codes of ethics and audit committee financial experts 
            g. Benefit plan blackouts 
            h. Attorney conduct standards

V. Corporate Housekeeping 
    A. Background 
    B. Operational Structure of the Issuer 
    C. Capital Structure of the Issuer 
        1. Stock splits, stock dividends, or reverse stock splits 
        2. Conversion of preferred stock or debt securities 
        3. Options and warrants 
        4. Recent sales of unregistered securities 
    D. Corporate Governance and the Board of Directors 
        1. Rule 10A-3 
        2. NYSE 
            a. Independence of majority of board members; definition of independent director 
            b. Audit committee 
            c. Other committees 
            d. Corporate governance guidelines; code of business conduct and ethics 
            e. Exceptions to the NYSE corporate governance proposals 
    E. Charter Provisions 
        1. Certificate or articles of incorporation 
        2. Bylaws 
    F. Corporate Recordkeeping 
        1. Minute books 
        2. Stock books 
        3. Good standing and tax certificates 
        4. Corporate actions 
    G. Insider Transactions 
        1. Repayment of loans to insiders 
        2. Employment and compensation agreements 
        3. Registration rights provisions 
        4. Lock-up agreements 
        5. Due diligence and disclosure 
    H. Relations with Employees 
    I. Contract Review 
        1. Loan agreements 
        2. Deeds, mortgages, and leases 
        3. Principal contracts 
        4. Intellectual Property 
        5. Registration statement exhibits 
    J. Internal Controls 
    K. Corporate Actions

VI. Negotiating and Documenting the Terms of the IPO 
    A. Introduction 
        1. Background 
        2. The letter of intent 
        3. The underwriting agreement 
    B. The Basic Financial Terms of the IPO 
        1. The type of securities offered 
        2. Size and price of the offering 
        3. Secondary distribution by selling stockholders 
        4. The over-allotment option 
        5. The underwriters’ engagement: firm commitment or best efforts? 
        6. Expenses 
        7. Timing of the offering 
        8. ‘Market-making' activities 
    C. Underwriters’ Compensation 
        1. Introduction 
        2. The underwriters’ discount or commission 
        3. The underwriters’ expense allowance 
        4. Securities received in connection with the offering 
        5. Advisory and consulting arrangements 
        6. Right of first refusal 
    D. Representations and Covenants in the Letter of Intent 
        1. Preparation of the registration statement and related documents 
        2. Warrants and options 
        3. Underwriter's due diligence and access to properties and records 
        4. Business changes and personnel modifications 
        5. Finders’ fees 
        6. Selection and use of professionals 
    E. Representations and Warranties in the Underwriting Agreement 
        1. Basic representations and warranties 
        2. Specific representations and warranties 
        3. Representations and warranties of selling stockholders 
    F. Covenants and Further Agreements of the Issuer 
        1. Future stockholder sales (lock-up agreements) 
        2. Securities Exchange Act registration, reports to stockholders, exchange listings, and transfer agents 
        3. Prospectus delivery requirements 
        4. Other matters 
    G. Conditions of Underwriters’ Obligations 
        1. Introduction 
        2. Legal opinions 
            a. Issuer’s counsel 
            b. Selling stockholders’ counsel     
            c. Managing underwriter’s counsel 
        3. ‘Cold comfort' letters 
        4. Officers’ certificates and related documents 
        5. Closing memorandum 
        6. Other closing documents 
    H. Indemnification and Contribution 
    I. Termination and Underwriter Defaults

VII. Preparing for the IPO 
    A. Due Diligence 
        1. The multiple purposes of due diligence 
        2. The due diligence environment 
            a. Introduction 
            b. The role of issuer's counsel 
            c. Underwriters' due diligence 
            d. Ancillary due diligence procedures 
            e. Timing of the due diligence investigation 
        3. SEC and FINRA guidelines regarding the content and scope of appropriate due diligence procedures 
            a. Introduction 
            b. Securities Act Release No. 5275 and NASD Notice to Members No. 73-17 
            c. NASD Notice to Members No. 75-33 
            d. 1981 NASD due diligence reports and SEC rulemaking promulgations 
            e. Certifying and documenting the due diligence 
        4. Due diligence procedures 
            a. Content of the review 
            b. Financial statements and due diligence 
            c. Manner of the review 
    B. Preparation of the Registration Statement 
        1. Introduction 
        2. Selection of the registration statement form 
        3. ‘Plain English' requirement 
        4. Content of the nonfinancial portion of the registration statement 
        5. Content of the financial portion of the registration statement 
            a. Content, period, and age of financial statements 
            b. Additional financial statements 
            c. ‘Pro forma' financial statements 
            d. Management's Discussion and Analysis 
            e. Potential IPO accounting issues 
    C. Filing the Registration Statement and Related Documents 
        1. Overview 
        2. Regulation C: The mechanics of SEC registration 
            a. Filing the registration statement 
            b. Requesting confidential treatment 
        3. Blue Sky filing procedures 
        4. FINRA filing procedures

VIII. Potential Liabilities in the IPO Process 
    A. Introduction 
    B. Private Damages Actions Under the Federal Securities Laws 
        1. Overview 
        2. Materiality 
        3. Section 11 of the Securities Act 
        4. Section 12(a)(2) of the Securities Act 
        5. Section 12(a)(1) of the Securities Act 
        6. Rule 10b-5 of the Exchange Act 
        7. ‘Control person' liabilities 
        8. Statutes of limitations 
        9. Private Securities Litigation Reform Act of 1995 
        10. Securities Litigation Uniform Standards Act of 1998 
    C. Anti-Fraud Provisions Under §17(a) of the Securities Act 
    D. State Statutory and Common Law Causes of Action 
        1. Civil and criminal liabilities 
            a. State blue sky laws 
        2. Common law actions and remedies 72 
    E. Applying the Standards of Liability in the Public Offering Context 
        1. Introduction 
        2. The issuer and its affiliates 
            a. Officers and inside directors 
            b. Outside directors 99 
            c. Other signatories 
        3. The underwriters 
        4. The experts 
            a. Summary 
            b. Liability under § 11 
            c. Liability under § 10(b) 
            d. SEC enforcement actions 
        5. Conclusion

IX. Alternatives for Small Businesses 
    A. SEC's Small Business Initiatives 
    B. Regulation A 
        1. Overview 
        2. Eligibility requirements 
            a. Issuer characteristics 
            b. Disqualification provisions 
        3. Quantitative limitations 
            a. In general 
            b. Sales by selling stockholders 
        4. Regulation A procedures 
        5. Solicitations of interest prior to filing offering statement 
        6. Preparation of the offering statement 
            a. Notification 
            b. Narrative disclosures in offering circular 
                (1). Model A: Form U-7 
                (2). Part I of Form S-1 
                (3). Model B 
            c. Financial statements and projections 
            d. Exhibits 
        7. SEC filing requirements 
        8. Preliminary and final offering circulars 
            a. Overview 
            b. Preliminary offering circular 
            c. Final offering circular 
            d. Revised or updated offering circulars 
        9. Reports on Form 2-A 
        10. Private actions and administrative proceedings 
            a. Liability for violation of registration statements 
            b. Liability for fraud 
            c. Suspension orders and procedures 
        11. Integration 
            a. Completed Regulation A offerings 
            b. Offerings terminated prior to filing offering circular 
        12. SEC Rule 504 
        13. Internet offerings 
        14. Blue Sky laws 
            a. Coordination with Regulation A 
            b. SCOR 
    C. Registration and Reporting for Smaller Reporting Companies 
        1. Overview 
        2. Summary of scaled disclosure requirements

Portfolio 60-2nd: Initial Public Offerings

Wks. 1 Sample Timetable and Responsibility Schedule For an Initial Public Offering of Common Stock

Wks. 2 Due Diligence Request Checklist (from Underwriter's Counsel to Issuer's Management)

Wks. 3 Board Resolutions

Wks. 4 Securities Act Registration Statement on Form S-1

Wks. 5 Securities Exchange Act Registration Statement on Form 10

Wks. 6 Underwriting Agreement

Wks. 7 Form of Lock-up Agreement

Wks. 8 Public Offering of Common Stock

Wks. 9 Sample Risk Factor Disclosure with Respect to Internal Controls

Wks. 10 Certification of Form 10-K

Wks. 11 Accountants Report with Respect to Internal Controls

Wks. 12 Opinion of Counsel for the Company to be delivered pursuant to Section [ ] of the Underwriting Agreement

Wks. 13 Opinion of Counsel for the Underwriters to be delivered pursuant to Section [ ] of the Underwriting Agreement

Wks. 14 Opinion of Counsel to Selling Stockholders to be delivered pursuant to Section [ ] of the Underwriting Agreement

Wks. 15 Accountant's Comfort Letter

Robert A. Hudson
Butzel Long
Detroit, Michigan

Donald L. Toker
Crowell & Moring LLP
Washington, D.C.