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Preparing to go public 2.1 Choosing advisors J.P. Morgan (Investment Banking) (a) Retention of advisors/service providers Going public involves assembling a large and experienced team of professionals, including lawyers for the company and the underwriters, independent auditors, underwriters, insurance brokers, financial printers and data room providers. The company should carefully consider the skills and qualifications of all parties it hires, given the importance of the advice and services they will provide throughout the process as well as the messages their involvement with the IPO will signal to other advisors and to the market. The key advisors and service providers that the company and board need to evaluate and hire are as follows. Company counsel: Company counsel work in concert with the company’s management team, including in particular the company’s chief financial officer (CFO) and general counsel, to represent the company’s legal interests throughout the process. They are integrally involved in carrying out due diligence investigations into the company, drafting the registration statement and advising the company in relation to the various legal agreements it will enter into in connection with the IPO process, such as lock-up and underwriting agreements, as well as generally providing legal advice to the company throughout the process. In selecting company counsel, it is important to choose a firm that has considerable expertise and a proven track record of executing IPOs as well as appropriate industry and sector expertise. At a more personal level, it is critical to select individual law firm partners with whom the management team has good rapport, as they will be spending a considerable amount of time together through the process. Independent auditors and consulting accountants: The independent accountants are involved in performing an audit and, where relevant, review of certain financial statements prepared by management and included in the registration statement, and in providing a “comfort letter” to the underwriters which, among other things, confirms the accuracy of certain financial numbers included in the registration statement. The underwriters and their counsel will conduct in-depth due diligence with the accounting firm around their relationship with the company, their independence under applicable rules and regulations, the integrity of the company’s financial statements and the processes and methodologies underpinning their preparation and audit. The decision to hire auditors is of critical importance, given that they will be integrally involved in the company’s financial reporting for many years. Auditors should be hired well in advance of preparing for the IPO so that the financial statements and related disclosures to be included in the registration statement are presented on a basis consistent with prior-year audits. The SEC requires three years of annual historical audited financials (two years in the case of emerging growth companies) and these would ideally have been audited by a single firm of auditors. Although a “Big 4” firm is typically recommended for companies that are contemplating an IPO, there are a number of boutique and regional auditing firms that are also well regarded and talented. The company should consider industry expertise, reputation and fit with the company, among other factors, when selecting an auditing firm. In many cases the company requires assistance in designing enhanced accounting processes and controls, preparing financial statements and other information for audit and to supplement its staff during the IPO process and transition to becoming a public company. The auditor may be unable to perform some of these tasks due to independence requirements, so a separate accounting consultant may be necessary. Accounting consultants provide useful skills, experience and resources to supplement the company’s accounting and controls functions in this time of transition, though the company should ensure that it does not become reliant on them beyond the IPO and has assembled an appropriate team of in-house experts. Underwriters: The underwriting syndicate consists of various banks, each having different roles and status within the syndicate. The lead banks are known as bookrunners and are so called because they literally run the order book for the offering once it is in its marketing phase. Many companies will choose more than one bookrunner, in which case one will be appointed the lead bookrunner, or “lead left” bookrunner (so called because its name is listed first on the top line in the prospectus). The company should carefully choose the lead bookrunner for the IPO because of the critical role that it plays throughout the process. As the quarterback of the IPO, the lead bookrunner advises the company on all aspects of the IPO process, assists the company in shaping its investment thesis to be used while marketing the transaction, guides the company in its dealings with investors during the roadshow and develops the optimal pricing recommendation for the IPO. The bookrunners as a group are closely involved in diligence, drafting the registration statement, crafting the marketing materials, creating the roadshow schedule, pricing the transaction and supporting the stock in the aftermarket. The bookrunners’ research analysts will also be involved in undertaking due diligence on the company and play an important role in providing an independent view on the company to investors during the roadshow. The bookrunners should be chosen based on their relationship with the company, industry expertise, expertise in executing IPOs, track records with issuers and investors, distribution platform, research analyst capabilities and market-making ability. Beneath the bookrunners sit a further group of underwriters, typically known as “Co-managers.” The Comanagers’ investment banking teams are significantly less involved in the day-to-day advisory role for which the bookrunners are responsible. They are, however, involved in most (if not all) of the due diligence undertaken. The Co-managers’ research analysts will also take part in all analyst diligence that is conducted, and they will also play an active role in discussing their view of the company with investors while the roadshow is ongoing (although separate from the roadshow). The primary role of the Co-managers is to underwrite additional shares in the offering, provide additional research coverage post-IPO and assist in market making once the stock is public. Co-managers should be chosen based 14 NYSE IPO Guide
Preparing to go public on their relationship with the company, industry expertise, research analyst capabilities and market-making ability. Underwriters’ counsel: The bookrunners, on behalf of the underwriters, will select a counsel to act for them in connection with the IPO. This role includes advising the underwriters generally on managing their own liability in connection with the IPO, including ensuring that the offering disclosure does not contain any material misstatements or omissions, and that any issues that arise in due diligence are thoroughly and appropriately dealt with, whether by disclosure or otherwise. In addition, underwriters’ counsel prepares drafts of the underwriting agreement and lock-up agreements and negotiates them with company counsel, as well as negotiating the terms of the comfort letter to be delivered to the underwriters by the company’s auditors. Other advisors: In addition to the above, it may be appropriate to appoint various other advisors in connection with the IPO, such as a compensation consultant (to advise the company on the structure of its stock-based compensation and related disclosures in the registration statement), a roadshow coach (to advise the management team, alongside the underwriters, on the most effective way of presenting the company and its business during the roadshow), and an investor relations firm. Other service providers: Aside from the advisory team, the company will require the services of a number of service providers in connection with its IPO: Financial Printers and Data Room Providers: The company will need to appoint a specialist firm of financial printers to typeset and format its registration statement and deal with the submission of it to the SEC via EDGAR, as well as process subsequent changes to the registration statement resulting from SEC comments and general updates. The financial printer is also likely to provide virtual data room services to the company, enabling documents required for the due diligence process to be uploaded and viewed electronically by the working group. Transfer Agent: To list its stock on the NYSE, the company will need to appoint a transfer agent that complies with the connectivity and insurance requirements to operate within the direct registration system of the Depository Trust Company (DTC). Electronic Roadshow Provider: Companies undertaking an IPO typically use an electronic roadshow for both the institutional and retail parts of the offering. This consists of a taped version of the roadshow, available for viewing electronically, and is usually arranged by the underwriters on behalf of the company. Stock Option / Equity Administrator: Either before or, if not, upon becoming a public company, it is common for the company to appoint a third party to manage and administer its stock option program(s). 2.2 Financial information KPMG LLP (a) Registration statement An entity making an offering of securities registered with the SEC under the Securities Act of 1933 (the Securities Act) must file a registration statement and distribute a prospectus in connection with the offering. The registration statement and prospectus must contain financial statements and other financial information regarding the financial condition of the company and the results of its operations. The Securities Act and the related rules and regulations set out the requirements that the company must follow when making an offer to sell securities that do not meet one of the limited exceptions from registration. This framework includes the use of forms for registrations of offers (in particular, Forms S-1, S-3, S-4 and S-11). These forms specify the information that must be disclosed under Regulation S-X and Regulation S-K. Regulation S-X generally deals with financial statement form and content, while Regulation S-K generally deals with nonfinancial statement disclosures in the body of the registration statement. Form S-1 is the basic registration form used for a U.S. company’s IPO. Form S-3 is generally used for the registration of securities by a company that already has securities registered with the SEC, while Form S-4 is generally used for the registration of debt or equity securities issued in relation to a merger or acquisition. Form S-11 may be used for the registration of securities issued by certain real estate companies, including real estate investment trusts or securities issued by other companies whose business is primarily that of acquiring and holding for investment interests in real estate. The SEC has specific and complex rules regarding the financial statements and other financial information that must be presented in a registration statement for an IPO. Some of the significant financial statement information that may be required includes: • audited annual financial statements for recent fiscal years; • unaudited interim financial statements for the most recently completed interim period and the corresponding period of the preceding year; • selected financial information (usually summarized from the company’s financial statements) for the past five fiscal years and most recently completed subsequent interim period and its comparative period; • separate audited annual and unaudited interim financial statements for businesses that have been acquired or will probably be acquired that meet certain significance thresholds (described below). Depending on the significance of the acquisition, the company may be required to present one to three years of audited financial statements; • separate audited or unaudited annual financial statements for significant investments accounted for under the equity method that meet certain significance thresholds; • financial statements of guarantors of securities being offered and affiliates whose securities collateralize the securities being offered; • pro forma financial information giving effect to certain events such as significant business acquisitions/ dispositions, reorganizations, unusual asset exchanges and debt restructurings; NYSE IPO Guide 15
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Page 8 and 9: Preface Congratulations on making i
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Page 35 and 36: The IPO process Underwriter interna
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Obligations of a public company 6.1
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8 Managing risk NYSE IPO Guide 83
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Foreign private issuers Level III A
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Appendices NYSE IPO Guide 109
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Appendices Appendix IV: NYSE financ
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Appendices Appendix VI: Summary of
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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