The Road to the IPO:

Late Stage Private Placements & IPO Readiness

January 28, 2020

Event Materials

1. Presentation: The Road to the IPO

2. Navigating your IPO (PwC)

3. IPO Prospectuses: Avoiding and Responding to Common SEC Comments (LexisNexis)

4. IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity,

Communications, and Offers (LexisNexis)

5. Market Trends 2018/19: Lock-Up Agreements (LexisNexis)

6. IPO Accommodations for EGCs, FPIs, and Non-EGCs (Mayer Brown)

7. JOBS Act IPO On-Ramp Accommodations (Mayer Brown)

8. Comparing the Registration, Reporting and Governance Requirements for Domestic

(U.S.) Companies and Foreign Private Issuers (Mayer Brown)

9. Initial Public Offerings: At A Glance 2019 (Mayer Brown)

The Road to the IPOLate Stage Private Placements and IPO Readiness

January 28, 2020

Rationale

• There may be a variety of different motivations for a late stage or pre-IPO private placement

– Company may want to defer IPO and need to raise additional capital prior to the IPO

– Company may want to take out early friends and family and angel investors and “clean up” capitalization table or provide partial liquidity for longstanding holders

– Company may want to bring in strategic investors

– Company may be advised that it should prepare itself for the IPO by gaining support and validation from key sector investors that are opinion leaders

– Company and bankers may want to “de-risk” IPO by bringing in cross-over investors that will also invest in the IPO

– Company may be advised that an up round will make higher IPO pricing easier for IPO investors to accept

– May be quite sector dependent

2

Market Trends

3

PwC 4

Late-stage Private Capital – Last 3 years

973 companies

$12.23B

$19.18B

$14.97B

$9.07B

$12.77B$13.93B

$24.42B

$22.60B$19.73B $20.11B

$18.42B

$17.00B

66

83

77

61

95103

128

119

111 139 120108

0

20

40

60

80

100

120

140

160

$0.00M

$5.00B

$10.00B

$15.00B

$20.00B

$25.00B

$30.00B

2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4

Source: Pitchbook DataCapital Invested Deal Count

$204B invested

Includes Venture Capital and Growth-oriented Private Equity

Late Stage Investments

5

The Private Placement Road Map

6

Positioning Process Pricing

• Understand / develop / set your key capital raising objectives

o Investor type(s), sizing, timing, use of proceeds

• Develop expectations around valuation and terms

• Create / update investor narrative and key materials

o NDA, teaser, investor presentation

• Prepare / update diligence information and data room

• Align all parties to the process (legal, accountants, consultants)

• Review possible investor universe and create set of key targets

• Refine investor approach

o Type of investor

o Quantum of initial outreach

• Launch marketing process

• Define investor timeline early with a structured process

• Further screen investors based on feedback from management

• Detailed analysis of terms received

• Maximize process tension to drive final investor(s) to the best terms

o Value

o Investor rights

o Exit / liquidity considerations / timing

o Choose best investors to match company objectives

• Facilitate confirmatory diligence sessions and deliver information in a timely manner

• Negotiate and finalize purchase and sale agreement and other required documentation

Late stage investment characteristics

• Impact on structuring and negotiating

• Typically made into existing, relatively mature companies

– Late stage

• Proven product viability

• Exhibits signs of increasing adoption and revenue growth

• Focused on marketing and sales

– Very late stage

• Cash flow is dependable

• Past initial hyper-growth period and reasonable to expect sale or IPO within 12 - 24 months

7

Types of securities

• Late stage equity

– Typically equity deals based on the previous A-D series of preferred

– However, later stage deal can depart greatly from venture

– Can be greater upside depending on liquidation preference

– Key is calculation of preference, whether there is participation and whether/how many additional rounds to exit

8

Types of securities (cont’d)

• Alternative is to take debt that looks like equity and includes:

– Interest payments to match PIK dividends

– Mandatory prepayment on trigger events to match redemption rights

– More financial control in terms of covenants

– Possible security interest in assets of issuer

– Convertibility features and warrant coverage

– Complications involve intercreditor/subordination issues with other lenders, particularly financial institutions

– Less up-side, particularly in IPO, and therefore utilized more in pre-sale transaction

– Consider tax issues (treated as equity)

9

Liquidation preference

• Liquidation preference of the investor’s preferred stock

– Typically senior to all other outstanding classes or series of common stock and preferred stock

– Sometimes pari passu to an existing series of preferred stock, particularly if the investment is priced as a flat or up round (using the same or higher pre-money valuation as the previous financing round)

– Typically includes all accrued and accumulated dividends in the liquidation value of the preferred stock

– Usually participating (sharing in any residual liquidation value of the common stock on an as-converted basis)

– If participating, is generally not capped in a down round investment, but usually capped (by dollar amount or multiple of return on investment) in a flat or up round investment

10

Dividend rights

• Dividend terms for preferred stock:

– Typically accrue a fixed dividend on the original liquidation value, with the dividend rate typically higher than in early stage deals (which typically have lower fixed dividend rates if they accrue a dividend at all)

– Are more likely than those in an early stage deal to be payable periodically in cash and, if not, are usually cumulative, unlike those in early stage deals, which are usually non cumulative even when they do accrue a dividend. In addition, the cumulative dividend is often compounding (earning a dividend on the accrued dividends) on a quarterly or annual basis (whether or not declared by the board)

– Often allow accumulated dividends to be convertible into common stock or, in some cases, are payable in cash on conversion (rather than forfeited on conversion as with many early stage deals that have cumulative dividends)

– Participating, with the right to share pro rata on an as converted basis in any dividends paid on the common stock

11

Redemption rights

• Redemption rights — much more common in late stage deals

– Not preferred exit method because investor relies on upside return of their underlying common equity value rather than minimal return of redemption and risk of non-payment of redemption price if company is struggling

• Primary issues to consider:

– What securities will be redeemed and how many shares?

– Which particular stockholders will be redeemed or will redemption be pro rata for all stockholders?

– Full redemption or partial redemption?

– Tax implications of the redemption

– Manner of redemption

12

Anti-dilution rights

• Specific issues for late stage private placements include:

– Price for late stage investor that triggers rights, particularly if have to pay a much higher valuation

– Full ratchet versus weighted average: can negotiate full ratchet if high valuation, however, this is very unusual; previous investors usually require weighted average using same formula as previous rounds

– “Pay to play”: much less common in later stage rounds (unless down-round) but may be required as condition to consent from early investors; if don’t participate, then lose anti-dilution protection: late stage investor more likely to receive anti-dilution rights in such cases

– Exempt securities: issuances that trigger anti-dilution; much more heavily negotiated in late stage; issuer often desires to use equity in acquisitions and third-party partnerships without triggering anti-dilution

13

Participation rights and restrictions

• Right of first refusal (“ROFR”)

– Mirrors rights of previous investors to have the right to buy when designated stockholders sell

– Issues around percentage trigger for stockholders who are subject to the right

– Usual threshold is 1-5%; however, if retain same threshold, (a) aggregation of sales can have material impact and (b) may exclude senior management (if you don’t want them to sell out) because of dilution in round

– Late stage investors typically not subject to ROFR

• Right of first offer

– Typical right to have securities offered by the issuer first to investors prior to third parties

14

Representations & warranties

• How much to rely on work of previous investors in diligence

– Careful to distinguish between strategic and financial investors given risk profile and desired outcomes

– Timing of last investment and composition of investors

• Usually include more detailed representations and warranties and disclosure schedules

– Longer operating histories

– More “material” agreements, partnerships, joint ventures

– More complex balance sheets

– U.S. regulatory compliance — issues like privacy and environmental matters

– International compliance — issues like FCPA

– Intellectual property issues

15

Secondary purchases

• Secondary purchases — often combine investment directly in issuer with purchase in secondary directly from existing stockholders

– “Cross-purchase” structure

– Less cash from investment available for company

– Typically purchase of common stock from management and employees to provide liquidity

– Can also purchase preferred from previous investors particularly those that need exit given LP demands

• Note issues particularly with liquidation preferences and other terms not desirable to late stage investor

• Can’t change charter rights of class but can change contractual rights

• In contract rights, particularly important to ensure that you can bundle secondary shares with primary securities for co-sale, tag and registration rights

16

Protective provision – charter/contractual

• High valuations at later stage yield minority investments and therefore protective provisions are usually stronger

• Negotiate to include strong affirmative covenants

– Financial and other information delivery rights

– Registration rights and rights in M&A

– Redemption rights

• Negotiate to include strong negative covenants

– Specify the actions that the company may or may not take without specific vote of the class

– Usually include all of the “ordinary course” provisions from venture—related to sales of company or assets, bankruptcy, expansion of option pool, IPO or sale

– Expanded to include financial covenants, additional of debt, acquisition strategy, partnerships, management changes, etc.

• Contractual remedies for failure particularly with affirmative covenants—e.g., right to take over board if fail to redeem

17

Pre-engagement

• Initial opportunity review by investment bank

• Initial company call / meeting withinvestment bank

• Gathering the facts from the company (subsequent material and company review)

• Determine status of potential marketing materials and financial models

• Engagement letter signed by company and investment bank

Preparation

• Organizational call with all parties

• Identify management and shareholder objectives and preferences

• Conduct additional business and financial due diligence

• Finalize marketing materials (NDA, teaser, management presentation, PPM)

• Identify and tier potential investors based on transaction terms and management preferences

• Finalize financial models and term sheet / transaction structure

• Set up electronic data room (to be managed throughout process)

• Company review and signoff of all materials (marketing materials and data room contents)

• Investment bank internal committee approval

Launch

• Distribute Teaser & NDA (potentiallyManagement Presentation) to identified targets

• Investor discussions (to gauge interest and fit)

• Management meetings and calls with interested investors

• Give interested accounts post-NDA access to data room

• Initial investor feedback, additional investor outreach

Diligence/Negotiation

• Investor follow-up and feedback

• Facilitate investor due diligence

• Begin negotiating financial and strategic terms

• Finalize lead investor / determine if investor syndicate is necessary or valuable

• Circle additional investors (if necessary)

• Finalize term sheet (general understanding of terms)

Closing

• Company counsel drafts definitive documentation

• Negotiate and finalizelegal documentation (finalize terms)

• Transaction closes

Private placement timeline

18

1-2 Weeks 2-3 Weeks 2-4 Weeks 6+ Weeks 2-4 Weeks

Key timing risk—driven by investors

Key Process Materials

19

ENGAGEMENT LETTER• Engagement Letter

o Agreement between placement agent and the Company

EXECUTIVE SUMMARY• Transaction overview

o Brief company overview

o Investment highlights o Use of proceeds

• Industry overview o Target market o Competitive landscape o Recent trends

• Business overview o Company history o Business objective and

strategy o Sales and marketing

• Management, organization and shareholders

• Financial summary o Historical financials o Pro forma

capitalization

PROPOSED TERM SHEET• Security• Use of proceeds• Key terms

o Valuation o Redemption features o Board participation o Voting rights o Change of control

FINANCIAL MODEL• Detailed financial model

o Operating assumptions / inputs

o 3-5 years of projections

o Quarterly projections for 2019

o P&L, BS and CFS

NDA• Non-disclosure agreement

o Confidentiality agreement between Company and investor

MANAGEMENT PRESENTATION• Transaction

o Investment highlights o Use of proceeds o Summary of terms

• Company o Brief company history o Company advantages o Growth strategy

• Industry o Competitive landscape

• Sales and marketing • Management team • Financials

o Financial highlights o Financial projections and

assumptions o Sources and uses o Pro forma capitalization

DATA ROOM• Marketing materials • Financial / accounting

o Historical financials o Financial model

• Corporate documents o Articles of incorporation,

bylaws, etc. • Legal overview

o Selected contracts / agreements

o Overview of any litigation • Regulatory overview • Capitalization

o Detailed ownership table o Existing stock documents

• Organization structure o Employees and Board of

Directors composition

RISK FACTORS• Disclosure about primary material

risks associated with investing in the Company o Often included in data room

CLOSING DOCUMENTS• Share purchase agreement • Non-reliance agreement • Shareholder agreement

Outreach and Advocacy

• Contact targeted investors, highlighting the opportunity in a manner which maximizes interest

• Distribute teaser and NDA (and potentially management presentation) to identified targets

• Discuss with investors to gauge interest and fit

• Grant interested accounts post-NDA access to data room

• Set up management meetings and calls with interested investors

• Track and analyze investor feedback and facilitate follow up

Diligence Management

• The investment bank will usually work with management to facilitate the due diligence process for interested parties, including:

– Organizing, maintaining and granting access to the virtual data room

– Tracking the diligence requests and progress of each party

– Scheduling follow-up meetings and diligence calls

Process Management

• In order to ensure a competitive process and strict timing guidelines, the investment bank will present prospective investors with a process letter that outlines key components and deadlines for indications of interest

– Setting a deadline for potential investors to submit bids will lead to closing the transaction in a timely manner

– Creating a competitive tension process with investors will obtain the optimal price and terms

– The company benefits from the investment bank’s knowledge and experience in dealing with the investor groups in selecting the best long term partner

Considerations for Cross-Over Funds

23

Considerations

• Considerations

– Deal structure and terms can be highly variable

• Common stock, preferred stock, convertible preferred, though convertible preferred stock is the most common

• Board representation

• Affirmative and negative covenants

• Information rights

• Financial statement requirements

• IPO/Qualified IPO provisions

• M&A and IPO ratchet provisions

– Time horizon

• Pre-IPO investors may have a specific timeline in mind for the IPO and a target valuation

Considerations (cont’d)

• Will cross-over investors participate in the IPO?

– Ideally, the pre-IPO round investors will be the “anchor orders” in the IPO

– No ability in the U.S. to obtain and secure cornerstone investors

– Only two options: either obtain an indication of interest from the cross-over investor that can be disclosed in the IPO prospectus, or do a concurrent private placement to the cross-over investor at the IPO price concurrent with the IPO

– Maybe more uncertainty with the indication of interest option if the market remains volatile and IPOs price below stated ranges

• Did the cross-over investors receive confidential information during the pre-IPO process? Has that information been disclosed in the IPO prospectus? Are they cleansed of material nonpublic information?

Involvement by Strategics

26

Transfer and investment restrictions

• Transfer to “competitors”

– More heavily negotiated definition of competitors to whom investor may not transfer—current and future competitors

– Negotiated “update” rights to list of competitors

• Related — negotiation of the right for strategic investor to make investment in competitors of company

– Particularly important to issuer if investment is coupled with a strategic partnership or commercial arrangement

– Key is definition of competitor — by type of product and/or by name —and update rights over time

– Also negotiation regarding steps to be taken if investor buys into a competitor either directly or indirectly

Stand-still provisions

• Stand-still provisions more common in M&A transactions

• Sometimes asked of investors in late stage deals, particularly of strategics

– Investor is obligated to refrain from actions that relate to acquisition of control of the issuer including making proposals to acquire the issuer, buying shares, or launching a proxy contest

– Exceptions

• Negotiated sale

• Agreed-to-limits

Right of first look for M&A

• Right of first offer

– Notice period

– Negotiation period

– Other potential rights

• Right of first refusal

– Investor friendly

– Chilling effect on competitive M&A

– Terms of transaction

2019 US IPO Market

January 2020

PwC 31

S&P 500 hits record highs

PwC

2019 IPO proceeds hit a five-year high

32

PwC 33

Foreign issuance has steadily increased since 2015

Country 2015 2016 2017 2018 2019 Total

China 3 5 13 26 20 67

United Kingdom 3 2 5 10

Brazil 3 3 2 8

Israel 1 1 2 3 7

Canada 2 3 1 6

Germany 1 1 2 4

Argentina 1 2 1 4

Hong Kong 1 2 3

Other 4 6 3 2 3 18

Total 13 13 29 39 33 127

Number of IPOs via Form F-1 by Country, 2015 - 2019

Number of IPOs via Form F-1 as a Portion of All IPOs, 2015 - 2019

149

87

147175 163

13

13

29

3933

8%

13%

16%18%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50

100

150

200

250

2015 2016 2017 2018 2019

% o

f IP

Os

Fil

ed v

ia F

-1

# o

f IP

Os

S-1 & Other F-1 F-1s as % of IPOs

Source: Dealogic. Excludes IPOs with deal values under $25mm. (1) Other refers IPOs via SEC Form S-11, Form 10, and FDIC.

(1)

PwC

IPO windows open and close quickly

34

PwC

IPOs continue to outpace the broader markets

35

Consumer Markets

Energy, Utilities & Mining

Financial Services

Health Services

Industrial Products

Pharma & Life Sciences

TMT

All IPOs

2018 IPO Returns: Offer to Year-End 2019 IPO Returns: Offer to Year-End

56%

2%

18%

32%

6%

52%

9%

30%

2018 S&P Return

(6%)

2019 S&P Return

29%

(25%)

(24%)

(2%)

(17%)

4%

7%

(1%)

PwC

IPO Themes

36

PwC

2019 IPOs were primarily Pharma & Life Sciences and Technology

37

IPO OverviewAre you ready?

PwC

Why?

39

Access to capital

Demonstrate maturity(move out of your parents’ basement)

Enhance brand, customer & market profile

Publicly traded stock as currency(acquisitions)

Liquidity(exit for investors, compensation for

employees)

Anticipated Benefits

PwC

40

Macro and capital market conditions

1

Valuation2

Company readiness3

Competing equity pipeline

4

Investor appetite for IPOs

5

Key Considerations Assessment

• Inflows into equity funds• Attractive investment case – sooner the better to benefit

from maximum investment opportunities• Positive economic performance of US will be key

• Selection of the “right” comps• Timing will determine valuation multiples

• Corporate and legal structure, financials and documentation ready for filing and launch

• Well defined and compelling equity investment story• Confidence in predicting and delivering business results

• Sector equity pipeline• Significant equity issuance to take advantage of positive

investor appetite for equity offerings• Scarcity value for high growth companies remains

• Sector specific• Overall risk tolerance (risk “on/off”)

There is high option value in being ready to access the equity markets as windows of opportunity present themselves – early preparation is key

Key Decision Points• An issuer can reassess

market conditions and valuations at different phases in the preparation process as appropriate

• An SEC filing provides increased flexibility in time to launch –especially if the company is an ECG

Considerations• Market volatility and

peer valuation declines could jeopardize launch time frame

• Company must meet key operating and financial milestones for marketing credibility

When?

40

PwC

Overview of the IPO process

41

IPO process execution

Readinessplanning and preparation

Going publicExecution of the IPO process

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

Post-IPO/Public companyPre-Kickoff/Planning

12-18 months Years6-9 months

IPO pricingKickoff meeting

As

se

ssm

en

t

PwC

IPO timeline – key activities

42

IPO & Capital Structure

• Primary/secondary• Use of proceeds• Optimize capital

structure & financing needs

• Dividend policy• Eliminate preferred

equity, converts

SEC Review8-10 Weeks

• Suitability of current corporate organization vs. reorganization

• Tax structuring and implications

• Domicile determination

Corporate Structure and Re-Organization IPO Prospectus

• Key marketing document; Foundation to equity story

• Outline/investment highlights in advance

• Company counsel drafts prospectus

• Composition of board• Search for independent

directors• Board committees

(audit, nomination and compensation)

• SOX• Management

changes/additions

Corporate Governance/ Board

• Receive Company model

• Analysts develop own model/”haircut”

• Discussions with Company to refine

• Bankers triangulate

Research Analyst Model

• Investor targeting• Management dry-run• Salesforce presentation and

teach-ins• Roadshow (1x1s and group

events)• Bookbuilding• Pricing and allocation

Marketing and Pricing

• Business overview• Senior exec. present• Company projection

model

Research Analyst Diligence Meeting

Total 22–28 Weeks

Due Diligence

• Bankers and Counsel• Business• Financial• Legal• Accounting

FinancialStatements

• 2- 3 years audited financials

• 2- 5 years selected financials

• SOX/internal financial controls

Hire Advisors

• IPO Advisor• Bookrunners• Auditors• Company

counsel

Financial Projections

• Develop detailed financial projections (5 years)

• Develop quarterly financial projections

All Hands Organization

meeting

Roadshow Presentation

• Equity story• Investment thesis to

guide presentation• Available online to retail

and institutional investors (NetRoadshow)

Pre-Organization Meeting Preparation (Up to two-years)

Filing Preparation (10-14 Weeks)SEC Review

(10-12 Weeks)

Marketing & Pricing (1-2 Weeks)

“Testing the

Waters”

Final Valuation/$ Price Range

Research Analyst Due

Diligence

PwC

Articulating the “equity story” – Step by step

Clearly define the business model, present a compelling case for executing the business plan and position the Company to be valued against the right comps

Review & refine business plan

Valuation drivers Identify KPIs Positioning

• Review the business plan, financial model, and equity story with a focus on growth

• Align the equity story with the business model – do not present the company as something it is not

• Understand valuation drivers and how your story is being communicated

• Reflect equity story in financial model projections

• Do the research analysts understand the business model and are they able to model it to reflect management’s vision?

• Should represent management’s view of the business, objectives, goals, and strategy

• Should support the equity story & effectively communicate it to the Buyside

• KPIs need to “work” now and in the future

• Position the Company in the context of market and comps

• Review recent “stories”/IPO comps and evaluate what structures have worked

• Analyze recent comps –company may not have direct comps but will need to analyze the “comps” universe

• Segments?

43

PwC

IPO marketing process

44

Phase I Phase II Phase III Phase IV

Ob

ject

ive

• Prospectus• Develop key

selling points• Ensure the

industry and the company’s positioning are clearly understood

• Identify and craft responses to potential investor concerns

• Prepare documentation to reflect key themes developed

• Identify institutions that are potential long term core investors

• Analyze holders of comparable companies

• Identify recent investors of comparable offerings

• “Testing the waters” can be used to sound out timing, valuation and/or educate Buy-side – occurs after S-1 filing

• Educate research analysts on the Company and key strengths of the business

• Forms basis for writing research reports

• Obtain feedback on equity story/key concerns in order to refine equity story ahead of pre-marketing

• Brief sales forces on transaction, Company, key selling points, issues and mitigants

• Education by capital markets team, research analysts and Company management

• Enable salesforceto market offering to institutional investors and solicit feedback

• Comprehensive roadshow via a combination of 1 x1 and group meetings

• Build early stage demand momentum to drive substantial subscription throughout the price range

• NetRoadshow®• Sets stage for

continued dialogue with the Buy-side

• Maximize proceeds while ensuring a stable aftermarket

• Allocate to high quality long-term investors at a level which ensures demand in the aftermarket and minimizes “flipping”

Investor Targeting

“Testing the Waters”

Research Analyst

Presentation

Educate Salesforce

Roadshow Bookbuilding Distribution

Pricing and Allocation

Documentation and Refine

Equity Story

PwC

Buyers of an IPO

45

IPO buyers

Long only funds

Small cap funds

Hedge funds

Index funds

Sector specific

fund

International funds

Retail / private banking

PwC

IPO Cost Estimation

46

The magnitude and scope of IPO costs can vary significantly from offering to offering based on a number of variables, such as the size of the offering, the complexity of the IPO structure, and your organization’s readiness to be a public company. Cost elements include:

One-time

organizational costs

Recurring

incremental costs

Based on our survey results,

on average companies incur

more than $1 million of

annually recurring costs as a

result of being public

Based on our survey results, on

average companies incur more

than $1 million of one-time costs

to convert their organization to

a public company

Going public costs Being public costs

Offering costs(directly attributed

to the offering)

Other incremental organizational

costs

• Underwriter fee (typically 4-7% of gross proceeds)

• Legal and accounting fees associated with drafting the registration statement and comfort letter

• Incremental road show expenses

• Additional audit, SAS 100review costs, Regulation S-X compliance, valuation reports

• Tax and legal entity restructuring costs in anticipation of the IPO and a potential Up-C structure

• Drafting new articles of incorporation, audit committee charter, by-laws, & other agreements

We estimate that on

average, companies incur

more than $1 million of

one-time costs as a result of

going public

In addition to underwriter

fees, on average companies

incur $4.2 million in

offering costs

• Costs to implement new financial reporting systems and processes

• Initial costs to document internal controls and comply with SOX

• Costs to identify and recruit a new board of directors

• Costs to implement new executive compensation plans

• Incremental costs of new FTEs (accounting, tax, legal, HR, IT, internal audit, IR)

• Professional fees for legal and accounting advice

• Incremental audit costs and 404 audit

• Annual TRA compliances

PwC

Board Diversity

47

Source: PwC, Annual Corporate Directors Survey, October 2012-2016 and October 2018

Source: PwC, 2018 Annual Corporate Directors Survey, October 2018

PwC

Scope of the IPO readiness assessment

A comprehensive IPO readiness assessment typically requires a thorough evaluation of the following areas of an organization:

48

Tax Executive compensation and HR

Accounting and financial reporting

Internal controlsFinance effectiveness

Enterprise risk management

TreasuryFinancial planning and analysis

Engage with investment banks

Internal auditLegal

Wealth management planning

Corporate strategy and development

Governance and leadership

Media and investor relations

Project management, change management, and

communication

Technology

PwC 49

Key participants in the IPO working group

Company Personnel

Investment Banker or Underwriter

Capital Markets Advisor

Company Counsel or Securities Counsel

Underwriter’s Counsel

Company personnel will need to provide the necessary information with which to prepare the document and be actively involved in all aspects of the registration process

A lead(s) or managing underwriter, works with a company to develop the registration statement, coordinate the roadshow, underwrite certain risks and form a syndicate

Capital markets advisors provide independent and objective advice to companies on key value-driving decisions and judgments throughout the IPO process

A company’s attorney will become the quarterback of its registration process and must have the ability to clearly explain challenging concepts around the transaction

Underwriter counsel's principal objective in reviewing the registration statement is to ascertain on behalf of the underwriter that the registration statement is complete and not misleading

Independent Auditors

Advisory Accountant

Independent auditors provide audits of the company’s financial statements and advise on both preparing the registration statement and on potentially sensitive or problematic accounting issues

An advisory accountant can offer advice and assistance to organizations

with limited experience in IPOs and executing capital markets transactions and is generally not restricted by independence standards

PwC

PwC’s Deals Practice IPO Services

50

Accounting and financial

reporting

Financial planning and

analysis

Internal audit and controls

Tax

Executive compensation

and HR

Treasury

Enterprise risk

management

Corporate Strategy and development

Governance and

leadership

Capital Markets Advisory

Capital Markets Advisory: What comparables should I look at for my IPO? How will my company be valued? How much capital do I need to raise?

Accounting and financial reporting: How do I develop and prepare my SEC financial statements and disclosures?

Governance and leadership: How do I meet my new governance requirements?

Corporate strategy and development: How do I improve my capital structure and evaluate financing alternatives?

Enterprise risk management: How do I evaluate my ability to assess and manage risk?

Treasury: How do I manage the proceeds from my offering?

Financial planning and analysis: How do I improve my budgeting, planning, and analysis function?

Internal audit and controls: How do I prepare to comply with SOX?

Tax: How do I develop my jurisdiction and domicile tax plan?

Executive compensation and HR: How do I benchmark, plan, and design my executive compensation plan?Project management advisory: How can

l accelerate my IPO closing process?

IPO services

pwc.com

Thank you

© 2019 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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Navigating your IPO

How PwC can help

PwC Deals IPO Services

2 Navigating your IPO: How PwC can help | PwC

Where to start?

You’ve decided to explore the potential for an Initial Public Offering. But where do you start your exploration? You know it’s going to be a transformational event. You know there are many advisors you will need on board to help you navigate the significant challenges of going public.

This is where PwC can help

Most private companies are likely unprepared to be public and will need a significant investment of management time and funds to bring their capabilities up to public company standards. This period of preparation which PwC calls “readiness” can be 12-24 months depending on the maturity of the company. The first step to readiness is an assessment of where your company currently stands. You can’t change what you don’t measure. PwC can help you properly assess and identify gaps in your company’s public company preparedness.

Ask yourself a few basic questions to test your readiness to be public

Q1) Do you have the appropriate number of people with the requisite skill sets needed in your finance department?

Consideration: Having the right number of people in the finance function is not only critical to enabling the completion of key tasks like closing the books, forecasting and the preparation of the ongoing reporting requirements as a public company, but also enabling that a strong control environment is maintained. In PwC’s analysis of material weaknesses (MW) a key issue is insufficient accounting personnel (27% of MWs) leading to issues with insufficient segregation of duties (8% of MWs) (see figure 1). You will need to develop the right people and processes to prepare a thorough budget for at least 4 quarters in the future for earnings releases.

Q2) Are you currently constructed with an optimal tax and organizational structure from a tax perspective for an IPO?

Consideration: Tax structure can have a significant impact on a public company’s financial reporting, legal, and tax outcomes and should be undertaken early to avoid unnecessary costs, inefficient processes or unexpected issues and delays. There are complex tax structures that are becoming increasing popular, some of which can be extremely time consuming and from our experience can take up to 6 months for a company to design and establish.

Navigating your IPO: How PwC can help | PwC 3

Figure 1: Material weakness disclosures

Source: SEC Filings, S&P Capital IQ, and PwC Analysis. Excludes SPACs. Excludes companies that raised less than $25M. Material weaknesses were taken from S-1, S-11 and F-1 filings, however annual breakouts are by pricing date to allow for year over year analysis. Data from 1/1/2011 to 6/30/2018.

Q3) How long does it take you to close your books and what does that include regarding management effort?

Consideration: The close of the ledger may be within 10 days, however that probably doesn’t include the required footnote disclosures (US GAAP and SEC), preparation of the Management Discussion & Analyses and completion of the required internal certifications and reviews by auditors, audit committee and board of directors. As a public company, you’ll need to be able to meet all of this within 40 or 45 days following the close of the quarter and 60, 75 or 90 days at the year-end.

Q4) Are your internal controls and audit procedures public company ready?

Consideration: Similarly, our review of newly minted public companies shows 38% of MWs stem from a lack of procedures and review processes (see figure 1). Prior to going public, you will need to establish a process for your internal review and sign-off of internal controls to allow for the CEO and CFO to certify that the financial statements are fairly presented and contain no untrue statements of material facts. These certifications are required to be filed in the first SEC filings after going public. If any material weaknesses have been identified, they would be disclosed in the registration statement.

Q5) Is your compensation plan competitive with companies like yours in the public markets?

Consideration: Over 90% of companies introduced at least one new equity compensation plan at IPO. Shifts from stock options to restricted stock and the introduction of performance plans in conjunction with options and/or restricted stock are common. It is important to develop a compensation strategy that’s right for the company in order to retain key executives and for long term incentive plans.

Insufficient accounting personnel

Lack of review processes

Lack of procedures

Inappropriate reconciliation of complex or non-routine transactions

Lack ofsegregationof duties

Insufficient technology systems

Other

27%

20%

18%

17%

8%

5%5%

The first step to readiness is an assessment of

where your company currently stands.

4 Navigating your IPO: How PwC can help | PwC

IPO readiness

Getting started

PwC has committed over 500 partners and staff to helping companies like yours assess and then build the capabilities to be a public company. We’ve developed a proprietary IPO readiness assessment using a holistic framework which is both time efficient for senior management and thorough in scope. With one call to our Capital Markets team, you can mobilize a team to be with you quickly and be ready to advise and assist you in your assessment.

When should you know your state of readiness?

Most companies underestimate the significant effort and time needed to develop the capabilities needed to be public. Twelve to 18 months ahead of an IPO kickoff with your legal and banking team would be the optimal time to assess your state of readiness. This affords your team the time needed to build out your capabilities in such a way that your IPO process proceeds smoothly. It’s much more challenging to try and develop your capabilities while in the middle of an IPO process. You still have to be able to run your company and the demands of a readiness are significant as are the calls on your time from the IPO process.

How do we deliver?

We typically need just one day of your time supported by selective follow up calls. PwC can mobilize a team in any region of the US, or the globe for that matter, to help you assess your readiness in a very efficient manner. We will ask you for one day of your time for a workshop where we will discuss with your most senior executives how you are managing and executing your business across everything highlighted in the five questions we posed above. Beyond those core areas, which are often complex and time intensive to build, we will cover a wide range of other topics including risk management, technology, cyber security, governance, corporate strategy, treasury, legal, investor relations and project management. Selected follow up via conference calls enables us to round out our picture of your readiness.

What do you achieve?

In a matter of 3-4 weeks you will have our initial recommendations by functional area to be public company ready. You will gain knowledge on how to navigate the winding road to readiness and where you may need PwC or other advisors to help you. You will be able to determine where the commitment of time and resources will likely be substantial, as well as where you already possess the appropriate level of capabilities—in keeping with a public company state of readiness.

We’ve developed a proprietary IPO readiness assessment using a holistic framework which is both time efficient for senior management and thorough in scope.

Navigating your IPO: How PwC can help | PwC 5

The big picture

Start early

The portrayal of the timeline that needs to be in your mind is below. Unlike timelines that focus on the “going public” process typically signified by the kickoff meeting with bankers and lawyers, the PwC timeline is thorough. We know from experience that companies need time to transform their practices internally and move the organization into a public company mindset. If you are thinking about being public in 1-2 years, you are currently in the hot zone of this timetable. The PwC readiness assessment applies a holistic framework designed to help you guide your company through pricing into public company status. Again, your guiding principle should be to create an organization capable of “being” public vs simply “going” public.

The IPO timeline

IPO process execution

Going public Execution of the IPO process

Post-IPO/Public company Pre-Kickoff/Planning

12-18 months Years 6-9 months

IPO pricing Kickoff meeting

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

Readiness Planning and preparation

Assessment

6 Navigating your IPO: How PwC can help | PwC

PwC as your IPO advisor

We offer:

A uniquely positioned firm that has mobilized a thorough set of integrated services to advise you from your strategic planning stage through the execution of 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 thoroughly address the components of your offering.

A proven track record involving thousands of complex IPOs to help you move forward quickly and efficiently.

Advising you in your proactive resolution of issues hopefully decreasing surprises and delays in your IPO process.

Deep technical skills combined with in-depth industry knowledge and experience that helps us provide services tailored to your unique needs.

What our clients are saying about IPO readiness and PwC

“PwC is really the only choice when it comes to IPO work.”

– Corporate Controller & Chief Accounting Officer, Technology Company

“We never did an IPO assessment and I wish we would have. It would have made the IPO process much easier. It was much more intense and time consuming than I had expected.”

– Corporate Controller & Chief Accounting Officer, Technology Company

“We had a huge initiative to get to our IPO. PwC brought their ‘A game’– their depth of technical expertise, cross functional approach to an IPO and overall leadership skills helped us to achieve our IPO in a very short timeframe.”

– CFO, Energy Company

“A lot of firms can help with the project. The difference is the people. PwC brings an experienced service team that understands our company and the transaction challenges, and know how best to get the work done.”

– Chief Accounting Officer/Controller, Manufacturing Company

“It was a huge undertaking to get through the Registration process. PwC’s commitment and effort enabled our portfolio company to overcome language, cultural and technical hurdles literally on a global scale. They assembled a strong team, accessed critical internal channels and were highly responsive throughout the process.”

– CFO, Private Equity

“The PwC team was outstanding and they certainly made the path getting to bell-ringing much more tolerable than it would have been otherwise. We all appreciated their support very much.”

– Senior Vice President & Chief Accounting Officer, Hospitality Company

“We really appreciate all the great work the PwC team did on our offering. Your help got us through a critical junctures –technical accounting hurdles, due diligence support and S-1 crunch time. Great work!”

– Treasurer, Energy Company

“PwC is a great firm, but service comes down to people, and they are truly a fantastic service provider.”

– CFO, Private Equity

Navigating your IPO: How PwC can help | PwC 7

PwC’s IPO services*

PwC’s thorough IPO services brings together an integrated set of capabilities to help companies as they prepare for the public markets. The following chart illustrates many of the areas an organization will need to focus on to improve as the organization embarks on the going public process and transitions to operate as a public company.

Internal controls & internal audit

Advise client relating to:

Client’s development of an internal audit function

Client’s evaluation of internal audit co-source and outsourcing solutions

Advise client relating to:

SOX readiness assessment and development of a remediation plan, if needed

Internal control documentation, internal control testing and development of its CEO/CFO annual and quarterly certification process

* PwC may not be able to provide all of these services to PwC

audit clients or clients with independence restrictions.

Tax

Advise client relating to:

Client’s application of ASC 740—tax accounting and disclosures

Client’s application of Foreign Account Tax Compliance Act (FATCA)

Client’s tax department organizational design, tax processes and controls

Accounting and financial

reporting

Financial planning

and analysis

Internal audit and controls

Tax

Executive compensation

and HR

Treasury

Enterprise risk

management

Corporate strategy and development

Governance and

leadership

Capital markets advisory

PwC’s IPO

services

8 Navigating your IPO: How PwC can help | PwC

Accounting and financial reporting

Advise client in its development and its preparation of SEC financial statements and disclosure

Advise client in its development of MD&A, summary/selected financial data, capitalization/ dilution tables and other financial data in a registration statement, prospectus or offering memorandum

Advise client in improving its finance organization, close process, general finance and accounting processes and management reporting

Advise and assist client with its documentation, identification and advise client on its resolution of critical, complex and judgmental accounting issues and policies

Advise and assist client with its development of responses to SEC comment letters

Advise and assist client with its development of Article 11 pro forma support schedules with client’s financial data and client’s pro forma adjustments

Financial planning and analysis

Advise client on improving its budgeting, planning and analysis function and related processes

Executive compensation and HR

Advise client relating to:

Benchmarking, program planning and design of client’s executive compensation processes

Client’s preparation of compensation and governance disclosures

Client’s HR systems and processes

Enterprise risk management

Advise client with its implementation of risk management framework and processes

Advise and assist client relating to:

Evaluation of its risk management assessment and evaluation of capabilities

Client’s development or refinement of its risk management framework

* PwC may not be able to provide all of these services to PwC

audit clients or clients with independence restrictions.

Capital markets advisory

Advise client relating to:

Development of its IPO story and identification of KPIs

Identification of methods to increase and improve value

Identification of client’s comparables

Client’s advisor selection process including underwriters, research analysts, exchange

Client’s analyst and roadshow presentations

Project management advisory

Advise client relating to:

Development of flexible and scalable project management solutions

Development of its project governance structure, communication framework and status reporting mechanism

Development of its readiness assessment, timelines and project plans

Development of an issue resolution framework and organization around complex workstream structures

Options to accelerate its IPO closing process

Treasury

Advise client relating to:

Development of its treasury strategy

Improving its bank and cash management infrastructure

Selection and implementation of its treasury systems and processes

Corporate strategy and development

Advise client relating to:

Improvement of its capital structure and evaluation of financing alternatives

Client’s development of its strategic plan to increase value

Governance and leadership

Advise client relating to:

Client’s new governance requirements

Client’s board and audit committee composition

Development of its charters, bylaws and whistleblower program

Navigating your IPO: How PwC can help | PwC 11

Our insights

From keeping abreast of the capital raising landscape, improving M&A processes to increase deal value, understanding how to help advise on executing an IPO and evaluating exit strategies, PwC Deals brings you research and insights on the business issues that matter. To keep abreast of the latest in capital markets, sign up for our Capital Markets Watch weekly mailing list.

Download these publications and more at: www.pwc.com/us/en/deals/publications

8 Navigating your IPO: How PwC can help | PwC

PwC US at a glance

PwC ranked

#1 Most powerful professional services brand by Brand Finance

PwC provides assurance, advisory and tax services for over

90%

of FT Global 500 companies

PwC firms provided services to:

157 countries

in our global delivery network

PwC advises and works with

100,000+

entrepreneurial and private businesses across the world

57,000+

people

3,000+ Dedicated Deals Professionals

We advise on over

5,500

transactions in the US each year

80

locations

Our project teams are supported by

seasoned deals research and analytics capabilities

Fortune Global 500 companies

US Fortune 500 companies

422 410

© 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

Contact PwC Deals

For a deeper discussion abou t IPO services, please contact one of our practice leaders:

Mike Gould

IPO Services Senior Partner

Chicago

(630) 456 0729 mike.gould@pwc.com

David Ethridge

US IPO Services Leader

New York

(973) 615 1091 david.a.ethridge@pwc.com

Daniel Klausner

US Capital Markets

Advisory Leader

New York

(646) 573 6756

daniel.h.klausner@pwc.com

Derek Thomson

Capital Markets

Research Leader

New York

(646) 416 0386 derek.thomson@pwc.com

Samantha Hauptman

Deals Director

New York

(201) 602 9190 Samantha.a.hauptman@pwc.com

A Lexis Practice Advisor® Practice Note byAnna Pinedo and Alexandra Perry, Mayer Brown LLP

IPO Prospectuses: Avoiding and Responding to Common SEC Comments

1

Anna Pinedo Alexandra Perry

This practice note examines some of the issues most commonly raised in initial Securities and Exchange Commission (SEC) comment letters on registration statement filed for initial public offering (IPOs). It is intended to guide you, as counsel to an IPO company, in assisting your client in efficiently navigating the SEC comment and review process.

This practice note discusses comments that apply to IPO prospectuses generally, including comments on plain English principles and expert consent requirements, and comments on specific sections of a prospectus, including the risk factors, management’s discussion and analysis of financial condition and results of operations, and others. It provides excerpts from, and links to, representative SEC comment letters, and offers drafting and other tips to help issuers avoid receiving these types of comments or, failing that, to respond effectively to the SEC’s concerns.

This practice note does not provide a comprehensive list of the types of comments that the staff of the SEC’s Division of Corporation Finance (SEC staff or staff) can issue, and does not address SEC staff comments on executive compensation disclosure, which has become less important since the Jumpstart Our Business Startups Act of 2012 (JOBS Act) enabled emerging growth company (EGCs) to provide less detailed executive compensation disclosures in their registration statements, which most EGCs undertaking IPOs have done. It also does not discuss financial statement and related accounting issues, which are typically addressed by the issuer’s chief financial officer and its outside auditor. SEC staff comments can vary widely from offering to offering and depend on the issuer’s industry sector, the stage of the issuer’s business, and the issuer’s financial condition. Accordingly, each issuer must draft its IPO prospectus disclosures to accurately reflect its own unique facts and circumstances.

For information about preparing the registration statement and prospectus for an IPO, see Registration Statement and Preliminary Prospectus Preparations for an IPO, Top 10 Practice Tips: Drafting a Registration Statement, and Form S-1 Registration Statements. For information about the IPO process, see Initial Public Offering Process. For information generally on responding to SEC comment letters and the SEC staff review process, see SEC Comment Letter Responses and Understanding the SEC Review Process.

SEC REviEw PRoCESSAfter a company files a registration statement on Form S-1 (or Form F-1 for foreign private issuer), the SEC staff will perform a cover-to-cover review of the document to ensure compliance with the applicable disclosure and accounting requirements under the Securities Act of 1933, as amended (Securities Act). The SEC staff does not

2

IPO Prospectuses: Avoiding and Responding to Common SEC Comments

evaluate the merits of an investment in an IPO but rather focuses on whether the disclosures provided in the registration statement provide investors with enough information to make an informed investment decision.

The SEC Staff’s Comment LetterVirtually all IPO registration statements receive comments. The SEC staff will generally issue a comment letter within 30 days from the date the registration statement is filed (whether submitted confidentially or publicly on EDGAR). According to the SEC’s Fiscal Year 2016 Annual Performance Report, available at https://www.sec.gov/files/secfy18congbudgjust.pdf, in 2016 the SEC staff issued initial comments within an average of 25.5 days.

The SEC staff’s comments will include a description of any deficiencies identified in their review and may also include requests for supplemental information from the company if the staff believes the disclosures do not comply with SEC disclosure requirements or omit information that may be material to investors. Each comment letter is unique to the filing and may include comments that require substantial revisions to the registration statement. The number of comments in the SEC staff’s initial comment letter can range from just a few to 70 or more. There may be several rounds of letters from the SEC staff and responses from the company until the issues identified in the staff’s review are resolved.

Responding to SEC Staff Comment LettersYou should work with your client, underwriters’ counsel, the company’s auditor, and the other members of the IPO working group to carefully address each SEC staff comment in the company’s response letter and in any amended registration statement filed with it.

When responding to the SEC, it is important to be mindful of your responses as they will eventually be made publicly available. If you do not fully understand a specific comment, you should contact the SEC staff reviewer for clarification so you can provide an appropriate response. Thoughtful, well-written response letters are crucial to resolve SEC staff comments efficiently. Responses should focus on the SEC staff’s specific questions and cite the SEC’s rules, guidance, and other authoritative sources (especially for accounting comments) wherever possible. Although it is helpful to review other registrants’ response letters, a company’s response letter should address its unique facts and circumstances. If an amendment to the registration statement is being filed with the response letter, the responses should indicate specifically where the revisions have been made to address the SEC staff’s comments.

You should not assume that receiving a comment means that the SEC staff reviewer disagrees with the company’s approach or disclosure. Often comments seek additional information and clarification to better understand the company’s position. You should not, however, respond to a comment by adding disclosures to the registration statement that you believe to be immaterial. If you believe that a comment concerns an immaterial matter, you should communicate that to the SEC staff reviewer (legal or accounting) responsible for the comment as early as possible in the review process to avoid causing any delays in resolving the comment. The response letter should thoroughly explain the judgments the company applied in drafting such disclosure to assist the SEC staff in understanding why additional disclosure is not material to investors or necessary to comply with the disclosure requirements.

Generally, SEC comment letters request responses within 10 business days. However, if you believe more time is needed to respond to the comments, you should discuss this with the appropriate SEC staff reviewer.

Once all the SEC staff’s comments on its registration statement have been resolved, the company can request that the SEC declare the registration statement effective, which allows it to proceed with the IPO. The SEC

3

IPO Prospectuses: Avoiding and Responding to Common SEC Comments

staff will upload its comment letters and the company’s responses to EDGAR within 20 days of declaring the registration statement effective.

For additional information about the SEC review process, see Understanding the SEC Review Process.

To minimize the number of SEC staff comments on your client’s registration statement, you should review staff comment letters and company response letters from recently completed IPOs in the same industry to identify industry-specific issues that the SEC staff may have, as well as IPOs for companies that have adopted similar accounting principles to identify any accounting-specific issues that the SEC staff is focused on. Foreign private issuers should also review SEC comment letters and company response letters from recently completed IPOs for issuers with the same country of domicile. However, many comments tend to fall under the recurring themes discussed below.

Common SEC CommEnTS on iPo PRoSPECTuSESThe following types of comments apply to prospectuses generally.

Plain EnglishRule 421 under the Securities Act (17 CFR 230.421) requires companies to use plain English writing principles in their prospectuses. Here are some examples of comments received by issuers that failed to do so:

“Throughout the prospectus numerous statements in your disclosure are unclear because they are not written in plain English or the concept is not fully described. Please review your entire prospectus to ensure that your disclosure throughout is written in plain English and the concepts that you describe are fully explained. See Rule 421(b) of Regulation C.” (SEC Comment Letter to Achison Inc. (Sept. 20, 2016), Comment #1).“Please note that the summary is subject to the plain English principles under Securities Act Rule 421(d). Revise to eliminate unnecessary redundancy. For example, the fourth paragraph in this section appears to repeat much of the information in the first paragraph.” (SEC Comment Letter to UPAY, Inc. (Aug. 4, 2016), Comment #1).

“Throughout your registration statement you utilize industry jargon. For example purposes only, we note your reference to “commercial real estate CDOs” on page 6. Please concisely explain these terms where you first use them.” (SEC Comment Letter to TPG RE Finance Trust, Inc. (May 24, 2017), Comment #3).

“Please revise to explain industry jargon to an investor not in your business, such as “technology white space,” and eliminate marketing language.” (SEC Comment Letter to Ameri Holdings, Inc. (Mar. 6, 2017), Comment #9).

To avoid this type of comment, you should write in short declarative sentences, use definite and concrete everyday language, use active voice, present complex information in tabular format, and avoid legal and industry jargon and double negatives. Descriptive headings and bullet lists are also recommended. If highly technical or legal jargon cannot be avoided, then you should include a glossary in the prospectus to facilitate the reader’s understanding of the prospectus disclosure.

Eliminating RepetitionThe SEC staff may comment if there is too much redundant information in the prospectus. The problem of repetitive disclosure most commonly arises in the summary section of the prospectus. Here is an example of this type of comment:

4

IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“Please identify those aspects of the offering and your company that are most significant, and highlight these points in plain, clear language. The summary should not, and is not required to repeat the detailed information in the prospectus. The detailed description of your business, competitive strengths, and strategy is unnecessary since you repeat them verbatim in the business section of the prospectus.” (SEC Comment Letter to Valvoline Inc. (Jun. 27, 2016), Comment #2).

In preparing the summary section, you should avoid repeating too much information from the business section. The summary should highlight the most significant aspects of the company’s business, with a lengthier description reserved for the business section. Item 503(a) of Regulation S-K (17 CFR 229.503) provides that the prospectus summary should be brief and provide an overview of the key aspects of the offering, and the SEC staff will object if it is too long. When drafting the summary, you and your client should consider and identify those aspects of the offering that are most significant and determine how to best highlight those points in clear, plain language.

Clarifying the Basis for the issuer’s StatementsAlthough the prospectus is, in part, a marketing tool, companies should avoid hyperbolic statements and marketing language. Statements of belief should be clearly labeled as such and be accompanied by an explanation of the basis for each belief. Companies should also be cognizant of potential liability under the federal securities laws for misstatements or omissions in the registration statement. Here are some examples of this type of comment:

“We note your statement that you believe Top Kontrol is “the most advanced anti-theft and personal safety automobile device of its kind currently available.” Please expand here and in all applicable places in the document to disclose the nature of the Top Kontrol device, such as how it is installed and how it works. Please also better explain the basis for your belief that it is the “most advanced” of its kind currently available. In this regard, we note that on page 25 you compare Top Kontrol to Viper and LoJack. As each of Viper and LoJack offer multiple products with multiple features, please clarify to which of their products you are referring in making the comparison to Top Kontrol.” (SEC Comment Letter to SecureTech Innovations, Inc. (Mar. 15, 2018), Comment #2).

“Disclose the basis for your assertion that nervonic acid “is known to be beneficial to memory related brain health, anti-aging, blood lipid regulation, and anti-fatigue symptoms.” Disclose whether this information is based upon management’s belief, industry data, reports/articles or any other source. In this regard, you state on page 14 that the benefits are claimed by studies. Elaborate upon the nature of these studies and whether you or a third party commissioned such studies.” (SEC Comment Letter to CAT9 Group Inc. (Jan. 23, 2018), Comment #6).

To avoid comments on statements about a company’s relative position in the industry, such as being a leader in a field, the company should disclose the relevant metric used for making the assertion, such as industry-wide sales figures or, if possible, a third-party source. It should also be clear when a statement is made based on management’s belief (i.e., “We believe that . . .”). Although phrasing a statement as a belief may weaken its impact, it can help companies avoid liability under federal securities laws for misstatements or omissions of material facts. If a company has a good faith basis for its belief or opinion, and does not omit any material facts necessary to make the statements not misleading, statements of belief and opinion should be insulated from liability under Section 11 of the Securities Act (15 U.S.C. § 77k). Additionally, a good faith belief can support a defense against claims asserted under Section 10(b) (15 U.S.C. § 78j) of the Securities Exchange Act of 1934, as amended (Exchange Act), and Rule 10b-5 thereunder (17 CFR 240.10b-5), which require proof of an intent to deceive, manipulate, or defraud to impose liability.

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

For more information about the liability under the federal securities laws of participants in IPOs, see Liability under the Federal Securities Laws for Securities Offerings and Liability for Securities Offerings Checklist.

The SEC staff may, nonetheless, ask for the company’s basis for a statement of belief. When responding to such comments, the company should carefully review how the statement of belief is phrased and provide support where possible, as in this example:

SEC Comment:

“Please tell us the basis for your belief that your company is ‘the only service available which is a patented methodology to effectively safeguard an individual’s personal rights.’” (SEC Comment Letter to Right of Reply Ltd (Nov. 27, 2017), Comment #2).

Company response:

“We have amended our disclosure to state that the Company is “one of the only…” in lieu of “the only…”. We have also attached as Exhibits A and B to this letter opinions of counsel for the Company which we believe supports the statement highlighted in your comment.” (Response to SEC Comment Letter to Right of Reply Ltd. (Jan. 3, 2018), Response #2).

The SEC staff will also typically ask the company to provide copies of all sources cited in the prospectus:

“Please supplementally provide the report by the National Institute of Health Research in the United Kingdom referred to in this section.” (SEC Comment Letter to OncoGenex Pharmaceuticals, Inc. (May 17, 2017), Comment #7).

“Please provide us with supplemental support for the factual assertions made throughout your prospectus. To the extent you do not have independent support for a statement, please revise the language to clarify the basis for the statement. In addition, to the extent that some of these statements are intended to be qualified to your belief, please revise your disclosure to state the basis, to the extent material, for your belief.” (SEC Comment Letter to FTS International, Inc. (Jan. 31, 2017), Comment #7).

To facilitate a timely response, you should prepare copies of all relevant third-party reports in advance and clearly highlight the relevant portions of the reports that support the statements included in the prospectus. Third-party reports and other supplemental information submitted in response to SEC staff comments are generally not filed on EDGAR and thus will not be made publicly available.

Experts’ ConsentsRule 436 under the Securities Act (17 CFR 230.436) requires that the written consent of any expert (e.g., the issuer’s independent auditor) or counsel whose report is quoted or summarized in the prospectus be filed as an exhibit to the registration statement. Here are some examples of this type of comment:

“We note your response to comment 5 and your revised disclosure on page 12. It appears that this disclosure is being attributed to Savills PLC. Please provide an analysis as to why this third-party attributed disclosure is not expertized disclosure requiring a consent. Refer to Rule 436 of the Securities Act and Securities Act Compliance and Disclosure Interpretation Question 233.02.” (SEC Comment Letter to Majulah Investment, Inc. (Oct. 23, 2017), Comment #2).

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“We note your disclosure throughout that Egan-Jones has rated the CM Loan at “A+” and that you have rated the loan an “A.” Please file the consent for the Egan-Jones Ratings Company, as required by Securities Act Rule 436. Alternatively, please remove the references to the credit rating. For further guidance, please consider our Securities Act Rules Compliance and Disclosure Interpretations Questions 233.04 and 233.05.” (SEC Comment Letter to Korth Direct Mortgage, LLC (Sep. 8, 2017), Comment #13).

“We note references throughout your prospectus to third-party sources, such as Notch Consulting and ACT Research, for statistical, qualitative and comparative statements contained in your prospectus. Please provide us with copies of any materials that support third-party statements, appropriately marked to highlight the sections relied upon. Please also tell us if any reports were commissioned by you for use in connection with this registration statement and, if so, please file the consent as an exhibit. See Rule 436 of Regulation C of the Securities Act of 1933.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #4).

The SEC staff will not require a consent when the prospectus cites a publicly available report, but will require a consent when the report or other information was prepared by a third party at the company’s request. Third parties may be reluctant to be deemed to be “experts” because experts are subject to liability under Section 11 of the Securities Act for any material misrepresentations in or omissions from their reports or other information included in the prospectus. Therefore, before filing your client’s initial registration statement, you should determine whether any third-party information included in the prospectus will require a consent and whether the third party(ies) would be willing to deliver a consent.

If the company believes that an expert’s consent is not required, it should explain its position in its response to the SEC:

SEC comment:

“We note your reference to a study commissioned by you and conducted by Millward Brown regarding your brand awareness among women in the United States. Please file the consent of the named researchers as an exhibit to your registration statement or provide us with your analysis as to why you do not believe you are required to do so. Refer to Rule 436 under the Securities Act.” (SEC Comment Letter to Stitch Fix, Inc. (Nov. 1, 2017), Comment #2).

Company response:

“The Company respectfully submits that Millward Brown is not an “expert” under Rule 436. Rule 436 requires that a consent be filed if any portion of a report or opinion of an expert is quoted or summarized as such in a registration statement. Section 7 of the Securities Act of 1933, as amended, provides that an expert is “any accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him.” The Company respectfully submits that Millward Brown, the third party provider of this study, is not among the class of persons subject to Section 7 and Rule 436 as “experts” unless the Company expressly identifies such provider as an expert or the statements are purported to be made on the authority of such provider as an “expert.” Accordingly, the Company believes that Millward Brown should not be considered an “expert” within the meaning of Rule 436 and the federal securities laws.

In addition, the Company notes that the consent requirements of Section 7 and Rule 436 are generally directed at circumstances in which an issuer has engaged a third party expert or counsel to prepare a valuation, opinion or other report specifically for use in connection with a registration statement. The information from this study included in the Amended Registration Statement was not prepared in connection

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

with the Registration Statement or the Amended Registration Statement. In fact, the study was commissioned in November 2016, at which time the methodology, study details, key deliverables and price were set. As a result of the foregoing, the Company respectfully submits that the third party provider of this study is not an expert of the kind whose consent is required to be filed pursuant to Rule 436.” (Response to SEC Comment Letter to Stitch Fix, Inc. (Nov. 6, 2017), Response #2).

In the example above, the company, through its outside counsel, responded to the SEC staff’s comment citing the applicable rules to explain why an expert’s consent was not needed.

Signatures, Exhibits, and material AgreementsThe SEC staff may question the completeness and adequacy of exhibits, audit reports, and management signatures included in or omitted from the registration statement. In particular, the staff often inquires about seemingly material contracts that have not been filed as exhibits to the registration statement, and a company may need to amend its filing to resolve these questions. Here are some examples of this type of comment:

“We note your disclosure that Dr. O’Neill currently has a consulting agreement with the company. Please file this agreement as an exhibit or tell us why you believe that you are not required to pursuant to Item 601(b)(10) of Regulation S-K and disclose the material terms of this agreement in this section.” (SEC Comment Letter to BioXcel Therapeutics, Inc. (Feb. 23, 2018), Comment #2).

“We note that on August 22, 2017, you received an in-process research and development product candidate from a related party together with an agreement with a third party for the development, manufacturing, and commercialization of the product. Please expand your disclosure, here and elsewhere, to identify the product and collaborative partner. Additionally, disclose the material terms of the agreement, such as the duration, termination provisions, and each party’s rights and obligations. File the agreement as an exhibit or provide an analysis supporting your determination that you are not required to file it pursuant to Item 601(b)(10) of Regulation S-K.” (SEC Comment Letter to Sol-Gel Technologies Ltd. (Jan. 12, 2018), Comment #1).

In determining which contracts to file as exhibits to the registration statement, you should apply the definition of “material” in Securities Act Rule 405 (17 CFR 230.405), which provides that information is material if “there is a substantial likelihood that a reasonable investor would consider it important in determining whether to purchase the security registered.” You should also carefully review Item 601(b)(10) of Regulation S-K (17 CFR 229.601), which lists the types of contracts that are considered to be material, including contracts not made in the ordinary course of business; contracts with directors, officers, or shareholders other than contracts involving the purchase or sale of securities at market price; contracts on which the company’s business is substantially dependent; contracts for acquisition or sale of substantial amounts of property, plant, or equipment; and leases for property held by the company.

See the SEC’s Compliance & Disclosure Interpretations for Regulation S-K, available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm, for the SEC staff’s views on what may be required to be filed as an exhibit to the registration statement.

For further guidance on making materiality determinations, see Materiality Determination Guidelines, Materiality: Relevant Laws and Guidance, and Determining Materiality for Disclosure Checklist.

Emerging Growth CompaniesThe JOBS Act created a new category of issuer, called an EGC, to encourage public offerings by small and developing companies. EGCs are subject to less stringent SEC disclosure and reporting requirements, including

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

scaled (reduced) disclosures in their IPO registration statements. In its comment letters, the SEC staff has primarily asked EGCs to discuss: (1) their EGC status and their elections under the EGC provisions of the JOBS Act; (2) how and when they may lose EGC status; and (3) their qualification for an exemption from Section 404(b) of the Sarbanes-Oxley Act of 2002 (i.e., the requirement to provide an auditor’s attestation report on the issuer’s internal control over financial reporting). These are some examples:

“Please update your disclosure throughout the prospectus describing how you may lose emerging growth company status. In this regard, we note that the gross revenue threshold is $1,070,000,000 and the non-convertible debt limit is $1,000,000,000. Refer to the definition of Emerging Growth Company found in Rule 405 of the Securities Act of 1933.” (SEC Comment Letter to Atlantic Acquisition II, Inc. (Dec. 5, 2017), Comment #4).

“We note your response to our prior comment 2 and your revised disclosure that you are ‘an emerging growth company’ as defined in the Jumpstart Our Business Startups Act. Please revise your registration statement to:

● Describe how and when a company may lose emerging growth company status ● Briefly describe the various exemptions that are available to you, such as exemptions from Section 404(b) of

the Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Exchange Act; and ● State your election under Section 107(b) of the JOBS Act:

� o If you have elected to opt out of the extended transition period for complying with new or revisedaccounting standards pursuant to Section 107(b), include a statement that the election is irrevocable; or

� o If you have elected to use the extended transition period for complying with new or revised accountingstandards under Section 102(b)(2), provide a risk factor explaining that this election allows you to delaythe adoption of new or revised accounting standards that have different effective dates for public andprivate companies until those standards apply to private companies. Please state in your risk factorthat, as a result of this election, your financial statements may not be comparable to companies thatcomply with public company effective dates. Include a similar statement in your critical accounting policydisclosures.”

(SEC Comment Letter to Achison Inc. (Oct. 19, 2016), Comment #1).

To avoid these types of comments, a company should include in its prospectus:

● If it has elected to be an EGC ● How it qualifies for EGC status ● How and when it may lose its EGC status ● The elections it has made under the EGC provisions ● Any related risk factors

For more information about EGCs, see IPO Requirements for Emerging Growth Companies Checklist, Emerging Growth Company Practice Guide, and Top 10 Practice Tips: Emerging Growth Companies.

Foreign Private issuersThe SEC staff’s comments to foreign private issuers have included financial accounting and other disclosure topics, many of which are generally like those issued to domestic filers and relate to issues discussed in other

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

sections of this practice note (although SEC staff comments to foreign private issuers on financial statement issues may refer to international financial reporting standards (IFRS) rather than U.S. generally accepted accounting principles (GAAP)).

CommEnTS ThAT APPLy To SPECiFiC SECTionS oF ThE PRoSPECTuSThe following types of comments relate to the disclosure included in specific sections of an IPO prospectus.

management’s Discussion and Analysis of Financial Condition and Results of operations (mD&A)SEC staff comments on MD&A are common and tend to focus on results of operations, critical accounting policies and estimates, and liquidity matters. Additionally, the SEC staff often comments on the use of financial measures not presented in accordance with U.S. (or IFRS) GAAP (non-GAAP financial measures), which, if included in the prospectus, typically appear in the MD&A section.

Results of operationsThe SEC staff often requests that companies explain the results of their operations with greater specificity, including identifying underlying drivers for each material factor that has affected their earnings or that is reasonably likely to have a material effect on future earnings. Here are some examples of these type of comments:

“Please note that the purpose of Management’s Discussion and Analysis (MD&A) is to provide information necessary to a reader’s understanding of the registrant’s financial condition, changes in financial condition and results of operations, as required by Item 303(a) of Regulation S-K. Specifically, where the consolidated financial statements reveal material changes from year to year in one or more line items, the registrant shall discuss the underlying reason(s) for the changes to assist in understanding their business. In this regard, please revise your MD&A to provide a robust discussion of your financial statements as previously requested.” (SEC Comment Letter to International Land Alliance, Inc. (Feb. 17, 2017), Comment #1).

“We refer to your discussion of regulatory changes in Brazil affecting higher education. You state that these program changes had an adverse impact on you in 2015 and are likely to have an adverse impact on you in 2016. It is not clear how and to what extent these changes impacted your results of operations in 2015 and how you expect them to affect you in 2016. Accordingly, please expand your disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations to provide a more informative analysis and discussion of the effect on your results of operations in 2015 and how you expect these changes to impact your revenue and related income in 2016. Refer to Item 303(a)(3) of Regulation S-K and Section III of SEC Release No. 33-8350.” (SEC Comment Letter to Laureate Education, Inc. (May 26, 2016), Comment #1).

“We note your September 29, 2015 acquisition, from an entity under common control, of what appears to be a substantial custom design on-line educational platform. Tell us and include in management’s discussion a description of the operating history of this educational platform. Address those financial and non-financial metrics you use to assess its operating performance. Identify any known trends and uncertainties arising from the platform’s historic operations that you expect to have a material impact on your prospects for future revenues.” (SEC Comment Letter to British Cambridge, Inc. (Dec. 4, 2015), Comment #5).

To avoid these types of comments, you should carefully review the instructions to Item 303(a)(3) of Regulation S-K (17 CFR 229.303) for preparing disclosure about an issuer’s results of operations. The disclosure should

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

include the key metrics that are monitored by management and how those metrics correlate to material changes in the company’s results of operations. The company should also describe any:

● Unusual or infrequent events or transactions that may materially affect its operations ● Significant components of its revenues and expenses necessary to understand the results of operations ● Known trends that have or are expected to have a material effect on its operations ● Material changes to revenues resulting from a business combination or introduction of a new product/service

line ● Segment information needed to understand the company’s operations

The SEC staff often requests that companies provide a more granular quantification and discussion of specific factors, including any material offsetting factors, that contribute to material changes in the results of operations period over period, as well as the business or economic reasons that contributed to those factors.

Critical Accounting Policies and EstimatesThe SEC staff often requests discussion and analysis of critical accounting policies and estimates, and criticizes companies that merely repeat the disclosure provided in the financial statement footnotes. Here are some examples:

“Please revise your filing to include a robust discussion and analysis of the critical accounting policies you name here. This disclosure should supplement, not duplicate, the description of accounting policies in the notes to the financial statements, and should provide greater insight into the quality and variability of information regarding financial condition and operating performance. The discussion here should present your analysis of the uncertainties involved in applying a principle at a given time or the variability that is reasonably likely to result from its application over time. Refer to the guidance in FR-72.” (SEC Comment Letter to X Rail Enterprises, Inc. (Jul. 3, 2017), Comment #8).

“Please disclose and discuss the critical accounting policies and estimates that required significant management judgement. It appears to us, at a minimum, you should enhance disclosures related to business combination, intangible assets, taxes, and stock compensation.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #25).

“Your disclosure should supplement, not duplicate, the description of accounting policies that are already disclosed in the notes to the financial statements. Please revise to limit your disclosure to significant accounting estimates and assumptions. Your disclosure should address accounting estimates and assumptions where the nature of which is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or where the impact of the estimates and assumptions on financial condition or operating performance is material. Refer to Item 5 of Form 20-F and Section V of SEC Release 33-8350.” (SEC Comment Letter to AGM Group Holdings Inc. (Jun. 9, 2017), Comment #16).

To avoid this type of comment, companies should focus their MD&A discussion of critical accounting estimates on the quality and variability of management’s most significant judgments and assumptions. The SEC staff’s comments have frequently targeted repetitive discussions about critical accounting estimates in MD&A, and the SEC staff has reminded companies that MD&A should supplement but not repeat the disclosures in the significant accounting policies note of the financial statements.

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

Liquidity mattersSEC staff comments on liquidity focus on disclosure and analysis of the drivers of an issuer’s cash flow. Here is an example:

“In addition to the disclosures provided, your discussion and analysis of operating, investing, and financing activities should focus on the primary drivers of and other material factors necessary to understand your cash flows and the indicative value of historical cash flows. Please revise to provide disclosure and analysis of the underlying drivers that affect your cash flows that are not readily apparent from your cash flow statements. Ensure that your discussion includes an explanation of the cash received from deposit payable and the investment in transaction monetary assets. In this regard, clarify whether transaction monetary assets are available to fund your operations, or whether they are considered restricted solely for repayment to your clients. Refer to Item 5.B of Form 20-F and Section IV.B of SEC Release No. 33-8350.” (SEC Comment Letter to AGM Group Holdings Inc. (Jun. 9, 2017), Comment #14).

To avoid this type of comment, you should carefully review Items 303(a)(1) and (2) of Regulation S-K, which require discussion of known material trends, demands, commitments, events, or uncertainties that are reasonably likely to affect (either favorably or unfavorably) liquidity or capital resources. The MD&A section should therefore include a meaningful analysis and discussion of the material components that explain the variability of cash flows, including the underlying drivers for material changes. Especially when there are trends or uncertainties affecting liquidity, the MD&A section should focus on sources and uses of cash and the availability of cash to fund liquidity needs. For example, if there is an elevated risk of default on a company’s contractual obligations, or if management believes that is reasonably likely that the company may not continue to comply with its debt covenants, the company should include comprehensive disclosures on the potential risks and effects of covenant noncompliance and whether there are any possible waivers or covenant modifications available to the company to cure or prevent such covenant violations.

For information about preparing or reviewing MD&A, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and Management’s Discussion and Analysis Section Drafting Checklist.

non-GAAP Financial measuresIn recent years, the SEC staff has increased its focus on compliance with the presentation and disclosure requirements for the use of non-GAAP financial measures. All public companies are prohibited from presenting non-GAAP financial measures in ways that are misleading or give them greater prominence than GAAP measures. These prohibitions apply to both the order of presentation and the degree of emphasis given to these measures. In April 2018, the SEC staff updated its guidance on the use of non-GAAP financial measures, available at https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm, and identified certain uses that the SEC staff considers misleading or providing undue prominence. Here are some examples of comments on the use of non-GAAP financial measures:

“To the extent you provide the non-GAAP financial measure, total segment adjusted EBITDA, please reconcile it to the most directly comparable GAAP measure, net income, as required by Item 10(e) of Regulation S-K.” (SEC Comment Letter to PQ Group Holdings Inc. (Jul. 7, 2017), Comment #23).

“We note your presentation on page 15 of the non-GAAP measures “Gross Merchandise Volume (GMV)” and “SPE Revenue”. We also note you define GMV “as the total of uSell revenue plus revenue generated by the SPE,” an entity whose revenues are neither reportable in your financial statements nor in accordance with GAAP. Your presentation of these non-GAAP measures is inconsistent with Question 100.04 of the

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

Compliance and Disclosure Interpretations guidance on non-GAAP measures issued on May 17, 2016. Accordingly, please revise your presentation to remove these non GAAP measures or tell us why you believe it is not necessary to do so.” (SEC Comment Letter to uSell.com (Dec. 14, 2017), Comment #1).

“Please balance your presentation by showing a GAAP gross profit percentage with equal or greater prominence to the incremental contribution margin percentage. In addition, please revise your reconciliation of the non-GAAP measure, incremental contribution, to begin with consolidated gross profit, the most directly comparable GAAP financial measure. Refer to Question 102.10 of the updated Compliance and Disclosure Interpretation Guidance on non-GAAP financial measures issued on May 17, 2016. Furthermore, expand your disclosure on page 65 to disclose why the presentation of this non-GAAP measure is useful to investors.” (SEC Comment Letter to WideOpenWest, Inc. (May 12, 2017), Comment #6).

“Your measure of adjusted net income includes an adjustment to exclude the loss from discontinued operations. This measure appears to use an individually tailored measurement method substituted for one in GAAP. Please revise to exclude this adjustment or advise. Refer to Question 100.04 of the Non-GAAP Compliance and Disclosure Interpretations.” (SEC Comment Letter to Bandwidth, Inc. (Oct. 19, 2017), Comment #3).

To avoid SEC staff comments about non-GAAP financial measures, companies should include clear and specific disclosure of why each non-GAAP measure is useful for investors and how management uses it. The statements a company makes about non-GAAP measures in its IPO prospectus may signal how it plans to communicate with investors in the future; therefore, it is important that you carefully review any non-GAAP disclosures in the registration statement. When disclosing non-GAAP financial measures, companies must include a reconciliation of such measures to the most directly comparable GAAP financial measures. Non-GAAP financial measures must also not use individually tailored measurement methods instead of GAAP methods, which could be viewed as misleading and violative of Rule 100(b) of SEC Regulation G (17 CFR 244.100). You and the other members of the IPO working group should carefully review Regulation G, Item 10(e) of Regulation S-K (17 CFR 229.10), and the SEC staff’s guidance for any non-GAAP disclosures included in the prospectus.

For guidance in preparing compliant non-GAAP financial measures, and for more information about the SEC’s regulation of non-GAAP financial measures generally, see SEC Regulation of Non-GAAP Financial Measures.

Risk FactorsItem 503(c) of Regulation S-K (17 CFR 229.503) requires the disclosure of the most significant factors that make the IPO speculative or risky. Risk factors should be specific to the company’s facts and circumstances, and the SEC staff commonly questions risk factor disclosures that could apply generally to any public company. It also may question the completeness of a company’s risk factor disclosures based on information included elsewhere in the document or other public information. Here are some examples:

“This risk factor is overly generic in nature. Please remove the risk factor or address the specific risks posed to the Company.” (SEC Comment Letter to Franklin Hill Acquisition Corp (Jan. 11, 2017), Comment #9).

“We note that the Chief Executive Officer, Lin Yi-Hsiu, will be offering the company’s securities to the public while simultaneously offering his own shares for sale. Please add a risk factor that addresses this potential conflict of interest.” (SEC Comment Letter to Leader Capital Holdings Corp. (Dec. 11, 2017), Comment #4).

“We note your disclosure on page 18 that your Chief Executive Officer resides in Canada. Please provide a risk factor pertaining to the difficulty that U.S. stockholders would face in effecting service of process against

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

your sole officer. This risk factor should address the risk U.S. stockholders face in: effecting service of process within the U.S. on your officer; enforcing judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against the officer; enforcing judgments of U.S. courts based on civil liability provisions of the U.S. federal securities laws in foreign courts against your officer; and bringing an original action in foreign courts to enforce liabilities based on the U.S. federal securities laws against your officer. Alternatively, please advise as to why you believe such a risk factor is unnecessary.” (SEC Comment Letter to Hoops Scouting USA (Nov. 21, 2017), Comment #4).

“Given your disclosure on page 2 and elsewhere that you intend to focus on companies in the senior housing and care industry in the United States, please add risk factors that highlight the materials risks concerning companies in that industry.” (SEC Comment Letter to Big Rock Partners Acquisition Corp. (Nov. 9, 2017), Comment #5).

To avoid comments such as these, you should carefully draft the risk factors to:

● Concisely summarize the major risks facing the company’s business or industry. ● Provide sufficient information to place each risk in context and allow investors to assess the magnitude of the

risk.

Each risk factor should have a clear heading and identify the risk facing the company, rather than simply stating facts about the company and its industry. For example, see the following SEC comment and resulting revisions made by the company to address the comment:

SEC comment:

“We acknowledge your response that you are unclear on the DEA’s position on CBD. Please expand your risk factor disclosure to discuss why this uncertainty exists and the potential impact on your business if your products are considered by the DEA to be Schedule I controlled substances, and highlight this possibility in your risk factor header.” (SEC Comment Letter to LBC Bioscience Inc. (Jul. 31, 2017), Comment #4).

Original risk factor:

We are subject to numerous potential regulatory matters.

The Drug Enforcement Administration (“DEA”) which enforces the controlled substances laws of the United States has issued various rules and announcements concerning various items considered to be marihuana extracts which may encompass Cannabinoids. The uncertainty involves the extent to which the DEA will try to restrict the marketing or distribution of any CBD product. If the DEA were to take any aggressive action against CBD products, it would likely result in LBC ceasing operations.

(LBC Bioscience Inc. Registration Statement on Form S-1 (Apr. 20, 2017))

Revised risk factor:

We are subject to numerous potential regulatory matters. If the DEA were to take actions against CBD products as Schedule 1 controlled substances, it could cause LBC to cease operations.

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

The Drug Enforcement Administration (“DEA”) which enforces the controlled substances laws of the United States has issued various rules and announcements concerning various items considered to be marihuana extracts which may encompass Cannabinoids. The DEA created a separate Administration Controlled Substances Code number for marijuana extract earlier this year, defined to cover an extract containing one or more cannabinoids, and stated that such extracts will continue to be treated as Schedule I controlled substances.

If the DEA were to take actions against CBD products as Schedule 1 controlled substances or restrict the marketing or distribution of any CBD product, it would likely result in LBC ceasing operations.

(LBC Bioscience Inc. Prospectus on Form 424(b)(3) (Sep. 28, 2017))

Additionally, risk factors should not include any mitigating language, as noted in this SEC comment:

“Please revise to eliminate the last two sentences of the second paragraph of this risk factor, as they mitigate the risk you discuss.” (SEC Comment Letter to Nine Energy Service, Inc. (May 15, 2017), Comment #2).

Accordingly, you should not include (or should delete) any language in a risk factor that appears to mitigate or otherwise lessen the impact of the identified risk, even statements of objective fact. However, mitigating language may be used in the business and MD&A sections of the prospectus.

Issuers must disclose all material risks. As shown in the following example, the SEC staff will object to any language in the prospectus disclaiming a company’s responsibility to do so:

“The second and third sentences in the introductory paragraph suggest that the risk factor disclosure is not complete because you may not be disclosing all material risks. Please revise or remove this language and disclose all material risks.” (SEC Comment Letter to NPQ Holdings Limited (Aug. 10, 2016), Comment #7).

An emerging area of SEC focus is cybersecurity risk. In February 2018, the SEC issued interpretative guidance on cybersecurity disclosures, providing a framework to assist companies in preparing disclosure about cybersecurity risks and incidents involving cybersecurity in registration statements filed under the Securities Act and registration statements and current and periodic reports filed under the Exchange Act, which is available at: https://www.sec.gov/rules/interp/2018/33-10459.pdf. With the increase in frequency and severity of cyberattacks and data breaches, you should carefully consider what, if any, material cybersecurity risks or incidents should be disclosed in the prospectus, as this is likely to be an area of continued staff focus in reviewing IPO filings.

For information about drafting risk factors, see Risk Factor Drafting for a Registration Statement, Top 10 Practice Tips: Risk Factors, and Market Trends 2016/17: Risk Factors. For a form of cybersecurity risk factor, see Cybersecurity Risk Factor.

use of ProceedsItem 504 of Regulation S-K (17 CFR 229.504) requires companies to describe their planned uses and amounts of offering proceeds, including whether any proceeds will be used to discharge debt, complete an acquisition, or provide working capital. The SEC staff may request additional information or clarification, particularly if the disclosure is general or vague or the issuer states or implies elsewhere in the prospectus that it will use the proceeds in a manner inconsistent with, or not included in, the use of proceeds section disclosure. Here are some examples of these types of comments:

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

“Please clarify your specific plans for the proceeds of the offering or if you have no such plans discuss the principal reasons for the offering. Refer to Item 3.C.1 of Form 20-F.” (SEC Comment Letter to Jinxuan Coking Coal Limited (Feb. 9, 2018), Comment #3).

“In addition to the table on page 13, please provide a narrative summary of your expected use of proceeds, including how each level will or will not advance your planned operations. To the extent you provide this detailed disclosure elsewhere in the prospectus, you may provide a descriptive cross-reference to that disclosure.” (SEC Comment Letter to SigmaRenoPro, Inc. (Nov. 28, 2017), Comment #10).

“Please revise your Use of Proceeds table to quantify, at each level of gross proceeds received, how much you will spend for your major categories of expenditures, such as advertising, officer compensation, new personnel, platform expansion and the development of the CCMP software. Please also clarify whether you will use any offering proceeds to repay related party debt pursuant to Instruction 4 of Item 504 of Regulation S-K.” (SEC Comment Letter to Yappa World Incorporated (Sep. 28, 2017), Comment #5).

“We refer to your statement that you intend to use the net proceeds for ‘general and administrative expenses and the remainder for working capital and other general corporate purposes.’ Please clarify whether the ‘general and administrative expenses’ will cover costs related to the development of your nasal and/or oral Lorazepam spray, and state the approximate amount intended to be used for each such purpose. Refer to Item 504 of Regulation S-K for guidance.” (SEC Comment Letter to Axium Pharmaceuticals, Inc. (Sep. 15, 2017), Comment #18).

To avoid these types of comments, you should review Item 504 of Regulation S-K carefully when drafting the use of proceeds section. The instructions to Item 504 provide useful guidance and detailed requirements that apply to specified uses of proceeds, including to discharge debt and to acquire businesses or other assets. You should also make sure that disclosures elsewhere in the prospectus are consistent with that in the use of proceeds section.

industry and market DataProspectuses that include industry and market data taken from industry publications or other third-party sources sometimes include cautionary language that the third-party information has not been independently verified and may not be reliable. The SEC staff will object to such cautionary language because a company is responsible for all the information in its registration statement. Even if the company files the consent of a third party as an exhibit to the registration statement (making the information provided by that person an expertized disclosure), the accuracy and completeness of the information remains the company’s responsibility under the federal securities laws. Here are some examples of this type of comment:

“We note your statements, “However, we have not independently verified any of the data from third-party sources. Similarly, our internal research is based on upon our understanding of industry conditions, and such information has not been verified by any independent sources.” It is not appropriate to infer that you are not liable for information included in your registration statement. Accordingly, please delete the statements referenced above or state specifically that you are liable for the disclosure included in the registration statement that is based on third-party sources.” (SEC Comment Letter to Immuron Limited (Jan. 18, 2017), Comment #2).

“We note your statement that “the accuracy and completeness of the [industry and market data included in the prospectus] cannot be guaranteed.” Please delete such statement or revise as necessary, so that you do

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

not suggest that you could lack a reasonable belief as to the accuracy and completeness of the market data that you elect to include in the filing.” (SEC Comment Letter to Global Water Resources, Inc. (Feb. 11, 2016), Comment #14).

To avoid this type of comment, you should carefully consider whether any cautionary language in the prospectus could be viewed by the SEC staff as disclaiming liability. Including this type of language could prompt the SEC staff to request that the company include an affirmative statement regarding its liability for all the information in the prospectus, which, although accurate, is disclosure that most companies would prefer not to include in their IPO prospectuses.

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IPO Prospectuses: Avoiding and Responding to Common SEC Comments

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LEXISNEXIS.COM/PRACTICE-ADVISORLearn more

Anna PinedoPartner at Mayer Brown LLPAnna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd-Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters.

Alexandra Perry Associate at Mayer Brown LLPAlexandra (Ali) Perry is an associate in Mayer Brown’s New York office and a member of the Capital Markets practice.

Ali earned her JD from the University of Pennsylvania Law School where she was the managing editor of the Journal of Business Law and a member of the Entrepreneurship Legal Clinic. She also received a Certificate of Management from The Wharton School of Business. She received her BBA in Accounting and Finance from Emory University’s Goizueta School of Business and is a certified public accountant.

A Lexis Practice Advisor® Practice Note byAnna Pinedo and Vanessa Browder, Mayer Brown LLP

IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

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Anna Pinedo

This practice note provides answers to questions frequently asked by securities lawyers and their clients regarding the federal securities laws applicable to communications and publicity matters involving companies conducting initial public offerings (IPOs) and other securities offerings under the Securities Act of 1933, as amended (Securities Act).

Specifically, this practice note includes questions relating to:

● Publicity Guidelines during IPOs ● Publicity Guidelines for Follow-On Offerings ● Road Shows and Non-deal Road Shows ● Earnings Guidance Issued Close to a Registered Offering

For more information about communications during an IPO, see IPO Process: Permitted Communications, Permitted Communications Memorandum (IPO), and SEC Communications Rules for Issuers in Registered Offerings (Chart). For additional information about road shows, see Preparing for a Road Show and Pre-Road Show Checklist. For more information about issuing earnings guidance, see Earnings Guidance, Earnings Releases: Regulatory Framework and Disclosure Process, and Filing an Earnings Release for a Public Company Checklist. For a general overview of, and links to available resources regarding, these disclosure and publicity issues, see Publicity and Communications Resource Kit.

Publicity Guidelines durinG iPOsUnder the Securities Act, and rules adopted by the Securities and Exchange Commission (SEC), a company engaged in an IPO is restricted in what it may communicate to the public and potential investors, and the methods of communication it may use, for the IPO.

The following questions discuss the SEC’s rules that seek to ensure that a company’s communications do not improperly condition the market during the three phases of the IPO process: the quiet (or pre-filing) period, the waiting (or post-filing) period, and the post-effective period.

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IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

What is gun jumping?“Gun jumping” generally refers to unlawful offers made during the IPO process. More specifically, it refers to written or oral offers made before the registration statement is filed, and to written offers made after the registration statement is filed other than by means of a prospectus that complies with Section 10 of the Securities Act (15 U.S.C. § 77j) (a so-called statutory prospectus), a free writing prospectus, or a communication falling within one of the SEC-created safe harbors (discussed below) for communications made in proximity to an offering. While gun jumping is a serious concern, the SEC’s safe harbors provide considerable flexibility for companies. In addition, the ability of emerging growth companies (EGCs) (and, perhaps, in the future, all companies, as being considered by the SEC) to test the waters before filing a registration statement, together with the recent elimination of the ban on in connection with certain exempt offerings, have significantly reduced concerns about gun jumping.

What are the consequences of engaging in gun jumping?If the SEC determines that a company is conditioning the market or gun jumping, the SEC may require the company to delay the offering or to add disclosure to the registration statement regarding the risk that the company has violated Section 5 of the Securities Act (15 U.S.C. § 77e).

Additionally, Section 12(a)(1) of the Securities Act (15 U.S.C. § 77l) provides a rescission right to an investor who buys securities in a transaction that violates Section 5, which enables the investor to recover the purchase price paid or, if it no longer owns the securities, the difference between the purchase and the sale price of the securities, plus interest, less any amount (e.g., dividends or interest) received on the securities.

For more information about liability under Section 12(a) and other federal securities laws applicable to IPOs, see Liability under the Federal Securities Laws for Securities Offerings.

May a company publicly announce that it may go public in the next two to three years?Yes, if that is its intent. However, if the company is actively working on its IPO at the time and estimates a two-year process, counsel may recommend not making the statement for fear of a potential gun-jumping violation. See “When does the company need to start to take steps to prevent leaks about its upcoming IPO?”, below.

When does the company need to start to take steps to prevent leaks about its upcoming iPO?The company should consider itself to be “in registration” when it decides to proceed with the IPO, which is generally considered to be at the time of the initial “all-hands” organizational meeting to discuss the proposed IPO, or, if underwriters are not yet involved, an equivalent starting point. The quiet (or pre-filing) period begins at this time and continues until the registration statement is publicly filed on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

During the quiet period, the company is not permitted to make offers to sell its securities. The SEC has broadly construed an offer to include “every attempt or offer to dispose of, or solicitation of an offer to buy” as well as any publicity that has the effect of “conditioning the public mind or arousing public interest in the company.” Consequently, certain activities or types of publicity (including information appearing on the company’s website or hyperlinked to it), may result in a gun-jumping violation, even if that activity or publicity is not expressly phrased in terms of an offer to sell securities.

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IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

What steps should a company take?At the beginning of the quiet period, the company and its counsel should review the company’s website and social media accounts and remove information that is inaccurate or could conflict with the registration statement, as well as anything that could be construed as an offer of securities. The company should also implement internal controls and adopt a communications policy that, among other things, requires that all press releases and public statements about the company undergo review by counsel, limits the ability of employees to talk to or comment to the press or on social media about the company, identifies which channels of communication are approved for business use, and identifies the persons authorized to speak (or post) on the company’s behalf.

If a company is large or there is a high risk of leaks, the company may consider requiring employees working on the IPO to sign confidentiality agreements.

A company starts working on its IPO but has not publicly filed its registration statement. May the company continue to communicate to the public about its business?Yes, within certain parameters. The following communications with the public are permitted during the quiet period:

● Communications made more than 30 days before the registration statement is filed. A communication made 30 days before the company first files the registration statement will not constitute an unlawful offer if all of the following are true:

○ The communication (whether written or oral) does not mention the IPO and is made by or on behalf of the company and not any underwriter or proposed underwriter.

○ The company takes reasonable steps to prevent further distribution or publication of the communication during the 30 days immediately preceding the initial public filing of the registration statement.

○ The company is not (and during the last three years was not) a blank check company, a shell company, an issuer offering penny stocks, a registered investment company, or a business development company. See Securities Act Rule 163A (17 CFR 230.163A).

● Regularly released factual business information. A company may continue to release factual business information during the quiet period, if it satisfies all the following requirements:

○ The communication does not mention the IPO. ○ It is an ordinary course communication that provides only factual business information. ○ The timing, manner, and form in which the information to be released or disseminated is consistent

in all material respects with past releases or disseminations (this requirement may disqualify issuers lacking a track record of making such disclosures).

○ The information is intended for persons, such as customers and suppliers, other than in their capacities as investors or potential investors.

○ The company is not a registered investment company or a business development company. See Securities Act Rule 169 (17 CFR 230.169).

● Notice of a proposed registered offering. A company may publish a brief written notice that provides the company’s name, certain basic statements about the IPO, including its size and anticipated timing, and the securities to be offered, and a legend stating that the communication is not an offer, but does not name any underwriter or potential underwriter or describe the company’s business. See

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IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

Securities Act Rule 135 (17 CFR 230.135). ● Offshore communications by foreign private issuers. A foreign private issuer, a foreign

government issuer, or a selling securityholder of either of such issuers, may engage in certain offshore communications that mention the IPO if all of the following are true:

○ The IPO is not conducted solely in the United States. ○ Access to any meetings or press conferences is provided to both U.S. and non-U.S. journalists. ○ Any written press-related materials state that the materials do not constitute an offer of securities in

the United States and specify whether the issuer or any selling security holder intends to register any part of the proposed offering in the United States, and do not include any purchase order or coupon that could be returned indicating an interest in participating in the offering. See Securities Act Rule 135(e) (17 CFR 230.135e).

In addition to these permitted communications, EGCs may test the waters for a proposed IPO by communicating with qualified institutional buyers (QIBs) and institutional accredited investors, as discussed below.

Companies may conduct exempt offerings in the United States (e.g., private placements made in reliance on Section 4(a)(2) or Regulation D), and outside the United States in compliance with Regulation S, concurrently with conducting an IPO. See “May a company concurrently pursue an IPO and a private placement?” and “May a company concurrently pursue an unregistered offshore offering and an IPO?”, below.

A company submits its IPO registration statement on a confidential basis to the SEC. May the company now tell the public about the iPO?Yes. Although the SEC will keep the registration statement confidential (i.e., it will not be made available on EDGAR), the company may communicate in compliance with one of the safe harbors discussed above, and EGCs may make testing-the-waters communications to QIBs and institutional accredited investors, as discussed immediately below.

What are “testing-the-waters” communications?The JOBS Act amended Section 5 of the Securities Act (15 U.S.C. § 77e) to provide that an EGC, or any other person, such as an underwriter, that it authorizes to act on its behalf, may engage in oral or written communications with QIBs and institutional accredited investors to gauge their interest in a proposed offering, whether before or after the first public filing of any registration statement, subject to the requirement that no binding orders can be solicited or accepted at that time. Though the “testing-the-waters” process is currently available only to EGCs and their authorized representatives, the SEC staff has stated that it is considering allowing all issuers and their authorized representatives to take advantage of this more flexible marketing process.

There are no form or content restrictions on these communications, but any information provided must be consistent with that in the registration statement. No written materials should be provided to the potential investors, and the company and the underwriters should review and agree on any scripts, slides, and other presentation materials before they are used. Before any communications are made, the underwriters will typically require the company to sign a letter outlining the permitted process and stating that the information presented in the testing-the-waters materials is limited to the information included in the registration statement, and that no written materials will be distributed to the prospective investors. The underwriters may also limit the number of institutions contacted.

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IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

The underwriters will typically request that the company agree in the underwriting agreement to indemnify them against liability for any material misstatements in or omissions from the testing-the-waters materials. The SEC typically requests to see any written testing-the-waters materials and may require the company to amend the registration statement to reflect any information in the materials that is missing from, or inconsistent with, the registration statement.

For more information about testing-the-waters by EGCs, see Emerging Growth Company Practice Guide and Top 10 Practice Tips: Emerging Growth Companies.

if the company is relatively unknown to the market and does not yet have an underwriter for its iPO, can the company prepare a “teaser” summary about the company and send it via a blast email to family, friends, former colleagues, and potential underwriters?Counsel should review the teaser closely to assess whether it would qualify for the Rule 163A safe harbor discussed above. Accordingly, the teaser should not mention the IPO and should be emailed more than 30 days before the initial public filing of the registration statement. Additionally, the company should take reasonable steps to prevent further distribution or publication of the communication during the 30 days immediately preceding the initial public filing, and the company may not be (and during the last three years was not) a blank check company, a shell company, an issuer offering penny stocks, a registered investment company, or a business development company.

A company that is preparing for an iPO would like to identify an underwriter, appoint a director, or hire an officer. May the company email its draft registration statement to potential candidates before the initial filing or confidential submission?In general, this is permitted. The company should inform the recipient, however, that the recipient is receiving the document only as a potential underwriter/director/officer, and that the information should be kept confidential.

May a company communicate with its shareholders before the registration statement is publicly filed?A company may generally communicate with its shareholders at any time. An IPO company may need to communicate with its shareholders for a variety of reasons, both before and after the registration statement is filed, including when selling shareholders are participating in the IPO, the company needs to obtain lock-up agreements from shareholders, or the company requires shareholder approval to proceed with the IPO.

Before the registration statement is publicly filed any such communications should be limited to only the information reasonably necessary to accomplish the purpose for which the communication is made and should provide that the information must remain confidential. For example, if shareholder approval for the IPO is required, the company would have to provide sufficient information about the proposed offering to allow for a reasonably informed shareholder vote.

Should individuals and entities named in the registration statement be notified by the company?Generally, yes. All persons named in the registration statement should be given the opportunity to review, revise, and consent to the disclosure about them included in the registration statement (subject to the SEC’s disclosure requirements, which may mandate disclosure that a party would prefer to exclude). In addition to considering

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whether to submit a confidential treatment request for any sensitive business information, market practice involves doing the following before the registration statement is publicly filed on EDGAR:

● Directors, director nominees, and executive officers should review and approve the biographical information about them, as well as their shareholdings, and each director nominee should sign the consent to be named in the registration statement required to be filed pursuant to Securities Act Rule 438 (17 CFR 230.438).

● Experts (e.g., the issuer’s independent public accounting firm) should confirm they are referenced properly in the registration statement and sign any consents required to be filed pursuant to Securities Act Rule 436 (17 CFR 230.436).

● Parties to agreements containing confidentiality provisions should waive the provisions to the extent necessary to prevent the company from breaching those agreements.

● Any other third parties named in the registration statement should consent in writing to the disclosure to avoid any potential negative commercial impact to the company. For example, a company should consider whether to obtain consents from its celebrity clients before disclosing their names in the prospectus.

● Principal and selling shareholders should confirm their addresses, beneficial ownership details, and any other information included in the prospectus describing their relationship to the company.

● Any lenders or other counterparties should provide any waivers required to allow the IPO to proceed (e.g., change of control covenants waivers) and the prospectus should disclose whether the offering is still subject to their consent.

● Any nonpublic provider (such as a subscription service) of information included in the registration statement should review and consent in writing to the disclosure that references the provider.

It is generally not necessary to obtain consents for referencing or reprinting information from publicly available sources or from parties to agreements that are required to be described in, or filed as exhibits to, the registration statement (and who, such as the parties to a loan agreement, are unlikely to object), but there are exceptions that may still make consents in such cases appropriate, such as with respect to commercially sensitive disclosure.

If a third party refuses to provide a consent, the company may need to redraft the disclosure, subject to the registration statement form disclosure requirements. The company could also request confidential treatment of the sensitive information from the SEC. However, the lack of a third-party consent does not permit the company to omit any required information from the registration statement.

A company publicly files its registration statement for the first time, and a friend of an officer of the company asks via email for details about the IPO. May this officer reply with a link to the publicly filed registration statement?No, because the prospectus included in the registration statement is not likely to constitute a Section 10 prospectus, which, for an IPO, requires stating a price range. As a result, sending the link would be an impermissible written offer. The price range is usually included later in the IPO process, at which time the prospectus may be emailed (or a link to it forwarded) to members of the public, although it would be preferable for the underwriters to handle all such communications.

To help address these situations, a company can publicly identify its investor relations contact immediately prior to the first public filing, and all inquiries about the offering received by company personnel should be forwarded to

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that person for consistent replies. In this case, the investor relations contact could provide an oral or email reply stating that a registration statement has been filed with the SEC, without linking the filing.

Additionally, some companies issue a press release concurrently with making their first public filing, which typically states that a registration statement has been publicly filed with the SEC but is not yet effective (without including a link to the filing on EDGAR), and including other information about the company and the offering permitted by Securities Act Rule 134 (17 CFR 230.134). For the information permitted in a communication complying with Rule 134, see Contents of a Communication Permitted Under Rule 134 Checklist.

May a company’s ceO give an interview to the press immediately after the company publicly files its registration statement for the first time?It depends, but it is rare for a CEO to intentionally give an interview to the press immediately after the first public filing of the registration statement. The public filing of the registration statement begins the waiting period, during which oral offers and certain written offers are permitted but binding agreements to sell securities are prohibited.

For an interview with the press to not constitute an unlawful written offer, it would have to qualify for the safe harbor protection of either Securities Act Rule 134 or Rule 169, which, because of the limited information allowed under the conditions of the safe harbors, is not likely to be the case. Alternatively, the interview may possibly not constitute a written offer, but given the very broad definition of a “written communication” in Securities Act Rule 405 (17 CFR 230.405), which includes any publication or rebroadcast of an interview, and the difficulty in controlling whether an interview is recorded, transcribed, etc., a high level of caution is warranted.

The interview may qualify as media free writing prospectus under Rule 433(f), and thus would be permissible. Rule 433(f), unlike other subsections of Rule 433 (17 CFR 230.433), does not require the registration statement to include a price range. However, all the following criteria must be satisfied:

● The company or any other IPO participant or their representatives, provided, authorized, or approved the information in the communication.

● A Section 10 prospectus has been publicly filed (with or without a price range). ● The interview was prepared and published or disseminated by a person:

○ Unaffiliated with the company or other IPO participant –and– ○ In the business of publishing, radio, or television broadcasting or otherwise disseminating written

communications ● If the company or one of its affiliates is itself the media company that wrote the relevant article:

○ It must be a bona fide newspaper, magazine, or business or financial publication of general and regular circulation, or bona fide broadcaster of news, including business and financial news.

○ It must have established policies and procedures for the independence of its publications or broadcasts from the offering activities of the issuer.

○ It must have written or published the article in the ordinary course. ● No payment was made or consideration given by or on behalf of the company or other IPO participant for

the written communication or its dissemination. ● The company or other IPO participant in question files the written communication with the SEC with the

required legend within four business days after its publication, broadcast, or dissemination.

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IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

A company will be subject to liability under Section 12(a)(2) of the Securities Act (15 U.S.C. § 77l) for the information included in a media free writing prospectus, although it may correct the information in the free writing prospectus when making the filing. In addition, a CEO who says something in an interview that is inconsistent with, or not included in, the information in the registration statement, could expose the company to liability under the federal securities laws for misrepresentations or omissions in the registration statement or prospectus. Consequently, Rule 433(f) media free writing prospectuses are not often used in connection with IPOs.

For more information about the use of free writing prospectuses in IPOs, see Free Writing Prospectuses in IPOs.

A reporter writing an article on the IPO calls management to ask them to confirm/deny certain statements. How should management handle it?A “no comment,” that is, neither confirming nor denying statements in an upcoming article, is the recommended approach. If management confirms a statement—even an obvious truth—the reporter could write “as confirmed by the company,” which could create the appearance that the company participated in the preparation of the article and that the article may be viewed as an attempt to unlawfully condition the market.

May the company send an email to its employees with information about a directed share program?Yes, but sharing information and asking about participation in the program must be undertaken at different stages of the IPO process. A company may, pursuant to Rule 134, share information about a directed share program any time after a Section 10 prospectus has been publicly filed, even if it does not include a price range. However, Rule 134(d) requires that any request that employees indicate their interest in participating in the directed share program must be accompanied or preceded by a Section 10 prospectus that includes a price range.

For information about directed share programs, see Directed Share Programs.

May a company concurrently pursue an iPO and a private placement?Yes, provided that prospective private placement purchasers are not identified or solicited because of the IPO or through use of the registration statement, that is, they must become interested in or aware of the private placement through some other means, for example, having a substantive, preexisting relationship with the company or the underwriters. In that case, the private placement will not be integrated with the IPO because the registration statement would not constitute prohibited general solicitation for the private placement (which would cause the loss of the exemption). See Securities Act Sections Compliance and Disclosure Interpretation Question 139.25 [Nov. 26, 2008] and Securities Act Release No. 33-8828, available at https://www.sec.gov/rules/proposed/2007/33-8828.pdf. General solicitation should not be used for a private placement that is conducted concurrently with an IPO, even if the exemption relied on for the offering permits general solicitation (such as Securities Act Rule 506(c) (17 CFR 230.506)).

For information about integration of private and public offerings, see Securities Offerings Integration, Integration Issues for Private Offerings, and Top 10 Practice Tips: Private Placements.

May a company concurrently pursue an unregistered offshore offering and an iPO?Yes, provided that the offering is conducted in compliance with the requirements of Rule 903 of Regulation S (17 CFR 230.903), including the requirement that the company and persons acting on its behalf not engage in any directed selling efforts in the United States regarding the offshore offering.

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For information about offshore offerings by U.S. companies, see Offshore Offerings by U.S. Issuers and Regulation S Transactions.

May a company simultaneously pursue an iPO and an M&A transaction? And if so, can it share information with a potential M&A buyer?Yes. Dual-track processes are quite common. Sharing information confidentially with potential M&A buyers is permitted, even while the issuer is working on an IPO, for a possible sale of the company rather than to solicit interest in the IPO. A potential issue in any dual-track approach, however, is that if the company proceeds with the IPO rather than the sale, any potential buyers that received material nonpublic information from the company might not be able to buy or sell the company’s securities until the information is publicly disclosed or has become stale, or the company releases the buyers from any contractual prohibition on trading in its securities.

For more information about conducting a dual track process, see Dual-Track IPO and Sale Process.

should the ceO conduct an interview the day after the iPO closing?The best practice would be to not conduct this interview because the CEO might say something material that is not disclosed in the prospectus. If that happens during the 25-day (or 90-day) period following the date the securities were first offered to the public, the company would have to amend the registration statement to include the information or prepare and file the interview as a free writing prospectus. See Section 4(a)(3) of the Securities Act (15 U.S.C. § 77d) and Securities Act Rule 174 (17 CFR 230.174). Whether an amendment or a free writing prospectus is used typically depends on which format more clearly communicates the changes. However, for certain changes, an amendment would be required, such as if the company cannot use a free writing prospectus because it is an ineligible issuer or an excluded issuer, as set forth in Securities Act Rule 164 (17 CFR 230.164).

What happens once the iPO prospectus includes a price range?Typically, this is when the full marketing effort for the IPO begins, because written offers accompanied or preceded by the company’s Section 10 prospectus setting forth the price range are now permitted. There is also some additional leeway regarding the use of media free writing prospectuses (pursuant to Rule 433(f)). Because the registration statement has not yet been deemed effective by the SEC, however, binding agreements to purchase the securities are still prohibited.

A company will typically file the Section 10 prospectus with the price range (often called the “red herring”) shortly before beginning its road show.

Publicity Guidelines fOr fOllOW-On OfferinGsA company conducting an offering following its IPO is subject to many of the same publicity and communications guidelines as it was for the IPO, but there are some differences.

How are publicity guidelines different for companies that are already public but are contemplating a registered offering?When an SEC reporting company conducts a follow-on offering (i.e., a registered public offering following its IPO), it must still carefully monitor its communications, especially any communication that might be deemed to constitute an offer of its securities.

A reporting company that has established a pattern of communicating factual business information and forward-looking information to the public may rely on Securities Act Rule 168 (17 CFR 230.168) to continue to do so while

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engaged in an offering. IPO companies may rely only on Rule 169, which permits disclosure of factual business information but not forward-looking information.

Seasoned issuers (generally, issuers that meet the eligibility requirements to conduct a primary offering on registration statement Form S-3 or F-3) may use free writing prospectuses after a registration statement is filed, and well-known seasoned issuers (WKSIs) may use free writing prospectuses at any time, pursuant to Rules 433 and 164 (17 CFR 230.164), but may need to file them with the SEC. WKSIs may make oral and written offers before and after filing a registration statement with the SEC pursuant to Rule 163 (17 CFR 230.163) (although a written offer would need to include a legend, and may need to be filed with the SEC as a free writing prospectus), and WKSIs have some additional flexibility to issue media free writing prospectuses pursuant to Rule 433(f). (For a discussion of the media free writing prospectus requirements, see “May a company’s CEO give an interview to the press immediately after the company publicly files its registration statement for the first time?”) EGCs may continue to test the waters in connection with follow-on offerings.

For additional information about communications by WKSIs and seasoned issuers, see WKSIs and Seasoned Issuers.

ROAd SHOwS ANd NON-dEAl ROAd SHOwSA road show is the principal way to market most IPOs and follow-on offerings, and securities lawyers should be aware of the SEC’s rules and concerns with the conduct of road shows.

What is a road show?Rule 433(h)(4) defines a road show as an offer (other than a statutory prospectus or a portion of a statutory prospectus filed as part of a registration statement) that contains a presentation regarding an offering by one or more members of the company’s management and includes discussion of one or more of the issuer, its management, and the securities being offered. A road show is a concentrated marketing effort that typically begins shortly after a company’s preliminary, or red herring, prospectus is filed with the SEC. A road show for an IPO usually lasts from one to two weeks and comprises a series of live meetings between management and prospective investors at which management discusses the company’s business and financial performance, and the offering and planned use of proceeds. Management prepares its presentation, which usually includes a slide show, in advance and typically answers questions from the audience. Underwriters customarily manage the schedule for, and invitees to, the road show meetings. A live road show presentation, even if it includes visual aids, is typically not considered to be a written communication, as defined in Rule 405 (discussed below), and is thus not a free writing prospectus required to be filed with the SEC.

Companies often prerecord one or more versions of the road show for presentation to different investor groups. A video road show would be a “written communication,” as defined in Rule 405, and thus required to be filed with the SEC as a free writing prospectus unless the company makes at least one bona fide electronic road show readily available to an unrestricted audience electronically (i.e., a so-called retail road show). See Rule 433(d)(8)(ii). Rule 433(h)(5) defines a “bona fide electronic road show” as a written communication transmitted by graphic means that contains a presentation by one or more officers of a company or other persons of the company’s management and, if more than one road show that is a written communication is being used, includes a discussion of the same general areas of information regarding the issuer, management, and the securities being offered, as such other issuer road show or shows for the same offering that are written communications.

Under Rule 405, a written communication is any communication that is “written, printed, a radio or television broadcast, or a graphic communication.” A graphic communication includes “all forms of electronic media,

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including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks, and other forms of computer data compilation.”

A company should not allow any slides used in a road show to be retained by attendees. If attendees download the slides or take printouts with them after the meeting, the slides could be deemed a written communication that is neither a road show nor a bona fide electronic road show, and thus could constitute a free writing prospectus that likely would have to be filed with the SEC.

For reporting companies, especially those eligible to file shelf registration statements on Form S-3 (or Form F-3), road shows are generally much shorter, and often consist of prerecorded videos available only to prospective investors. The road show may only be available for viewing for a very limited time, and the launch, marketing, and pricing of the offering may occur in a compressed timeframe. Most follow-on offerings are now marketed either on an accelerated basis, usually over two to three days, or are marketed on a confidential, or wall-crossed, basis without a formal road show.

For more information about conducting road shows for offerings, see Preparing for a Road Show.

What is a non-deal road show?A non-deal road show is a live or video presentation by a company’s management to investors that does not mention any specific offering but rather provides information about the company and its financial performance. Non-deal road shows are commonly conducted to establish and strengthen relationships with existing and prospective investors and to establish a track record of communicating regularly with them.

May a company start a deal road show the day after a non-deal road show?A deal road show may follow a non-deal road show, but it may be prudent to allow some time to elapse between the two. The SEC has cautioned that Rule 168 (the safe harbor for releasing factual business information and forward-looking statements by reporting companies) is not available for offering-related activities. The market has evolved over the years, however, and market participants have become more comfortable with a shorter time between a non-deal road show and a road show, as well as between the completion of a non-deal road show and the launch of a follow-on offering.

Most underwriters have a process for handling these situations, including a script for the format of the communication, the types of individuals who may be invited to non-deal meetings, and whether any meeting requires “wall-crossing” procedures (in which the persons contacted agree to keep confidential the information shared with them).

For information about the wall-crossing process, see Investor Wall-Crossing Script and Email Confirmations.

May a deal road show be immediately followed by the ceO speaking at a business conference?Generally, yes. The attendees at business conferences are typically participants in the business or industry that is the subject of the conference, or related persons such as suppliers and customers, who are not necessarily attending as investors or potential investors. A company that regularly presents at business conferences could do so at any time pursuant to Rule 168 or Rule 169 safe harbor, even immediately prior to commencing a deal road show. A company should limit its communications at business conferences to those it customarily makes about its

12

IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

business and should not refer to an offering. If a company does not regularly present at business conferences, the CEO’s presentation at such a meeting around the time of a road show may raise gun-jumping concerns.

What type of information is included in road show slides?Deal road show slides are subject to liability under the federal securities laws. Non-deal road show slides could also be subject to the anti-fraud provisions of the securities laws.

For IPOs, information included in (and, for follow-on offerings, also incorporated by reference into) the prospectus can be included in the road show slides. The grey area for information included in the road show slides commonly falls into the following categories:

● The information is derived from information included in the prospectus through simple calculations or, in some cases, is derived from a combination of the prospectus and management’s presentation.

Example. The prospectus includes the company’s profits over the last five years, and the road show includes the company’s cumulative annual growth rate (CAGR) over that five-year period. This may be permissible in the road show because anyone with access to the prospectus could calculate the CAGR.

● The information is publicly available or may obtained by anyone.Example. A bar graph of the company’s revenue is overlaid with a red line that shows the average revenue for the company’s industry (with the source footnoted). Including the industry revenue in the road show may be permissible even though it is not in the prospectus if the prospectus includes disclosure that is generally consistent with the information in the slide and the information is publicly available.

● The information is otherwise not material.Example. The prospectus may include five years of net income data, but a road show slide may show eight years of net income data. If the older data did not reflect any significant material trend, including that additional information should not be problematic.

The road show should not include any forward-looking information (e.g., projections about future events) that was not included in the prospectus. All the information in the road show should be substantiated through the typical diligence process.

A question that sometimes arises is whether a reporting company should reaffirm its annual earnings guidance during a road show. Doing so may be considered issuing new guidance, which would be material information to investors. In that event, the company would need to include the guidance in the prospectus and disclose it in a Form 8-K (or Form 6-K, for a foreign private issuer) submitted under the Exchange Act.

The road show slides include various disclaimers, legends, and required information. These should be tailored to the presentation, but typically include disclaimers relating to forward-looking statements (to allow the company to avail itself of either the statutory safe harbor for such statements or the judicially created “bespeaks caution” defense), a notice that a registration statement has been filed, and any non-GAAP financial measure reconciliations required by SEC rules. Any non-GAAP (or non-IFRS) financial measures included in the presentation must comply with the requirements of SEC Regulation G and the requirements of Item 10(e) of Regulation S-K (17 CFR 229.10) if the road show is filed with or furnished to the SEC, including the mandated reconciliation to GAAP (or IFRS) financial measures.

13

IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

For information about forward-looking statements, see Safe Harbors for Forward-Looking Statements. For guidance on preparing forward-looking statements, see Forward-Looking Statement: Drafting a Compliant Statement. For information about the SEC’s regulation of non-GAAP financial measures, see SEC Regulation of Non-GAAP Financial Measures.

The underwriting agreement for an IPO or follow-on offering will customarily provide that the company will indemnify the underwriters against any losses incurred in connection with material misstatements in or omissions from road show slides and will not market the IPO using materials other than those that have been agreed upon with the underwriters.

should companies be concerned about regulation fd when preparing and conducting a road show?Road shows used in primary registered offerings are exempt from Regulation FD pursuant to Rule 100(b)(2)(iii)(F) (17 CFR 243.100). See also Regulation FD Compliance and Disclosure Interpretation Question 101.07 [Aug. 14, 2009]. But road shows used in exempt offerings and solely secondary offerings and road shows conducted by WKSIs before the filing of a registration statement in reliance on Rule 163, are subject to Regulation FD. Generally, reporting companies should keep a current investor presentation available on the investor relations section of their websites and, for Regulation FD purposes, should announce their participation in industry conferences and make such presentations publicly available.

For more information about Regulation FD, see Regulation FD.

What can management say in the road show presentation and when answering the audience questions?Management should follow the script prepared for the road show. During a Q&A session following the presentation, the executives may provide any information that is in the prospectus or is otherwise publicly available. Determining what information to provide may be difficult in a live presentation, so companies, underwriters, and their counsel should prepare as thoroughly as possible for anticipated questions. If any material information not included in the prospectus is inadvertently disclosed, company counsel and the underwriters should determine whether any remedial steps are required, including amending the prospectus or filing a FWP.

eArninGs GuidAnce issued clOse tO A reGistered OfferinGIssuing earnings guidance around the time of a registered offering presents several issues. For information about issuing earnings guidance generally, see Earnings Guidance and Earnings Releases: Regulatory Framework and Disclosure Process.

May a reporting company revise its earnings guidance downwards just before launching an offering?Yes, this should be fine and could mitigate the company’s potential liability. Updating guidance to moderate the market’s expectations ordinarily would not be considered an offer under the Securities Act.

May a reporting company revise its earnings guidance upwards just before launching an offering?Yes. Rule 168 allows for forward-looking information, including earnings guidance, to be released only in the ordinary course of business in a manner that is consistent with past practice. Concerns may be raised, however,

14

IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

regarding the timing of such an announcement and whether the announcement may be viewed as unlawfully conditioning the market.

if a reporting company revises its earning guidance upwards, how long should it wait before launching an offering?If the company earnings release falls within the Rule 168 safe harbor (i.e., the company regularly releases similar information at the same time(s) each year), a cooling off period may not be required. If Rule 168 is not available, however, then a cooling-off period would be recommended, the length of which will depend on the company’s circumstances, such as the risk that the new guidance will be subject to further changes. A company should be careful to avoid forward-looking statements from being included in marketing materials for an offering unless a forward-looking statements safe harbor is available.

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Other products or services may be trademarks or registered trademarks of their respective companies. © 2018 LexisNexis

This document from Lexis Practice Advisor®, a comprehensive practical guidance resource providing insight from leading practitioners, isreproduced with the permission of LexisNexis®. Lexis Practice Advisor includes coverage of the topics critical to practicing attorneys. For more information or to sign up for a free trial, visit lexisnexis.com/practice-advisor. Reproduction of this material, in any form, is specifically prohibited without written consent from LexisNexis.

LEXISNEXIS.COM/PRACTICE-ADVISORLearn more

IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers

Anna Pinedo Partner, Mayer Brown LLPAnna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd-Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters.

Vanessa K. BrowderAssociate, Mayer Brown LLPVanessa K. Browder is an attorney at Mayer Brown LLP in New York. She focuses on securities law in the context of registered and unregistered domestic and cross-border transactions. Ms. Browder received an A.B. in philosophy from Harvard University and a J.D. from Boston College Law School. She also studied philosophy at the University of Chicago and violin with James Buswell (of New England Conservatory).

Lexis Practice Advisor®

Market Trends 2018/19: Lock-Up AgreementsA Lexis Practice Advisor® Practice Note by Anna T. Pinedo, Mayer Brown LLP

Anna T. PinedoMayer Brown LLP

This market trends article discusses lock-up agreements,

which are usually negotiated between the underwriters or

placement agents and the issuer and its directors, officers,

and control persons in connection with offerings of securities.

Pursuant to the terms of the lock-up agreement, the issuer

agrees that it will refrain from issuing for the agreed lock-up

period securities of the same class as the offered securities

and securities convertible or exchangeable into the same

class as the offered securities. The issuer also will agree to

refrain from filing any registration statement relating to the

offer of securities, subject to certain exceptions as discussed

further below. 

Similarly, the issuer’s directors, officers, and control persons

will enter into lock-up agreements.  The lock-up agreements

provide the underwriters or placement agents some

assurance that new securities will not be sold immediately

following the proposed offering which might disrupt the

trading market for the securities that have been offered.

For additional information on lock-up agreements, see Top 10

Practice Tips: Lock-Up Agreements and IPO Key Agreements.

For a form of a lock-up agreement, see Lock-Up Agreement

(IPO).

Length of Lock-Up PeriodIn the case of an initial public offerings, the underwriters will

seek to obtain lock-up agreements from all, or substantially

all, the existing securityholders for a period of 180 days,

subject to some limited carve-outs. In the case of a follow-on

offerings (i.e., an offering following an issuer’s IPO), the lock-

up period may vary from 30 days to 90 days depending on a

number of factors, including the company’s maturity and the

liquidity of its stock.

In almost all recent IPOs other than those involving special

purpose acquisition companies (SPACs), the lock-up period

has been 180 days. To the extent that any IPO in recent years

has not had a 180-day lock-up period, the lock-up period has

been tiered with different parties subject to different lock-

up periods. For example, insiders may have been subject to a

somewhat shorter lock-up period than option holders.

During 2019, even the most high-profile IPO issuers agreed

to 180-day lock-up periods; however, there was some

speculation in the press that short-selling trading schemes

were implemented that allowed stockholders to circumvent

the lock-up restrictions in at least one or two instances.

Looking back at variations to the 180-day lock-up period,

the lock-up for Snap, Inc. and the lock-up for Dropbox

are deviations that may be useful to consider in terms of

precedent.

In Snap, Inc., the company, its directors and officers, and

holders of substantially all of the company’s outstanding

securities agreed that without the prior written consent of

either of the representatives acting on the underwriters’

behalf, they would not engage in sales or transfers for a

150-day period. The lock-up period was understood to

end 10 business days prior to the scheduled closure of the

company’s trading window for the first full fiscal quarter

completed following the prospectus if (1) the lock-up

period ended during or within 10 business days prior to the

scheduled closure of the trading window and (2) the lock-up

period would end at least 120 days after the pricing of the

company’s IPO.

In Dropbox, the company’s executive officers, directors, and

other holders agreed to a lock-up of 180 days provided that

if (1) at least 120 days have elapsed since the IPO pricing,

(2) the company publicly released its earnings results for the

quarterly period during which the IPO occurred, and (3) the

lock-up period is scheduled to end during or within 5 trading

days prior to a blackout period, the lock-up period would end

10 trading days prior to the commencement of such blackout

period.

Lock-Up PartiesIn almost all IPOs, the prospectus will disclose either that

substantially all the pre-IPO shares have been locked up or

will specify the percentage of the pre-IPO shares that have

been locked up. An IPO lock-up also will apply to shares

acquired through a directed share program.

In follow-on offerings, which often are undertaken in an

abbreviated time period, lock-up agreements usually only

will be obtained from the issuer, the directors, and the

officers. Other significant stockholders will not be advised

about the potential offering since the fact that the issuer

is contemplating a potential offering may itself constitute

material nonpublic information. Existing stockholders

generally would not want to receive material nonpublic

information since the receipt of that information would

restrict their ability to trade in the issuer’s securities.

Lock-Up Agreements and Carve-outsThe customary lock-up will contain an acknowledgment

and agreement that the lock-up party will not (1) offer, sell,

contract to sell, pledge, or grant any option to purchase or

otherwise dispose of (collectively, a disposition) any company

securities or any securities convertible into or exercisable

or exchangeable for, or any rights to purchase or otherwise

acquire, any company securities held by or acquired by the

lock-up party, or that may be deemed to be beneficially

owned by the lock-up party (the lock-up shares) pursuant to

the rules and regulations promulgated under the Securities

Act of 1933, as amended (the Securities Act), and the

Securities Exchange Act of 1934, as amended (the Exchange

Act), for the lock-up period, or (2) exercise or seek to exercise

or effectuate in any manner any rights of any nature that

the lock-up party has or may have to require the company

to register the lock-up party’s sale, transfer, or other

disposition of any of the lock-up shares or other securities

of the company held by the lock-up party, or to otherwise

participate as a selling securityholder in any manner in any

registration effected by the company under the Securities

Act.

The lock-up party also agrees not to engage in any hedging,

collar (whether or not for consideration), or other transaction

that is designed to or reasonably expected to lead or to

result in a disposition of lock-up shares during the lock-up

period, even if such lock-up shares would be disposed of by

someone other than the holder. The prohibited hedging or

other similar transactions would include any short sale or any

purchase, sale, or grant of any right (including any put or call

option or reversal or cancellation thereof) with respect to any

lock-up shares or with respect to any security (other than a

broad-based market basket or index) that includes, relates to,

or derives any significant part of its value from the lock-up

shares.

The underwriters generally will agree to exceptions for the

following:

1. Transfers of shares as a bona fide gift, including gifts to

charitable organizations

2. Transfers of shares to a trust for the direct or indirect

benefit of the lock-up party or such party’s immediate

family

3. Transfers by will or intestacy to legal representatives,

heirs, or legatees

4. Transfers pursuant to a domestic order, divorce

settlement, or other court order

5. Transfers of shares of common stock or any security

convertible into or exercisable for common stock to the

company pursuant to any company right of repurchase

or right of first refusal over such securities, or transfers

of shares of common stock to the company for the net

exercise of options, settlement of RSUs or warrants, or

to cover tax withholding

6. Distributions of shares to members, limited partners, or

stockholders of the lock-up party

7. Transfers to affiliates or to any investment fund or other

entity controlled by or managed by the lock-up party

8. Transfers of shares to the company as forfeitures to

satisfy tax withholding and remittance obligations of the

lock-up party in connection with the vesting or exercise

of equity awards granted pursuant to the company’s

equity incentive plans or pursuant to a net exercise or

cashless exercise by the stockholder of outstanding

equity awards pursuant to the company’s equity

incentive plan

To the extent that the transactions identified in (1), (2), (3),

(4), (5), (6), and (7) do not involve a disposition or transfer for

value; do not require a filing with the Securities and Exchange

Commission; and any donee, distributee, or transferee

does not otherwise voluntarily effect any public filing or

report regarding the transfer, each donee, distributee,

and transferee agrees to be bound by a similar lock-up

agreement. In the case of a transaction identified in (8), any

filing made pursuant to Section 16 of the Exchange Act shall

state in the footnotes thereto that the filing relates to the

circumstances described in (8) and the lock-up party shall not

voluntarily effect any other public filings or reports regarding

any such exercises during the lock-up period.

Often, the lock-up will apply to pre-IPO shares and will not

apply to shares purchased by the lock-up party in the open

market in the offering or following the offering (provided that

such sales are not required to be reported in any public filing,

and the lock-up party does not otherwise voluntarily make

any public filing regarding the sales).

The lock-up will not restrict any grant or exercise of options

pursuant to the company’s stock option plans or the exercise

by the lock-up party of any warrant to acquire shares

provided that such shares are not transferred during the

lock-up period.

Other Lock-Up Carve-outsFrom time to time, the underwriters may agree to other lock-

up carve-outs to address special situations.

For example, if the lock-up party is a financial institution,

which is engaged in broker-dealer, investment advisory, and

other services, the lock-up is not intended to prevent the

lock-up party or its affiliates from engaging in ordinary course

lending or capital markets activities, such as brokerage, asset

management, derivatives transactions, and other securities

activities.

Also, the underwriters may agree to exclude from the lock-

up transfers pursuant to an order of a court or a regulatory

agency. In recent offerings, underwriters also have been

permitting a carve-out for transfers pursuant to a bona fide

third-party tender offer, merger, consolidation, or similar

transaction that in each case is made to all of the holders of

the company’s common stock involving a change of control;

however, if the strategic transaction is not consummated, the

shares remain subject to the lock-up agreement.

Less frequently, the underwriters may allow a carve-out for

holders to enter into a trading plan established pursuant to

Rule 10b5-1 under the Exchange Act provided that sales

under the plan do not occur during the lock-up period and

the entry into the plan is not required to be disclosed in any

public filing.

Lock-Up TerminationUsually, the lock-up agreement will have a termination date

such that if the underwriting agreement is terminated, the

company elects not to pursue the offering, or a certain drop-

dead date has passed, the parties will be released from their

lock-up agreement.

The Issuer’s Lock-Up AgreementThe issuer also will be subject to a lock-up agreement. The

issuer may negotiate limited carve-outs from its lock-up

agreement. Usually, the underwriters will accept carve-outs

for the following:

• The sale of the securities to the underwriters

• The ability to issue shares under executive compensation

plans, which, may, from time to time, be subject to a share

limit

• The ability to file any registration statement on Form S-8

relating to securities granted or to be granted pursuant to

any executive compensation plan in effect as of the date of

the underwriting agreement or any assumed benefit plan

pursuant to an acquisition or strategic transaction

• The issuance of shares (or a specified number of shares

or a percentage of the pre-transaction total shares

outstanding) in connection with acquisitions or joint

ventures

• In the case of life science companies, the issuance of

shares (or a specified number of shares) in connection with

licensing arrangements

• The issuance of shares pursuant to pre-existing agreements

Generally, the issuer’s lock-up agreement in the case of

SPAC IPOs will not contain carve-outs for stock-based

compensation.

LexisNexis, Lexis Practice Advisor and the Knowledge Burst logo are registered trademarks of RELX Inc.Other products or services may be trademarks or registered trademarks of their respective companies. © 2019 LexisNexis

LexisNexis.com/Lexis Practice-Advisor

Anna T. Pinedo, Partner, Mayer Brown LLP

Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

She works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. She has particular financing experience in certain industries, including technology, telecommunications, healthcare, financial institutions, REITs and consumer finance. Anna has worked closely with foreign private issuers in their securities offerings in the United States and in the Euro markets. She also works with financial institutions in connection with international offerings of equity and debt securities, equity- and credit-linked notes, and hybrid and structured products, as well as medium term note and other continuous offering programs.

In the derivatives area, Anna counsels a number of major financial institutions acting as dealers and participants in the commodities and derivatives markets. She advises on structuring issues as well as on regulatory issues, including those arising under the Dodd-Frank Act. Her work focuses on foreign exchange, equity and credit derivatives products, and structured derivatives transactions. Anna has experience with a wide range of transactions and structures, including collars, swaps, forward and accelerated repurchases, forward sales, hybrid preferred stock and off-balance sheet structures. She also has advised derivatives dealers regarding their Internet sites and other Internet and electronic signature/delivery issues, as well as on compliance matters.

This document from Lexis Practice Advisor®, a comprehensive practical guidance resource providing insight from leading practitioners, is reproduced with the permission of LexisNexis®. Lexis Practice Advisor includes coverage of the topics critical to practicing attorneys. For more information or to sign up for a free trial, visit lexisnexis.com/practice-advisor. Reproduction of this material, in any form, is specifically prohibited without written consent from LexisNexis.

Lock-Up ReleasesGenerally, the lead book runner will have the right to release

parties from the lock-up. In recent deals, there are many

instances in which there are joint book runners. Often, the

book runners will make a point of negotiating that the release

must be granted jointly by the two (or more) co-book or

joint book runners. It is less common for a lock-up release

to require the consent of all of the underwriters. The right

to release the lock-up is important, especially in the context

of an IPO since releasing the lock-up may enable the co-

book runners to secure a role for themselves as the lead

underwriters in a follow-on offering by the issuer.

Under applicable Financial Industry Regulatory Authority

(FINRA) rules, the release of a lock-up in the context of an

IPO requires that public disclosure through a major news

service be made at least two business days prior to the

effective date of the release. The FINRA rules do not require

an announcement for a waiver relating to a transfer not made

for consideration to a transferee that has agreed to be bound

by the lock-up provisions.

From time to time, the lock-up parties will negotiate for the

right to be released from their agreement to the extent any

record or beneficial owner of any lock-up shares is granted

an early release. The release provisions may stipulate that

if the maximum number of lock-up shares that could be

released pursuant to such waiver in the aggregate is at

least 1% of such owner’s total lock-up shares, then certain

significant holders of the company’s securities also will be

granted an early release from their lock-up obligations on a

pro rata basis based on the maximum percentage of lock-up

shares held by such holder. This early release provision for

significant holders would not be triggered in certain instances

where the underwriters released the lock-up agreement of a

holder as a result of an emergency or hardship affecting only

such holder.

In some IPOs, the lock-up agreement may contain a release

that is automatic and staggered pursuant to which a specified

percentage of the locked-up shares will be released from the

lock-up in the event that the issuer’s stock is performing well.

This is not considered typical and may be limited to IPOs

involving larger companies.

Pre-IPO Private PlacementsMore and more often, companies are undertaking private

placements in close proximity to their IPOs. Investors in

these pre-IPO private placements, especially cross-over fund

investors (i.e., those that invest in both public and private

equity), will address IPO lock-up provisions in the investors’

rights agreement. Generally, a cross-over fund investor will

want to ensure that the IPO lock-up will be no more than

180 days in length and that it will cover only pre-IPO shares

and not affect shares purchased by such fund in the open

market. Cross-over investors also will want to be certain

that all company directors, officers, and 1% shareholders

will be subject to a substantially similar lock-up agreement.

Correspondingly, cross-over fund investors will want a “most-

favored-nations” type of lock-up release provision, such

as the one described above, which will provide that if any

stockholder gets released from its lock-up agreement, then

the cross-over funds will be released from their agreements

to the same extent and in the same proportion.

IPO Accommodations for EGCs, FPIs, and Non-EGCs

Available Accommodations

An EGC An EGC FPI A Non-EGC A Non-EGC FPI

CONFIDENTIAL SUBMISSION?

Yes, an EGC may submit its IPO registration statement to the SEC for confidential review as a result of JOBS Act provisions.

Confidentiality is established by statute. Securities Act Section 6(e)(2).

New policy allows anon-EGC to submit its registrationstatement to the SEC for confidentialreview.

A non-EGC must request confidential treatment for its submission under Rule 83.

Certain FPIs, evennon-EGCs, are permittedto submit their IPOregistration statementsfor confidential review.The new SEC policyextends this to FPIs beyond those indented in2011/2012.1

A non-EGC FPI other than those addressed in SEC guidance would have to requestconfidential treatment for its submission under Rule 83.

WHEN MUST REGISTRATION BE FILED PUBLICLY?

15 days prior to commencement of a traditional roadshow. If relying on new SEC policy, 15 days prior to commencement of a traditional roadshow.

Other FPIs do not have a deadline for public filing.1

TEST-THE-WATERS? Yes.

DISCLOSUREACCOMODATIONS?

Yes. Yes. Certainaccommodations available to FPIs.

No. Yes. Certain accommodations available to FPIs.

FINANCIALINFORMATION THAT MAY BE OMITTED?

Confidential submissions may omit annual and interim financial statements that will not be required to be presented at the time of the offering.

In reliance on new guidance, confidentialsubmissions may omit annual and interim financial statements that will not be required to be presented at the time of the first public filing.

GOVERNANCE &OTHER SOX-RELATED ACCOMMODATIONS?

Yes. An EGC FPI benefits from the accommodationsavailable to EGCs and those available under the securities rules and theregulations of thenational securitiesexchanges for FPIs.

No. An FPI will benefit fromthe accommodations available to FPIs under the securities rules and the regulations of the national securities exchanges.

1 See Non-Public Submissions from Foreign Private Issuers, December 8, 2011, amended May 30, 2012, at: https://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm

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PRIOR TO JOBS ACT UNDER THE JOBS ACT

FINANCIALINFORMATION IN SEC FILINGS

• 3 years of audited financial statements

• 2 years of audited financial statements for smaller reporting companies

• 2 years of audited financial statements

• Not required to present selected financial data for any period presented in connection with an IPO

• Within 1 year of IPO, EGC would report 3 years of audited financial statements

CONFIDENTIALSUBMISSIONS OF DRAFT IPO REGISTRATION STATEMENT

• Confidential submissions now available to all issuers as a result of SEC staff policy, but confidential submission is not incorporated into legislation or regulations

• EGCs (including FPIs that are EGCs) may submit a draft IPO registration statement for confidential review prior to public filing, provided that such submission and any amendments are publicly filed with the SEC not later than 15 days before the EGC conducts a “road show”

COMMUNICATIONS BEFORE AND DURING THE OFFERING PROCESS

• Limited ability to “test-the-waters” • All issuers1, including EGCs, either prior to or after filing a registration statement, may “test-the-waters” by engaging in oral or written communications with QIBs and institutional accredited investors to determine interest in an offering

AUDITORATTESTATION ON INTERNAL CONTROLS

• Auditor attestation on effectiveness of internal controls over financial reporting required in second annual report after IPO

• Non-accelerated filers not required to comply

• Transition period for compliance of up to 5 years

ACCOUNTING STANDARDS

• Must comply with applicable new or revised financial accounting standards

• Not required to comply with any new or revised financial accounting standard until such standard applies to companies that are not subject to Exchange Act public company reporting

• EGCs may choose to comply with non-EGC accounting standards but may not selectively comply

EXECUTIVECOMPENSATION DISCLOSURE

• Must comply with executive compensation disclosure requirements, unless a smaller reporting company (which is subject to reduced disclosure requirements)

• Required to calculate and disclose the median compensation of all employees compared to the CEO

• May comply with executive compensation disclosure requirements by complying with the reduced disclosure requirements generally available to smaller reporting companies

• Exempt from requirement to calculate and disclose the median compensation of all employees compared to the CEO

• FPIs entitled to rely on other executive compensation disclosure accommodations

SAY ON PAY • Must hold non-binding advisory stockholder votes on executive compensation arrangements

• Smaller reporting companies are currently exempt from say on pay

• Exempt from requirement to hold non-binding advisory stockholder votes on executive compensation arrangements for 1 to 3 years after no longer an EGC

JOBS Act IPO On-Ramp Accommodations

1 On September 26, 2019, the SEC extended the ability to test-the-waters to all issuers by adopting new Rule 163B under the Securities Act of 1933, as amended. The new rule became effective on December 3, 2019.

The following chart summarizes the accommodations made available to emerging growth companies (EGCs) as a result of the JOBS Act.

COMPARING THE REGISTRATION, REPORTING AND GOVERNANCE REQUIREMENTS FOR DOMESTIC (U.S.) COMPANIES AND FOREIGN PRIVATE ISSUERS

FILING OBLIGATIONS TERMINATION OF

REGISTRATION / DEREGISTRATION1. Annual reports 2. Quarterly reports 3. Current reports 4. Proxy statements 5. Section 16 filings 6. Schedule 13D

and 13G filings

DOMESTIC ISSUER

Required (Form 10-K), between 60 and 90 days following the end of the fiscal year covered by the annual report, depending on public float and other factors

Required (Form 10-Q)

Required (Form 8-K)

Required (Schedules 14A and 14C) for annual and spe-cial meetings of shareholders

Required (Forms 3, 4 and 5) for insiders

Required for 5% holders

Under Exchange Act Section 12(g)(4), termination of registration is only permitted if the number of record holders falls below 300; or (ii) the number of record holders falls below 500 and the issuer’s assets have been no more than $10 million at the end of each of its last three fiscal years

FOREIGN PRIVATE ISSUER (FPI)

Required (Form 20-F), within four months after the fiscal year covered by the annual report

Not required, unless NYSE-listed (in which case must file quarterly report under Form 6-K)

Not required, unless disclosure made in the home country or required by the home country exchange (in which case must file the disclosure on Form 6-K)

Not required Not required Required for 5% holders

Under Exchange Act Rule 12g3-2(b), an FPI may terminate its registration if certain conditions are satisfied, regardless of number of US holders

Other related benefits for FPIs:

Can present financial statements in IFRS ( as issued by the IASB ) without US GAAP reconciliation

Only annual internal control reporting required ( rather than quarterly )

More onerous executive compensation disclosure requirements not applicable

The chart below summarizes briefly some of the benefits available to, and the accommodations made for, foreign private issuers that elect to register a class of securities with a U.S. securities exchange and offer securities publicly in the United States.

COMPARING THE REGISTRATION, REPORTING AND GOVERNANCE REQUIREMENTS FOR DOMESTIC (U.S.) COMPANIES AND FOREIGN PRIVATE ISSUERS

REQUIREMENTS FOR FINANCIAL STATEMENTS IN CONNECTION WITH OFFERING

CONFIDENTIAL SUBMISSIONS FOR REGISTRATION STATEMENTS

CORPORATE GOVERNANCE REQUIREMENTS20% SHAREHOLDER APPROVAL RULE (Nasdaq AND NYSE)

1. SEC and NYSE / Nasdaq rules regarding audit committees

2. NYSE /Nasdaq rules regarding compensation committees

3. NYSE/Nasdaq rules regarding nominating committees

4. Dodd-Frank governance and disclosure provisions

DOMESTIC ISSUER

Financial statements cannot be more than 135 days old

Permitted Must comply with SEC and NYSE/Nasdaq rules

Must comply with SEC and NYSE/Nasdaq rules

Must comply with SEC and NYSE/Nasdaq rules

Applicable provisions:

- Sec. 951 (Say on Pay)

- Sec. 952 (Compensation Committee Independence)

- Sec. 953 (Pay vs. Performance & Pay Disparity)

- Sec. 954 (Compensation Clawbacks)

- Sec. 955 (Employee and Director Hedging Disclosure)

- Sec. 972 (Disclosure of CEO and Chairman Separation)

Applicable

FOREIGN PRIVATE ISSUER (FPI)

Financial statements go stale more slowly. An FPI may omit interim unaudited financial statements if a registration statement becomes effective less than nine months after the end of the last audited fiscal year (unless the FPI has already published more current interim financial information). After that time, an FPI must provide interim unaudited financial statements (which may be unaudited) covering at least the first six months of the fiscal year, together with comparative financial statements for the same period in the prior year

Permitted Not required, unless disclosure made in home country or required by home country exchange (in which case must file the disclosure on Form 6-K)

Not required Not required Not applicable to FPIs:

- Sec. 951 (Say on Pay)

- Sec. 952 (Compensation Committee Independence), if FPI complies with home country practices and requirements of home country exchange

- CEO pay ratio disclosure under Sec. 953 (Pay vs. Performance & Pay Disparity)

May comply with home country practices and requirements of home country exchange

The chart below summarizes briefly some of the benefits available to, and the accommodations made for, foreign private issuers that elect to register a class of securities with a U.S. securities exchange and offer securities publicly in the United States.

2

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Please visit wPlease visit www.mayerbrown.com for comprehensive contact information for all Mayer Brown offices. ww.mayerbrown.com for comprehensive contact information for all Mayer Brown offices.

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© 2020 Mayer Brown. All rights reserved.

Medical & Healthcare

12.5%

At A Glance

Top Five Sectors for IPOs in 2019 (By Number of Deals)

$107

$612

2018: 217 2018: 332017: 188 2017: 28

Median Deal Size in 2019 IPOs Completed

Venture Capital-Backed IPOs

Private Equity-Backed IPOs

Median Market Cap at Time of IPO in 2019

million

million

Foreign private issuers completed an IPO in the US in 2019.

Companies listed their stock on the New York Stock Exchange

Companies listed their stock on the Nasdaq Capital Market

Companies listed their stock on the Nasdaq Global Market

Up from

$580 million in 2018

ComputerSoftware/Services

Financial Services Internet of Things Other Sectors

11.9% 9.4% 8.1% 25.6%

Proceeds Raised in Largest IPO of 2019

Completed by Uber Technologies, Inc.

$8.1 billion

Biotech/Pharma

32.5%

www.

$$ $

$$ $

Preliminary IPO

Registrations Filed

Companies that Withdrew

their IPOs

49

37

15

108

Source:  IPO Vital Signs(Excludes IPOs by SPACs, closed-end funds, best efforts IPOs, self-underwritten IPOs, and direct offerings.)

2019: 208 2019: 46

Initial Public Offerings

20192018 2017

20192018 2017

$21.3 billion

$10.5 billion

$9.1 billion

73

75

52

20192018 2017

$7.6 billion

$11.7 billion

$12.7 billion

18

31

43

For more information about initial public offerings, please visit mayerbrown.com

© 2020 Mayer Brown

$45.8 billion

$46.7 billion

$35.0 billion

160

188

155

Down from

$108 million in 2018

IPOs_Infographic_2019.indd 2IPOs_Infographic_2019.indd 2 1/26/2020 1:52:26 PM1/26/2020 1:52:26 PM