Drafting the S-1: Avoiding Common Pitfalls in the ... - FTI Consulting

THE IPO MARKET
Investors’ appetite for initial public offerings has been erratic over the last year despite a strong
showing by U.S. equity markets. Some high-profile IPOs experienced a variety of issues that
led to poor market debuts or post-IPO performance, temporarily dampening enthusiasm for
new issues. However, while these disappointing IPOs may have attracted most headlines, other
companies have fared well following their IPOs, including LinkedIn, Zillow, Annie’s, Bloomin’
Brands and Workday.
One of the most
challenging
aspects of
drafting the S-1
document is
that it requires
input from so
many different
areas within a
company
50
46
45
41
40
36
35
33
31
30
28
25
25
25
20
22
21
20
15
10
5
4
0
Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12
Source: Standard & Poor’s Capital IQ
Number of IPOs Closed
Market conditions can change quickly these days. Accordingly, companies preparing for an IPO
must be nimble and flexible in their timing. The process of drafting the Registration Statement
and gaining subsequent clearance from the Securities and Exchange Commission is one of
the more unpredictable aspects of IPO preparation. It is not a process to be taken lightly,
as evidenced by the well-known difficulties encountered by Groupon, Zynga and Facebook
following their IPOs. Groupon did not sufficiently clear its accounting methods with the SEC,
while Zynga was not consistent with its accounting methods leading up to the IPO. Facebook,
for its part, faced claims from investors that it did not consistently and clearly disclose its
growth prospects immediately before the IPO. These missteps likely contributed to the decline
of each company’s stock price from its initial IPO level.
The recently passed Jumpstart Our Business Startups Act has reduced the requirements for
smaller emerging companies. But for companies with revenues of more than $1 billion, resolving
SEC pre-clearance issues, creating multiple S-1 drafts and amendments, and responding to SEC
comments can be time consuming — often taking several months. With a project management
office and a well-planned development process that thoroughly addresses all risks and issues
with the SEC, a company can reduce unexpected delays with its IPO and avoid post-filing SEC
issues, enabling the company to take advantage of changing market conditions on short notice.
MANAGING THE DRAFTING PROCESS
One of the most challenging aspects of drafting the S-1 document is that it requires input
from so many different areas within a company. A core working group should be formed
that is responsible for drafting and reviewing the document, including representatives from
DRAFTING THE S-1 1