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The IPO process
by the SEC. The registration statement
includes the prospectus that is provided
to prospective investors and other
material that is also publicly available. The
registration statement is the company’s
responsibility, even if the IPO is made up
entirely of shares being sold by existing
shareholders (a “secondary” offering) and
the company will not sell any shares or
receive any proceeds.
The preparation of the registration
statement is a principal focus of the IPO
process. It has three different aspects:
• Regulatory—The registration statement
must comply with detailed SEC rules
governing its content and will be subject
to intensive review by the SEC staff.
• Marketing—The prospectus, which is
part of the registration statement, is
the central item in the marketing of the
offering, so it must effectively convey
the arguments for investing in the
company.
• Liability protection—A materially
misleading statement or omission can
result in liability to purchasers for the
company, the underwriters and other
participants, so particular care should be
taken with the contents of the registration
statement and the prospectus.
Reconciling these three aspects of the
registration statement is an important
challenge for the IPO working group.
Somewhat different rules apply to
the registration process for an emerging
growth company (described in Chapter 4)
and a foreign private issuer (see Chapter 9).
The remainder of this chapter describes
the registration process for a U.S. domestic
company that does not qualify as an EGC.
(a) Statutory framework
The IPO process can be divided into
three main stages based on the regulatory
framework set forth in Section 5 of the
Securities Act. Before the registration
statement is filed there is a “quiet period,”
when no offers are permitted. Between
filing and effectiveness of the registration
statement, there is a “waiting period,”
when offers may be made, but written
offers are subject to content regulation
and filing requirements. Only in the third
stage, after the registration statement
becomes effective, are sales to investors
permitted.
The preliminary prospectus—often
called a “red herring” because of the
red legend on the cover indicating its
preliminary nature—is the principal
instrument for marketing the shares during
the waiting period. Copies of the preliminary
prospectus are distributed to the salesforce
of the underwriting and selling syndicate
members and provided to prospective
buyers. It is substantially complete, except
for the key points that are determined at
the end of the marketing period: the price,
the actual proceeds, the underwriting
commitments and related matters. Although
the price is not yet available, the preliminary
prospectus includes an estimated range for
the final price.
The “final” prospectus, with final
information on pricing and underwriting,
must be filed within two business days after
pricing. It is often delivered to investors as
well, though this is no longer required.
(b) Gun jumping
The law regulates offers of securities (and
particularly written offers) as well as sales.
During the quiet period, no offers may be
made, whether written or oral. During the
waiting period, no written offers may be
made except by means of the preliminary
prospectus. Violations of the restrictions
on offers during each stage are sometimes
referred to as “gun jumping” and can result
in the SEC imposing a delay or “coolingoff
period” to allow the effects of the
impermissible offer to dissipate.
These rules can take an IPO participant
by surprise, particularly because of the
broad definitions given to the terms
offer and written. For example, under
some circumstances a discussion of the
company’s business prospects could be
construed as an offer, and a discussion
with a journalist who plans to publish
could be construed as a written offer.
Because the terms are so broad, offering
participants must be careful to distinguish
between permissible communications and
illegal offers and avoid any conduct or
communications that could be construed
as impermissibly conditioning the market
for the securities to be offered.
(c) SEC review and declaration of
effectiveness
The IPO cannot be completed until
the registration statement is effective,
which generally requires an affirmative
declaration by the SEC staff. Before
providing this declaration, the staff
reviews the registration statement,
provides comments and requires that its
comments be addressed to its satisfaction.
The comments are provided in written
comment letters. The company’s response
generally takes the form of an amendment
to the registration statement, accompanied
by a response letter explaining how the
company has addressed the matters raised
in the staff’s comment letter.
SEC review of an IPO registration
statement is very thorough, and the
process of responding to the comments is
a major driver of the timing of the IPO and
often the content of the disclosure. The
staff usually provides the first comment
letter within four to six weeks of filing.
After that, the amount of time required
to reach effectiveness can vary widely,
depending on the nature of the comments
and the work required to resolve them.
Difficult accounting comments can take
months to resolve and can substantially
change the information content of the
prospectus.
In some IPOs, it may be useful to raise
issues with the SEC staff before the first
filing by requesting a prefiling conference.
This is most common where there is
a question of accounting or financial
presentation that will shape the financial
statements or where an accommodation
under the SEC’s rules will be needed. The
SEC staff is willing to provide this kind of
guidance in advance, subject to reviewing
the implementation in the filing. Often a
prefiling conference leads to an exchange
of letters to document the precise
contours of the staff’s guidance.
The first filing of the registration
statement in an IPO is typically a “quiet
filing,” meaning that the preliminary
prospectus, although publicly available,
is not actually sent to investors. It may
omit the price range, but if so it must be
amended to include a price range before
the marketing can begin. Only after the
SEC comment process is complete (or
nearly so) does the marketing of the
offering begin, using the preliminary
prospectus included in the most recent
amendment of the registration statement.
The declaration of effectiveness
is not actually required until the
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