www.pwc.

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Roadmap for
an IPO
A guide to going public

November 2017
A publication from PwC Deals
Table of contents
Introduction............................................................................. 1 Consolidation....................................................................... 39
The decision to go public......................................................... 3 Income taxes......................................................................... 39
What is a public offering?.......................................................... 3 Building a going public team...............................................41
Why “go public?”..................................................................... 3 Identifying your going public team.......................................... 41
Is going public right for your organization?............................. 4 The SEC.................................................................................41
Major factors to consider when exploring whether to go public... 7 Company personnel...............................................................41
Determining filer status.......................................................11 Securities counsel................................................................. 42
Do I qualify as a foreign private issuer?................................... 11 Investment banker or underwriter......................................... 42
Do I qualify as an emerging growth company?....................... 11 Capital markets advisor......................................................... 43
What are some of the advantages of qualifying for EGC status?.. 12 Underwriters’ counsel........................................................... 43
How does qualifying for EGC status impact the going Independent auditors............................................................ 43
public process?.......................................................................14 Advisory accountant............................................................. 45
How long does a company retain its EGC status?....................16 Financial printer................................................................... 45
What if I don’t qualify as an EGC?...........................................17 Other professional advisors................................................... 45
Preparing to become a public company.............................19 Preparing the registration statement................................47
Preparation is the secret to success......................................... 19 The Form S-1 registration statement....................................... 47
What areas should management evaluate as part of an IPO Sources of SEC technical requirements.................................. 47
readiness assessment?.................................................................20 Registration statement filing................................................. 48
Accounting and financial reporting....................................... 21 Preparing the registration statement..................................... 49
Finance effectiveness............................................................ 21 The Form S-1 filing............................................................... 49
Internal controls................................................................... 22 Navigating the IPO process..................................................55
Tax........................................................................................ 23 Typical execution timeline....................................................... 55
Executive compensation and HR........................................... 24 Days 1–60.................................................................................. 56
Governance and leadership................................................... 25 Holding the all-hands meeting.............................................. 56
Financial planning and analysis............................................. 27 Performing due diligence...................................................... 56
Treasury................................................................................ 27 Days 61–90................................................................................ 57
Legal..................................................................................... 28 Timeliness of financial information and going “stale”............ 57
Internal audit........................................................................ 29 Filing the registration statement and SEC review................... 58
Engage with investment banks.............................................. 29 Confidentiality...................................................................... 58
Media and investor relations................................................. 29 The waiting period................................................................ 59
Enterprise risk management................................................. 29 Days 91 onward........................................................................ 59
Corporate strategy and development..................................... 30 Responding to SEC comment letters and preparing the
Wealth management planning.............................................. 30 amended registration statement............................................ 59
Technology........................................................................... 31 The preliminary prospectus or “red herring”......................... 60
Project management, change management Financial analyst meetings or roadshows............................... 60
and communication.............................................................. 31 Negotiating and signing the price amendment and the
Common accounting and financial reporting issues.......33 underwriting agreement....................................................... 60
Common accounting and reporting issues.............................. 33 Holding the closing meeting...................................................61
Segment reporting................................................................ 33 Summary timing, participants and roles and responsibilities....62
Non-GAAP measures............................................................. 33
We are public! Now what?....................................................65
Management’s Discussion and Analysis (MD&A)................... 34
Preparation for life as a public company................................. 65
Risk factors........................................................................... 35
Understand your reporting obligations.................................. 65
Compensation Discussion and Analysis (CD&A).................... 35
Maintain investor enthusiasm............................................... 68
Revenue recognition............................................................. 35
Maintain regulatory compliance............................................ 68
Stock-based compensation.................................................... 36
Earnings per share (EPS)....................................................... 36 Conclusion..............................................................................71
Liability versus equity classification....................................... 37 How PwC can help..................................................................73
Beneficial conversion features of preferred stock and debt..... 37 The benefits of having PwC as an advisor on your IPO........... 75
Employee notes receivable.................................................... 38 What our clients are saying about IPO readiness.................... 75
Pro forma financial information............................................ 38 Contact the PwC Deals practice...........................................77
Goodwill and intangible assets.............................................. 38 More from PwC.......................................................................79
Business combinations.......................................................... 38 Glossary...................................................................................80
iv Roadmap for an IPO: A guide to going public
 Introduction

Going public is a monumental decision for any company. It forever changes how a company
goes about doing business. While a public company faces greater public scrutiny and
regulations, it also secures access to more, and often deeper, sources of capital. How do you
get there? And how do you know if it is the right path to capital for you?

An initial public offering (IPO) is a transformational event the JOBS and FAST Acts were extended to all issuers,
for an organization. Preparation for “being public” is just which gave the issuers the ability to apply some of the
as important as preparation for “going public.” A company accommodations previously limited to EGCs, including
will need to meet additional requirements and continuing confidential review of registration statements. In August
obligations as a public company that will require new skill 2017, the Division of Corporation Finance further clarified
sets, additional talent and changes to business as usual. the policy changes through the release of Compliance and
Thinking through these requirements in advance and Disclosure Interpretations (“C&DIs”). These clarifications
developing an appropriate plan will help ensure you’re able expanded on accommodations available to companies
to own success at every turn. regarding omission of certain financial information in
confidential pre-effective submissions.
For organizations looking to open paths to capital,
particularly an IPO, it is also useful to understand how And the landscape continues to evolve with more recent
quickly windows of opportunity can open and close. That triggers, such as changes in the global political climate and
way, you can leverage the right insights to make the right interest rate environment.
moves at the right times. This publication is a comprehensive guide to going and
The landscape for IPOs is, to put it mildly, dynamic— being public. Our aim is to help companies make informed
varying peaks and valleys prompted by macroeconomic decisions by addressing such factors as the advantages,
trends, world events, political change and new regulations. disadvantages, costs, timing and alternatives to going
public. It outlines the process for going public and
It is a landscape that is still adapting to the enactment of the discusses the registration process and ongoing reporting
Jumpstart Our Business Startups (JOBS) Act in April 2012 requirements of a public company, including determining
and the Fixing America’s Surface Transportation (FAST) filer status. Further, this guide summarizes the most
Act in December 2015, which have eased the on-ramp for significant accounting and financial reporting matters
many companies and can be an important consideration and broader readiness considerations of becoming a
in developing a roadmap for going public—particularly for public company.
emerging growth companies (EGCs), which represent the
vast majority of IPOs since 2012. If you’re considering an IPO as the means to fuel your
company’s future, we hope you find this guide to be a
In June 2017, the SEC’s Division of Corporation Finance helpful and easy-to-use reference. Should you wish to
announced a number of policy changes intended to discuss your company’s path to capital, we welcome
facilitate capital formation. Many of the provisions from the opportunity.

Roadmap for an IPO: A guide to going public 1

2 Roadmap for an IPO: A guide to going public
 The decision to go public

Going public is the process of offering securities—generally common stock—of a privately

owned company for sale to the general public. The first time these securities are offered is
referred to as an initial public offering or IPO.

What is a public offering?

Useful tip
An IPO in which a company sells new securities and receives
During the IPO process, companies often underestimate the
all proceeds in the form of additional capital is called a
requirements to complete the transaction in addition to the
primary offering. A securities sale in which securities held ongoing obligations and scrutiny of life as a public company.
by the owners of the company are sold and from which the An early assessment of a company preparing to go public
owners receive the proceeds is called a secondary offering. could uncover unforeseen issues across many areas both
IPOs are almost always primary offerings, but may include inside and outside of the organization, including:
the sale of shares held by the present owners. • Accounting and • Engage with
Why “go public?” financial reporting investment banks
• Finance effectiveness • Media and investor
The most important question business stakeholders should
relations
ask is, “Why go public?” • Internal controls
• Enterprise
• Tax
Some possible reasons include the following: risk management
• Executive compensation
• To access public capital markets and raise money to and HR
• Corporate strategy
expand operations; and development
• Governance and leadership
• To acquire other companies with publicly traded stock as • Wealth
• Financial planning management planning
the currency; and analysis
• Technology
• To attract and retain talented employees; • Treasury
• Project management,
• To diversify and reduce investor holdings; • Legal change management
• Internal audit and communication
• To provide liquidity for shareholders; and
• To enhance a company’s reputation.
Other reasons may be private and personal. It is important
to keep specific goals in mind throughout the going-
public process.

Roadmap for an IPO: A guide to going public 3

The decision to go public

Is going public right for your organization?

Useful tip
A company usually begins to think about going public when
the funding required to meet the demands of its business Companies need to objectively assess their readiness for life
begins to exceed its ability to raise additional capital through as a public company. Going public requires management to
be prepared to meet shareholder and market expectations
other channels on attractive terms. But simply requiring
from day one. This includes addressing ongoing compliance
additional capital does not always mean that going public and regulatory requirements, operational effectiveness, risk
is the right, or even possible, answer. There are a number of management, periodic reporting and investor relations.
questions you should consider before deciding to go public.
Do you have an attractive track record?
• A well-thought-out, focused business plan;
Generally, a company that outpaces the industry average in
growth will have a better chance of attracting prospective • Favorable financial prospects in a growth
investors than one with marginal or inconsistent growth. industry, including
Investment bankers want the IPO that they back and
–– Revenue growth,
underwrite to be successful. Therefore, they look for
companies that can fulfill several benchmark criteria –– Future earnings visibility (such as subscription or
to boost the chances for a successful offering and solid contract revenue), and
performance in the aftermarket. Here are some of the most
–– Strong cash flow generation;
important factors:
• Established track record;
• A large addressable market;
• An experienced, “public company-ready”
• A unique and differentiated business model;
management team; and
• An attractive product or service, preferably one with a
• Strong financial, operational and compliance controls.
competitive advantage or first-mover status;

4 Roadmap for an IPO: A guide to going public

 The decision to go public

Though some companies may not meet all these criteria, Have you established the necessary financial statement
they may still be perceived as having enormous potential for integrity through the implementation of an effective system
growth because of other favorable characteristics (e.g., a of internal control to support management’s reporting
product or service that is highly visible, unique or of public obligations as a public company?
interest. Biotech, for example, may fit this profile given the
The passage of the Sarbanes-Oxley Act of 2002 raised the
unique drug development process).
bar on the amount of advance preparation and planning
Are your prospects good for maintaining a strong sales and necessary for a successful IPO in the US capital markets.
earnings growth trend? This legislation, among other provisions, requires Chief
Executive Officers (CEOs) and Chief Financial Officers
Companies that successfully go public can show market
(CFOs) to explicitly evaluate and report to the public on the
support for their product or service that is likely to sustain
effectiveness of internal controls over financial reporting
a strong annual growth rate over time. A track record
in the company’s first filing as a public company. In this
demonstrating the ability to forecast sales and earnings
publication, we use the term “Sarbanes-Oxley” or “SOX”
trends and evidence of predictability in the business will help
to refer to either the legislation or its provisions. The JOBS
to differentiate companies looking to go public.
Act of 2012 provides a time period of relief for certain
Are your products or services highly visible and of interest areas of compliance with Sarbanes-Oxley. For issuers that
to the consuming and investing public? do not qualify under the JOBS Act, the company’s external
auditor is required to annually attest to the effectiveness
The established company can answer this question with
of the company’s internal controls over financial reporting
historical sales data, while the early-stage company must
beginning with the registrant’s second annual report.
use market research projections and demonstrated product
Accordingly, a plan for compliance with Sarbanes-Oxley
superiority. An early-stage company may qualify as an IPO
should be part of every company’s going public and being
candidate due to the uniqueness of its product or service,
public roadmap.
particularly within the technology and life sciences and
pharmaceutical industries. Is leadership capable and committed?
Are you prepared to file timely financial statements with In any public offering, the quality of the leadership team is a
the Securities and Exchange Commission (SEC)? key factor. It is vital to ensure that both the board of directors
and management have the right blend of experience and
Public companies must file financial statements on a
skills to operate a public company, manage investor relations,
quarterly and annual basis with the SEC, with prescribed
establish the optimal corporate governance structure and
data requirements and adherence to rigorous SEC accounting
ensure that board committees are operating effectively.
and disclosure guidelines. Because these financial statements
are due soon after each period end, there is increased time To gain credibility with the investing public, the organization
pressure on reporting compared to that of a privately held must have experienced leadership that functions well as a
company. Identifying ‘long poles in the tent’ (i.e., critical team. Ownership by management demonstrates to investors
path items due to the length of time required to address) in that management has a vested interest in the company’s
the close process as well as building out appropriate systems, future. To have a successful IPO, management must be
processes and controls is critical to the ability to meet public committed to the time and effort involved in meeting
company reporting requirements. registration requirements, conducting analyst and other
investor-facing meetings and providing financial reports
required by both the SEC and shareholders on a timely
basis. It must also be prepared to upgrade the company’s
system of management controls and financial reporting well
Useful tip in advance of the offering to ensure compliance with full
Begin positioning your company early! Have audited annual disclosure requirements, to accommodate shorter financial
financial statements, reviewed quarterly financial information reporting deadlines and to confirm the ability to forecast
and a well-documented and conservative business plan; future operating performance, all of which are necessary to
ensure that legal “housekeeping” is thorough; and cultivate maintain credibility and investor confidence after the IPO.
relationships with professionals who can help you, including
underwriters, lawyers and accountants.

Roadmap for an IPO: A guide to going public 5

The decision to go public

Do the benefits outweigh the costs of going public?

Selling equity represents a permanent forfeiture of a portion
of the returns associated with corporate growth. Also, raising
equity capital in the public markets can entail substantial
costs, such as underwriting and other advisor fees and
expenses. As with many business initiatives, the answer as to
whether the benefits outweigh the costs will not be known
until several years after an IPO.
Which stock market?
A company seeking to go public must choose the market,
geography and exchange that is right for its stock. Each
exchange has specific entry requirements regarding such
factors as earnings history, shareholders’ equity, market
capitalization, number of expected shareholders and
corporate governance. A company’s banking advisors can
furnish in-depth information on the investor base in each
market and the market’s likely appetite for the company’s
shares. A company and its advisors should approach the
exchange early in the capital-raising process to ensure the
smoothest possible transaction. Companies considering
overseas or dual listings will also need to evaluate the impact
of an International Financial Reporting Standards (IFRS) or
other potential Generally Accepted Accounting Principles
(GAAP) conversion on the offering process, and internal
control related requirements.
Is the market right?
The demand for IPOs can vary dramatically depending on
overall market strength, the market’s recent experience with
Useful tip IPOs, industry economic conditions, technological changes
Beginning early to position your company to go public will save and many other factors. Stock market volatility is one of the
fees and, most importantly, time. The sooner you are ready most unpredictable aspects of going public and it makes
to enter the market, the more flexibility you will have to take timing the IPO critical in achieving the best possible result.
advantage of an opportune market and the greater proceeds
and market valuation that favorable market conditions will
When a bull market is booming, the market window for
provide. By engaging external advisors early in the IPO process, new corporate offerings tends to open and these new
companies get an objective and professional mechanism for offerings enjoy bursts of popularity. In a declining market,
assessing their state of readiness for life as a public company. however, the market window tends to close and IPO activity
slows down or comes to a stop. Although it is impossible
to accurately forecast the market’s receptivity, a company
must consider the importance of timing and be prepared to
alter its timetable. In general, from the initial meeting of all
team members until the first filing, it can take at least five
months (under the best circumstances) to price an offering
and begin selling shares, although the timeframe can be
significantly longer.
Recognizing the urgency of the registration process and
being prepared to efficiently navigate the going public
process is critical. The proper approach is to plan well,
anticipate the likelihood of delays and position your company
to launch when a window opens. Missing an IPO window by
as little as one day can result in a postponed or withdrawn
IPO or a lower market valuation.

6 Roadmap for an IPO: A guide to going public

 The decision to go public

Major factors to consider when exploring • Being public expenses—New roles and responsibilities
whether to go public associated with being a public company will require
hiring of new talent with skills across several areas of the
Companies should consider the following factors when business, particularly within finance and reporting, legal,
evaluating whether to commence the going public process: human resources (HR), information technology (IT) and
• Increased cash and long-term capital—Funds support investor relations. There will be ongoing expenses related
growth, increase working capital, invest in plant and to these changes, such as the expense of independent
equipment, expand research and development and retire auditors. Administrative and investor relations costs
debt, among other goals. include those related to quarterly reports, proxy materials,
annual reports, transfer agents and public relations.
• Increased market value—The value of public A public company will now be paying premiums for
companies tends to be higher than that of comparable directors’ and officers’ (D&O) liability insurance as well.
private companies due in part to increased liquidity, Furthermore, compliance-related costs could also increase
available information and the transparency of a publicly due to management’s assessment of, and if applicable the
traded security. auditor’s attestation on, internal controls over
• Mergers and acquisitions—Public companies can financial reporting.
use their stock as acquisition currency, thereby • Loss of control—The shares offered in an IPO are widely
conserving cash. distributed such that management and the board of
• Liquidity—Subject to certain restrictions and practical directors may maintain effective control, even though
market limitations, shareholders may, over time, sell their they own less than 50 percent of the shares. Some
stock in the public market. companies structure their offerings so that after an IPO,
the founder(s) still has control. This is often accomplished
• Ability to attract and retain key personnel—If a through the use of dual class stock, corporate governance
company is publicly owned, employee incentive and and voting structures.
benefit plans are usually established in the form of
stock ownership arrangements to attract and retain key • Loss of privacy—The registration statement and
personnel. Stock option plans may be more attractive to subsequent filings for public company reporting require
officers and other key personnel than generous salary disclosure of many facets of a company’s business,
arrangements due to the significant upside potential. operations and finances that may never before have been
known outside the company. Some sensitive areas of
• Enhanced reputation and brand—Visibility for disclosure that will be available to competitors, customers
shareholders and their company is usually enhanced. The and employees include:
ability to enter into and influence customer negotiations
can be positively impacted by having the transparency of – Extensive financial information (e.g., financial position,
public company status. sales, cost of sales, gross profit, net income, business
segment data, related-party transactions, borrowings,
• Going public expenses—Several factors play a role in cash flows, major customers and assessment of
determining the cost of an IPO, but the costs of going internal controls);
public are always significant. These costs usually include
underwriting fees, fees related to legal and accounting – Compensation of officers and directors, including
advisors and printing costs. In addition, there are other cash compensation, stock option plans and deferred
fees such as the SEC filing fee, the exchange listing fee and compensation plans;
any Blue Sky filing fees. The term “Blue Sky” refers to the – Security holdings of officers, directors and major
securities laws of various states that have been enacted to shareholders (insiders); and
protect investors. While the SEC regulations are national
in application, various states have securities laws that – Increased transparency into a variety of corporate
affect public offerings. Most expenses directly related to practices (e.g., conflict mineral disclosures required by
the offering in a completed IPO are reflected as an offset to the Dodd-Frank Act).
the proceeds received and a reduction of additional paid-
in capital. IPO costs are, therefore, not expensed in the
statement of operations. If the IPO is not completed or is
not likely to be completed, such costs are expensed.

Roadmap for an IPO: A guide to going public 7

The decision to go public

• Pressure for performance—In a private company, the • Restrictions on insider sales—Stock sales by insiders at
business owner/manager operates more independently. the IPO are usually limited. Underwriters also require that
However, once the company becomes publicly owned, a company’s existing shareholders enter into contractual
the owner acquires as many partners as the company has agreements to refrain from selling their stock during a
shareholders and is accountable to all of them. Shareholders specified time following the IPO, typically 180 days. This is
expect steady growth in areas such as sales, profits, market called the “lock-up” period.
share and product innovation on a quarterly basis. Thus, in
• Investor relations—The responsibilities of CEO or CFO
a publicly held company, management is under constant
in a private company shift dramatically both leading up
pressure to balance short-term demands for growth with
to and after the IPO process. Preparation and coaching
strategies that achieve long-term goals. The inability to
for both non-deal and deal roadshows, mock analyst and
meet analysts’ expectations for short-term earnings can
investor presentations and “test the waters” meetings
dramatically hurt the marketplace’s valuation of a company.
require additional personnel or public relations resources.
In the first year of being a public company, failing to meet
Further, investor inquiries, investment community
analyst expectations and the resulting loss of investor
presentations, managing activist shareholders and printing
confidence can be a substantial and long-lasting blow to a
and distributing quarterly and annual financial reports
company’s stock.
require a significant time commitment from management
• Prospect of shareholder activism—If a company’s stock once a company goes public.
price performance or valuation lags behind its peers,
• No turning back—The IPO process is a significant
there is increased chance of an approach from activist
distraction. Management will be challenged to run the
shareholders seeking board seats or changes to company
day-to-day operations while actively participating in the
strategy. A significant amount of time may be consumed in
IPO process.
handling activist shareholders.

8 Roadmap for an IPO: A guide to going public

 The decision to go public

• Vulnerability to hostile takeovers—Having publicly traded All too often, going public is viewed as the only means,
shares reduces a company’s ability to control its ownership rather than one of several, to achieve a company’s objectives.
and exposes it to unsolicited acquisition threats. If a company is seeking to expand rapidly, it may consider
commercial bank loans, private placement of debt or
• Litigation risk—Being public increases a company’s
equity or the IPO alternatives in the chart below. Advisors
exposure to shareholder lawsuits, particularly since the
can provide the expertise that will enable you to make an
passing of Sarbanes-Oxley. Newly public companies are
informed, intelligent and objective decision.
especially vulnerable to class-action lawsuits in the initial
year of being a public company, particularly when investor
expectations have not been met.

IPO alternatives
IPO alternative What is it? Advantages Disadvantages
Exempt offerings Transaction in which • Can be completed • May result in lower
(144A offerings) securities are sold on quickly, as there is no SEC valuation than an IPO
a restrictive basis to review process due to less liquidity
sophisticated investors, with for investors
• Funds are raised
very limited SEC filing and
immediately, but public • Potential investor base
reporting requirements
company reporting is limited to qualified
obligations are deferred institutional buyers (QIBs)
(in cases where
• Costs could increase
these securities are
due to preparation of
exchanged for registered
offering memorandum
securities later)
plus subsequent
registration statement
Reverse merger/special A reverse merger is a • Lower cost and time • Difficulty in finding the
purpose acquisition transaction in which a requirements than an IPO appropriate merger vehicle
company (SPAC) privately held company
• No dependence on • Exposure to public
merges with a publicly held
market “window” company risks for a
company
potentially “non-IPO-
• Underwriters are not
A SPAC raises equity capital ready” company
required but can add
upfront without knowing
valuable support
the exact use of the funds—
the acquisitions are closed • SPACs often utilize
using the capital subsequent specialized investment
to the SPAC doing its IPO banks
Private sale Sale of equity directly to a • Can usually complete a • May result in lower
private or public buyer(s) larger percentage sale of valuation than an IPO
outside of an exchange equity initially
• Potential loss of future
• Lower cost and time tax benefits
requirements (no
• Smaller pool of
SEC review)
potential buyers
• Underwriters are
not required but can
add valuable support
in structuring

Roadmap for an IPO: A guide to going public 9

10 Roadmap for an IPO: A guide to going public
 Determining filer status

Filer status determines reporting requirements, during both the going public process and in
life as a public company. Filer status should be assessed continuously throughout the going
public process and at the end of the second quarter of the fiscal year for public companies.

Do I qualify as a foreign • Not subject to quarterly reporting on Form 10-Q or

periodic reporting on Form 8-K (but required to file Form
private issuer? 6-K when applicable); and
The majority of companies registering with the SEC are • Not required to provide the S-K 302 supplementary
domestic issuers. However, there are several areas of financial information related to selected quarterly
potential relief available to companies that qualify as financial data.
foreign private issuers (FPI). Securities law defines a foreign
issuer as a foreign government, a foreign national of any The remainder of this publication will focus on
foreign country or a corporation or other organization requirements related to domestic issuers. However, several
incorporated or organized under the laws of any foreign of the considerations herein, particularly surrounding
country. A foreign issuer can qualify as an FPI unless the IPO readiness, are equally relevant to FPIs. If a company
following applies: contemplating an IPO determines that it may meet the
FPI criteria, consultation with a PwC IPO specialist
• More than 50 percent of the issuer’s outstanding voting is recommended.
securities are held directly or indirectly of record by
residents of the United States; and Do I qualify as an emerging
• Any of the following: growth company?
–– Majority of executive officers or directors are US The JOBS Act was enacted on April 5, 2012. The principal
citizens or residents; goal of the JOBS Act was to encourage private companies
–– More than 50 percent of assets are located in the to raise capital through an IPO of their common equity. The
United States; or Act was initially contemplated in March 2011 when it was
determined that a long-term decline in US IPOs could result
–– Business is administered principally in the in a loss of up to 22 million American jobs.
United States.
The FAST Act was enacted on December 4, 2015. While the
A foreign company that obtains FPI status has certain primary objective of the law was to ensure funding for US
benefits, including the following: transportation and infrastructure improvements, the FAST
• Required to file annual reports up to four months after Act also included a number of securities-related provisions,
year-end; including changes to the requirements of the JOBS Act.

• Permitted to file using foreign accounting principles (such In August 2017, the Division of Corporation Finance
as IFRS), provided material differences are reconciled to further clarified the policy changes through the release
US GAAP; of Compliance and Disclosure Interpretations (“C&DIs”).
These clarifications expanded on accommodations available
–– Reconciliation requirement is waived if financial to companies regarding omission of certain financial
statements are prepared in accordance with IFRS as information in confidential pre-effective submissions.
issued by the International Accounting Standards
Board (IASB); The two main objectives of the JOBS Act are:

• Not subject to SEC proxy rules or executive compensation 1. To create an “IPO on-ramp” which reduces the filing and
disclosures under S-K Item 402 and Regulation FD; disclosure burdens associated with undertaking an IPO.
2. To provide companies easier and broader access to the
capital markets.

Roadmap for an IPO: A guide to going public 11

Determining filer status

The Act applies to EGCs for up to a maximum of five years.

EGCs are broadly defined as companies that meet the Useful tip
following criteria: The JOBS Act and FAST Act have made it easier for qualifying
• < $1.07 billion in gross revenue (such amount is indexed smaller companies to go public by simplifying the IPO process
and ongoing SEC reporting requirements. Companies should
for inflation every five years);
explore with their legal counsel their ability to take advantage
• < $1 billion in issues of non-convertible debt in a three- of this opportunity.
year period; and
• Generally less than $700 million in worldwide public float
(not a large accelerated filer). What are some of the advantages of qualifying
for EGC status?
As long as these criteria are met, companies are permitted to
abide by less stringent financial reporting rules as compared Several of the accommodations offered to EGCs are outlined
to non-EGC filers. Both domestic issuers and FPIs can qualify in the table below—see specific differences highlighted in
to be EGCs. red. Note that qualifying EGCs are not required to follow
each of the JOBS Act or FAST Act provisions; rather,
these are privileges which may be exercised at the
company’s discretion.

Non-EGC requirements EGC requirements

Form S-1 filing/submission Companies can submit a registration statement for SEC review on a confidential basis up
until 15 calendar days before a company’s roadshow
Annual audited financial Balance sheet – 2 years Balance sheet – 2 years
statements in an effective
Statements of operations, cash flows and Statements of operations, cash flows and
IPO filing (*)
shareholders’ equity – 3 years shareholders’ equity – 2 years
Selected financial 5 years 2 years
information in an effective
IPO filing (*)
Annual audited financial A non-EGC may omit financial statements An EGC may omit financial statements that
statements in pre-effective that it reasonably believes will not be it reasonably believes will not be required
IPO submissions and filings (*) required at the time the registration at the time of the contemplated offering
statement is publicly filed (i.e., prior to distribution of the preliminary
Selected financial prospectus to investors)
information in pre-effective
IPO filings (*)
Interim audited financial A non-EGC may omit interim financial An EGC may omit interim financial
statements in confidential information that it reasonably believes information that it reasonably believes
pre-effective IPO submissions will not be required at the time the will not be required at the time of the
registration statement is publicly filed contemplated offering; however, EGCs
must include applicable interim financial
information at the time the registration
statement is publicly filed
Audited financial statements 20% significance – 1 year 20% significance – 1 year
of an acquired business in an
40% significance – 2 years 40% significance – 2 years
effective IPO filing (*)
50% significance – 3 years 50% significance – 2 years

12 Roadmap for an IPO: A guide to going public

 Determining filer status

Non-EGC requirements EGC requirements

Audited financial statements A non-EGC may omit financial statements An EGC may omit financial statements that
of an acquired business that it reasonably believes will not be it reasonably believes will not be required at
in pre-effective IPO required at the time the registration the time of the contemplated offering
submissions and filings (*) statement is publicly filed
Effective date and transition A company preparing an SEC filing must An EGC may elect to apply new or revised
of new accounting standards apply all accounting standards as if it had financial accounting standards on the same
always been a public company date that a company that is not an issuer
is required to apply the new or revised
accounting standard
Management assessment of Management's assessment on internal controls over financial reporting in second
internal control Form 10-K filing
SOX 404(a)
Auditor attestation on Auditor’s attestation on internal controls Deferred for as long as the company is an
internal control over financial reporting in second Form EGC, i.e., deferred for up to 5 years
SOX 404(b) 10-K filing (applicable for accelerated and
large accelerated filers)
Executive compensation Shareholders’ voting on “say on pay” EGCs are exempt from shareholders’ voting
disclosures and “golden parachute” compensation on “say on pay” and “golden parachute”
disclosures are required compensation disclosures
Provide full compensation disclosures EGCs are allowed to follow reporting
(e.g., compensation tables for top 5 obligations of smaller reporting company
executives for 3 years) (SRC) (e.g., compensation tables for top 3
executives for 1 year within the Form S-1)
* Upon written request by the registrant, SEC staff will consider a waiver for the exclusion of certain financial statements pursuant
to Rule 3-13 of Regulation S-X. 

The provisions allowing EGCs to (1) omit financial EGCs are also exempt from the requirement to obtain
statements that are not reasonably believed to be required an audit of internal control over financial reporting. It
until the time the registration statement becomes effective, is important to note that this exemption only applies to
(2) include one fewer year of audited financial statements the internal control audit requirements (Sarbanes-Oxley
and up to three fewer years of selected financial data in Section 404(b)). EGCs are not exempt from the requirement
an effective registration statement, and (3) omit interim for management to assess internal control over financial
financial information that they reasonably believe will not reporting (Sarbanes-Oxley Section 404(a)) beginning with
be required at the time of the contemplated offering can be the company’s second annual report.
particularly attractive to companies that have not previously
The JOBS Act also provides EGCs additional flexibility
prepared historical financial statements. This allows those
with respect to many current and forthcoming executive
companies to avoid the extra time and expense associated
compensation-related disclosure requirements. An EGC may
with preparing additional years of financial information.
comply with the SEC’s detailed executive compensation
However, a registration statement must be amended to
disclosure requirements (set forth in Item 402 of Regulation
include interim information at the time of the public filing
S-K) on the same basis as a smaller reporting company
and all other information required by Regulation S-X before
(SRC). Executive compensation continues to be a very high-
the distribution of the preliminary prospectus to investors
profile topic at the SEC. Therefore, EGCs may wish to discuss
and effectiveness of the offering.
the extent of executive compensation disclosure with their
legal counsel, underwriters or other professional advisors.

Roadmap for an IPO: A guide to going public 13

Determining filer status

How does qualifying for EGC status impact the An EGC may also omit from its draft registration statements
going public process? interim financial information that it reasonably believes
will not be required to be presented separately at the time
In addition to financial reporting implications discussed of the contemplated offering. However, EGCs must include
above, there are other factors related to the SEC filing process applicable interim financial information at the time the
that should be considered by management and legal counsel. registration statement is publicly filed.
Initial and pre-effective filings For example, consider a calendar year-end EGC that submits
Neither the JOBS Act nor the FAST Act specify the exact a draft registration statement in November 20x3 and
content requirements for a draft registration statement; reasonably believes it will commence its offering in April
however, the SEC expects that any draft registration 20x4 when annual financial information for 20x3 will be
statement would be substantially complete (including required. This issuer may omit from its draft registration
exhibits) at the time of initial submission. The review of a statements its 20x1 annual financial information and interim
draft registration statement that is materially deficient will financial information related to 20x2 and 20x3. Assuming
be deferred. that this issuer were to first publicly file in April 20x4 when
its annual information for 20x3 is required, it would not need
The FAST Act allows omission of certain historical financial to separately prepare or present interim information for 20x2
information in pre-effective IPO filings. EGCs may and 20x3. If this issuer were to file publicly in January 20x4,
omit financial information (including audited financial it may omit its 20x1 annual financial information, but it must
statements) from a Form S-1 filed (or confidentially include its 20x2 and 20x3 interim financial information in
submitted) for an IPO if that financial information relates to that January filing because that interim information relates
periods that are not reasonably believed to be required at the to historical periods that will be included at the time of the
time of the contemplated offering (i.e., prior to distribution public offering.
of the preliminary prospectus to investors). Additionally,
the FAST Act allows omission of other required financial The SEC staff has indicated that since a draft registration
statements (e.g., financial statements for a business acquired statement is not a “filing,” it does not need to be signed and
or to be acquired under Rule 3-05 of Regulation S-X or for an does not need to include an auditor’s (or other expert’s)
equity method investee under Rule 3-09 of Regulation S-X) consent. However, a draft registration statement submitted
that are not reasonably believed to be required at the time of by an EGC must include a signed audit report(s) of the
the contemplated offering (i.e., prior to distribution of the independent registered public accounting firm(s) covering
preliminary prospectus to investors). the fiscal years presented in the registration statement.
For example, assume that a calendar year-end EGC is Confidential SEC review
planning an IPO that it expects to be complete in the summer Ordinarily when a registration statement is submitted to
of 20x4. Because an EGC is only required to provide two the SEC for review, it becomes immediately available to the
years of audited financial statements in its IPO registration public via the SEC’s Electronic Data, Gathering, Analysis and
statement (i.e., fiscal years 20x3 and 20x2 in this example), Retrieval (EDGAR) system. However, EGCs are permitted to
the EGC could omit its 20x1 audited financial statements submit their registration statements on a confidential basis to
from its initial registration statement that is filed or the SEC.
confidentially submitted during 20x3. Further, if audited
financial statements for an acquired business are required by The confidential submission and review process allows an
Rule 3-05 of Regulation S-X, the EGC could omit financial EGC to keep its financial and business-related information
statements if the issuer reasonably believes those financial confidential until it has received initial feedback from the
statements would not be required at the time of the offering SEC staff and until it has decided to complete its transaction.
in 20x4. This situation could occur when an issuer updates It will also permit an EGC to explore alternate paths (e.g.,
its registration statement to include its 20x3 annual financial pursuing a strategic or financial buyer) while concurrently
statements prior to the offering and, after that update, the preparing for a public offering. The ability to pursue
acquired business has been part of the issuer’s financial multiple alternatives outside the public eye may provide
statements for a sufficient amount of time to eliminate the the EGC with additional flexibility and leverage. There may,
need for separate financial statements. however, be reasons why an EGC might want to opt for a
public submission from the outset. For instance, if the EGC is

14 Roadmap for an IPO: A guide to going public

 Section title here

Roadmap for an IPO: A guide to going public 15

Determining filer status

concurrently seeking a strategic or financial buyer, the public filed with the SEC no later than 15 calendar days before the
availability of the early registration statement may encourage date on which the issuer conducts a roadshow (as defined in
additional bidders to come forward and may help advance Securities Act Rule 433).
the due diligence process.
This 15-day period (sometimes referred to as a seasoning
If an EGC decides to abandon its transaction, the information period) is designed to provide potential investors with
previously submitted to the SEC will not become public and ample time to review the information previously submitted
that information would be exempt from disclosure under the on a confidential basis. If the EGC does not make use of
Freedom of Information Act. a roadshow (or communications that would constitute a
roadshow for purposes of this analysis), then its registration
Comment letters
statement and prior confidential submissions should be
The SEC staff has indicated that it will publicly release publicly filed no later than 15 calendar days before the
comment letters and company responses relating to anticipated effective date of the registration statement.
confidential submissions. EGCs are asked to resubmit
response letters relating to confidential submissions at the How long does a company retain its
time of the first public filing. Those letters and responses will EGC status?
be released in the same timeframe as letters and responses A company will remain an EGC so long as it does not trip
relating to public filings (no earlier than 20 business days certain thresholds. A company that is an EGC as of the first
after the effective date of the registration statement). An day of its fiscal year will continue to be an EGC until the
EGC should follow the normal SEC procedures for seeking earliest of:
confidential treatment (sometimes referred to as following
Rule 83) if there are sections of response letters that the EGC • The last day of the fiscal year during which it had total
wishes to keep confidential after the letters and responses are annual gross revenues of $1.07 billion or more (such
publicly released. amount is indexed for inflation every five years);

Quiet period restrictions • The date on which the issuer has issued more than
$1 billion in non-convertible debt securities during the
An exception to the “quiet period” rule restricting previous three-year period; or
dissemination of published information outside the
prospectus is provided for EGC filers. EGC filers may engage • The date on which the issuer becomes a large accelerated
in oral or written communications with certain potential filer (generally, a company with a worldwide public float of
investors during the quiet period to gauge interest in the at least $700 million—see Exchange Act Rule 12b-2).
offering. The potential investors must be either qualified The FAST Act provides a grace period for companies that lose
institutional buyers (QIBs) or institutions that are designated EGC status during the registration process. If a company that
as accredited investors. These activities, referred to as filed (or confidentially submitted) a registration statement
“testing the waters,” may occur prior to or following the date for an IPO as an EGC loses its EGC status, the company will
of the registration statement filing. These discussions help continue to be treated as an EGC until the earlier of: (1) the
management and their advisors gauge the level of interest in date on which the company completes its IPO, or (2) one year
the market for their stock. Companies should bear in mind from the date that the company ceases to be an EGC.
that any materials used to test the waters may be requested
by the SEC and remain subject to federal securities laws. Once the IPO is completed, an issuer that is an EGC as of the
first day of its fiscal year will continue to be an EGC until the
Roadshow timing earlier of (1) the dates listed in the criteria outlined above
The FAST Act amended the JOBS Act timeframe to make relating to gross revenues, non-convertible debt or filer
confidential registration statements public before a status; or (2) the last day of the fiscal year following the fifth
roadshow. Since 2012, EGCs have been permitted to submit anniversary of the first sale of the issuer’s common equity
certain registration statements for review by the SEC staff securities in an offering registered under the Securities Act.
on a confidential basis (although the EGC must file that Certain of these criteria are largely predictable; however,
registration statement and any amendments publicly before EGCs will need to closely monitor their total annual gross
starting its roadshow). The FAST Act reduced the required revenues and worldwide public float. If an EGC experiences
timeframe to make the registration statement public to 15 significant increases in revenues or volatility in share price,
calendar days from 21 calendar days. The initial confidential it might exit EGC status sooner than expected, triggering
submission and all amendments are required to be publicly unplanned SEC reporting requirements.

16 Roadmap for an IPO: A guide to going public

 Determining filer status

What if I don’t qualify as an EGC? • Confidential SEC review—Companies may confidentially

submit certain registration statements for SEC review,
Companies that do not qualify for EGC status are still allowing them to keep their financial and business-related
afforded certain accommodations that are consistent with information confidential until they have decided to
those available to EGCs. All companies, regardless of EGC complete their transaction.
qualification, can take advantage of the following:
• Comment letters—Companies need to resubmit response
• Initial and pre-effective filings—A non-EGC may omit letters relating to confidential submissions at the time of
audited financial statements and selected financial data the first public filing, which will be released no earlier than
if that financial information relates to periods that the 20 business days after the effective date of the registration
company reasonably believes will not be required at the statement.
time the registration statement is publicly filed. A non-
EGC may omit from its draft registration statements • Roadshow timing—Companies may keep the financial
interim financial information it reasonably believes will information associated with the initial submission and all
not be required to be separately presented at the time it amendments confidential up until 15 calendar days before
publicly files its registration statement. the date on which they conduct a roadshow.

Roadmap for an IPO: A guide to going public 17

18 Roadmap for an IPO: A guide to going public
 Preparing to become a public company

A successful IPO requires careful planning. A company must prepare its management team
and business units to begin acting and functioning as a public company, both internally and
externally. Focusing narrowly on accounting and financial reporting matters surrounding
preparation of the offering document is the wrong approach—a cross-functional, holistic
view to readiness is critical to preparing the organization to operate as a public company.

Preparation is the secret to success In our experience, a successful IPO has three equally
important elements:
Planning, executing and managing an IPO is a complex task
for any organization. The better prepared a company is, the 1. A thorough IPO readiness assessment, where big picture
more efficient and less costly the process can be. While the issues are identified early and realistic timetables are
planning process for an IPO can start the day a company is established based on the offering’s strategic objectives,
incorporated or as late as months before a public offering, the company’s specific business issues, the time needed to
we recommend that an orderly plan be executed over a one- prepare registration information and the time required to
to two-year period. This window gives a private company prepare for operation as a public company.
time to build the capabilities to think, act and perform as a
2. A working group focused on the immediate process of
public company.
going public.
The preparation process can often be lengthy, depending
3. A working group focused on the tasks needed to prepare
on the maturity of a company’s existing processes. It is vital
the business for being public.
that the company understand and address any gaps before
going public. The magnitude of the required improvements These three elements and their sequencing are
will determine the number of resources required. illustrated below.

Kick-off meeting IPO pricing

#1 #2 #3
Pre-kick-off/planning IPO process execution Post-IPO/public company

Initial planning and preparation Going public

• IPO readiness assessment • Execution of the IPO process

Being public
• Application of a holistic framework to transform the company, enabling
it to operate as a public company

Roadmap for an IPO: A guide to going public 19

Preparing to become a public company

Going public is the process of gathering the necessary data auditor’s attestation of internal controls over financial
for the registration statement, submission to the SEC, all reporting; however, the temporary exemption does not apply
the way through to the roadshow and pricing. This includes to management’s reporting on internal controls over financial
preparing the required financial, marketing and business reporting requirements of the Sarbanes-Oxley Act.
information, as well as determining the optimal tax and
legal structure, all of which are vital steps in the process. The What areas should management
going public process ends when the offering is sold and the evaluate as part of an IPO
company and/or its shareholders receive the proceeds.
readiness assessment?
Being public is the process of preparing the organization
to operate as a public company. The many tasks involved Challenging accounting and financial reporting issues are
include upgrading, sustaining or enhancing financial the mere tip of the iceberg in terms of IPO preparation. The
reporting capabilities; creating an investor relations function; greater challenge is looking across major functions to identify
and meeting the governance, reporting and internal controls which areas may need to be created or enhanced to prepare
standards and listing requirements of the SEC and of the the company to become a public company. The chart below
selected exchange. The JOBS Act temporarily exempts illustrates the IPO readiness framework that PwC uses to
companies that qualify as EGCs from Section 404(b) of the evaluate public company readiness across major functions
Sarbanes-Oxley Act, relating to the company’s independent and activities.

Accounting and Finance effectiveness Internal controls Tax Executive compensation

financial reporting and HR

Governance and Financial planning Treasury Legal Internal audit

leadership and analysis

Engage with Media and Enterprise risk Corporate strategy Wealth management
investment banks investor relations management and development planning

Project management,
Technology change management, and
communication

20 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

Accounting and financial reporting

Evaluate auditor independence
Useful tip
Sarbanes-Oxley prohibits a company’s external auditor
from providing certain non-audit services, including, but Waiting until “crunch” time to have multiple-year audits
could lead to two nasty surprises: first, the high costs of
not limited to, internal audit, legal and valuation services.
reconstructing historical financial statements; and, second,
There are a number of non-audit services that an auditor may figures that show the company may be performing at a level
provide, such as tax services and general advisory services. below expectations, resulting in potential significant delays in
These permissible non-audit services must be pre-approved the process.
by the audit committee. Accordingly, companies should
evaluate their existing relationship with their outside audit
firm to clarify permissible and non-permissible services Assess need for additional audited financial statements for
and to establish clear independence related to existing or certain specified entities
future services.
Another area that requires advance planning is assessing
Have your financial statements audited and resolve whether the IPO document will require separate financial
potential accounting and disclosure issues statements of certain specified entities such as significant
A company that wants to go public needs to have audited businesses acquired or to be acquired (Rule 3-05), certain
financial and interim (reviewed) information. It is easier and equity method investments (Rule 3-09), guarantors of public
more cost efficient to perform audits of financial statements in debt securities (Rule 3-10) and affiliates whose securities
the normal course of business, rather than shortly before going collateralize a registered debt issuance (Rule 3-16). These
public. As a company gains financial sophistication, it should separate financial statements must also comply with SEC
also begin preparing quarterly financial statements. Preparing rules and guidance on form and content (Regulation S-X),
these statements in a timely manner can add to an investment although a non-public entity would not need to include
banker’s positive evaluation of a company. Though not public company disclosures, such as segment information,
required for SEC reporting purposes, investment bankers may pensions and earnings per share (EPS). However, solely with
want to include unaudited financial information for the prior respect to financial statements required under Rule 3-10,
four to eight quarters in order to reflect growth and trends. If the SEC allows a reduced level of reporting with condensed
such quarterly financial information is presented, underwriters consolidated financial information or specified narrative
typically require that it be reviewed by the company’s disclosure as a substitute for full financial statements,
independent auditors under the Public Company Accounting provided certain criteria are met.
Oversight Board’s (PCAOB) AS 4105, "Reviews of Interim Although there is some relief for inclusion in a pre-effective
Financial Information" (formerly AU 722 and SAS 100). filing, obtaining separate audited financial statements that
In draft registration statements submitted for confidential might be required by Rule 3-05, 3-09, 3-10 or 3-16 can often
review, a company may omit interim financial information be a difficult and costly task and could potentially delay an
it reasonably believes will not be required to be separately IPO. Further, separate financial statements for any non-US
presented at either (i) the time of the contemplated offering entities may require a US GAAP reconciliation if the financial
(if the company is an EGC) or (ii) the time it publicly files statements are not prepared in accordance with IFRS as
its registration statement (if the company is a non-EGC). issued by the IASB. Pursuant to Rule 3-13 of Regulation S-X,
However, once a company files publicly (even if it is an EGC), it companies may request the SEC’s consideration to waive
will need to include all required interim periods, even if those requirements for certain financial statements.
periods are the not the same periods required to be presented Finance effectiveness
separately as of the contemplated offering.
Assess adequacy of finance resources for public
The company’s financial statements included in an IPO company reporting
registration statement will have to conform to positions
and practices prescribed by the SEC staff as well as US Finance leaders should evaluate their organization to
GAAP standards applicable to public companies, which ensure the structure is in place to meet specific stakeholder
may be different from the financial statements a company needs. Beyond the traditional back-office role, finance
previously prepared. staff and systems must be prepared to meet the needs and
requirements of new external stakeholders, including higher

Roadmap for an IPO: A guide to going public 21

Preparing to become a public company

expectations of transparency and data reliability, increased such as tax and investor relations. Aligning planning,
scrutiny of budgets and projections and demands for reporting and analytic capabilities is essential for public
accelerated filing. Public company experience and technical company finance organizations.
accounting capabilities must be a priority when acquiring
and growing talent. Enabling the finance organization with Internal controls
mature processes and technology will help to ensure that Prepare for Sarbanes-Oxley compliance
finance resources are able to provide value-added analysis
rather than simply gathering data. Improved communication Waiting until the registration statement is being prepared
and collaboration significantly enhances the ability to and marketed to address compliance with Sarbanes-Oxley
proactively manage issues and avoid surprises. Due to the can make for a challenging IPO process. Many companies
accelerated timeline and number of dependent steps for have found that they require significant process changes to
public company reporting, clear responsibilities and the effectively implement a strong internal control framework,
ability to efficiently share knowledge and level of progress is so waiting too long to address Sarbanes-Oxley requirements
essential. Leading companies are leveraging workflow and can create a huge burden on staff who should be focused
collaboration technology to improve control, communication on preparing the filing statements and coordinating with
and accountability. banks and underwriters. The Sarbanes-Oxley Act contains
11 major sections that enumerate responsibilities incumbent
Establish a controlled and accelerated close cycle upon public company management, boards and auditors
Beyond satisfying new and accelerated external reporting in the areas of financial practices, accounting controls
requirements, a smart and efficient close-to-report cycle and corporate governance. The Act also imposes criminal
creates a foundation for evaluating performance and penalties for non-compliance.
supporting business decisions. Finance organizations should The most costly provision of the Sarbanes-Oxley Act, Section
focus on control, accountability and first-time accuracy 404, requires a registrant’s management (CEO and CFO) and
as opposed to speed alone. Focusing on speed alone often external auditor to report on the adequacy of the company’s
results in a close cycle followed by a series of post-close internal control over financial reporting. This section mandates
adjustments and rework. Several key strategies should be the inclusion of an internal controls report in annual financial
leveraged to improve quality and timeliness of the end-to-end reports, affirming management’s responsibility for establishing
cycle. These include: and maintaining an adequate internal control structure and
• Streamlining the cycle by appropriately sequencing work procedures for financial reporting. This includes performing
steps and by eliminating bottlenecks, duplication of effort an assessment of the effectiveness of the company’s internal
and non-value-added activities; control over financial reporting.

• Sequencing dependent tasks and distributing workload Companies must also identify the control framework
away from a time-intensive period-end to avoid duplication used to conduct the required evaluation. Typically, US
and unnecessary down time; and companies use the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) Internal Controls—
• Simplifying and standardizing processes to eliminate Integrated Framework. COSO articulates five components
unnecessary complexity and inconsistencies. necessary for effective internal control: control environment,
Leverage technology and data to align planning, reporting risk assessment, control activities, information and
and analytic capabilities communication and monitoring. In response to an
increasingly complex, technologically driven and global
Effective reporting requires much more than just looking business environment, COSO released an updated framework
at past performance. Companies need to know how they in 2013. While the fundamentals of the original Framework
perform against expected results and the key drivers remain unchanged, the 2013 Framework articulates 17
impacting any variance in order to improve their predictive principles for effective internal control within the five
capabilities. Establishing consistent definitions and common components, as well as points of focus that describe
data structures provides a foundation that can significantly characteristics of the principles. An effective system of
reduce the time spent collecting information, reconciling internal control requires that each of the five components
data and understanding variances. Automation of manual of internal control and relevant principles is present and
activities and streamlining the flow of information can functioning and that the five components are operating
improve quality, consistency and timeliness. Leading together in an integrated manner.
organizations are expanding existing consolidation systems
to collect additional supplemental data to support footnote While newly public companies (defined as those that were
and Management’s Discussion and Analysis (MD&A) not required to file an annual report pursuant to Section
preparation, as well as the flow of information to functions 13(a) or 15(d) of the Securities Exchange Act of 1934 [the

22 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

“1934 Act”] for the previous fiscal year and did not file an Tax
annual report for the prior fiscal year) are not required to
comply with either the management or auditor reporting Evaluate efficiency of existing tax structure
requirements relating to internal control over financial In a traditional IPO, all historical owners hold economic
reporting until their second annual report, companies and voting shares in the registrant and sell the shares to the
preparing for their IPO need to consider the discussion public at the time of the desired exit. Typically, the public
of their Section 404 plan and timeline in their marketing company pays tax on its earnings and US shareholders pay
documents. Companies are required at their initial public tax on the sale of the shares and on dividends from the
company filing to be in compliance with Sections 302 company, resulting in two layers of tax. Generally, the IPO-
and 906, which require that the CEO and CFO of a public related transactions should only be taxable to the extent of
company certify that the company’s financial statements are cash received. However, certain transactions may result in
accurate and comply with the requirements of the 1934 Act gains that could be deferred in an alternative structure.
and that the information reported is fairly presented. For
this reason, management should integrate consideration of For companies treated as flow-through entities for tax
internal controls into the company’s financial processes as purposes, usually no tax is paid at the company level. The
early as possible to allow time to implement and adequately profits of the company flow through to the owners and
assess the effectiveness of those controls. generally distributions are non-taxable, resulting in a single
level of tax at the owner level only. Therefore, a company
EGCs are also exempt from the requirement to obtain currently treated as a flow-through entity and contemplating
an audit of internal control over financial reporting. It an IPO may want to consider alternative structures that
is important to note that this exemption only applies to continue to provide flow-through tax benefits to investors.
the internal control audit requirements (Sarbanes-Oxley
Section 404(b)). EGCs are not exempt from the requirement The benefits of most alternative structures are limited to
for management to assess internal control over financial specific industries (e.g., real estate investment trusts, master
reporting (Sarbanes-Oxley Section 404(a)) beginning with limited partnerships, etc.) based on certain requirements
the company’s second annual report. All companies need to in tax law. However, one alternative structure, the Up-C
consider the discussion of their Section 404 plan and timeline structure, provides significant tax and economic benefits to
in their registration statement. pre-IPO investors in any industry. In an Up-C IPO structure,
the public typically invests in a newly formed corporation
Additional Sarbanes-Oxley requirements that often overlap (PubCo) that uses the IPO proceeds to acquire an interest in
with listing requirements of some exchanges include: a partnership. Any economic interest retained by the pre-
• A majority of board members at a public company must be IPO investors continues to be in the partnership. The Up-C
from outside the company; structure provides the following benefits:

• Public company boards must have an independent audit • Access to public markets and a flow-through structure—
committee with at least one member qualified as a The structure allows historical owners in any sector to
financial expert; retain the tax benefits of a flow-through investment,
mitigating potential gain from conversion to a corporation.
• The company’s external auditor is prohibited from
providing certain non-audit services, including, but not • Increased proceeds on exit—Historical owners may
limited to, internal audit, legal and valuation services; and receive 40–50 percent of additional proceeds after they exit
if they enter into a Tax Receivable Agreement (TRA) with
• The company must have a code of ethics for senior financial PubCo in conjunction with the IPO.
officers or clarify why one has not been implemented.
• Liquidity—Historical owners have similar liquidity
rights as they would holding PubCo shares directly via
exchange rights.

Useful tip • Ability to retain control—Historical owners can hold

high-vote shares in PubCo to retain control of the
The market has created an expectation that if a material
business post-IPO.
weakness is not disclosed in a company’s registration statement it
is assumed one does not exist. If one is identified sometime after Assess net operating loss carryovers
the IPO, the effect on a company’s share price can be significant.
Therefore, while full compliance may not be immediately Net operating losses are beneficial to the company in that
required, companies should ensure they have done enough work, they can usually be carried forward 20 years and carried back
pre-IPO, to determine if a material weakness exists. two years, offsetting to their full extent the income earned in

Roadmap for an IPO: A guide to going public 23

Preparing to become a public company

those years. However, some of this benefit is lost if a company Establish incentive compensation plans
with net operating losses goes public and the IPO results in
an “ownership change.” Developing a long-term incentive compensation plan is
critical to keeping management and employees motivated.
“Ownership change” is a technical term defined by the Today, many companies establish such plans for the benefit
Internal Revenue Code as a change in ownership (during of management and employees shortly after formation. Plans
a three-year period) of greater than 50 percent. If an to grant equity securities (including options and warrants)
“ownership change” occurs, a company with net operating within two years of an IPO should be carefully evaluated.
losses will often be allowed to use only a fraction of its net Companies should also consider establishing employee
operating losses to offset income in future years. stock ownership plans (ESOPs) contemporaneous with a
As a result of a company’s possible forfeiture, upon going public offering.
public, of the use of net operating losses, tax planning—with Ensure competitiveness of compensation levels and mix
regard to the full use of net operating losses—should occur
well in advance of the public offering. The company will be required to disclose executive and
director compensation levels publicly—in many cases for
Plan for state and local tax compliance the first time. Registration statements and annual proxy
Many states have tax laws that may impact companies doing disclosures require detailed reporting of base salaries,
business there, as well as the owners of such companies. annual cash bonuses, perquisites and benefits, stock option
While it is not possible to list all tax planning opportunities grants and any other long-term incentive grants. Specific
due to variations in state tax laws, there are often significant data is required for the CEO, the CFO, the three most highly
tax savings opportunities that can reduce the taxes of the compensated executive officers other than the CEO and CFO
company or individual owners if proper planning is done who were serving at the end of the fiscal year and up to two
prior to the IPO. additional individuals for whom disclosure would have been
provided but for the fact that these individuals were not
executive officers at the end of the completed fiscal year. For
EGCs, this would be the top three compensated executives.
It is critical to demonstrate that compensation is reasonable
Useful tip relative to industry practices and necessary to the company’s
Key shareholders should take the opportunity to put into strategy and performance. Unreasonably low pay will
place important tax planning strategies early in the process to attract recruiters, while unreasonably high pay will attract
optimize their financial goals. unwanted criticism by investors and analysts.
Shift accountability for executive pay to an independent
board committee
The board of directors of a public company has a fiduciary
Executive compensation and HR
responsibility for executive pay levels and programs.
Consider executive compensation programs Accordingly, public companies have independent
compensation committees to oversee executive pay decisions.
IPO related securities filings require companies to make
extensive quantitative and qualitative disclosures about Prepare for increased shareholder and media scrutiny
their compensation programs for executives and directors.
While shareholders encourage the alignment of executive
Investors often use these disclosures to gain insight into
and shareholder interests, they actively monitor pay
corporate governance, risk profile, value-creation strategy
practices for executives to ensure pay for performance.
and management competence. Companies considering a
With “say on pay” advisory shareholder votes increasing at
public offering should review their executive and director
various companies, there is more scrutiny of pay practices
compensation programs to ensure they accomplish
for executives. Institutional Shareholders Services (ISS)
their objectives.
and other shareholder advisory groups have issued voting
Support the company’s strategy guidelines advocating that executive compensation align
with the company’s performance and shareholders’ return.
Compensation programs exist to effectively attract, motivate
Questions may be raised as to both the reasonableness and
and retain personnel to execute corporate strategy. A key
competitive nature of the current total rewards program.
strategy for public companies is to increase shareholder
Thus, a company should be prepared to justify pay strategy
value. The compensation program, therefore, should be
and practices.
aligned with the business strategy, adequately communicate
the performance measures that drive value and share a
portion of the value creation with employees.

24 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

Useful tip
Even before a company begins drafting its registration
statement and interviewing investment bankers, it should
review its compensation design to ensure that it is competitive
and can stand up to public scrutiny. Making changes to stock
grant and option plans should be done long before the IPO to
avoid possible incremental income statement charges.

Governance and leadership

Build an effective management team
As a company prepares for its IPO, it must expand its
management capabilities. The investment community wants
to be sure that the management team is not a “one-person
band.” This may require adding individuals with public
company experience in marketing, operations, development
and finance. Many companies also want to put a CFO in place
that has been through the IPO process before. To obtain
maximum financial return and valuation, the team needs to
be cohesive and share a long-term vision for the company.
Other governance requirements differ based on whether
Understand the basic governance requirements for a
the company decides to list on the NYSE or the NASDAQ.
public company
Some of those differences—such as the definitions of what
Public companies are subject to many requirements that constitutes an “independent” director—are subtle. Others
impact their board composition and governance practices, are more substantial, such as the additional responsibilities
as well as the structure, composition and responsibilities the NYSE requires surrounding the requirement to have an
of their board committees. So it is important to start by internal audit function.
understanding the basic rules that will apply once a company
Both the NYSE and the NASDAQ allow new public companies
goes public.
a transition period before they are required to comply with
The SEC has a number of rules on governance. For example, the board and committee independence requirements.
specific requirements for audit committees and compensation That said, many companies fully adopt the board and
committees address independence, authority and selected committee independence requirements by the time their final
responsibilities. The SEC also requires a number of specific registration statement goes effective.
proxy disclosures on governance issues that describe how the
Recruit independent members to the board of directors
board oversees risk, establishes board leadership, considers
its diversity and provides directives on board committees and Attracting and retaining board members has become more
the number of board and committee meetings the company difficult and expensive due to the perceived higher level of
holds. Additionally, the SEC requires companies to provide risk and shift from equity to cash compensation. A company
detailed proxy disclosures about each director. should not wait until the last minute to begin its search for
qualified outside board members. A potential board member
The NYSE and the National Association of Securities Dealers
who is unfamiliar with a company may be reluctant to join
Automated Quotation System (NASDAQ) both establish
the board immediately prior to an IPO, since a director has
governance requirements for their listed companies. They
personal liability for information contained in or omitted
require that a majority of directors on a company’s board
from the registration statement.
be independent and also that all directors on audit and
compensation committees are independent. Both exchanges As companies consider the transition to becoming a public
provide exemptions to these rules for controlled companies entity, along with the growth and evolution that process
where more than 50 percent of the voting power for the involves, it is helpful to consider what additional skills,
election of directors is held by an individual, group or experience or diversity on the board would be beneficial
another company.

Roadmap for an IPO: A guide to going public 25

Preparing to become a public company

as the company grows. One of the best sources of objective Create an audit committee
advice can come from an independent or outside director.
Audit committees have an essential role in ensuring the
While a private company may already have excellent
integrity and transparency of corporate reporting. Investors
directors, if those directors are not independent, they will
now expect published information to be subject to objective,
not be eligible to serve on key committees and their long-
board-level review. Sarbanes-Oxley specifically defines the
term service on the board may be limited. Therefore, it
role and composition of public company audit committees.
may be necessary to transform the existing board to meet
Some of the key requirements for audit committees are
independence requirements.
that they:
Once a company is public, its directors are going to draw
• Are composed entirely of independent directors. To
scrutiny. Shareholders will be assessing board composition
be considered independent, the individual may not—
and starting with the first annual meeting of shareholders
other than in his or her capacity as a member of the
after going public, they will get a vote on electing directors.
audit committee, the board of directors or any other
Certain major institutional investors have become more
board committee—accept any consulting, advisory or
vocal about board composition for new companies. They
other compensation fee from the company or any of its
express concerns about any directors they believe are
subsidiaries. The NYSE and the NASDAQ have different
“overboarded”—that is, sitting on numerous boards—and if a
rules for independence—companies should consult
board does not appear to be sufficiently diverse.
with their securities counsel to confirm in advance of
going public.
• Designate at least one member to serve as a financial
expert, which is defined as: (1) having experience as
Useful tip a principal financial or accounting officer, controller,
Build in enough time to recruit proper outside directors. In the accountant or auditor; or (2) having experience overseeing
post-Sarbanes-Oxley environment, companies may want to or assessing the performance of companies with respect
allow four to six months for this process. to the evaluation of the financial statements; or 3) having
other relevant experience (e.g., as an investment banker,
venture capitalist, commercial banker or financial analyst).

26 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

• Are directly responsible for the appointment, compensation corporate governance matters, it is important for companies
and oversight of the company’s independent auditors. to take a close look at their corporate governance principles
and practices when planning their public offering.
• Have authority to engage independent counsel and
advisors as deemed necessary to carry out their duties Address other governance issues
and establish procedures for dealing with concerns from
Sarbanes-Oxley requires a code of ethics for senior
employees and others regarding accounting, internal
financial officers or clarification of why one has not been
control or auditing matters.
implemented. Many exchanges also require a code of
Understand potential shareholder mix ethics and whistleblower programs. It is important to
understand the overlapping nature of these requirements
When a company is planning to go public, there is an
so that appropriate processes can be put in place. Sarbanes-
understandable tendency to focus on the initial sale of shares
Oxley also prohibits public companies from extending or
to the public including how the underwriter will market the
maintaining credit in the form of a personal loan to or for any
offering, how many shares to sell and how to price the shares.
director or executive officer. Accordingly, appropriate actions
As a result, companies devote a lot of attention to attracting
should be taken to ensure any such arrangements can be
initial buyers. However, sometimes investors who buy at the
extinguished prior to the IPO.
IPO do not hold the shares for the long term. Accordingly,
once initial IPO investors have disposed of their shares, Financial planning and analysis
companies may find they have a different mix of investors
and face challenges to understand what these investors Develop budgets and measure performance
expect from a governance perspective. Throughout the IPO process, underwriters will ask for
The shareholder base will not be homogeneous. Shareholders financial projections and will compare a company’s historical
have different investment horizons and objectives and may performance to its past budgets. Accordingly, a company
have different expectations for a company’s performance, as should establish a financial planning and analysis team
well as conflicting perspectives on how to structure the board to put a budget and forecasting process in place. The
and which governance practices to adopt. Addressing the company should get into the habit of preparing realistic
divergent needs of shareholders can be a challenge. budgets and updated forecasts and be able to articulate
why variances have occurred. For an early-stage company,
It is helpful for a company to understand which institutional projections and profitability are the most important measures
investors it might have and what their expectations are of performance.
for governance. Large institutional investors often provide
policy statements that outline their preferences and views After a company goes public, budgets and projections
on governance structures. The statements also give some will become an important tool for research analysts.
indication of how they are likely to vote on routine matters, Furthermore, this information and a public company’s
such as director elections and executive compensation and on ability to meet its own earnings estimates and those of the
governance proposals, such as splitting the CEO and board investment community can have a significant impact on
chair roles or changing director terms from three years to one its stock performance. Therefore, accurate budgeting and
year (also known as declassifying a board). forecasting is critical for a successful IPO, as the market
allows little room for error and punishes companies for
Evaluate corporate governance principles and practices significant underachievement.
Both the NYSE and the NASDAQ have specific corporate Treasury
governance standards that need to be addressed in
connection with an IPO and the listing of a company’s Create a forward-looking capital structure
equity securities on their exchanges. These listing standards As a company begins to consider an IPO, the focus is often
address such matters as board composition, structure and solely on the equity issuance process, key decisions related
process, including the nomination of directors, compensation to this process and the management of investor relations
practices and similar matters. The standards are in part and communications. Typically, companies will also need to
a response to Sarbanes-Oxley, but they go further and consider access to the debt capital markets to fund ongoing
address such matters as the establishment of a code of business investment needs, provide fuel for growth and, in
business conduct and ethics for employees and directors, the time, support potential acquisitions. Accordingly, companies
establishment of an internal audit function for companies should consider their overall financing strategy, including
listed on the NYSE and approval of related party transactions target capital structure, interest rate risk management and
for companies quoted on the NASDAQ. Given the level of potential shareholder payout strategies including dividend
interest by institutional investors and the investing public in policy and share repurchase programs. New debt issuances
may also require companies to register debt securities,

Roadmap for an IPO: A guide to going public 27

Preparing to become a public company

engage with financial intermediaries (investment and comprehensive assessments of their treasury functions with
commercial banks) and establish credit ratings. In short, the objective of matching their practices to these higher
while the focus for pre-IPO companies is equity capital, it expectations. Such an assessment may result in: changes
is likely that additional work needs to be done to develop a to treasury’s governance model, signature authorities and
sound capital structure and ensure ongoing access to capital limits; upgrades to the skills and sophistication of the team
and liquidity at a reasonable cost to fund the business after (especially with respect to capital markets activities and
the IPO. financial risk management); process changes to improve
controls, particularly around the management of cash; and,
Proactively manage financial risks finally, implementation of leading-edge treasury tools and
A key focus for newly public companies is external technologies that increase visibility of cash and liquidity,
communication relating to quarterly financial performance automate key processes and provide greater access to
information and data for improved decision making around
metrics (e.g., revenues, EPS, cash flow, etc.). Among factors
funding, cash and liquidity management and financial risk.
that influence financial performance are financial risk
Importantly, investments in the treasury organization,
variables tied to foreign exchange rates, interest rates and
processes and infrastructure can not only reduce financial
commodity prices. To mitigate potential volatility in financial statement and operational risk, but also potentially provide
results, pre-IPO companies should consider implementing benefits in the form of lower cost of capital, increased cash
hedging programs and strategies for managing foreign flow and reduced operating costs.
currency, interest rate and commodity price risks. Where
financial derivatives are currently utilized for hedging, Legal
companies should consider whether derivatives used in Consider appropriate level of required legal counsel
existing risk management programs might qualify for hedge
accounting, allowing for the deferral of hedge gains and Legal counsel is a critical function of any public organization.
losses to coincide with the timing of the recognition of In some cases, internal counsel can be more cost effective
underlying exposures in earnings. than external counsel, but internal counsel will not replace
the requirement for specialists such as SEC counsel, litigation
Secure adequate insurance coverage attorneys, etc. If management has no legal counsel, it should
Prior to an IPO, most companies already have brokerage consider which core legal expertise would be most needed
relationships and insurance coverage for property damage, internally and staff counsel appropriately with support from
general liability, employer liability, business interruption external specialists. In addition, internal counsel can provide
and many other specialty lines of coverage suitable to perspective and oversight for understanding legal obligations
their business risk profile. While existing relationships and internal compliance requirements.
and insurance levels may have met a company’s needs for Build an effective legal and compliance program
many years, the run-up to an IPO is an opportune time to
reevaluate the company’s risk profile and assess whether A Chief Compliance Officer (CCO) is a critical role for
existing coverage and retention levels are appropriate organizations as they think ahead to the regulatory and other
for a public company. Beyond traditional basic insurance risks impacting strategic goals and threatening the sustained
programs, many private companies do not maintain directors’ growth of the business. In short, a CCO can provide executive
and officers’ (D&O) liability insurance coverage. As a newly management and boards with comfort that the organization
public company, the potential liability for directors and is appropriately addressing its internal and external
officers to public shareholders is greatly increased. Securing obligations.
appropriate coverage is critical to attracting and retaining The CCO, like the Chief Information Officer (CIO) or
talented directors and officers to lead the public company the CFO, sets the framework for managing compliance
and is an important action item for any company planning throughout the organization. The CCO should develop,
an IPO. understand and monitor compliance metrics to help detect
Consider upgrading the treasury function issues early and improve the effectiveness of internal
programs for maintaining compliance with laws and
In many ways, an IPO should not require much change
regulations. The CCO should also ensure that ethics (and
to the operational infrastructure of a treasury function
ethical decision making) are an integral part of everyday
that is required to execute the daily tasks of collecting,
business discussions, that there is a framework in place
concentrating, disbursing and investing cash and other
liquid assets. However, for a newly public company, the to manage the complex and rapidly expanding regulatory
expectations for the control, effectiveness and efficiency environment, that there are appropriate compliance
of treasury operations increase. Consequently, as part skills embedded in every function as appropriate and that
of planning for an IPO, many companies perform employees see compliance as part of what they do every day.

28 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

Internal audit quickly and be able to scale internal audit and compliance
capabilities post-IPO.
Consider requirements for an internal audit function
Engage with investment banks
Regardless of industry, a public company will
generally require the following: Build relationships with investment banking firms
• Policies and processes to allow effective risk identification, Solid relationships with investment banks will help establish
assessment and management by senior leaders; a company’s credibility and can factor greatly in the success
of an IPO as well as other capital raising and M&A activities.
• Processes and mechanisms to prioritize risks and allocate
Investment bankers can help assess and sharpen a company’s
resources on a risk-rated basis;
equity story, provide valuation guidance and provide a sense
• Formal communication channels to the board regarding of the appropriate IPO timing based upon the company’s
compliance, risk and risk management issues; financial perspective and market receptivity. Specific skills
and support include the following:
• Mechanisms to make risk disclosures to the public; and
• Experience in marketing, structuring and facilitating the
• A formal compliance infrastructure, compliance program
underwriting syndicate to create support for the stock after
and related reporting.
it is issued;
Establishing a formal internal audit function is a beneficial
• Assessment of market conditions and appropriate
way to evaluate a company’s risk, compliance and control
investors/targets;
environment given the new requirements it faces. While a
formal internal audit function is only a current requirement • Expertise in pricing an offering so it will be attractive to
of the New York Stock Exchange (NYSE), risk, controls and the company but also generate a reasonable return for
compliance become vital drivers of sustainable growth, the investor; and
giving companies the tools to meet investor, market and
• Visibility and ongoing updates to public investors.
regulatory expectations and improving risk management and
operational effectiveness. Media and investor relations
Enhancing risk management processes and structures starts Build a positive public image
in the C-suite, with the board exercising its oversight role
by requiring management to identify all relevant risks and A positive image can enhance the initial sales effort and
then obtaining assurance that those risks have been properly maintain the public’s interest in the stock in the aftermarket.
managed. From there, risk management cascades down into Accordingly, most companies will need to enhance or create
the business, where it is overseen by the company’s various such an image with potential buyers and those who influence
risk and compliance functions, which could include internal their buying decision (e.g., financial analysts, stockbrokers,
audit, legal, regulatory, SOX, IT, etc. Coordination is critical. the financial press and industry media). A positive image
When the disparate strands of a company’s governance, risk, cannot be developed overnight; it can take months or even
compliance and internal audit efforts are brought together years to achieve, so the earlier a company gets started, the
into a coordinated system rather than operating in silos, the better. It is important that building a public image start well
result is not only greater effectiveness and efficiency, but before the beginning of the “quiet period.”
also the ability to align systems, people and culture with Creating or enhancing a company’s image may require hiring
management’s strategic priorities. a public relations firm well in advance of the public offering.
Risk management, controls and compliance processes This firm can help a company get their story out prior to the
are likely already in place at some level in most pre-IPO offering and maintain positive external communications and
companies, but may be neither formalized nor sufficiently shareholder relations after the company has gone public.
robust to meet the requirements placed on public companies. Other ways a company can enhance its public image include
A company preparing to go public will therefore need to adding analysts and business editors to its mailing lists,
build out its risk, controls and compliance and internal participating in trade shows and conferences that are attended
audit functions, while prioritizing the people, processes by analysts and publicizing key employee appointments.
and technologies that will be most critical as it navigates
the IPO process and assumes its new responsibilities as a Enterprise risk management
public entity. Another option is to outsource all or part of Elevate your enterprise risk management activities
the company’s internal audit and/or compliance processes,
including SOX compliance, in order to get up to speed The SEC requires disclosure of how boards administer risk
oversight as part of their proxy disclosures. Regulators have

Roadmap for an IPO: A guide to going public 29

Preparing to become a public company

stated in the past that risk oversight is a key responsibility company. An investment thesis that resonates with potential
of the board and that additional disclosures would improve shareholders can provide the foundation for strong IPO
investor and shareholder understanding of the role of the aftermarket stock performance. Developing the equity story
board in the organization’s risk management practices. is the synthesis of many components, including:
Companies are encouraged to share information about how
• Business model of the company;
the board and management work together in addressing the
material risks facing the company. • Growth strategy;
Recognizing that the board’s role is oversight while the • Forecasts and projections including company guidance;
management team’s responsibility is day-to-day execution
• Positioning of the company to be valued against the right
of risk management activities, the disclosure requirements
comparable companies; and
provide companies some flexibility in describing how
the board fulfills its duty. It is important to consider and • Management who can execute the business model.
formalize the division of responsibility between the full
These elements need to be woven together to create the
board and individual board committees, establishing a clear
equity story and the rationale for an investor to take an
process for how those committees report back to the full
interest in the company and, ultimately, to buy at the IPO and
board on the major risks under their purview. For example,
in the aftermarket. The equity story is the underlying theme
is risk oversight administered through the whole board, a
for the marketing of the IPO and will be communicated in
separate risk committee of the board or the audit committee?
the following:
Do individuals who assume day-to-day risk management
responsibilities report directly to the board as a whole or • Pre-IPO “test the waters” investor meetings;
to a board committee? How does the board or a committee
• Prospectus (Form S-1/Form F-1);
receive information from these individuals?
• Roadshow slide deck and presentations;
Beyond any requirements for implementing a risk
management program, it is also imperative to understand • Financial projections; and
how effective risk management enables the organization to
• Earnings release and conference call.
take risks and achieve strategic goals. This includes proactive
mitigation strategies as well as strong response and recovery All of these elements need to be integrated to tell the same
from unexpected events that would help to minimize the equity story for the company. This will ensure that the
impact of those events. This will require clarification of message to investors and research analysts is consistent.
the roles and responsibilities of management and business
leaders with regard to ongoing risk oversight. Once the roles Wealth management planning
and responsibilities are clear, the supporting processes can be Conduct pre-IPO estate planning
enabled. Consider how the company manages different types
of risks, as well as the unique cultural and organizational An IPO requires the full attention of all executives involved
realities that need to be addressed. in the transaction. Providing executives with guidance in the
estate planning process is important to minimize distractions
Management should consider creation of a risk function and maintain focus on taking the company public. Proper
that is focused on enabling achievement of strategic estate planning during the pre-IPO phase also helps to
objectives. This is not a risk ownership group or a risk align the interests of executives with those of the company
auditing group, but a function designed to drive consistency throughout the transaction and following the IPO. Pre-IPO
and transparency and support a clear understanding of the estate planning is critical in taking advantage of significant
organization’s risk appetite. The risk function may facilitate, tax savings opportunities and can aid in the overall wealth
monitor and coordinate the methodologies, tools and management strategy of executives.
templates, but the business always owns the management of
risks. The organization should look to create a function that Early in the process, the IPO project lead or HR manager
delivers risk information for better decision making. should notify executives and engage advisors to ensure that
all necessary components are considered in developing the
Corporate strategy and development executives’ estate plans. While all estate plans should include
a will, healthcare proxy and durable power of attorney, each
Develop the equity story
should also be tailored to the individual and based upon
It is important to present a well-articulated equity story to the executive’s needs and objectives. Executives may have
the marketplace so that investors understand the company different requirements in terms of liquidity, equity options,
and the drivers that provide the basis for the valuation of the managing taxes, charitable contributions and passing

30 Roadmap for an IPO: A guide to going public

 Preparing to become a public company

wealth along to future generations. Furthermore, the estate whether the company has the capabilities and systems to
plan must be sensitive to regulatory requirements, market deliver profitability. To help drive sales and revenue in the
perception and potential timing constraints. Implementing 18 months prior to an IPO, companies should take steps
a well-crafted pre-IPO estate plan can align incentives and to capture all information flows about current and future
ultimately preserve wealth generated during an IPO. market opportunities and integrate them within a central
repository. This will give leadership a complete picture
Technology so it can focus resources on high-potential opportunities,
Gauge the ability of systems to meet new requirements predict future areas of growth and acquire and enable sales
leadership to keep the momentum going.
A company’s existing systems and processes will often prove
inadequate for its future as a public company. Therefore, Though ramping up processes and systems can seem
another vital aspect of the enterprise risk assessment daunting, especially while a company is mired in the other
process should involve determining whether those systems complexities of IPO preparation, there are considerable
are sufficiently robust to accommodate growth and benefits to having the necessary platforms in place to support
deliver the levels of information and detail required to the business and the upcoming IPO.
meet the company’s new public reporting and compliance
responsibilities. A growing company, for instance, may not be
able to continue using off-the-shelf accounting software once
it gains scale and operational mass. Companies being spun Useful tip
out from larger enterprises might face the opposite problem:
Staff up early, as there will be many demands on the company’s
scaling down from more complicated tools and processes.
key resources at peak times, at which point it may be too late
Moreover, companies built through acquisition often face to bring in temporary assistance. Strike the right balance
challenges of disintegrated systems and questionable data between internal and external resources to ensure appropriate
quality. In any of these cases, processes have to change before knowledge retention after the registration is complete, while
new tools are installed—preferably a year or more ahead enabling management to focus on running the business.
of the IPO process launch. Areas in which scalability issues
present a risk include:
• Accounting systems—Most companies will need to grow Project management, change management
the capabilities of their accounting systems during the and communication
run-up to their IPO. Systems more suited to a small, private
Develop a strong project management office
company can’t be allowed to slow the process of closing
(PMO) function
the books in a timely fashion. If closing eats up two to
three weeks every month, the finance function will lack Launching a successful IPO requires making many decisions
the bandwidth to focus on value-added activities and not and coordinating the various parts of your business to
be able to meet public company reporting requirements. achieve common goals. An effective PMO will allow you
An ineffective process could also lead to reporting errors to coordinate internal and external resources from a wide
and inadequate analysis of results. The increased scrutiny array of advisors and organization units. Strong project
and reporting requirements that come with being a public management is essential to achieve a level of success that
company also make it imperative for accounting system could be vital to the success of your IPO process as well as the
issues to be resolved during the pre-IPO stage. market perception of your company.
• HR systems—With the war for talent raging worldwide, The establishment of a PMO to manage IPO preparation
attracting and retaining talent can be one of a company’s activities includes many elements and several considerations
biggest challenges. A flexible, integrated, easily based on an organization’s communication preferences,
customizable HR system can help in this area. Most historical level of involvement with a PMO and familiarity
companies will want to look for one that covers not only with public company requirements for those tasked with
the basic HR management functions but also areas such executing the going public tasks. For a project management
as strategic recruiting, employee development, internal function to be effective and operate efficiently, it will require
employee communications, social and mobile networking a strong project governance structure with proper decision-
and embedded metrics to allow for robust talent analytics. making authority delegated at each level of the organization,
a detailed project plan with accountable owners and a
• Customer relationship management systems—In the
robust communication and reporting cadence. An efficient
lead-up to an IPO, investors will be paying particular
and experienced project management solution can result in
attention to a company’s potential for growth and assessing
reduced execution costs, fewer surprises, increased project
efficiencies, enhanced transparency and accountability and
improved issued resolution.

Roadmap for an IPO: A guide to going public 31

32 Roadmap for an IPO: A guide to going public
 Common accounting and financial
reporting issues
There are many accounting and financial reporting disclosure issues to address with
an IPO, including matters related to financial statements, taxation, compensation and
complex technical accounting areas. The key is to get in front of these issues well in
advance of the registration process so that they will not be an impediment to becoming a
public company.

Common accounting and The SEC will also remind registrants that they are
required to disclose certain enterprise-wide information,
reporting issues such as disaggregated revenue by products or services
Below are some of the most common accounting and (unless impractical to do so, which should be stated) and
reporting issues that a company will face as part of the IPO geographical disclosures (revenues and assets) by country,
process, as well as related areas that are often the focus of if greater than 10 percent of the consolidated totals.
SEC reviews. Typical areas of SEC comment
Segment reporting • Determination of the CODM, which may not always be a
Private companies are not required to report financial single individual
information about their segments, so this is usually a • Exclusion of components of a business as a segment when
major change for companies undertaking an IPO. Segment the CODM receives reports of that component’s operating
reporting has been an area of recurrent comments from results on a regular basis
the SEC, which frequently challenges the identification
and aggregation of operating segments. Reporting only • Aggregation of segments, which the SEC has noted
one segment is considered a “red flag” that will attract a represents a “high hurdle” that is only suitable in certain
comment almost without exception. limited situations

When operating segments are aggregated, questions • Inconsistencies in the manner in which the business
often center on the application of the “similar economic section and MD&A are written
characteristics” criterion, with special attention paid to the Non-GAAP measures
similarity of long-term average gross margins. Companies
should be prepared for the SEC to request a copy of the As companies plan for an IPO, among the many choices they
reporting package that the chief operating decision maker must make is how to utilize non-GAAP measures (NGMs) in
(CODM) receives. This is usually the CEO or a combination their IPO filings and in discussions with potential investors.
of the CEO and board of directors. Use of the right NGMs allows companies to highlight key facts
and circumstances and position themselves to the investment
Segment reporting is based on the information included community and against their peers. However, while NGMs
in the internal reporting package and it is presumed that can be a key tool during an IPO, companies should carefully
all information made available to the CODM is actually consider the costs and benefits associated with their use. The
used to assess the performance of the business and make SEC will closely review the basis of calculation and level of
decisions about the allocation of resources. The objective is disclosure. The investment community will expect consistent
for investors to have the benefit of seeing the business in the usage of the NGMs and consistency with peers both during
same level of detail as management. and following the IPO. Thus, appropriately identifying these
items early in the IPO planning process is critical. In a worst
case scenario, improper usage or disclosure of NGMs can
lead to unanticipated costs and delay the company’s IPO. It
can also have a negative impact on the company’s share price
after its IPO.

Roadmap for an IPO: A guide to going public 33

Common accounting and financial reporting issues

Companies often present certain quantitative measures of As a company completes its annual and quarterly financial
past performance, financial position or cash flows that make statements, it should take time to write its MD&A. It can be
various adjustments (inclusions or exclusions) to measures very difficult to remember, three years after the fact, why
reported in the GAAP financial statements. Such NGMs are insurance costs went up or when a marketing campaign
permitted to be included in registration statements, including commenced. The practice of writing a high quality,
IPO filings, as long as they meet the requirements of comprehensive MD&A will expedite a company’s registration
Regulation G and Item 10(e) of Regulation S-K. Examples of process and be a major step toward operating like a public
common NGMs can include adjusted earnings before interest, company. The SEC comment letter process has reinforced the
taxes, depreciation and amortization (EBITDA), free cash well-established MD&A objectives that disclosures should
flows or quality of earnings adjustments. be transparent in providing relevant information, tailored to
the company’s facts and circumstances, consistent with the
Typical areas of SEC comment
financial statements and other public communications and
• Equal or greater prominence given to NGMs relative to the comprehensive in addressing the many business risks that
equivalent GAAP measure exist in today’s economic environment.
• Reasons why management believes NGMs provide useful Typical areas of SEC comment
information to investors
• Addition of an executive overview section
• Items in the reconciliation of NGMs to the most comparable
• Explanation of the underlying specific drivers behind
GAAP measure
changes in financial position, results of operations and
• Labeling of items as non-recurring, infrequent or unusual cash flows
when a similar item has occurred in the prior two years
• Reasons for and specifically quantifying significant
and/or is reasonably likely to occur again
underlying variances, even when they offset each other
• Labeling NGMs as “pro forma” when they do not comply
• Discussion and quantification of the impact of pricing and
with the provisions of Article 11 of Regulation S-X
volume changes on results of operations
Management’s Discussion and
• Material known trends that may positively or negatively
Analysis (MD&A) impact future results of operations and liquidity
A stumbling block that many companies face is their • Quantified impact of foreign currency fluctuations on
inability to describe the effect of underlying factors on the revenues, expenses and margins
company’s performance. A registration statement and all
future financial statement filings with the SEC will require • Quantified impact of acquired or disposed businesses on
the inclusion of MD&A related to a company’s financial results of operations
statements. Specifically, MD&A is intended to give the reader • Discussion of known trends, events or uncertainties that
information about the quality of the company’s earnings are reasonably likely to impact future liquidity
and cash flow so that investors can ascertain the likelihood
that past performance is indicative of future performance. • Further disclosure of sources and uses of cash and drivers
The company will need to describe in-depth such items as of cash flows as opposed to repeating what can already be
changes in sales volumes and cost structures, liquidity and found on the face of the cash flow statement itself
capital resources, sources and uses of cash flows, vendor • Description of the covenants in the company’s debt
relationships, employee compensation, unusual non- agreements and an indication regarding compliance
recurring charges, significant environmental exposures,
off-balance sheet arrangements, contractual obligations and • Amounts of cash held overseas, especially where a
other risks and uncertainties. company has asserted that it will permanently reinvest
foreign earnings

34 Roadmap for an IPO: A guide to going public

 Common accounting and financial reporting issues

Risk factors Typical areas of SEC comment

Risk factors are included in the non-financial part of a • Basis for omitting incentive plan performance targets (this
registration statement. Regulation S-K requires companies to is a high hurdle) and disclosure regarding the relative
disclose all known significant factors that make an offering likelihood that those performance targets will be met
risky or speculative. Common categories of risk include
• Description of incentive plan performance targets
industry risks, company risks and investment risks. Risk
factors should be specific to the company and described in • Identification of other companies used for
clearly understandable language. benchmarking purposes
Typical areas of SEC comment • Description of the roles and responsibilities that the CEO,
compensation consultants and compensation committee
• Removal of risks that could apply to any issuer in the
had in the executive compensation decision making process
same industry
Revenue recognition
• Removal of any disclosure implying that there are other
material risks that are not described in the filing Revenue recognition still receives a great deal of attention
from the SEC. Some of the most common topics include
• Expanded disclosure for EGCs relating to the risk of a
the following:
lack of comparability of financial statements and reduced
reporting requirements • Software revenue recognition
• Additional information regarding any material weakness or • Multiple-element arrangements
significant deficiency reported in the filing process
• Gross versus net revenue presentation
• Description of the nature, severity and frequency of any
• Reseller arrangements
data breaches
• Collaboration agreements
Compensation Discussion and
Analysis (CD&A) • Barter transactions
The CD&A addresses the objectives and implementation • Bill and hold/consignment sales
of executive compensation programs, focusing on • Upfront fees
the most important factors underlying the company’s
compensation policies and decisions. It also addresses New revenue recognition guidance issued by the Financial
why each compensation program element was chosen, Accounting Standards Board (FASB) will affect almost all
how award levels were determined and how each element entities and significantly increase required disclosures.
fits into the company’s overall compensation objectives. While current guidance is often industry-specific and spread
EGCs are required to follow smaller-company reporting across various pieces of accounting literature, Accounting
rules, which provide relief regarding compliance with Standards Codification (ASC) 606, “Revenue from Contracts
CD&A requirements. with Customers,” provides a single, comprehensive model
to be applied in all industries. The standard is effective for
Recent changes to proxy requirements require a disclosure public entities for annual reporting periods beginning after
of how risk is related to compensation and whether or not December 15, 2017, including interim periods therein. For
these risks may have a material effect on the company. The non-public entities, the standard is effective for annual
focus is on how the corporation’s compensation structures reporting periods beginning after December 15, 2018, and
and practices drive an executive’s risk-taking and the interim periods within annual periods beginning after
compensation committee’s management of risk related to its December 15, 2019. Early adoption is permitted only as
compensation program. of annual reporting periods (including interim reporting
The changes are meant to increase disclosure of the periods within those periods) beginning after December
relationship between a company’s overall compensation 15, 2016. Companies contemplating an IPO should begin
policies and how these policies create incentives that can an assessment of the impact of the new standard on the
affect the company’s risk and the management of that risk. organization so they can articulate to investors, investment
Public companies are required to discuss and analyze in bankers and other stakeholders the potential impact of the
the CD&A the risk attributes of their broader compensation adoption of the new guidance.
policies for employees (including non-executive officers).
This disclosure is only required if the risks from a company’s
compensation policies have a material impact on the company.

Roadmap for an IPO: A guide to going public 35

Common accounting and financial reporting issues

Typical areas of SEC comment Typical areas of SEC comment

• Level of detailed disclosure surrounding revenue • Significant factors, assumptions and methodologies used to
recognition policies in the notes to the financial statements determine the fair value of the underlying common stock
• Questions about a registrant's determination of separate • Whether a contemporaneous valuation by an unrelated
units of accounting or performance obligations, allocation valuation specialist was performed
of arrangement consideration to separate deliverables or
• The valuation range determined by various methodologies
performance obligations, application of fair value criteria
and the combination or weighting of those methods
and determination of transaction price
• Significant factors contributing to the difference between
• Detailed analysis of the gross and net indicators as they
the fair value as of the date of each grant and the estimated
pertain to specific arrangements in order to assess the
IPO price range
appropriateness of a company’s conclusion regarding the
presentation of revenue • Explanations of why or whether marketability discounts,
illiquidity discounts and common stock discounts (due to
• Upfront versus over-time recognition and the appropriate
preferential rights of preferred stock) were used
period over which revenue should be recognized
• Determination of comparable companies used
Stock-based compensation
“Cheap stock” refers to the issuance of equity instruments
(e.g., options, warrants, common stock or restricted stock)
typically during the 12 to 24 months preceding an IPO, for Useful tip
a price (or with a strike price) that is below the expected A contemporaneous common stock valuation report from
IPO price. This issue usually arises in connection with the a third-party valuation specialist can not only ease SEC
granting of employee stock options and often results in the scrutiny, it can also be used for computation of stock-
recognition of additional stock-based compensation expense. based compensation and for safe harbor purposes under
Section 409A.
The SEC expects that companies will provide critical
accounting estimate disclosures within the MD&A section
of the registration statement surrounding methods that
management used to determine the fair value of the Earnings per share (EPS)
company’s shares and the nature of the material assumptions Private companies are not required to present EPS and for
involved. Alternatively, companies may request confidential companies with complex capital structures—including
treatment of this information by submitting a letter to multiple types of equity, different types of potential common
the SEC with such disclosures. With respect to valuations shares and various classes of common stock—this calculation
performed, management should include a detailed can be complex. To further complicate matters, companies
discussion of the valuation approaches for estimating the may have participating securities that are required to be
value of an enterprise, such as the cost, market and income included in the calculation of basic EPS using the two-class
approaches, various methodologies for allocating the value method (under which EPS is calculated separately for each
of an enterprise to its common stock, the weighting of the class of common stock and any participating securities).
different models used and any significant changes in the
weighting over time. Common shares (securities or other contracts that may
entitle their holders to obtain common stock, such as options,
Companies may receive comments requiring explanations warrants, forwards or other contracts) may be participating
for valuations that appear unusual (e.g., unusually steep securities if, in their current form, they are entitled to receive
increases in the fair value of the underlying shares leading dividends when declared on common stock. For example, an
up to the IPO). Companies preparing for an IPO need to unvested, share-based payment award that includes non-
carefully review their option pricing history. Where option forfeitable rights to dividends or dividend equivalents meets
exercise prices are significantly less than the price of other the definition of a participating security. Lastly, dividends
equity instruments sold near the dates of option grants, there declared in the year preceding an IPO are presumed to be in
will be close scrutiny by the SEC, and the closer the grant contemplation of the IPO.
dates are to the IPO, the more intense the review.

36 Roadmap for an IPO: A guide to going public

 Common accounting and financial reporting issues

When the dividends declared in the latest year exceed Beneficial conversion features of preferred
earnings for the previous twelve months, the SEC presumes stock and debt
they will be funded with proceeds from the IPO and,
therefore, registrants are required to present pro forma Similarly to cheap stock issues, the SEC continues to focus
earnings per share on the face of the income statement. This on the conversion price embedded in convertible preferred
requirement applies to dividends declared after the latest stock and debt securities issued within one year of an IPO.
balance sheet included in the registration statement, as well Occasionally, a company will issue convertible securities
as planned but not yet declared dividends. within a short period before an IPO with a conversion price
below the expected IPO price. The SEC staff believes this
Typical areas of SEC comment issue to be a valuation issue similar to that of cheap stock and
• Treatment of nominal issuance/penny warrants it has approached it in a similar manner.

• Inclusion of pro forma EPS on the face of historical In some cases, the SEC staff has required that the IPO price
financial statements due to automatic conversion of be used as the market price of the company’s common
preferred stock upon IPO stock in measuring the beneficial conversion feature (BCF).
Convertible securities issued within one year prior to the
Liability versus equity classification filing of an initial registration statement with a conversion
price below the initial offering price are presumed to
The SEC has a history of scrutinizing the classification of
contain an embedded BCF. To overcome this presumption, a
liabilities and equity in financial statements. This has resulted
registrant should provide sufficient, objective and verifiable
in the issuance of a standard that clarifies this classification.
evidence to support its assertion that the accounting
Certain financial instruments that were previously classified
conversion price represented fair value at the issuance
as “mezzanine” in the balance sheet may now be required to
(commitment) date. If the SEC determines that there is a
be classified as a liability. Particular attention should be paid
BCF, then the “in the money” portion would be reduced
to warrants and preferred stock. One area that could provide
from the net income available to common shareholders,
for complex transition issues between private and public
lowering EPS.
companies is that of mandatorily redeemable shares.
With the introduction of guidance on determining fair values,
The definition of mandatorily redeemable securities has
significant focus has been placed on the appropriateness of
historically been found only in SEC rules. However, recent
the fair value assigned to the underlying stock in connection
guidance issued by the FASB provided a new definition of
with such transactions. Judgment is required when
the term “mandatorily redeemable” and requires that any
determining the fair values for securities that are not actively
securities meeting that definition be reported as liabilities
traded. As a result, third-party valuation specialists are often
in financial statements. FASB’s definition of mandatorily
employed to determine the fair values of such securities.
redeemable differs from that of the SEC. Accordingly, a
mandatorily redeemable security that does not require Particular care should be taken if the company receives any
liability classification under FASB’s rules may require “bridge financing” in anticipation of an IPO. For example, a
separate classification and accounting under the SEC rules. company may issue a convertible note with an accounting
The rules can be complex and can vary significantly based on conversion price of $14 per common share when its expected
the preferred stock redemption provisions. IPO price is $18 per common share. These types of financing
arrangements often contain multiple settlement features that
Typical areas of SEC comment
are contingent on various outcomes (e.g., IPO by a certain
• Assumptions used to determine the fair value of the date). Such interim financing arrangements need to be
instrument, including the underlying security (e.g., the evaluated for BCFs as well as embedded derivatives.
fair value calculation of a preferred stock warrant and the
Typical areas of SEC comment
underlying price of the preferred stock itself)
• Significant factors, assumptions and methodologies used to
• Changes in the valuation of the instrument over time
determine fair value
• Variation of the valuation of the instrument from the value
• Explanations of why or whether marketability discounts,
of the registrant’s common stock
illiquidity discounts and common stock discounts (due to
preferential rights of preferred stock) were used

Roadmap for an IPO: A guide to going public 37

Common accounting and financial reporting issues

Employee notes receivable Goodwill and intangible assets

Historically, private companies have issued shares to Companies are required to assess goodwill and indefinite-
employees in exchange for notes receivable, primarily to start lived intangible assets for impairment at least annually.
holding periods for tax purposes. Employee notes have also Assessment is required sooner if there are any triggering
been issued for other reasons, such as relocations and house events that may be indicative of an impairment. The basis
purchases. There are some key factors that companies need for performing the two-step goodwill impairment test is the
to consider regarding employee notes. reporting unit. The SEC staff has often challenged registrants’
determination of reporting units, since setting them at too
For notes issued for stock, the recourse or non-recourse
high a level may result in avoiding an impairment charge.
nature of the notes, both in legal substance and in form,
needs to be evaluated to determine whether the transaction Typical areas of SEC comment
is substantive. Companies also need to consider Section
• Incremental disclosures in the critical accounting estimates
402 of Sarbanes-Oxley, which prohibits publicly traded
section for any reporting units with material goodwill
companies from providing personal loans to directors and
balances that are “at risk” of failing step one of the
executive officers. This prohibition has also led to an overall
goodwill impairment test
decrease in the frequency of loans being issued to employees
in private companies. • Disclosure of the percentage by which the fair value of the
reporting unit exceeds its carrying value
Companies with existing loans or considering entering
into new loans to employees should work with appropriate • Further qualitative discussion of assumptions used to
legal counsel to determine which loan arrangements are determine fair value
prohibited and take appropriate corrective action prior to the
• Where no impairment charge was recorded during the
public offering. This corrective action may require executives
annual assessment, but other publicly available data
to repay loans prior to the IPO and the original contractual
indicated the presence of a negative trend
maturity, so advance planning is essential.
Typical areas of SEC comment Business combinations

• Classification of employee notes receivable if not presented US GAAP requires that the purchase price allocation in a
as contra equity where the receivable was the result of a business combination begin with an analysis to identify all
stock transaction, unless such receivable was repaid prior tangible and intangible assets acquired. Intangible assets,
to the issuance of the financial statements such as patents, copyrights, brand names, customer lists and
above/below market contracts should be identified and the
Pro forma financial information fair value of each asset must be estimated. The total purchase
cost is allocated based on the relative fair values of the
The objective of pro forma financial information is to provide
individual assets.
investors with an understanding of the continuing impact of
particular transactions by indicating how they might have Underlying assumptions and data used to develop the
affected the historical balance sheet and income statement valuations should be adequately tested and challenged by
had they occurred at an earlier date. Companies with companies and their auditors.
significant business combinations or dispositions, previous
In addition to providing the acquisition disclosures required
history as part of another entity, material repayment of debt,
under ASC 805, “Business Combinations,” companies need
changes in capitalization at the effectiveness or close of an
to evaluate the significance of any acquisitions completed
IPO and other events and transactions that have had or will
up to three fiscal years prior to the filing of the Form S-1.
have a discrete material impact on the financial statements
Registrants may be required to provide audited historical
are required to include pro forma financial statements in the
financial statements of the acquiree(s) and pro forma
registration statement.
financial information in accordance with Rule 3-05 of
Typical areas of SEC comment Regulation S-X.
• Whether adjustments are directly attributable and factually Typical areas of SEC comment
supportable to the transaction
• Appropriateness of the fair values used to record assets and
• The level of reliable, documented evidence in support of liabilities acquired
the adjustments
• Additional information about the qualitative factors that
• Whether adjustments to the pro forma income statement resulted in significant goodwill
have a continuing impact
• Accounting for changes in a valuation allowance for
acquired deferred tax assets and the resolution of uncertain
tax positions
38 Roadmap for an IPO: A guide to going public
 Common accounting and financial reporting issues

• Disclosures associated with contingent consideration and • Incremental disclosures considering a company’s
related accounting involvement with variable interest entities and any
significant changes in risk exposure due to that
Consolidation involvement, as well as the impact of such entities on the
New guidance on consolidation significantly changes company’s financial statements
the consolidation rules for variable interest entities. The
Income taxes
consolidation principles are now closer to the traditional
control-based approach than to previous guidance that The accounting for income taxes, including related
focused more on the quantitative assessment of economic disclosure requirements, is often complex and involves
risks and rewards. Impacted arrangements include the significant judgment.
consolidation of common structures, such as joint ventures,
Typical areas of SEC comment
equity method investments, collaboration arrangements,
co-manufacturing agreements and power purchase • Disaggregation in the income tax provision disclosure
arrangements. The adoption of this new guidance may
• Sufficiency and consistency of indefinite
require significant changes to a company’s accounting
reinvestment disclosures
policies, financial statement disclosures, data-gathering
processes and internal controls. However, the impact of the • Incremental disclosure of how the results of operations
guidance is not limited to the financial reporting process and are impacted by having proportionately higher or lower
is expected to affect other areas, including debt covenant earnings in jurisdictions with different tax rates
compliance, financial metrics, compensation, controls,
• Interplay between indefinite reinvestment assertion
systems and stakeholder communications, to name a few.
and liquidity
Typical areas of SEC comment
• Sufficiency of valuation reserves and uncertain
• Consideration as to whether a variable interest entity tax provisions
exists, including factors considered in determining the
primary beneficiary and consideration of whether a service
provider has a variable interest

Roadmap for an IPO: A guide to going public 39

40 Roadmap for an IPO: A guide to going public
 Building a going public team

A successful IPO requires advisors who have “been there and done that.” A company must
identify the key players in its going public team, from the specialists it will hire to the staff
members who will help prepare the registration statement and other sales documents.

Identifying your going public team Government attorneys and accountants and, in some cases,
industry specialists or engineers, review each filing. The
The decision to go public can be one of the most important chain of review leads up to the director of the division and
in a company’s history—and one of the most challenging. the issuance of a “comment letter.”
A company needs expert direction and assistance to stage a
successful IPO. The company will have the opportunity to The SEC concerns itself with the thoroughness and
select many of the participants in the IPO process, such as clarity of the registration statement and the prospectus to
auditors, lawyers, underwriters and accounting advisors. It ensure that these documents adequately inform potential
is a company’s duty to potential shareholders to monitor the investors. Keep in mind that the SEC only regulates the
drafting of the registration statement. Companies should vehicle (Form S-1 or Form F-1 for example) used to offer a
ensure they completely understand all components of the security. It evaluates neither the company nor the quality of
document and the assumptions behind those components. the security.
The SEC will also play a significant role in the IPO process. Company personnel
Keeping in mind the impact that the SEC can have on the
company’s registration process is important when choosing The level of a company’s participation in the process of
advisors who will assist in the IPO process. preparing the registration document frequently depends
on the expertise of the company’s personnel, although
The SEC outside counsel will typically play a large part in the
The SEC is charged with ensuring a fair and level playing drafting process. In any case, company personnel will need
field for public companies and their investors. It has the to provide the necessary information with which to prepare
authority to pursue civil and criminal prosecution against the document and be actively involved in all aspects of the
those who breach established procedures. Liability may registration process.
arise from material misstatements or omissions in a A company should not underestimate the level of
registration statement. If the SEC finds mistakes or requests commitment a public offering will require of its staff. The
clarification during the registration process, it can delay process requires a great deal of a company’s attention and
an IPO. will likely distract staff from the day-to-day operations
The SEC’s Division of Corporation Finance reviews the of the business. It is important to recognize that this is
registration statement and ultimately allows or denies an common in an IPO and, in some instances, may necessitate
issue to “go effective” and sell shares. Registrants generally hiring additional staff. A team’s commitment to the offering
are assigned to one of the division’s review branches process will be the difference between a successful IPO and
on the basis of standard industrial classification codes. a failed attempt.

Roadmap for an IPO: A guide to going public 41

Building a going public team

Securities counsel Of course, the professional relationship between a company

and its underwriter is mutually beneficial. An underwriter
As with any selection of individuals to provide professional
earns money from an offering in a variety of ways:
services, there must be the right chemistry between a
management team and the company’s securities counsel. • Discount or commission. This averages around six to seven
A company’s attorney will become the quarterback of its percent of proceeds raised for the vast majority of IPOs, but
registration process. could be as high as 10 percent for more difficult or smaller
offerings or as low as one to two percent for large global
A company’s counsel must be professionally competent and
offerings in a competitive market;
have the ability to clearly explain technically challenging
concepts and descriptions of complicated transactions. • The right to underwrite future offerings of the
He or she must have the ability to evaluate large amounts company’s securities;
of information and turn around documents quickly. It is
• Non-accountable expense allowance. This standard
imperative that companies find a law firm experienced with
practice allows underwriters to bill a company an amount
both the IPO process and their industry—one the company
that may not exceed three percent of gross proceeds;
is confident will protect its interests when dealing with the
underwriters and SEC staff. In addition to securities counsel, • Other compensation, such as warrants to purchase stock in
investment bankers will appoint underwriters’ counsel to select circumstances; and
support the IPO transaction.
• Overallotments, as discussed below.
Investment banker or underwriter While these items may seem to allow quite a few charges by
Companies can go to market without an underwriter, but an underwriter, maximum underwriters’ compensation (both
the process is so complex and the know-how so specialized direct and indirect) is regulated and reviewed for fairness by
that it is rarely done. The complicated market issues that are the Financial Industry Regulatory Authority (FINRA) before
arcane to most people are the stock-in-trade of underwriters, the offering may proceed. Blue Sky laws also require a review
and it is in the best interest of a company to take advantage of underwriters’ compensation by state regulators.
of their expertise. The value added by an underwriter should Generally, the underwriter’s agreement comes in two
be the assurance that an IPO will be properly managed and basic forms. The first is a “firm commitment,” in which the
successfully marketed and supported, both before and after underwriters pledge to buy all of the stock offered in the
going public. IPO and resell it to the public. This arrangement offers the
The lead(s) or managing underwriter works with a company company the most security because the owners know they
to develop the registration statement, coordinate the will receive the full sales price of the issue. The second
roadshow, underwrite certain risks and form a syndicate. form is “under a best-efforts commitment,” in which the
This syndicate is composed of an underwriting group, which underwriter uses his or her best efforts to sell the stock but is
bears the risk of the underwriting and the selling group. The under no obligation to purchase the stock should part of the
selling group solicits interest from its retail and institutional issue remain unsold.
clients, sells stock once an IPO goes effective and provides There are variations on these two basic agreements. They
aftermarket support. The share allotment each underwriter is include an “all-or-none” commitment, which is a modification
committed to buy is stipulated in the prospectus. of the “best-efforts” agreement. In this commitment, all
Generally speaking, underwriters come in three sizes: “bulge of the stock must be sold by the underwriter or the entire
bracket” investment banks which are global powerhouses issue is cancelled (at considerable cost to the company). In
and provide a wide range of services to major clients around a partial “all-or-none” agreement, the underwriter requires
the world, “boutique” banks which are smaller and often sale of a specified portion of the issue (typically two-thirds)
specialize in a particular industry sector or financial product for the “best efforts” to remain in effect on the remainder of
and regional firms and local banks which help smaller the issue.
issuers. The size and scope of a company and its offering will,
in part, determine the size of the underwriter enlisted.

42 Roadmap for an IPO: A guide to going public

 Building a going public team

Capital markets advisor Underwriters’ counsel

Since the financial crisis, companies have been more Also involved in the IPO process is the underwriters’ counsel,
frequently engaging capital markets advisors to work who is generally responsible for drafting the underwriting
alongside the investment banks. Capital markets advisors agreement and reviewing the registration statement and any
provide independent and objective advice to companies on related agreements and contracts that are filed as supporting
key value-driving decisions and judgments throughout the exhibits. The principal objective in reviewing the registration
IPO process. Capital markets advisors are not in competition statement is to ascertain on behalf of the underwriter that
with the underwriting banks. Rather, they seek to assist the registration statement is complete and not misleading.
management in selecting an underwriting syndicate of In addition, the underwriters’ counsel usually prepares the
banks that complement one another and generally advise “Blue Sky” filing, which is necessary to get the registration
management on how to get the best out of their investment approved by state regulators. Another task performed by
banking service providers. the underwriters’ counsel is negotiating the content of
“comfort” letters.
The capital markets advisor has two key responsibilities:
1. Supporting the company in its preparation prior to Independent auditors
contacting and engaging the investment banks, including: As strategic and technical advisors, a company’s independent
advising on how to best tailor the company’s equity auditors will play a key role throughout the registration
story for a new and larger audience and helping gauge process. Therefore, at the start of the IPO process, a company
valuation expectations. will need to ensure that it has selected an audit firm that is
2. Assisting the company in underwriter selection (choosing registered with the PCAOB. The selection of an auditing firm
the banks), underwriter syndicate structure (determining should also be based on the following considerations:
number of banks and roles), syndicate economics • Experience with public company financial reporting;
(compensation to the banks, including gross spread,
fee splits and incentive structures) and finalizing an • Expertise in GAAP and the auditing standards of
underwriting agreement. the PCAOB;

Once the investment banks have been selected, the role of the • Reputation and experience with IPOs and other capital
capital markets advisor shifts to that of an advisor on process markets transactions; and
management and an independent sounding board on key • Ability to continue to service the company appropriately
decisions that will drive value. Capital markets advisors can through its growth and global expansion.
counsel management on how to mitigate potential conflicts
that arise among advisors and/or the parties involved in the
transaction and provide insight into how to best manage the
syndicate to ensure that underwriters work together toward
a common goal. Likewise, they can provide experienced
views on key value-driving components of the IPO process,
including the following: Useful tip
• IPO process decisions—advice in forming “go/no-go” By appointing key advisors early, management is freed up to
judgments on IPO preparations, as well as IPO timing focus on the marketing phase of the IPO, where it can add the
most value. Management will also be able to anticipate issues
and size
and avoid untimely delays, preserving the value of the IPO and
• Marketing—independent review of marketing strategy, enhancing the market’s confidence in management, while at
materials, roadshow process and investor targeting and the same time protecting the company’s brand equity.
feedback, as well as assistance in the preparation of analyst
and investor presentations, investor roadshow teams
and rehearsals
• Pricing and allocation—advice on pricing and pricing
tactics, including formulating key messages to banks
during the bookbuilding process, as well as advice on
allocation based on demand assessment

Roadmap for an IPO: A guide to going public 43

Building a going public team

Other factors to consider are the size of the firm’s local auditor made concerning the financial statements or other
and global resources and its experience in the company’s information contained in the prospectus; and
industry. Specific services the independent auditor will
• A review of the prospectus and assistance in responding to
provide include:
SEC comment letters.
• Strategic advice to help establish a realistic plan for
The importance of engaging qualified, independent auditors
entering the capital markets;
long before the IPO cannot be overstated, particularly if
• Advising the company on preparing the registration a company has never had its financial statements audited
statement in compliance with US GAAP and before. The first audit of many young and expanding
SEC requirements; companies often discloses accounting and financial reporting
problems that must be resolved before the registration
• Guidance on the identification of potentially sensitive
statement can be filed.
or problematic accounting issues (e.g., cheap stock
considerations, revenue recognition), financial disclosure Typically, large accounting firms are structured as full-
issues and the overall transparency of financial reporting; service professional firms, offering services in various lines
of business (e.g., audit, tax, consulting and human resource
• Audits of the financial statements. The process of auditing
advisory). A company’s independent auditors, as well as
multiple years of financial statements and related
individuals from these other lines of business, can play a
disclosure requirements for public offerings can be
valuable role as advisors before, during and after the going
extensive. An established relationship with an auditor who
public process. Some of these roles include evaluating
knows a company’s business well, coupled with thorough
whether going public is the best alternative for a company,
preparation on the company’s part, should enable it to
evaluating incentive compensation plans, addressing
complete the process faster and more effectively, which can
a company’s accounting system needs and capabilities,
be crucial to the success of the offering;
reviewing the terms and conditions of acquisitions and
• A comfort letter to assist the underwriter in its due tax planning. A company may also consider consulting an
diligence efforts. This letter details certain procedures that accounting firm that can provide IPO and financial reporting
the company’s external auditor performed at the request advisory services as described in the following section. 
of the underwriter, along with other representations the

44 Roadmap for an IPO: A guide to going public

 Building a going public team

Advisory accountant –– Implementing the new financial reporting protocols

necessary to meet public company reporting
Companies often seek transaction support and advisory
requirements, along with ongoing technical advice on
services from a second accounting firm that is not restricted
these requirements;
by auditor independence standards.
–– Corporate governance;
An advisory accountant can offer advice and assistance to
organizations with limited experience in IPOs by providing –– The adoption of new accounting, reporting and
an objective view of the critical issues involved in accessing a disclosure standards;
particular capital market. An advisory accountant can assist
–– Training accounting and finance staff; and
a company going through a capital-raising transaction in the
following ways: –– Ongoing compliance with Section 404 of Sarbanes-Oxley.
• Advice on project management—Companies must Financial printer
define the transaction requirements and the roles and
Another important factor contributing to a successful IPO
responsibilities of management and their advisors at the
is the role played by the financial printer. The printer is
outset. Failure to do so early can jeopardize control and
responsible for printing the registration statement and
effective management of the transaction.
prospectuses according to the format and presentation
• Strategic advice—Companies must evaluate alternative guidelines specified by the SEC. The major financial
approaches and establish a realistic plan to enter the printers can also “EDGARize” documents and make the
capital markets. required filing with the SEC via EDGAR. (With respect to
EDGAR, it is important that companies file Form ID with
• Issue resolution—The advisory accountant can advise
the SEC well in advance of the offering to receive their
and assist with complex financial reporting and deal
access and identification codes.) Because this is specialized
execution matters, including SEC pre-clearance matters.
printing involving rapid turnaround, only a few printers
• Registration statement requirements—The advisory can adequately handle it. Underwriters, attorneys and
accountant can advise and assist with financial statement accountants will be able to recommend qualified financial
requirements, including the navigation of annual audited printers. Companies must also select a firm to design and
financial statements and interim financial information print the company’s stock certificates.
requirements given accommodations now afforded to all
issuers. Other professional advisors

• Technical advisory—The advisory accountant A public relations firm experienced in SEC registrations can
brings extensive experience with complex capital help guide companies through the restrictions of the “quiet
markets transactions. period” and make the most of the opportunities that do
exist. Public relations firms typically help prepare materials
• Section 404—Companies should obtain assistance for analyst presentations and coach management in their
from their advisory accountant regarding the design, presentation skills. In addition, management teams may
documentation and testing of internal control over want to hire speech consultants to help them prepare for
financial reporting as management evaluates its the roadshow.
compliance with the requirements of Section 404 of
Sarbanes-Oxley. Companies will also need to appoint a stock transfer
agent to provide those administrative and operational
• Post-transaction services—A knowledgeable advisory services associated with trading stock. The transfer
accountant can provide advisory assistance after the agent issues, cancels and transfers stock certificates, pays
IPO with: dividends, handles other corporate actions and distributes
shareholder reports.

Roadmap for an IPO: A guide to going public 45

46 Roadmap for an IPO: A guide to going public
 Preparing the registration statement

Resist the temptation to allow the underwriters or attorneys to perform significant amounts
of drafting, as this could result in a registration statement that deviates from management’s
view. Management knows the business best, so it should take an active role providing
direction in the drafting process.

The Form S-1 registration statement • Staff Accounting Bulletins (“SABs”) reflect the
Commission staff's views regarding accounting-related
Sources of SEC technical requirements disclosure practices. They represent interpretations and
The form and content of registration statements, including policies followed by the Division of Corporation Finance
the requirements for most financial statements and other and the Office of the Chief Accountant in administering
financial information to be included in the registration the disclosure requirements of the federal securities laws.
statement, are contained in the following SEC rules, • Compliance and Disclosure Interpretations (“C&DIs”)
regulations and interpretations: comprise of interpretations that reflect the views of the
• Regulation S-X is the principal accounting regulation staff of the Division of Corporation Finance. They are not
of the SEC. It specifies the financial statements to be rules, regulations or statements of the Commission.
included in filings with the SEC and provides rules and • Industry guides are intended to assist registrants in the
guidance on their form and content. preparation of registration statements. They outline the
• Regulation S-K contains the disclosure requirements policies and practices required by the SEC staff relative
for the non-financial statement portion of filings with to specific industries. Industries covered by the guides
the SEC (otherwise referred to as the “forepart” of include oil and gas, mining, banking, insurance and
the document). real estate.

• The Financial Reporting Manual (“FRM”) contains • Regulation S-T governs the preparation and submission of
interpretations by the staff of the Division of Corporation documents filed through EDGAR.
Finance regarding various financial reporting matters. Beginning in 1996, virtually all documents processed
• Financial Reporting Releases (“FRRs”) are designed by the SEC, including filings by first-time issuers, were
to communicate the SEC position on accounting required to be submitted electronically via EDGAR. Copies
and auditing principles and practices. They are used of documents filed with the SEC using EDGAR may be
to adopt, amend or interpret rules and regulations obtained at the SEC’s website: www.sec.gov. The general
relating to accounting and auditing issues or financial and specific instructions for the relevant form (Form S-1,
statement disclosures. etc.) are also helpful.

Roadmap for an IPO: A guide to going public 47

Preparing the registration statement

Registration statement filing JOBS Act, enabling private companies to more easily access
the public capital markets. To qualify as an EGC, a company’s
The choice of which SEC form to be used for registration
annual gross revenue during the most recently completed fiscal
purposes is a legal determination that should be made by a
year must be less than $1.07 billion (such amount is indexed for
company in consultation with its counsel and underwriter.
inflation every five years), including some additional criteria.
Form S-1 is the basic registration form for IPOs. Companies
Generally, EGCs are permitted to do the following:
may confidentially submit certain registration statements for
SEC review, as well as omit audited financial statements and • File an effective registration statement with only two years
selected financial data if that financial information relates to of audited financial statements (instead of three);
periods that are not reasonably believed to be required at the
• Adopt any new or revised accounting standard using the
time of the contemplated offering (i.e., prior to distribution of
same timeframe as private companies; and
the preliminary prospectus to investors).
• Provide less detailed executive compensation disclosures.
In draft registration statements submitted for confidential
review, companies may omit interim financial information Additionally, EGCs are exempt from the following:
that is reasonably believed will not be required to be separately
• The internal control audit requirements of Sarbanes-Oxley
presented at either (i) the time of the contemplated offering
Section 404(b); and
(if the company is an EGC) or (ii) the public filing of the
registration statement (if the company is a non-EGC). However, • Any future PCAOB rules that might be adopted related to
once a company files publicly (even if it is an EGC), it will need mandatory audit firm rotation or supplemental auditor
to include all required interim periods, even if those periods are discussion and analysis reporting.
the not the same periods required to be presented separately as
EGCs have the option to utilize some, all or none of the above
of the contemplated offering. Companies may also request the
accommodations.
SEC’s consideration to waive requirements for certain financial
statements, pursuant to Rule 3-13 of Regulation S-X. Since the JOBS Act became effective in 2012, more registration
statements have been submitted by EGCs than any other filer
The extent of required disclosures in the Form S-1 may be
designation. The basic financial statement requirements for an
reduced if the company qualifies as an EGC. The EGC was
effective registration statement for EGCs compared to all other
introduced as a new filer designation in 2012 as part of the
companies are presented in the table below.

Effective registration statement Non-EGC Form S-1 EGC Form S-1

requirements
Income statement 3 years 2 years
Balance sheet 2 years 2 years
Statement of cash flows 3 years 2 years
Statement of shareholders’ equity 3 years 2 years
EPS 3 years (corresponding to 2 years (corresponding to
income statement) income statement)
MD&A Required Required

Selected financial data Required (5 years of historical selected Required (2 years of historical selected
financial data) financial data)
CD&A Required (3 years) Not required (although several
executive compensation disclosures
have to be provided)
Separate financial statements for Required (up to 3 years) Required (up to 2 years)
significant acquisitions
Pro forma financial information Required Required

48 Roadmap for an IPO: A guide to going public

 Preparing the registration statement

While FPIs may qualify as an EGC, their reporting Part I—Information Required in the Prospectus
requirements may differ due to home country listing
Prospectus summary—Appearing at the beginning of the
requirements or other relief afforded by the SEC.
prospectus, “the box” is a short summary describing the
Accordingly, consultation with a PwC IPO specialist is
company, its business, the type of securities being offered,
recommended to confirm specific requirements. A less
the amount of estimated proceeds, the intended use of the
common designation is that of a smaller reporting company
proceeds and principal risk factors. It may also include
(SRC), which provides similar benefits as those afforded
certain summary financial information. This section also
to EGCs. Qualifying SRCs generally have less than $75
includes the complete mailing address and the telephone
million of public equity float (or less than $50 million in
number of the company’s principal executive offices.
annual revenue if public float cannot be calculated). The
Although not required, many companies include their
accommodations available to SRCs and EGCs overlap in some
website addresses in this section. The summary should not
areas and differ in others. It is possible for a company to
merely repeat the text of the prospectus, but should provide a
qualify as both an SRC and an EGC.
brief overview of the key aspects of the offering. As this is the
The MD&A for an SRC is similar to that of other companies. most frequently read section of the prospectus, management
However, the discussion of the results of operations would should take time to ensure it fully conveys the business and
generally mirror the financial statements included in the the overall offering.
Form S-1. SRCs are also not required to include a tabular
Risks associated with the business—Risk factors are those
disclosure of contractual obligations.
that are specific to the company and not to any other
Preparing the registration statement company or offering. Risk factors that make an offering
speculative or risky must be disclosed. These factors may
Preparing and filing the registration statement is a relatively include the following:
complicated, time-consuming, technical process requiring
substantial planning and coordination. It involves providing • Recent adverse developments or operating losses;
the information specified by the SEC form and complying • Need for additional financing;
with the applicable SEC rules in the most efficient manner
possible. It requires a great deal of effort by the management • Dilution to public investors;
team, lawyers and independent accountants to describe a • Industry trends or business seasonality;
company as accurately and positively as possible, while also
disclosing any negative risk factors. • Existence of significant competition;
It is during the preparation process that a scheduled • Company’s dependence on a few customers, suppliers or
timetable for going public can take longer than expected, key members of management;
causing a delay in the anticipated filing date. It is therefore • Information regarding significant contracts or licenses;
imperative that the entire team be thoroughly familiar with
the registration statement requirements, be cognizant of the • Impact of current or proposed legislation (e.g.,
deadlines, periodically assess the status of specific sections communications, health care); and
of the registration statement and ensure that reviews of each • Technology changes.
section are timely.
Use of proceeds—A company must disclose the planned
The registration statement consists of two principal parts. use of the proceeds from the offering. This section of the
Part I contains the essential facts regarding the business registration statement should be carefully drafted because
operations, financial condition and management of the the SEC requires reports on the actual disposition of the
company, all of which are required to be included in the proceeds after the offering is completed. Because the
prospectus, as well as the company’s financial statements. actual use of proceeds may change between the filing date
Part II contains additional information that is not required to and the effective date as the company’s plans change, it
be included in the prospectus. may be necessary to revise this section of the registration
The Form S-1 filing statement on the effective date. Typical uses might include
debt reduction, acquisitions, capital purchases, research and
Information that is required by the Form S-1 includes development expenditures and marketing expenses.
the following:
Dividend policy and restrictions—A company must disclose
its current dividend policy, any anticipated changes to that
policy and any restrictions on the company’s ability to pay
dividends. For example, it is not uncommon for many new

Roadmap for an IPO: A guide to going public 49

Preparing the registration statement

public companies not to pay dividends, but rather to retain • A description of its properties;
earnings to finance operations and the company’s expansion
• Information relating to foreign operations, if any;
plans. Restrictions might be based on debt, contractual
agreements or the regulatory environment in which a • Amount of research and development expenditures;
company operates.
• Regulations affecting the industry and company;
Capitalization—Although not a requirement of Regulation
• Pending or threatened legal proceedings; and
S-K, the capital structure of a company, both prior to the
offering and after all securities offered are sold, is usually • Revenues, profits, assets, products and services, product
presented in a tabular format. development, major customers order backlog, inventory,
patents, suppliers and the competitive position of each
Dilution—Dilution occurs when there is a disparity between
major industry and geographic segment of the company.
the IPO price and the net book value per share of tangible
assets. The effects of any material dilution on prospective Financial information—The SEC has specific and sometimes
investors must be disclosed; this is usually presented in a complex rules regarding the content and age of the
dilution table. financial statements that must be presented in a registration
statement, and a company’s advisory accountants can be
Underwriting and distribution of securities—Information
invaluable in helping it comply with these rules. In an
must be provided about the price of the securities being
effective Form S-1, a company generally presents the items
offered, the members of the underwriting syndicate, the type
listed below:
of underwriting and any relationship between a company
and any of its underwriters. • Audited balance sheets as of the end of the two most recent
fiscal years;
Information about the company’s business—A company
must make extensive disclosures about its business. These • Audited statements of income, cash flows and changes in
disclosures include the following: shareholder’s equity for each of the past three fiscal years
(EGCs and SRCs may present such information for two
• A company’s business plan, particularly if it has less than
years only);
three years’ operating results;
• Selected financial information (summarized from the
• A description of the company’s principal segments,
balance sheets and income statements) for the past five
products, services and markets;

50 Roadmap for an IPO: A guide to going public

 Preparing the registration statement

fiscal years (EGCs need not present selected financial data public filings. Non-EGCs may omit financial statements
for any period prior to the earliest audited period presented (including both annual and interim) from confidential
and SRCs are not required to present any selected submissions if those financial statements relate to periods
financial information); and that are not reasonably believed to be required at the time
of the public filing. Both EGCs and non-EGCs are required
• Interim financial statements are required if the fiscal
to include interim periods in public filings, even if the
year-end financial statements are more than 134 days old,
periods are not required to be presented separately at the
except for third-quarter financial statements, which are
time of the contemplated offering.
timely through the 45th day after the most recent fiscal
year end. After the 45th day, audited financial statements • EGCs may omit other required financial statements (e.g.,
for the fiscal year must be included. Interim financial significant businesses acquired or to be acquired (Rule
statements can be presented in a condensed format 3-05), certain equity method investments (Rule 3-09),
and generally are not audited. However, a review of the guarantors of public debt securities (Rule 3-10) and
interim financial statements is typically performed by affiliates whose securities collateralize a registered debt
independent auditors. issuance (Rule 3-16)) that are not reasonably believed to
be required at the time of the contemplated offering. Non-
The following should also be noted:
EGCs may omit other required financial statements from
• The latest audited financial statements cannot be more confidential submissions if those financial statements relate
than one year and 45 days old at the date the registration to periods that are not reasonably believed to be required
statement becomes effective; at the time of the public filing. Non-EGCs are not permitted
to omit other required financial statements from public
• Separate financial statements of significant businesses
filings. Regardless, if other required financial information
acquired or to be acquired should be included. The
is expected to be required at the time the registration
financial statement requirements range from one to
statement becomes effective, both EGCs and non-EGCs
three years (or one to two years for EGCs), depending on
may request consideration by the SEC to waive such
whether certain significance criteria are met;
financial statements pursuant to Rule 3-13 of Regulation
• Insofar as practicable, the separate financial statements S-X, when appropriate based on the specific facts and
of significant equity investees of a registrant (except SRC circumstances.
registrants) should be as of the same dates and the same
Pro forma financial information—Pro forma financial
periods as the audited consolidated financial statements.
information includes financial statements or financial tables
These financial statements only need to be audited for
prepared as though certain transactions or events have
periods in which the equity investment is deemed to be
already occurred. Pro forma information may be included in
significant (as defined by SEC rules); and
an IPO registration statement to reflect the impact of a recent
• Companies should report separate, standalone acquisition or disposition, the use of proceeds from the IPO to
(unconsolidated) financial information in instances in repay outstanding debt obligations or other events that cause
which restrictions prevent its subsidiaries from freely the financial statements to not be indicative of t
transferring funds to the registrant. he ongoing entity.
• EGCs may omit annual financial statements from While the need for pro forma financial information most
confidential submissions and public filings if the annual frequently occurs in connection with business combinations,
financial statements relate to periods that are not the rule also applies to other events. For example, the use of
reasonably believed to be required at the time of the proceeds from the IPO to repay outstanding debt obligations
contemplated offering (i.e., prior to distribution of the also necessitates the provision of pro forma financial
preliminary prospectus to investors). However, non-EGCs information. There could be other events or transactions
are not permitted to omit annual financial statements from for which pro forma financial information may be required

Assumed date of Adjustments are Adjustments are Adjustments are

transaction directly attributable factually supported expected to have
to transaction ongoing impact
Balance sheet Balance sheet date Yes Yes N/A
Income statement Beginning of Yes Yes Yes
earliest pro forma
period presented

Roadmap for an IPO: A guide to going public 51

Preparing the registration statement

if the pro forma financial information would be material to non-equity incentive plan compensation, pensions,
investors, including the following: non-qualified deferred compensation and all other
compensation (including perquisites);
• The registrant’s financial statements are not indicative of
the ongoing entity (e.g., tax or cost-sharing agreements • Disclosure related to amounts payable to executive officers
will be eliminated); upon termination of employment and, separately, upon
a termination of employment following a change in
• Dividends are declared by a registrant subsequent to the
corporate control; and
balance sheet date;
• Enhanced related person disclosures, including disclosure
• Redeemable preferred stock or debt converts to common
of the policies for the review, approval or ratification of
stock at either the effective or closing date of an IPO;
transactions with related persons.
• Other changes in capitalization occur at or prior to the
As it relates to the above requirements, EGCs and SRCs both
closing date of an IPO; and
enjoy the following accommodations:
• An issuer was formerly a subchapter S corporation, a
• No requirement for a CD&A section;
partnership or similar company.
• Fewer named officers;
The basic guidelines for pro forma adjustments are as follows:
• Abbreviated “golden parachute” information and fewer
• Balance sheet: Pro forma presentation should be based on
required tables; and
the latest historical balance sheet included in the filing. A
pro forma balance sheet is not required if the transaction is • Only the most recent fiscal year information is required.
already reflected in a historical balance sheet.
Executive compensation disclosures for all filer types are
• Income statement: Pro forma presentation should be based considered to be “stale” as of the first day of the company’s
on the latest fiscal year and interim period included in new fiscal year and would need to be updated in a
the filing. subsequent registration filing.
• Footnote disclosure on pro forma adjustments for the MD&A—In this section, management provides investors
income statement and balance sheet may also be required. and users information relevant to the assessment of the
financial condition, results of operations, liquidity and capital
Information about the company’s officers, directors and
resources of the company, with particular emphasis on the
principal shareholders—Form S-1 requires a company to
company’s prospects for the future. MD&A continues to be an
identify and describe the business experience of its executive
area of focus for the SEC staff when reviewing registration
officers and directors; the security holdings of directors and
statements. It inevitably results in comments (particularly
principal shareholders; transactions with and indebtedness
the lack of forward-looking information required by each
of officers, directors and principal shareholders; and the
of the major sections of MD&A). It is therefore imperative
identity of transactions with and compensation paid to,
that this section be carefully drafted. It should be written
its promoters.
as objectively as possible, pointing out both favorable and
Executive compensation—The SEC requires extensive unfavorable developments and should be written from the
disclosures that are intended to ensure that investors and point of view of the company’s management. An MD&A
other parties receive clear, comprehensive and transparent statement includes the following:
disclosures regarding executive and director compensation
• Results of operations—This is a comparison of the
and related matters for the past three fiscal years.
income statement amounts for each period (both annual
The executive compensation disclosures include the following: and interim) presented and an explanation of the reasons
for any material changes that should be incorporated.
• Expanded disclosure related to named executive officers
The MD&A should also discuss the reasons for any recent
including the CEO and CFO;
positive or negative trends, as well as the quality of the
• A CD&A section, which requires a disclosure of the roles of company’s earnings. Any known trends or uncertainties
management and the compensation committee in making that have had, or are expected to have, a material impact
underlying compensation decisions and the methodologies on the company and any changes in significant balance
and rationales used in establishing the type and amount of sheet items also should be analyzed and discussed.
executive compensation;
• Liquidity—Any known trends or any known demands,
• A summary compensation table, accompanied by six commitments, events or uncertainties that will result in,
supplemental tables, to disclose compensation components or that are reasonably certain to result in, the company’s
relating to salary, bonus, stock awards, option awards, liquidity increasing or decreasing in any material way

52 Roadmap for an IPO: A guide to going public

 Preparing the registration statement

should be identified. Any course of action the company has This section continues to be an area of significant focus by
taken or proposes to take to remedy any deficiencies should the SEC.
be indicated. Also, internal and external sources of liquidity
• Market risk disclosures— A quantitative and qualitative
should be identified and described, and any material
discussion of the registrant’s risk exposures (i.e., interest
unused sources of liquid assets should be briefly discussed.
rate risk, foreign currency exchange rate risk, commodity
• Capital resources—A description of the registrant’s price risk and other relevant market risks), how the
material commitments for capital expenditures, the registrant manages such risks, any changes in such tactics
general purpose of such commitments and the anticipated period over period and a sensitivity analysis as to the
source of funds needed to fulfill such commitments impact of earnings if there were hypothetical changes in
should be included in the MD&A. Any known material interest rates, foreign currency rates, market rates, etc. that
trends, favorable or unfavorable, in the company’s capital generate such market risk disclosure.
resources should be divulged.
• Other disclosures—Other disclosures that are required
• Disclosure about off-balance sheet arrangements, in a registration statement include (but are not limited to)
aggregate contractual obligations and other matters— the following:
This section should include, among other things, an
–– Legal proceedings, if any;
explanation of off-balance sheet transactions and
arrangements, including the company’s relationships with –– Interests of named experts and counsel; and
unconsolidated entities or other persons that have, or are
–– Certain relationships and related party transactions.
reasonably likely to have, a current or future material effect
on financial condition, changes in financial condition, Part II—Information not required in the prospectus
revenues or expenses, results of operations, liquidity or
This part includes disclosures regarding the expenses
capital resources.
associated with the issuance and distribution of securities,
• Critical accounting policies and estimates—This the indemnification of directors and officers acting for the
section should provide greater insight into the quality company, any sales of unregistered securities within the
and variability of the company’s financial condition and last three years, representations made by the company
operating performance resulting from key accounting acknowledging that it will keep the registration statement
policies, assumptions and estimates. It should supplement, and prospectus current, various exhibits (such as certain
not duplicate, the description of significant accounting material contracts entered into by the company, articles of
policies in the notes to the financial statements and include incorporation and bylaws and the underwriting agreement)
quantitative and qualitative disclosures, a sensitivity and various financial statement schedules.
analysis and critical estimates by segment if necessary.

Roadmap for an IPO: A guide to going public 53

54 Roadmap for an IPO: A guide to going public
 Navigating the IPO process

The most successful IPOs are launched by those businesses that operate as though they were
public companies well in advance of their actual IPO. These businesses have a relatively
smooth process of going public and they quickly transition to life as public companies.

Typical execution timeline in the offering. The potential investors must be either QIBs
or institutions that are designated as accredited investors.
Businesses often begin their preparations for becoming These “testing the waters” activities, may occur prior to
public companies well before they launch the IPO process. or following the date of the registration statement filing.
A typical IPO execution process can take about six to 12 Companies should bear in mind that any materials used to
months. Advance preparation is a key success factor that test the waters may be requested by the SEC and remain
allows for a smooth and efficient execution process. subject to federal securities laws.
Companies will need to juggle the following tasks in parallel
timelines and keep business running as usual:

Useful tip • The preparation of the preliminary prospectus;

As excited as company executives may be about the • The investigation of the company’s affairs for underwriter
impending IPO, take care not to promote during the quiet due diligence; and
period. Allow the quiet period to be just that—quiet. EGCs
• The preparation of marketing materials for the roadshow.
may proceed with “test the waters” discussions, but loud
noises may attract unwanted attention, particularly from As previously mentioned, a company can generally expect
the SEC. Keep confidential company information private. a minimum of three to five months from the time it initially
Spreading news about the company to friends, family and files until the time it receives the proceeds from an offering.
even in casual conversation to someone on an airplane can be The actual length of this period depends on, among other
a real temptation—and can spell real trouble.
things, the readiness of the company to go public, the
availability of the information that must be disclosed in the
registration statement and market conditions.
Once a company reaches a preliminary understanding with
its underwriters, the IPO process starts in full force and a
quiet period begins during which a company is subject to
SEC guidelines regarding the publication of information Useful tip
outside the prospectus. The opportunity to enhance
awareness of a company, its name, products and geographic Of course, the company preparing to go public is not the only
markets will be limited, since any publicity that creates a source of information. Keep in mind that the press, which
is by definition independent, will time its articles according
favorable attitude toward the company’s securities could
to its interests, which may not be in the best interest of your
be considered illegal. Continuation of established, normal offering. Excessive attention during the quiet period can only
advertising and publicizing of information is acceptable. hurt and managing press interest should not be left to chance.
An exception to this rule is provided for EGCs. These filers Work with an experienced public relations firm and SEC
may engage in oral or written communications with certain counsel to properly maintain the quiet period.
potential investors during the quiet period to gauge interest

Roadmap for an IPO: A guide to going public 55

Navigating the IPO process

Useful tip
Days 1-60 There are numerous opportunities for schedule slippage
Holding the all-hands meeting during the IPO process. Some of it may be unavoidable, but
strive to maintain the timetable as much as possible. For each
The first step in the IPO process is arranging an all-hands unscheduled delay, the management team must balance
meeting. This meeting should be attended by all members of potential costs (new required financial information, a missed
the registration team—company management, independent market window or a less enthusiastic market) against the
auditors, accounting advisors, underwriters, the company’s costs of hasty decisions (expenses, problems with the SEC, or
attorneys, capital markets advisors and the underwriters’ withdrawal of a registration statement).
attorneys. The purpose of this initial organizational meeting
is to discuss the nature of the offering and the appropriate
SEC registration form, coordinate responsibilities for sections Time and responsibility schedules—These weekly
of the registration statement, establish a timetable for the schedules include major corporate events, scheduling
anticipated filing date and share information regarding the conflicts of working group members and a week-by-week
working group’s availability. listing of responsibilities and meeting assignments.
The all-hands or organizational meeting is normally a full Performing due diligence
day of activities that includes the following:
Throughout the registration statement preparation process,
• Introduction of the working group—This group is the entire IPO team will perform necessary procedures to
comprised of high-level company management, company provide a reasonable belief that, as of the effective date,
counsel, independent auditors, the lead or managing the registration statement contains no significant untrue or
underwriters, the underwriters’ counsel, capital markets misleading information and that no material information
advisors and any other consultants hired by the company has been omitted. These procedures are referred to as due
to act as independent advisors to the company as the IPO diligence and are performed primarily in response to the
process progresses and issues or questions arise. Securities Act of 1933 (1933 Act), which holds all parties
participating in the registration liable for any material
Procedurally, all issues affecting the upcoming IPO will be misstatements or omissions in the registration statement.
handled or delegated by this group. Due to the compressed Due diligence serves as the primary defense in any actions
timeframe of the IPO process and the busy schedules of brought against the parties, other than the issuer, under this
all parties involved, the finalized list of working group section of the 1933 Act.
members, including contact information, is prepared
Due diligence procedures entail a company’s attorneys and
and distributed. Finally, all parties are made aware of the
underwriters reviewing a company and its management,
confidential nature of the discussions.
including, but not limited to, visiting facility sites; reviewing
• Discussions about the offering—This is lengthy and significant agreements and contracts, financial statements,
detailed. It covers information about the following: tax returns and board of directors’ and shareholders’ meeting
minutes; and performing various analyses of the company
–– The minimum size and composition of the offering in
and the industry in which it operates. Due diligence also
terms of primary versus secondary shares sold;
encompasses reading the entire registration statement by
–– The target price range and whether there is a need all parties involved in its preparation to ensure there are no
for a pre-IPO stock split to move the share price of the material misstatements, omissions or inconsistencies.
company into the target price range;
A company’s attorneys and its underwriters’ attorneys will
–– Fees and expenses to be incurred; also distribute questionnaires to the directors and officers,
requesting them to review, verify and comment on the
–– Use of the proceeds;
information contained in the draft registration statement.
–– Distribution of the shares; In addition, the directors and officers may be interviewed by
the attorneys.
–– Agreement to a “lock-up” period;
“Keeping current” procedures are performed by the
–– Registration rights of “early holders,” especially venture
independent auditors to ascertain whether anything has
capitalists who may want to cash out as part of the IPO or
occurred through the effective date of the registration
soon thereafter; and
statement with respect to the company’s financial position or
–– Directed share programs, whereby designated operations that would have a material effect on the audited
individuals are allocated shares during the IPO and are financial statements included in the registration statement.
able to buy them at the IPO price.

56 Roadmap for an IPO: A guide to going public

 Navigating the IPO process

As part of their due diligence procedures, underwriters

request comfort letters from a company’s independent
auditors. Comfort letters address information that appears in
the registration statement outside of the financial statements,
as well as events subsequent to the auditor’s report date.
It is common for underwriters to request comfort on as
much information as possible. Auditing standards allow
auditors to provide comfort on information that is derived
from accounting records that are subject to the company’s
internal control over financial reporting. Generally, the more
information the underwriters seek comfort on, the more
expensive the process becomes. In light of this and to avoid
any misunderstandings and undue delays, it is important that
in the early stages of the registration process, a company,
its auditors and underwriters agree on the information on
which the auditors will be giving comfort.
Generally, two comfort letters are issued to the
underwriters—one at the time the underwriting agreement
is signed (generally the pricing date) and one (an updated Days 61–90
letter or “bring-down letter”) at the closing date. After
Timeliness of financial information and
the registration statement is filed, but before it becomes
effective, the principal underwriter holds a due diligence going “stale”
meeting. The due diligence meeting is attended by the The financial information in a registration statement that
principal underwriter and often by members of the is publicly filed must comply with the SEC staleness rules
underwriting group, as well as by a company’s principal on the filing date. The balancing act of preparing timely
officers and counsel, the underwriters’ counsel and the financial information while keeping up with the business-
auditors. At this meeting, the members of the underwriting as-usual workload can be a challenging aspect of executing
group are given the opportunity to exercise due diligence an IPO. The financial information filed with the SEC must be
regarding the proposed offering, in that they may ask any updated continuously throughout the public filing process.
questions concerning the company and its business, products, The table below illustrates the dates at which the latest
competitive position, recent developments in finance, available financial statements become stale, assuming a
marketing, operations and future prospects. calendar year-end company.

Reporting period Stale date

• Nine months ended • After February 14, 20x21,2
September 30, 20x1
Useful tip
• Year ended December • After May 14, 20x22,3
As distracting as the IPO may be, companies must keep a 31, 20x1
keen eye on their business. IPOs can be so absorbing that
management loses track of day-to-day business concerns. Good • Three months ended • After August 12, 20x22,3
project management is essential to navigating a successful IPO March 31, 20x2
process while maintaining focus on the day-to-day business. It
• Six months ended June • After November
may be useful to use project management tools and appoint an
IPO team captain to manage the process. Be cognizant of the
30, 20x2 12, 20x22,3
potential for distraction and plan for it to ensure the business 1 The gap between effectiveness of registration and latest audit period end cannot exceed more
than 45 days after the most recently completed fiscal year end.
does not come out of the IPO process weaker than it went
2 If the stale date falls on a Saturday, Sunday or holiday, the registrant has until the next
into it. business day.
3 The gap between effectiveness of registration and latest unaudited period end cannot exceed
134 days.

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Navigating the IPO process

Also, it is important to consider the timing of the filing Maintaining open communication with the SEC staff serves
relative to potential investor presentations. When to expedite the registration process. Company counsel
presentations to potential investors start toward the end of generally maintains close contact with the SEC staff while
the reporting period window, the potential investors could the registration statement is being reviewed.
ask for more recent financial information given that the
At the time the document is filed, the registration statement
financial information provided is more than a quarter old.
should be complete, and the age requirements of the financial
Filing the registration statement and statements should be met. SEC staff occasionally receive
SEC review incomplete registration statements in an attempt to “get in
line” for the review process but will generally not review
Upon completion, the draft registration statement is sent to incomplete registration statements. If a registrant believes
the printer. To avoid unnecessary reprinting or amending there are extenuating circumstances and the staff should
costs, companies should ensure that this draft is close to final. review an incomplete filing, the matter should be approved
However, it is common for several lengthy drafting sessions by the staff prior to submission.
to occur at the printer. When the registration statement has
been completed, the document, including exhibits, is filed
with the SEC by electronic transmission through EDGAR. The
registration statement must contain appropriate signatures
in typed form and each signatory must manually sign a Useful tip
signature page acknowledging inclusion of his or her typed
signature in the electronic filing. This signature page must If a company has any new or unusual accounting or disclosure
be retained by the company for a period of five years. Once issues, obtaining preliminary SEC clearance before going to
print can save considerable time and expense. The SEC permits
filed with the SEC, registration statements are processed and
a pre-filing review in which companies and their advisors can
reviewed by the staff of the SEC’s Division of Corporation
discuss any unusual or groundbreaking matters. These issues
Finance, generally consisting of an attorney, an accountant may be more easily handled earlier in the process rather than
and a financial analyst. waiting for the SEC’s comment letter.
The SEC has 30 days to perform the initial review and
provide comments on the registration statement. This may
involve consultation with other SEC staff familiar with a
Confidentiality
particular industry (such as mining or petroleum engineers).
The staff reviews the documents to determine whether there Historically, when a registration statement was submitted to
is full and fair disclosure, particularly to determine whether the SEC for review, it became immediately available to the
or not the document contains misstatements or omissions public via EDGAR. However, companies are now permitted
of material facts. The SEC review, however, cannot be relied to submit their registration statements on a confidential basis
upon to assure the accuracy or completeness of the data. with the SEC.
The review of financial data is performed by a staff The initial confidential submission and all amendments must
accountant who reads the entire prospectus and the be publicly filed with the SEC no later than 15 calendar days
remainder of the registration statement to become familiar before the date on which the issuer conducts a roadshow.
with the company and its business. The staff accountant This 15-day period (sometimes referred to as a “seasoning
may also refer to published annual and interim reports, the period”) is designed to provide potential investors with
company’s website, newspaper articles and the Internet for ample time to review the information previously submitted
information regarding the company and its industry. This on a confidential basis. If the company does not make use
review is primarily directed at the financial statements, of a roadshow (or communications that would constitute
other financial data and the independent auditor’s report. a roadshow), then its registration statement and prior
Its purpose is to determine whether the data complies with confidential submissions should be publicly filed no later
SEC regulations and all applicable authoritative accounting than 15 calendar days before the anticipated effective date of
literature, as well as with various SEC staff interpretations the registration statement.
and policies dealing with accounting and auditing issues.
If a company decides to abandon its transaction, the
The SEC’s Division of Corporation Finance currently uses information previously submitted to the SEC will not
a risk-based selective review process to decide whether a become public and that information would be exempt from
further review is warranted. If a document is selected for disclosure.
review, it can entail a full legal and accounting review, a
There may, however, be reasons why a company might want
full accounting review or a targeted review. Sarbanes-Oxley
to opt for a public submission from the outset. For instance,
requires that once a company becomes a registrant, it be
if a company is concurrently seeking a strategic or financial
reviewed no less than once every three years.

58 Roadmap for an IPO: A guide to going public

 Navigating the IPO process

buyer, the public availability of the initial registration Each comment in the staff’s letter must be addressed and
statement may encourage potential acquirers to come resolved in writing before the registration statement can
forward as a result of the credibility that results from the become effective. If revisions are necessary, they are made
pursuit of an IPO and the transparency the Form S-1 brings in an amended registration statement that is also filed via
regarding the financial success of the company. EDGAR. After the filing is effective, the comment letters and
the company’s responses are publicly available via EDGAR.
The waiting period
In addition, significant developments often occur during
Once the registration statement has been filed, the “waiting the period subsequent to filing the initial registration
period” or “cooling–off period” begins and continues up to statement and prior to final SEC approval and these must be
the effective date of the registration. During this period, reported. If a development is materially adverse, for example,
there are restrictions on the activities the company and the it would obviously affect the offering’s attractiveness.
underwriter can undertake. During the waiting period, Conversely, a positive development, such as the favorable
the underwriters may accept “indications of interest” from settlement of a major lawsuit, might reduce uncertainty
potential purchasers, but no actual sales can be made until about a company and its future. In other words, any interim
after the effective date. developments that materially affect a company and its
prospects must be disclosed via amendments to the initial
Days 91 onward registration statement.
Responding to SEC comment letters and A company can generally expect it to take approximately 30
preparing the amended registration statement calendar days from the time the registration statement is filed
After review of the registration statement, the SEC staff with the SEC for the staff to complete its initial review and
typically issues a comment letter that sets forth questions, issue comments. Thereafter, a company can expect to receive
possible deficiencies and suggested revisions. Submission several subsequent comment letters from SEC staff outlining
of a carefully prepared registration statement usually limits follow-up questions on responses to original comments
staff comments. While differences of opinion sometimes or additional comments on new or amended information
exist as to the propriety of a particular comment or included in the registration statement. Generally these
request, most comments and suggestions made by the staff responses range from two weeks (second filing) to a week or
are constructive. less (subsequent filings).

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Navigating the IPO process

In addition to filing the registration statement with the of the business. The credibility projected by a management
SEC, the company must make filings in the states in which team during its presentation and its ability to respond to
the company intends to offer the securities, as well as potential investors’ and brokers’ questions will have a major
with FINRA. Companies are required to publicly file the impact on the success of the offering.
initial confidential submission and all amendments with the
The roadshows represent a critical part of a company’s selling
SEC no later than 15 calendar days before the date on which
efforts, since it is here that a management team promotes
they conduct a roadshow.
interest in the offering with the institutional investors.
The preliminary prospectus or “red herring” This can be a very grueling process since the roadshow
can last up to two weeks with several presentations a day.
A preliminary prospectus may be sent to interested In addition, a company cannot discount the fact that in an
institutions or persons prior to the effective date of the active market, it becomes more difficult to pique institutional
registration statement. The registration statement must be investors’ interest if they are attending three to five similar
amended to include all information required by Regulation presentations in a day.
S-X before distributing the preliminary prospectus to
investors and becoming effective. Companies are now Undoubtedly, underwriters will play a significant role in
encouraged not to print the preliminary prospectus until SEC preparing a management team for these presentations.
comments have been received, reviewed and incorporated Additionally, some companies have sought assistance from
into the draft prospectus. SEC rules require that this professional investor relations organizations. Although a
prospectus substantially conform to the requirements company may have a good story to tell, these advisors can
of the 1933 Act and that the cover page bear the caption help tailor it to investors.
“Preliminary Prospectus.”
Negotiating and signing the price amendment
Prior to the full implementation of EDGAR, this language and the underwriting agreement
was required to be printed in red ink (hence the term “red
herring”). The following statement must be printed on the By the time the registration statement has been filed,
cover in type as large as that generally used in the body of a company and its underwriter have generally agreed
the prospectus: on the securities to be sold—both the number of shares
and dollar amount. However, the final price at which to
Information contained herein is subject to completion or offer the securities to the public, the exact amount of the
amendment. A registration statement relating to these underwriter’s discount and the net proceeds to the registrant
securities has been filed with the SEC. These securities have not yet been determined. The negotiation and final
may not be sold nor may offers to buy be accepted prior determination of these amounts depend on a number of
to the time the registration statement becomes effective. factors, including the past and present performance of the
This prospectus shall not constitute an offer to sell or company, current conditions in the securities markets and
the solicitation of an offer to buy, nor shall there be any indications of interest received during the roadshow.
sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or In establishing an offering price, the underwriters will look
qualification under the securities laws of any such State. at a multiple of revenue, earnings or cash flow based upon
that of similar companies. These multiples will be applied
SEC rules also stipulate that the preliminary prospectus to the company’s most recent results of operations and their
may omit the offering price, underwriting discounts or projected future results. The underwriter will also examine
commissions, discounts or commissions to dealers, amount of the current stock market price of comparable companies to
proceeds or other matters dependent on the offering price. assess current market sentiment in the relevant sector.
Financial analyst meetings or roadshows Another consideration is the IPO discount. A typical IPO
discount is 10-20 percent. In other words, the initial
For potential investors to learn about the company, an
offering price should allow for a small appreciation
underwriter arranges meetings, called roadshows, with
of the price per share in the aftermarket immediately
financial analysts, brokers and potential institutional
subsequent to the IPO. After a period of trading, the stock
investors. These meetings are generally attended by the
should settle at an aftermarket share value in line with its
company’s key executives and may take place at various
comparable companies.
locations around the country or the world.
Timing plays as important a part as any other factor in
It is vital that the management team be well prepared
determining the final offering price of the shares. Almost any
for these meetings. This cannot be emphasized enough.
company that went public during the dot-com boom would
Executives should not assume that the prospectus is able to
have done so at a higher offering price than it would have
stand on its own—rather, they should anticipate and know
during the economic crises that began in 2008. In addition
the answers to potential questions concerning the specifics
to cyclical market factors, particular industries go through

60 Roadmap for an IPO: A guide to going public

 Navigating the IPO process

hot and cold periods. Stocks sold through the public market If the staff of the SEC’s Division of Corporation Finance has
are often impacted by market sentiment, either positively no important reservations with respect to the registration
or negatively. statement, a company and its underwriter will customarily
request that the offering be declared effective immediately—
Upon completion of negotiations with the underwriter—
referred to as requesting acceleration. If acceleration is
usually about the time the registration statement is
granted, the underwriter may proceed with the sale of
ready to become effective and the roadshow is over—
securities to the public.
the underwriting agreement is signed by authorized
representatives of a company and the underwriter. Also at Holding the closing meeting
this time, the final amendment to the registration statement
is prepared, including (as applicable) the agreed-upon The closing date—This date is generally specified in the
offering price, underwriter’s discount or commission and the underwriting agreement and is usually within three to five
net proceeds to the company. This amendment is called the business days after the pricing of the offering. At closing, a
pricing amendment and is filed with the SEC. company delivers the registered securities to the underwriter
and receives payment for the issue. Various documents,
In an effort to simplify the filing requirements associated including the bring-down letter prepared by the independent
with the final pricing amendment, the SEC passed a rule auditors, are also exchanged.
allowing companies to omit information concerning the
public offering price, price-related information and the Overallotment or “greenshoe” option—If an offering trades
underwriting syndicate from a registration statement well following pricing, the company and its underwriters
that is declared effective. In such cases, the information may exercise an overallotment option, selling more shares
omitted would either be included in the final prospectus than originally planned. “Greenshoe” options are capped
and incorporated by reference into the registration at 15 percent of the shares offered, but they can be less.
statement or included in a post-effective amendment to the Overallotment options provide book runners a useful tool for
registration statement. managing the initial trading of an IPO.

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Navigating the IPO process

Summary timing, participants and roles and responsibilities

The following graph outlines a typical execution timeline involving key participants in an IPO for the period leading up to and
after an offering.

Prior to Prior to Prior to Effective date 3–7 days after Thereafter

filing date completion of effective date effective date
roadshow
Company • Begin quiet • Begin • Execute • Provide • Provide
period  cooling-off underwriting certificates additional
period agreement certificates
• Hold an all- • Collect proceeds
hands meeting • Executives • Issue • Collect
perform press release additional
• Select roadshow proceeds
printer and (overallotment
transfer agent or “greenshoe”
• Clean up option)
financial
statements;
ensure
compliance with
Regulation S-X

Company counsel • Perform • Clear • File pricing • Deliver • Update closing

housekeeping of SEC comments amendment documents/ documents
company records opinions
• Request
• Draft Form S-1 acceleration
• File w/the SEC • File final
registration
• File FINRA listing statement
application

Independent • Complete • Audit/review • Deliver draft • Deliver final • Deliver • Deliver second
auditor audit of annual updated financial comfort letter comfort letter bring down bring down
financial statements, comfort letter comfort letter
statements if necessary
and review of
interim financial • Respond to SEC
statements comment letters

• Review
registration
statement

Advisory • Advise the • Advise the • Advise the

accountant company on company on company
the financial the updated on ongoing
statements, registration reporting and
technical statement compliance
accounting issues requirements as a
and registration public entity
statement,
including any pro
forma financial
information

62 Roadmap for an IPO: A guide to going public

 Navigating the IPO process

Prior to Prior to Prior to Effective date 3–7 days after Thereafter

filing date completion of effective date effective date
roadshow
Investment banker • Assess market • Distribute • Form syndicate • Execute • Provide net • Exercise
or underwriter opportunity “red herring” underwriting proceeds overallotment
agreement option
• Continue • Orchestrate
due diligence roadshow • Make
determination
• Solicit about issuing
expressions research report
of interest

Capital • Advise company • Advise company on key decisions

markets advisor on underwriter
selection and • Serve as sounding board regarding advice provided by the investment banks
positioning
itself with
underwriters’
equity story
and valuation

Underwriters’ • Begin • Clear FINRA • Continue • Assist in closing • Assist in

counsel due diligence regulation due diligence second closing
comments
• Prepare FINRA
regulation filing
• Undertake “Blue
Sky” filings

Financial printer • Print preliminary • Print final

registration registration
statement/ statement/
prospectus prospectus
(“red herring”)
• Produce SEC &
FINRA regulation
filing packages

SEC • Review • Declare offering

preliminary effective
registration
statement
• Issue
comment letters

FINRA regulation • Review • Address • Declare no

preliminary comments objections
registration
statement
• Issue
comment letters

Roadmap for an IPO: A guide to going public 63

64 Roadmap for an IPO: A guide to going public
 We are public! Now what?

Public companies must proactively manage their reputations by communicating regularly

with investors, analysts and the financial media. Regular communication will help them
maintain a positive image and make sure their story is being told accurately. The public’s
perception of a company has a direct effect on the value of its stock. Do not underestimate it.
Life as a public company also means getting comfortable with the cadence of quarterly and
annual reporting requirements, their content and costs.

Preparation for life as a Companies should discuss their categorization in detail

with their counsel and accountants. However, the general
public company guidelines for the categories are as follows:
The IPO is not the end of the story—it is only the beginning. • Large accelerated filer—A company whose market value
Once listed, a company will be under far greater public of publicly floated equity is equal to or exceeds $700
scrutiny and will have a range of continuing obligations. million as of the last business day of the company’s most
Any weakness in systems or failure to comply with recently completed second fiscal quarter.
regulations could publicly embarrass management, damage
the company’s reputation and potentially result in criminal • Accelerated filer—A company whose market value of
and civil liability. The benefits of careful preparation and publicly floated equity is between $75 million and $700
planning are realized within the first year of the IPO. million as of the last business day of the company’s most
recently completed second fiscal quarter.
Understand your reporting obligations
In addition to the market capitalization requirements, to be
Public companies are required by the SEC, under the 1934 designated as a large accelerated filer or an accelerated filer,
Act and Sarbanes-Oxley, to file certain periodic reports to a company needs to meet the following conditions as of the
keep the investing public informed. This requirement will end of its fiscal year:
continue as long as the investor and asset tests are met. As
noted previously, preparing to meet these requirements • The company has been subject to SEC reporting
should be a focus for a company as it creates its filings. requirements (specifically Section 13(a) or 15(d) of the
Companies should discuss their obligations under the 1934 Act) for a period of at least 12 calendar months;
various regulations with their attorneys and accountants • The company has previously filed at least one annual
at the beginning to lay out the obligations and ensure they report pursuant to Section 13(a) and 15(d); and
can be met. A financial public relations firm can assist
companies with furnishing annual reports to shareholders. • The company is not eligible to use the requirements
for SRCs.
SEC-designated filer status
Companies not meeting these definitions are considered
The SEC designates companies into three categories of non-accelerated filers. Note that companies will generally
filers to determine filing deadlines for Forms 10-K and be considered non-accelerated filers in the first year as
10-Q. The SEC has also designated an SRC filer option. The a public company, as the requirements are calculated at
distinction among the different categories is based on the the fiscal year end and a newly public company would
non-affiliated (i.e., excluding large institutional investors, generally not have filed an annual report for the prior
directors, officers, etc.) market capitalization (also known year. Accelerated filer status must be considered at each
as “public float”) of companies as of the last business day year end to determine whether the designated filer status
of the company’s most recently completed second quarter. has changed.

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We are public! Now what?

What forms will I have to prepare?

The table below presents an overview of the basic SEC reporting forms and requirements for public companies based on their
designated filer status.

Form Description Due date based on designation

Form 10-K This is the annual report to shareholders (conforming • Large accelerated filer—60 days after
to SEC specifications) and it discloses detailed fiscal year end
information about the company’s activities, risks,
• Accelerated filer—75 days after fiscal
financial condition and results of operations. It also
year end
contains the company’s audited annual financial
statements, which include the external auditor’s • Non-accelerated filer—90 days after
opinion of financial statements and Section 404 of fiscal year end
Sarbanes-Oxley (only required from the second Form
• Newly public company—90 days after
10-K filed after going public).
fiscal year end
Form 10-Q This is the quarterly report required for each of the • Large accelerated filer—40 days after
first three quarters of the fiscal year. It includes fiscal quarter end
condensed financial data and information on
• Accelerated filer—40 days after fiscal
significant events. In addition, SEC rules require
quarter end
that the interim financial information included in
the quarterly report be subject to a review by an • Non-accelerated filer—45 days after
independent auditor prior to filing. fiscal quarter end
• Newly public company—45 days after
fiscal quarter end
Form 8-K This is a report filed for significant events such as an • Due within four business days of event
acquisition or disposal of assets; a change in control;
bankruptcy; a change in independent auditor;
resignation of directors because of disagreement
with the registrant; the entry into a material
definitive agreement; creation of direct obligations
or obligations under off-balance sheet arrangements;
a commitment to a plan involving exit or disposal
activities; asset impairments; and when a company
concludes, or is advised by its independent auditor,
that previously issued financial statements should no
longer be relied upon.
Proxy information This contains data furnished to shareholders so • Due dates vary
they can decide how to assign their statements’
proxies (votes).

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 We are public! Now what?

Preparation of a reporting calendar the inability to meet these requirements will shake investor
confidence or subject the company to a delisting. To meet
Public companies are required to comply with a host of
the various reporting requirements imposed on them, public
reporting and other requirements. The most significant
companies must maintain adequate financial staff, supported
change for many companies is the need to close and report
by legal counsel and knowledgeable independent auditors.
publicly on their financial results on an accelerated timeline
and to comply with Sarbanes-Oxley requirements. This is a The following is a sample compliance calendar assuming that
process the company will need to be fully prepared to meet as the registrant has a calendar fiscal year.

6/30/x1 Fiscal year 20x1 second quarter end

7/17/x1 Effective date of registration statement—company becomes a reporting company

8/31/x1 (1) Second quarter Form 10-Q due (unless 6/30/x1 financials are included and discussed in
registration statement)

9/30/x1 Fiscal year 20x1 third quarter end

11/15/x1 Third quarter Form 10-Q due

12/31/x1 Fiscal year 20x1 year end

3/01/x2 (2) Initiate proxy search

3/15/x2 File Preliminary Proxy Statement and form of Proxy with the SEC and FINRA, if necessary

3/31/x2 Fiscal year 20x1 Form 10-K due

3/31/x2 Fiscal year 20x2 first quarter end

4/02/x2 (2) Record date—Annual Meeting of Shareholders

4/16/x2 (2) File Definitive Proxy Statement, form of Proxy and Annual Report to Shareholders

4/16/x2 (2) Mail Definitive Proxy Statement, form of Proxy and Annual Report to Shareholders

5/15/x2 First quarter Form 10-Q due

5/30/x2 Annual Meeting of Shareholders

7/16/x2 Section 11(a) earnings statement available to security holders as soon as possible covering a
period of at least 12 months beginning after the effective date of the registration statement
(1) A first-time registrant is required to file its first 10-Q by the later of: (i) 45 days after the effective date of the initial registration statement or (ii) the date on which the Form 10-Q would have been
otherwise due.
Note: Such a concept does not apply to Form 10-K filed after an IPO under Section 12. For an equity offering (which is typically filed under Section 12) completed shortly after year end, the Form 10-K
would be due 90 days after the registrant’s year end.
(2) Depends on timing of meeting.
Note: If a filing date falls on a Saturday, Sunday or holiday, the document may be filed on the next business day (Rule 0-3(a)).

Roadmap for an IPO: A guide to going public 67

We are public! Now what?

Maintain investor enthusiasm Maintain regulatory compliance

Once a company is public, considerable effort must be Understand reporting requirements under Sarbanes-Oxley
expended to maintain its market position. If investor
The management of a newly public company is required
enthusiasm for a company is not maintained, trading will
to deliver a report that assesses the effectiveness of the
decline. If a company’s shares are thinly traded, the benefits
company’s internal control over financial reporting in the
sought from the IPO (such as liquidity through a future
second annual report filed subsequent to the IPO, pursuant
secondary offering) will not be realized. Thus, effective
to Section 302 of Sarbanes-Oxley. Section 404 of Sarbanes-
distribution and support of the stock, as well as continuing
Oxley also requires a company’s independent registered
security analyst interest, is necessary after the IPO.
public accounting firm to deliver an attestation report on
A strategy for aftermarket support can be created with the the operating effectiveness of the company’s internal control
assistance of a financial public relations firm. This strategy over financial reporting. The independent accounting firm
usually includes choosing an individual within the company must also give its opinion of a company’s audited financial
to handle shareholder relations as well as assistance from an statements as of the same date.
external firm. This helps ensure the release of information
EGCs are exempt from the requirement to obtain an audit of
that is uniform and accurate.
internal control over financial reporting. It is important to
A public company’s performance, as perceived by the market, note that this exemption only applies to the internal control
is reflected in the value of its stock. Management faces the audit requirements (Sarbanes-Oxley Section 404(b)). EGCs
pressure of balancing short-term productivity with long- are not exempt from the requirement for management to
term goals. Negative developments, such as the release of assess internal controls over financial reporting (Sarbanes-
lower-than-expected earnings, may adversely affect the Oxley Section 404(a)) beginning with the company’s
stock’s value. Management will need to ensure that all second annual report. Regardless, a company must perform
communications with external parties fully explain corporate substantial work to implement the appropriate processes,
results. Transparency in reporting will create greater document the system of internal control over key processes,
market trust. assess control design, remediate any deficiencies identified
and test the operation of controls. These processes can be
Earnings are not the only factor that affects the public’s
both costly and challenging.
perception of a company. Even after a company goes public,
it should strive to maintain (or improve) the characteristics Comply with XBRL reporting
that it desired to possess prior to going public. After the IPO,
Since 2011, all SEC registrants have been required to provide
companies should consider the following:
their financial statements and financial statement schedules
• Is the company demonstrating a sustained or increasing to the SEC and post them on their corporate websites in
growth rate that is high enough to attract/satisfy investors? interactive data format using eXtensible Business Reporting
A company must continue to grow at a rate satisfactory Language (XBRL). This will be a new endeavor for many non-
to investors; its share value will be determined to a large public companies and will require additional effort from the
extent by the company’s earnings potential. finance department each reporting period.
• Are the company’s products or services highly visible and Provide timely disclosure of material information
of interest to the consuming and investing public? The
A public company should disclose all material information
company should project a positive image to investors,
(unless there is a legitimate reason for not doing so),
customers and the community. This is important, since
both favorable and unfavorable, as promptly as possible.
the attitude of the public may sway the stock’s value. For
Information that is generally considered material includes
example, today there is a growing interest in corporate
significant financial transactions, new products or services,
social responsibility, including sustainability and climate
acquisitions or dispositions of assets, dividend changes and
change issues. Companies need a strategy to address
top management or control changes.
such concerns.
The disclosure of such information should be made as soon as
• Is management capable and committed? Management
(1) it is reasonably accurate, and (2) full details are available
plays a key role in the way a company performs; therefore,
to the company. This information is usually disseminated by
it is essential that management remains innovative,
press releases; however, companies may decide to also send
committed and capable.
announcements directly to their shareholders. Generally,
the need to disclose information should be discussed with
legal counsel.

68 Roadmap for an IPO: A guide to going public

 We are public! Now what?

It should be noted that when a release or public 2. Every risk factor need not be identified to gain protection
announcement discloses material non-public information under the safe harbor. “Boilerplate warnings,” however,
regarding a registrant’s results of operations or financial will not suffice as meaningful cautionary language.
condition, Item 2.02 Form 8-K requires that the release
The statutory safe harbor provision does not require a
be identified and included as an exhibit to a Form 8-K
company to update forward-looking statements. While
filing within four business days. In addition, Regulation
companies are not legally required to update such
FD requires that when an issuer or person acting on its
information, materially changed circumstances may
behalf, discloses material non-public information to
nonetheless have to be disclosed as dictated by MD&A
certain enumerated persons (in general, securities market
disclosure requirements. From a business and investor
professionals and holders of the issuer’s securities who may
relations standpoint, companies should consider updating
well trade on the basis of the information), it must make
such information.
public that information.
A newly public company should ensure that, when disclosing
Comply with safe harbor provisions
forward-looking information in annual reports and press
The Private Securities Litigation Reform Act of 1995 releases, the requirements for using the safe harbor
provides a safe harbor for forward-looking statements, provision are appropriately met. Legal counsel is invaluable
such as forecasts, projections and other similar disclosures in providing the necessary guidance. Such guidance is
in the MD&A. A safe harbor encourages registrants to particularly essential when forward-looking information is
disclose forward-looking information and protects them communicated orally (e.g., in conference calls with analysts).
from investor lawsuits if the forward-looking information
Restrict trading on non-public information
does not materialize. This protection does not extend to
statements which, when issued, were known to be false. A Until important information is made public, SEC rules
safe harbor applies to any form of written communication prohibit company insiders from personally trading the
(e.g., press releases, letters to shareholders) as well as oral company’s securities or passing this information onto others.
communications (e.g., telephone calls, analyst meetings) that Within the company, material information should be kept
contain forward-looking information. confidential. Persons privy to this information must treat it
as confidential until it is released to the public. In the past,
It should be noted that the safe harbor provision is not
violators of this rule have been dealt with harshly (fined or
applicable to historical financial statements or to forward-
otherwise penalized).
looking statements included in IPO registration statements.
However, the statutory safe harbor does not replace or alter Perform fiduciary duties
the current judicial “bespeaks caution” doctrine, on which
Fiduciary laws require that transactions between a company
the safe harbor rules were modeled. The bespeaks caution
and any of its officers, directors or large shareholders be
doctrine applies to registration statements and generally
fair to the company. These laws apply to both privately and
provides that, to the extent an offering statement (such as
publicly held companies. However, since the officers and
a prospectus) contains a forward-looking statement with
directors of a privately held company are usually its only
sufficient cautionary language, an action brought about as
shareholders, the ramifications of fiduciary laws are less than
a result of such a statement could be dismissed on those
what they might be for a publicly held company.
grounds.
Fiduciary laws must be carefully observed after a public
To avail itself of the safe harbor provision, forward-
offering due to the interests of the new shareholders.
looking information must be clearly identified as such by
Whenever there is a potential conflict of interest between
the company and must be accompanied by a cautionary
the company and its fiduciaries, management should obtain
statement identifying the risk factors that may prevent the
independent appraisals or bids and independent director
realization of the forward-looking information. In meeting
approval (or even shareholder approval), depending on the
these criteria, the following two points should be noted:
nature and significance of the transaction.
1. The forward-looking statements should be specifically
identified. A general statement such as “certain
information contained in this annual report is forward-
looking...” does not clearly identify the forward-
looking statements.

Roadmap for an IPO: A guide to going public 69

70 Roadmap for an IPO: A guide to going public
 Conclusion

When you are pursuing an IPO, having an advisor with the right experience and insight can
make the difference in helping you achieve your objectives. You need to be ready when the
capital market window opens.

An IPO is a transformational event, requiring many different An experienced advisor can help the “going public”
parts of the business to work together toward a common and “being public” processes stay on track. At PwC, our
goal. There will be multiple workstreams, from drafting unique vantage point allows us to spot opportunities
the registration statement, to preparing and auditing to help advance your strategic agenda. Our deals
financial information, legal and tax structuring, creating strategy, investment banking advisory, execution and
new governance structures, developing the equity story, implementation professionals not only give us a holistic
selecting underwriters and research analysts, providing and deep knowledge of your business, but also insights and
input into valuation, identifying and educating key ideas across sectors and geographies.
investors, preparing for the roadshow and readying the
We will assist in the development and execution of an IPO
organization for life as a public company.
strategy that drives your long-term growth agenda, while
For many companies this will present a significant delivering value in the short term.
cultural shift and adjustment period. Improved
Whether you are a venture or private equity backed
business fundamentals will increase your chances for a
company contemplating your exit or a privately held
successful transaction. Once the transaction is complete,
company seeking to expand, PwC can provide a full range of
your company will need to be ready for new timelines and
advisory services to support your IPO.
business cycles, incremental financial and operational
data needs and transparency in meeting shareholder To learn more about how PwC can support your specific
expectations. The organization needs to effectively operate growth objectives and paths to capital, please visit
as a public company and scale its operations. www.pwc.com/us/iposervices.

Roadmap for an IPO: A guide to going public 71

72 Roadmap for an IPO: A guide to going public
 How PwC can help
PwC’s comprehensive IPO services brings together an general finance and accounting processes and
integrated set of solutions to help companies as they management reporting
prepare for the public markets. The following chart
• Documentation, identification and assistance with
illustrates many of the areas an organization will need
resolution of critical, complex and judgmental accounting
to focus on to improve as the organization embarks on
issues and policies
the going public process and transitions to operate as a
public company. • Development of responses to SEC comment letters
PwC may advise clients in the following areas*: • Development of Article 11 pro forma support schedules
with financial data and pro forma adjustments
Accounting and financial reporting
Capital markets advisory
• Development of SEC financial statements and disclosures
• Development of IPO story and identification of KPIs
• Development of MD&A, summary/selected financial
data, capitalization/dilution tables and other financial • Identification of client’s comparables
data in a registration statement, prospectus or
• Advisor selection process including underwriters,
offering memorandum
research analysts and exchange
• Improvement of finance organization, close process,
• Analyst and roadshow presentations

Capital Accounting
markets and financial
advisory reporting

Financial
Governance
planning
and leadership
and analysis
no
Tech logy

Corporate Internal
strategy and controls and
development internal audit
IPO Services

Pr
oj ry
Enterprise ect
dv iso
Man
risk agem ent A Tax
management

Executive
Treasury compensation
and HR

Roadmap for an IPO: A guide to going public 73

How PwC can help

Project management advisory Executive compensation & HR

• Development of flexible and scalable project • Benchmarking, program planning and design of executive
management solutions compensation program
• Development of project governance structure, • Preparation of compensation and governance disclosures
communication framework and status
• HR systems and processes
reporting mechanism
Financial planning and analysis
• Development of readiness assessment, timelines and
project plans • Improvement of budgeting, planning and analysis function
and related processes
• Development of an issue resolution framework and
organization around complex workstream structures Treasury
• Options to accelerate IPO closing process • Development of treasury strategy
Tax • Improvement of bank and cash management infrastructure
• Application of ASC 740, “Tax Provisions,” accounting • Selection and implementation of treasury systems
and disclosures and processes
• Application of Foreign Account Tax Compliance Corporate strategy & development
Act (FATCA)
• Improvement of capital structure and evaluation of
• Tax department organizational design, tax processes financing alternatives
and controls
• Development of a strategic plan to increase value
• Legal entity restructuring
Governance and leadership
• Development of jurisdiction and domicile tax plan
• New governance requirements
Internal controls and internal audit
• Board and audit committee composition
• Development of an internal audit function
• Development of charters, bylaws and
• Evaluation of internal audit co-sourcing and whistleblower program
outsourcing solutions
Enterprise risk management
• SOX readiness assessment and development of a
• Implementation of risk management framework
remediation plan
and processes
• Internal control documentation, internal control testing
• Evaluation of risk management assessment and evaluation
and development of CEO/CFO annual and quarterly
of capabilities
certification process
• Development or refinement of risk management framework

(*) PwC may not be able to provide all of these services to PwC audit
clients or clients with independence restrictions.

74 Roadmap for an IPO: A guide to going public

 How PwC can help

The benefits of having PwC as an • A proven track record involving thousands of complex IPOs
to help you move forward quickly and efficiently;
advisor on your IPO
• Proactive resolution of issues resulting in fewer surprises
PwC offers: and delays in your IPO process; and
• A uniquely positioned firm that has mobilized a • Deep technical skills combined with in-depth industry
comprehensive set of integrated services to help you from knowledge and experience that helps us provide
the strategic planning stage through the execution of specialized services tailored to your unique needs.
your IPO and then to prepare for life as a public company
and beyond;
• A dedicated team of professionals specializing in IPOs, who
can leverage the power of PwC’s global reach, our broad
advisory and tax capabilities to address all components of
your offering;

What our clients are saying about IPO readiness

“We had a huge initiative to get to our “It was a huge undertaking to get through the
IPO. PwC brought their ‘A game’– their Registration process. PwC’s commitment and
depth of technical expertise, cross functional effort enabled our portfolio company to overcome
approach to an IPO and overall leadership language, cultural and technical hurdles literally
skills helped us to achieve our IPO in a very on a global scale. They assembled a strong team,
short timeframe.” accessed critical internal channels and were
— CFO, Energy Company highly responsive throughout the process.”
—CFO, Private Equity Firm

“The PwC team was outstanding and

they certainly made the path getting to
“A lot of firms can help with the project. bell-ringing much more tolerable than
The difference is the people. PwC brings it would have been otherwise. We all
“PwC is a great firm, appreciated their support very much.”
an experienced service team that
but service comes down to
understands our company and the — Senior Vice President & Chief Accounting
people, and they are truly a
transaction challenges, and knows how Officer, Hospitality Company
fantastic service provider.”
best to get the work done.”
—CFO, Private Equity Firm
—Chief Accounting Officer/Controller,
Manufacturing Company

“We really appreciate

all the great work the PwC
“We never did an IPO assessment and I team did on our offering.
wish we would have. It would have made Your help got us through
the IPO process much easier. It was much critical junctures–technical
“PwC is really the only choice more intense and time consuming than I accounting hurdles, due
when it comes to IPO work.” had expected.” diligence support and S-1
—Corporate Controller & —Corporate Controller & Chief crunch time. Great work!”
Chief Accounting Officer, Accounting Officer, Technology Company —Treasurer, Energy Company
Technology Company

Roadmap for an IPO: A guide to going public 75

How PwC can help

Selected PwC non-audit client IPOs

Below is a representative list of non-audit clients where we have provided IPO services during the IPO process.

Client Sector Deal Size Client Sector Deal Size Client Sector Deal Size
(in millions) (in millions) (in millions)

T $3,400 O&G $385 O&G $281

A $893 P&U $330 T $233

EMC $650 CM $319 IM $232

T $480 M $317 T $91

E&C $400 AWM $308 E&C $82

Selected PwC audit client IPOs

Below is a representative list of audit clients where we have provided audit, audit related and certain IPO services during the IPO process. Note, we
cannot provide all of the services listed in this publication to our audit clients or clients with independence restrictions.

Client Sector Deal Size Client Sector Deal Size Client Sector Deal Size
(in millions) (in millions) (in millions)

T $21,767 CM $391 T $146

O&G $633 O&G $275 PLS $139

E&C $575 REIT $225 PLS $134

REIT $560 C $190 T $127

CM $427 REIT $180 PLS $72

Legend: Asset & wealth management (AWM), Automotive (A), Chemicals (C), Consumer markets (CM), Engineering & construction (E&C), Entertainment,
media & communications (EMC), Industrial manufacturing (IM), Metals (M), Oil & gas (O&G), Pharma & life sciences (PLS), Power & utilities (P&U), Real
estate investment trust (REIT), Technology (T)

76 Roadmap for an IPO: A guide to going public

 Contact the PwC Deals practice
For a deeper discussion about our services, please contact one of our practice leaders:

Bob Saada
Partner, US Deals Leader
PwC Deals
(646) 471 7219
[email protected]
David Ethridge
Managing Director, US IPO Services Leader
PwC Deals
(212) 845 0739
[email protected]
Alan Jones
Partner, US IPO Services
PwC Deals
(415) 498 7398
[email protected]
Daniel Klausner
Managing Director, US Capital Markets Advisory Leader
PwC Deals
(646) 471-5388
[email protected]

Roadmap for an IPO: A guide to going public 77

78 Roadmap for an IPO: A guide to going public
 More from PwC
 

 
 
 
PwC’s Deals Practice - Capital Markets
US Capital Markets Quarterly Capital
Watch (weekly update) Markets Watch
  Watch
  Capital Markets activity for the week
 

Welcome to PwC's Capital Markets Watch weekly for the week ending Thursday, December 8,
2016. This snapshot of the IPO and the high-yield debt markets in the US includes issuances for the last
week and a look forward. We hope you find the information helpful in staying up to date on new issuance
activity. Please reply to this email if you would like to subscribe others to this weekly email.

For companies considering an IPO or high-yield debt offering, it is useful to understand how quickly
windows of opportunity can open and close, making it important to be well-prepared to enter the market
when that moment arrives. Having solid economics, strong fundamentals and a well prepared story to
market can provide a great foundation for a successful offering. From last week forward, we have revised
sector classifications to align with other PwC Deals publications.

Summary:
4 IPOs priced raising $1.2bn
17 high-yield debt issuances for $9.4bn

IPO Market: As 2016 begins to wind down, the US IPO market saw four IPOs raising $1.2 billion,
including Athene's $1.0 billion mega-IPO, the second largest deal this year. Overall market activity was
slow with two new companies filing and three IPOs expected to price before the winter holidays. In the
broader equity markets, the Dow Jones Industrial Average and the S&P 500 both reached new record
highs on Wednesday.

High-Yield Debt Market: The US high-yield debt market had its most active week in six months with
17 issuances raising $9.4 billion. Continued relative strength in oil prices helped drive refinancings in the
oil and gas sector, with seven issuances accounting for nearly $5.0 billion. The forward calendar fell
slightly from last week with 10 companies seeking to raise $4.1 billion.

Engineering & Construction: No IPOs priced, 1 high-yield debt issuance for $325m

High-yield debt issuances

 Mattamy Homes (home builder) issued $325m 144A for life 6.875% (BB) 7-year unsecured senior
notes to refinance existing revolving credit borrowings

High-yield debt offerings upcoming

 Avison Young (commercial real estate services) is expected to issue $130m in secured notes

www.pwc.com

2016 Annual
US Capital
2016 Annual US Optimize deals

Navigating Your IPO:

Markets Watch
Analysis and trends Capital Markets Navigating
your IPO
How PwC can help
How PwC can help
A publication from
PwC’s Deals practice

January 2017
Watch: Analysis PwC’s Deals Practice
IPO Services

and trends

Optimize deals

Considering an IPO?
Considering an IPO? Exploring an IPO:
Insight into the the 9 ½ questions
A continuing series
Insight into the mindset
of institutional IPO
investors in the US

May 2016

A publication from
PwC’s Deals Practice
mindset of institutional boards should ask
investors in the US

www.pwc.com/us/iposervices

Considering an
Considering an IPO to Material weaknesses:
fuel your company’s Why disclosing them
IPO to fuel your Material weaknesses:
company’s future? Why disclosing them before your
Insight into the costs of IPO may make sense
going public and being public

future? Insight into the before your IPO may

October 2015

A publication
from PwC’s
A publication from Deals practice
PwC Deals

November 2017

costs of going public make sense

and being public

How non-GAAP Private Company

How non-GAAP measures
can impact your IPO measures can impact Liquidity: CEO and
A publication from
PwC's Deals practice

October 2014
your IPO July 2017
A publication from
PwC’s Deals Practice
Private Company
Liquidity: CEO and
CFO Considerations—
A Guide to Secondary
At a Glance

A successful IPO depends CFO Considerations

A Guide to Secondary
on a thorough
understanding of how
non-GAAP measures can
impact the way your
company is viewed by
potential investors
Transactions

Transactions

Roadmap for an IPO: A guide to going public 79

Glossary
1933 Act See Securities Act of 1933. Blue Sky laws
1934 Act See Securities Exchange Act of 1934. The name applied to the securities laws of various states
enacted to protect investors. While the SEC regulations are
Accelerated filer
national in application, various states have securities laws
Domestic reporting companies that have a public float of at that affect public offerings.
least $75 million, that have been subject to the Exchange
Broker
Act’s reporting requirements for at least 12 calendar months
and that have previously filed at least one annual report. A commonly used term applied to individuals or firms
that trade securities. Brokers execute trades of securities
All-hands meeting
between buyers and sellers in return for a fee or
A meeting that occurs during preparation for an IPO commission. Brokers do not own the securities that they
that is attended by company representatives, company trade and, accordingly, do not share in the risks or rewards
counsel, independent auditors, underwriters and of ownership.
underwriters’ counsel.
Capital markets advisor
All-or-none agreement
An independent IPO advisor who can provide perspective
A specific type of a best-efforts underwriting. If the and advice on the company’s equity story, valuation and the
underwriter is not able to sell all of the shares being offered, viability of executing a successful IPO.
none of the shares will be offered and the offering will
Capitalization
be cancelled.
The total amount of a company’s outstanding securities.
Analyst
For purposes of display in a registration statement,
An individual, usually employed by an investment banking capitalization includes short-term debt, long-term debt and
firm, who studies and analyzes an industry and the publicly equity securities.
held companies operating within the industry for the
Cheap stock
purpose of providing investment advice.
Common stock, stock options, warrants or other potentially
Beneficial conversion feature (BCF)
dilutive instruments issued to employees, consultants,
A BCF exists when the conversion price of a convertible directors, promoters or others providing services to an
instrument is below the per share fair value of the issuer at a price lower than the public offering price.
underlying stock into which it is convertible. The instrument
Chief operating decision maker (CODM)
is “in the money” and the holder realizes a benefit to the
extent of the price difference. The person or function that allocates resources to and
assesses the performance of the operating segments. The
Best-efforts agreement
CODM is responsible for making strategic decisions about
An underwriting agreement in which the underwriters use the entity’s segments.
their best efforts to sell the stock; however, the underwriters
Closing
have no obligation to purchase stock not purchased
by investors. The final meeting of the going-public process in which the
company delivers its registered securities to the underwriter
and receives payment for the issue. The closing is usually
three to five business days after the pricing of the offering.

80 Roadmap for an IPO: A guide to going public

 Glossary

Comment letter Dilutive securities

A letter written by the SEC review staff that requests Securities whose issuance or exercise would decrease EPS.
modification to the registration statement or the inclusion
Directors’ and officers’ (D&O) liability insurance
of additional information.
Liability insurance covering directors and officers for claims
Committee of Sponsoring Organizations of the Treadway
made against them while serving on a board of directors
Commission (COSO)
and/or as an officer.
Organization focused on guiding executive management
Directors’ and officers’ (D&O) questionnaires’
and governance entities on relevant aspects of
organizational governance, business ethics, internal control, Questionnaires circulated by the company’s and
enterprise risk management, fraud and financial reporting. underwriters’ counsel during the registration process. The
COSO establishes common internal control models against questionnaires gather and confirm various data that must
which companies and organizations may assess their be disclosed in the registration statement.
control systems. Division of Corporation Finance
Compensation Discussion and Analysis (CD&A) A division of the SEC which, among other things, reviews
A required part of a company’s annual proxy statement. registration statements filed with the SEC.
It provides material information about the compensation Due diligence
objectives and policies for named executive officers.
An investigation conducted by the company’s officers
Compliance and Disclosure Interpretations (C&DIs) and directors, underwriters and lawyers to provide a
Interpretations that reflect the views of the staff of the reasonable ground for belief that, as of the effective date,
Division of Corporation Finance. the registration statement contains no significant untrue or
misleading information and that no material information
Controlled company
has been omitted.
A company in which more than 50 percent of the voting
Earnings per share (EPS)
power is held by an individual, group or another company.
A company’s net income, generally divided by the number
Convertible securities
of its common shares outstanding and adjusted for certain
Corporate securities (usually preferred stock or bonds) that dilutive securities such as stock options, warrants and
are exchangeable into a fixed number of shares of common convertible debt.
stock at a stipulated price.
Effective date
Cooling-off period See Waiting period.
The date the SEC allows the registration statement to
Dealer become effective and the sale of securities to commence.
A commonly used term applied to those individuals or firms Electronic Data Gathering, Analysis and Retrieval
that trade securities. Dealers trade securities for others (EDGAR) System
and for their own account. Dealers may own the traded
The SEC’s electronic system for filing registration
securities and thus are subject to the risks and rewards
statements and periodic reports under the 1933 and
of ownership.
1934 Acts.
Dilution
Emerging growth company (EGC)
A reduction in a shareholder’s relative ownership
An issuer that is broadly defined by:
percentage of a company or the company’s earnings per
share (EPS) as a result of the company’s issuance of more • Less than $1.07 billion in gross revenue (such amount is
shares. Dilution in an IPO results from a disparity between indexed for inflation every five years);
the IPO price and the net book value of tangible assets for
• Less than $1 billion in issues of non-convertible debt in
existing shares and is usually reflected in the registration a 3-year period; and
statement in tabular format, referred to as a dilution table.
• Generally less than $700 million in worldwide public
float (i.e., not a large accelerated filer).

Roadmap for an IPO: A guide to going public 81

Glossary

Financial Industry Regulatory Authority (FINRA)

Employee Stock Ownership Plan (ESOP) An independent, self-governing association of securities
brokers and dealers that helps to govern, among other things,
A plan instituted by a company that gives stock to its
its members and the over-the-counter stock market. FINRA
employees. The primary purpose of such a plan is to attract
also performs market regulation under contract for the
and retain talent.
NASDAQ, the NYSE and the International Security Exchange.
Equity method
Financial printer
Method of accounting in which the investor records an
A printer that specializes in the printing of financial
investment in the stock of an investee at cost and adjusts the
documents, including registration statements, prospectuses
carrying amount of the investment to recognize the investor’s
and proxy statements. These printers are also capable
share of the earnings or losses of the investee after the date of
of converting documents to an EDGAR format and
acquisition (generally applies to investments in which stock
electronically submitting the document to the SEC.
ownership is between 20 and 50 percent of the outstanding
securities of the investee). Financial Reporting Manual (FRM)
Exempt offering Manual containing interpretations by the staff of the Division
of Corporation Finance regarding various financial
A securities offering that does not require a registration
reporting matters.
statement to be filed with the SEC. Exempt offerings include
Regulations A and D and intrastate offerings. Financial Reporting Release (FRR)
Experts Release by the SEC designed to communicate the SEC’s
positions on accounting and auditing principles and practices
Independent auditors, accountants, engineers or others
and used to adopt, amend or interpret rules and regulations
whose proficiency in a specific area qualify them as specialists
relating to accounting and auditing issues or financial
in their fields.
statement disclosures.
eXtensible Business Reporting Language (XBRL)
Firm commitment underwriting
The financial and operational business reporting offshoot
A type of offering in which the underwriter agrees to
of eXtensible Markup Language (XML), which is a freely-
purchase all of the shares being offered, regardless
licensable, open technology standard used to electronically
of whether investors purchase the shares. Any shares
exchange business information.
not sold to the public are paid for and held by the
Fiduciary laws underwriters themselves.
Laws that require transactions between a company and its Fixing America’s Surface Transportation Act (FAST Act)
officers, directors or large shareholders to be fair to the
Legislation, enacted on December 4, 2015, to provide
company. These laws apply to privately held, as well as
new accommodations to facilitate capital formation by
publicly held, companies.
smaller companies and simplify disclosures. While the
Final prospectus primary objective of the law was to ensure funding for US
A document that must be circulated to all purchasers of stock transportation and infrastructure improvements, the FAST
disclosing material facts about the company’s operations, Act included a number of securities-related provisions and
its financial status and the details of the offering. It is often includes changes to the requirements applicable to emerging
preceded by a preliminary prospectus, also known as a growth companies (EGCs) under the JOBS Act.
“red herring.” Foreign Account Tax Compliance Act (FATCA)
Financial Accounting Standards Board (FASB) An act generally requiring that foreign financial institutions
A private body that establishes financial accounting and and certain other non-financial foreign entities report on the
reporting standards in the United States. foreign assets held by their US account holders or be subject
to withholding on withholdable payments.

82 Roadmap for an IPO: A guide to going public

 Glossary

Foreign private issuer (FPI) Insiders

Any foreign issuer (other than a foreign government), unless Individuals who may have access to non-public information,
such as officers, directors and major shareholders.
• More than 50 percent of the issuer’s outstanding voting
securities are held directly or indirectly or record by Institutional investors
residents of the US; and
Non-individuals shareholders. Instituional investors include
• Any of the following applies: pension funds, mutual funds and trust.
• The majority of the issuer’s executive officers or Institutional Shareholder Services (ISS)
directors are US citizens or residents;
A proxy advisory firm that provides research and analysis,
• More than 50 percent of the issuer’s assets are located governance data and proxy voting advice to corporations,
in the US; or governance institutions and investors, including hedge funds,
• The issuer’s business is administered principally in mutual funds and similar organizations.
the US.
International Accounting Standards Board (IASB)
Form 8-K
A private body that establishes International Financial
A form required to be filed by registrants with the SEC when Reporting Standards (IFRS) that are used in many parts in
certain significant reportable events occur (e.g., major the world.
acquisitions or legal proceedings).
Investment banker
Form 10-K
A person or (usually) a firm that, among other things,
An annual report required to be filed with the SEC pursuant underwrites securities, functions as a broker/dealer and
to the 1934 Act. Form 10-K includes annual audited offers corporate finance and merger and acquisition
financial statements, related schedules and a range of advisory services. Investment bankers are usually full-
textual information. service firms that perform a range of services, as opposed to
an underwriter or broker/dealer, which only provides one
Form 10-Q
specific service.
A quarterly report required to be filed with the SEC pursuant
Joint venture
to the 1934 Act; consists primarily of the company’s quarterly
financial statements. An arrangement whereby two or more parties (the ventures)
jointly control a specific business undertaking and contribute
Form S-1
resources towards its success.
The most common form of registration statement used in the
Jumpstart Our Business Startups Act (JOBS Act)
initial public offering of securities by issuers for which no
other form is authorized or prescribed. Legislation, enacted on April 5, 2012, designed to encourage
job creation and economic growth by making it easier for
Going public
private companies to access the public capital markets. Title I
The process of a privately owned company selling its of the JOBS Act created a number of special accommodations
ownership shares to the investing public. See Initial under US securities laws that are intended to make it easier
public offering. for EGCs to complete an equity IPO and to operate in the SEC
Industry guides reporting system.

Guides followed by the SEC staff requiring the disclosure of Listing application
policies and practices by certain industries. A document, similar in nature to a registration statement,
Initial public offering (IPO) formally requesting that an issuer’s securities be listed on a
national securities exchange.
The offering or sale of a company’s securities to the investing
public for the first time (i.e., converting a company from
private to public ownership).

Roadmap for an IPO: A guide to going public 83

Glossary

Lock-up period Ownership change

The period of time after an IPO during which (at the Defined in the Internal Revenue Code as a change in
underwriter’s request) insiders are prohibited from selling ownership of a corporation during a three-year period of
their shares. This period can range from a few months greater than 50 percent, which results in limitations on the
to several years. Usually appears as a provision in the ability of the corporation to utilize preownership change net
underwriting agreement. operating losses.
Management’s Discussion and Analysis (MD&A) Post-effective amendment
A textual discussion and analysis of a registrant’s liquidity, An amendment filed subsequent to the effective date of
capital resources and results of operations that must be the registration.
prepared by management and included in registration
Preliminary prospectus See Red herring
statements and most 1934 Act reports.
Price amendment
Managing underwriter
Usually the final amendment to a registration statement;
The primary decision-maker in a syndicate of underwriters,
includes the offering price and final pro forma
also referred to as the “lead underwriter.”
financial information.
Market window
Price range
The time during which the market is receptive to a particular
A proposed price per share range that is often printed on the
type of offering.
cover page of a preliminary prospectus. 
Primary offering
National Association of Securities Dealers Automated
An offering in which all of the proceeds from the sale
Quotation System (NASDAQ)
of previously unissued stock are received directly by
The NASDAQ is a large electronic stock exchange in the the company.
United States.
Private placement
New York Stock Exchange (NYSE)
An offering that is exempt from the requirements of
The NYSE is a large New York-based stock exchange. registration and is limited in distribution.
Non-GAAP measure (NGM) Pro forma
A metric calculated and presented using a methodology not Financial statements or financial tables prepared as though
outlined in GAAP. Non-GAAP measures are often used to certain transactions had already occurred. For example, a
supplement GAAP financial reporting to provide investors registration statement might include a pro forma balance
and other stakeholders with additional insight into an sheet that reflects the anticipated results of the offering.
issuer’s performance.
Project management office (PMO)
Option
Group within an organization that defines and maintains
A security giving its owner the right to purchase or sell a standards for project management within the organization.
company’s shares at a fixed date and agreed-upon price.
Prospectus
Overallotment option
The primary selling document in an offering distributed to
The sale of shares by the underwriter in excess of those potential investors. The prospectus provides information
shares initially available. In practice, this is also referred to as about the company and the offering. See also Preliminary
a “greenshoe” option. prospectus and Final prospectus.

84 Roadmap for an IPO: A guide to going public

 Glossary

Proxy Registrant
A document prepared for a shareholder to authorize another An entity that must file periodic reports with the SEC.
person to act on his/her behalf at a shareholders’ meeting.
Registrar
Proxy statement
An agent, usually a bank, that physically issues, transfers and
A statement of information required by the SEC to be cancels stock certificates as stock transactions occur.
furnished to shareholders by those individuals soliciting
Registration statement
shareholder proxies.
The primary document required to be filed with the SEC in
Public Company Accounting Oversight Board (PCAOB)
connection with the issuance of securities. As specified by the
An organization established by the Sarbanes-Oxley Act to Securities Act of 1933, a domestic registrant generally uses
oversee the audit of public companies that are subject to Form S-1 for an initial public offering.
US securities laws. The duties of the PCAOB, as established
Regulation S-K
by the Act, include establishing audit, quality control and
independence standards; registering public accounting Regulation that outlines the disclosure requirements for the
firms; inspecting public accounting firms; and conducting non-financial statement portion of filings with the SEC.
investigations and disciplinary proceedings. The PCAOB,
Regulation S-T
subject to the oversight of the SEC, replaced the accounting
profession’s self-regulating framework. Regulation that governs the preparation and submission of
documents filed via the SEC EDGAR system.
Public float
Regulation S-X
The aggregate market value of voting common stock held by
non-affiliates. Regulation that specifies the financial statements to be
included in filings with the SEC and provides rules and
Qualified institutional buyer (QIB)
guidance on their form and content.
A non-individual shareholder that owns and manages at
Restricted stock
least $100 million in securities, with certain exemptions for
broker-dealers, banks and savings and loan associations. Securities, usually issued in private placements that have
limited transferability. Also called “legended stock” or
Quiet period
“lettered stock.”
The period that begins on the date an offering commences
Roadshow
(usually once the company and its underwriter reach a
preliminary understanding) and generally ends 90 days A presentation to potential investors, brokers and dealers by
following the effective date of the registration statement. the company’s management and underwriters to facilitate a
Referred to as the quiet period because of the SEC’s securities offering.
restrictions on publicity about the company and/or Rule 144A
its offering.
An SEC exemption permitting the sale of certain restricted
Red herring stock without registration.
The preliminary prospectus circulated during the waiting S corporation
period to potential investors. Commonly referred to as a red
herring because the disclaimer, was required to be printed in Corporation that has 35 or fewer shareholders and that meets
red ink. certain other requirements of the Internal Revenue Code. An
S corporation is taxed by the federal government and some
states in a manner similar, but not identical, to a partnership.

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Glossary

Safe harbor provision Smaller reporting company (SRC)

SEC provision that protects issuers from legal action if A US or Canadian entity with revenues of less than $50
specified requirements have been satisfied or, in certain million and public float of less than $75 million.
cases, if a good-faith effort has been made to comply with
The SEC has created this designation to streamline
specified requirements.
and simplify the disclosure requirements. Companies
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley/SOX) qualify as smaller reporting companies if they meet the
following criteria:
The Act was signed into law on July 30, 2002 and represents
the most significant reform in securities laws since they • Have a common equity float of less than $75 million; 
were first enacted. Written in response to high-profile
• In the case of an initial registration statement, had a
corporate scandals, the purpose of Sarbanes-Oxley is to
public float of less than $75 million as of a date within 30
restore confidence in public financial reporting by prescribing
days of the filing of the registration statement, calculated
fundamental changes in how audit committees, management
by adding the aggregate worldwide number of such
and auditors interact and carry out their responsibilities.
shares held by non-affiliates to the number of such shares
Secondary offering included in the registration statement and then multiplying
by the estimated number by the estimated public offering
An offering by the company’s shareholders to sell some or
price of the shares; and
all of their stock to the public. The proceeds of a secondary
offering are received by the selling shareholders, not by • Have annual revenues of $50 million or less during the
the company. most recently completed fiscal year for which audited
financial statements are available.
Securities Act of 1933 (1933 Act)
This designation allows companies to qualify for disclosure
Legislation passed as a result of the market crash of 1929.
requirements that are scaled to reflect the characteristics and
Under the 1933 Act, a registration statement containing
needs of smaller companies and their investors. It also makes
required disclosures must be filed with the SEC before
it easier and less costly for smaller companies to comply with
securities can be offered for sale in interstate commerce
disclosure requirements.
or through the mail. The 1933 Act also contains antifraud
provisions that apply to offerings of securities. Sophisticated investor
Securities Exchange Act of 1934 (1934 Act) Potential investor who is capable of evaluating the merits of
the investment venture as related to certain exempt offerings.
Legislation designed to govern the trading of securities on
the secondary market and to regulate the exchanges and Special purpose acquisition company (SPAC)
broker-dealers as a means of protecting the investing public.
Publicly-traded buyout company that raises collective
The 1934 Act requires companies registered under the 1933
investment funds in the form of blind pool money, through
Act to file periodic reports (e.g., Forms 10-K and 10-Q) with
an IPO, for the purpose of completing an acquisition of an
the SEC and to disclose certain information to shareholders.
existing private company, sometimes in a specified target
Companies traded over the counter with 500 or more
industry. The money raised through the IPO of an SPAC
shareholders and total assets of more than $10 million and
is held in a trust until the SPAC identifies a merger or
companies that elect to be listed on a national stock exchange
acquisition opportunity to pursue with the invested funds.
must file a registration statement under the 1934 Act.
Staff Accounting Bulletin (SAB)
Securities and Exchange Commission (SEC)
Bulletin detailing interpretations and practices followed
The federal agency responsible for regulating sales and
by the SEC staff. Although these bulletins are not formally
trading of securities through its administration of the federal
approved by the SEC commissioners, they are generally
securities laws, including the 1933 and 1934 Acts.
required to be followed by registrants.

86 Roadmap for an IPO: A guide to going public

 Glossary

Stock option plans Trust

Plans whereby employees are granted options to purchase a Fiduciary relationship in which a person, called a trustee,
company’s stock at a stated price within a specified period of holds title to property for the benefit of another person,
time. Stock option plans may include one of the following: known as the beneficiary.
a. Incentive stock option plans (ISOs), which are accorded Underwriter
favorable tax treatment (i.e., the employee has no tax
Usually a firm that acts as an intermediary between the
at grant date or exercise date and shares are eligible for
company and the investing public in connection with the sale
capital gains treatment on ultimate sale). However, there
of the company’s securities.
are a number of statutory restrictions, including a limit on
the number of ISOs that can be exercised in one year and Underwriting agreement
a requisite period of time during which the stock must be
Contract between the company and the underwriter that
held before it can be sold.
sets forth the terms and conditions of a securities offering,
b. Non-qualified stock option plans, which are plans that including the type of underwriting, the underwriter’s
are not ISOs. These plans trigger a tax upon exercise. The compensation, the offering price and number of shares. The
issuing employer, however, can obtain a tax deduction in underwriting agreement is typically signed on the effective
the period the option is exercised, which is not permissible date of the registration.
when an ISO is exercised.
Up-C structure
Syndicate
An IPO structure in which the public typically invests in
A group of investment bankers who act together to a newly formed corporation (PubCo) that uses the IPO
underwrite and distribute an offering with the intention proceeds to acquire an interest in a partnership with the
of achieving wider distribution and spreading the historical owners. Any economic interest retained by the pre-
associated risk. IPO investors continues to be in the partnership. The pre-IPO
investors have exchangeable partnership units that provide
Tax Receivable Agreement (TRA)
similar liquidity rights as do those in a traditional IPO. A tax
A contract between the pre-IPO investors and the public receivable agreement is typically executed in conjunction
company to share in typically 85 percent of the tax savings with the IPO.
recognized by the public company as a result of certain
Waiting period
tax attributes available due to the form of the transaction.
Common tax attributes included in the tax receivable The period between the date a registration statement is
agreement are net operating losses and tax-basis step-ups initially filed with the SEC and the date the registration
under section 743(b) of the Internal Revenue Code. statement becomes effective.
Warrant
A security entitling its owner to purchase shares in a company
under specified terms.

Roadmap for an IPO: A guide to going public 87

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