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Preparing to go public If the company qualifies as a smaller reporting company in an initial registration statement, it must reassess this status at the end of its second fiscal quarter in each subsequent fiscal year. If the company fails to meet the test, a transition to the larger company reporting requirements commences with the first quarter of the subsequent fiscal year. Emerging growth company: The JOBS Act created a new category of public equity issuers called emerging growth companies that are exempt from certain SEC reporting requirements for up to five years. (For a more detailed discussion of the JOBS Act, see Chapter 4). An EGC 8 is a company that has not had an initial sale of registered equity securities on or before December 8, 2011 and has total annual gross revenues 9 less than $1 billion for its most recently completed fiscal year. Among the reduced reporting requirements allowed an EGC under the JOBS Act are the following: • An EGC may limit presentation of audited financial statements in the initial registration statement of its common equity securities to the two most recent fiscal years. 10,11,12 The JOBS Act does not change the existing 8 An FPI may also qualify as an EGC. 9 “Total revenues” means the revenues presented in a company’s most recent fiscal year’s income statement prepared under U.S. GAAP (for domestic companies and foreign companies that present a reconciliation to U.S. GAAP) or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 10 The JOBS Act provision that permits an EGC to file only two years of audited financial statements is limited to the registration statement for the EGC’s initial public offering of common equity securities. However, an EGC will not be required to include, in its first annual report on Form 10-K or on Form 20-F, audited financial statements for any period prior to the earliest audited period included in the registration statement filed in connection with its initial public offering of common equity securities. 11 If an EGC is not a smaller reporting company, it must include three years of audited financial statements in its initial registration statement for debt securities. 12 An FPI qualifying as an EGC may comply with the scaled disclosure provisions in a Form 20-F. If an FPI takes advantage of any benefit available to an EGC, then it will be treated as an EGC. requirement that registrants present unaudited financial statements for the most current interim period and comparative prior year period in registration statements. • An EGC may comply with the management’s discussion and analysis (MD&A) and selected financial data requirements of Regulation S-K by presenting information about the same periods for which it presents financial statements in an initial registration statement. • Because an EGC is not required to present more than two years of audited financial statements in a registration statement for an initial public offering of its common equity securities, the SEC will not object to limiting the years of financial statements provided under Rule 3-05 or 3-09 to two years. The SEC staff would also not object if an EGC voluntarily provides the third year of audited financial statements in the initial registration statement but chooses to provide only two years of audited financial statements under Rules 3-05 or 3-09 when three years of audited financial statements may otherwise be required based on the significance of the acquired business or equity method investment. An EGC will also be allowed to apply these accommodations to any other registration statement it files. • An EGC may apply the effective date provisions applicable to nonpublic companies for adoption of new or revised accounting standards issued by the FASB but must make this choice at the time the company is first required to file a registration statement, periodic report, or other report with the SEC. 13 13 EGCs must adhere to public company effective dates for all standards issued prior to April 5, 2012. Any update to the FASB’s Accounting Standards Codification after April 5, 2012 would be eligible for adoption according to the private company timetable. If an EGC elects to comply with public company effective date provisions, it must comply with them consistently for all new and revised standards throughout the period it qualifies as an EGC. • An EGC is exempt from the requirement for auditor attestation of internal control over financial reporting (ICFR). 14 • An EGC may report using the scaled disclosure requirements available to smaller reporting companies for executive compensation disclosures. An EGC retains this status until the earliest of: • the last day of its fiscal year in which it has total annual gross revenues of $1 billion or more; • the last day of its fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement; • the date on which the issuer has issued more than $1 billion in nonconvertible debt during the previous three-year period; or • the date on which the issuer is deemed to be a large accelerated filer. An EGC must continually revaluate its ability to qualify for EGC status. If an entity fails to qualify for EGC status at any point, the entity must follow certain transitional rules and commence complying with non-EGC reporting requirements during the year in which the entity no longer qualifies as an EGC. See Chapter 4 for further details of transitional offboarding rules. Summary: Planning an IPO is a complex undertaking that requires the compilation and collection of numerous financial statements and related information. Knowing what financial statements and other information will be required to complete a registration statement is a critical step in planning an IPO. The company should consult the SEC rules and regulations, as well as its auditor 14 Under existing SEC rules and regulations, newly public entities, other than nonaccelerated filers, begin complying with Section 404(b) auditor attestation of the Sarbanes-Oxley Act with their second annual report filed with the SEC. An EGC will be exempt from this requirement as long as it qualifies as an EGC; however, management’s reporting on internal control is still required, as according to Section 404(a). 22 NYSE IPO Guide
Preparing to go public and other advisors, to determine what financial information requirements might be applicable in its circumstances to allow for the planning of sufficient time and resources to complete the filing within manageable time frames. (b) Transition to being a public company The completion of an IPO marks the start of life as a public company. One of the first challenges for a successful transition is adapting to the new, often more complex, requirements of operating as a public company. New processes may need to be adopted, and management must now consider how decisions affect a much larger group of stakeholders and be conscious of ensuring regulatory compliance. Some of the transition areas that should be considered going forward are outlined below. Controls and procedures: The level of investor confidence in the reliability of financial disclosures can be a key factor in a public company’s success. To help ensure investor—and market—confidence, a public company’s internal controls systems must comply with all regulatory requirements. These requirements include quarterly certifications by executives and an audit report on the effectiveness of internal control over financial reporting required by Section 404 of the Sarbanes- Oxley Act, typically as of the second fiscal year-end after the IPO (although an EGC is exempt from the auditor attestation requirement in Section 404(b) of the Sarbanes-Oxley Act for as long as it qualifies as an EGC). Complying with Section 404 requires a significant investment of resources over several months to move through a project plan that includes a number of phases, such as: • assessing financial statement and general and specific fraud risks; • evaluating the control environment, entity-level controls and general IT controls; • identifying significant accounts and disclosures; • defining significant locations and business units; • documenting processes involving major classes of transactions; • identifying significant risk points and key mitigating controls; • providing preliminary assessment of effectiveness of design and operation of key controls; • remediating missing and ineffective controls; • demonstrating consideration of the regulatory risks and environment; and • conducting final tests that support an assertion of effective internal controls over financial reporting. Section 6.1 contains a more detailed discussion of the SOX compliance requirements. Financial accounting department: The process leading up to filing of the registration statement requires the gathering of various financial information. The company can utilize external advisors to assist in gathering this information, but once an IPO is completed, internal resources should be in place to support the ongoing reporting needs of a public company. The company will need to: • prepare ongoing reports that provide financial and nonfinancial information at a level of detail and in a time frame that generally was not required in the past; • develop a public entity organizational structure and recruit appropriate personnel to satisfy its public reporting requirements; • develop sufficient resources or processes to perform regular and consistent financial close and reporting processes to meet reporting requirements; • develop or enhance its accounting and reporting policies and procedures; • enhance the training and skills of its existing workforce involving accounting and reporting requirements of public companies; • develop or enhance its budgeting, forecasting and financial modeling processes to reflect its operations as a stand-alone entity with public shareholders; and • change underlying business processes to meet appropriate metrics or best-inclass services. After the IPO, the company will be subject to strict SEC reporting time lines for quarterly and annual reporting. It will also be required to file current reports on Form 8-K after the occurrence of certain specified material events within four business days of the occurrence of the event. Many private companies are unaccustomed to formal accounting closes for interim reporting periods and the strict reporting time lines for both quarterly and annual periods. In anticipation of going public, the following are some actions that the company should take in advance of the IPO: • Evaluate the current financial close process in light of post-IPO requirements and consider early implementation of an accelerated close time line that will be required of an SEC issuer, including the gathering of disclosure information for notes to the financial statements. Reducing the financial close cycle time will most likely involve changes in processes, IT systems and possibly resources. The transition to an established process can take time, but it is imperative that these modifications be in place before the first Form 10-Q or Form 10-K is required. • Evaluate the finance and accounting departments’ organizational structure and skill sets of key personnel in light of post-IPO reporting requirements, and identify gaps. Gaps can be filled by recruiting additional staff and providing training for current personnel. • Draft an accounting policy manual. Many private companies have informal policies and procedures, but public companies should have documented accounting policies as a component of their internal control environment. Budgeting and forecasting: After the IPO, investors will expect the company to implement the plans presented in the prospectus. The following are some of the organizational changes that the company should consider: • Review business strategies, forecasting processes and cost infrastructure in order to help ensure its competitiveness and meet shareholder expectations. • Develop an investor relations infrastructure and resources. • Develop or enhance budgeting, forecasting and financial modeling processes. NYSE IPO Guide 23
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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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