The Public Offering Registration Of The Unseasoned Issuer - Securities Regulation

Registration of the Unseasoned Issuer

1. In General

   1. The effort and expense for an IPO are greater than for an offering by a company that already is publicly traded, especially one that is already subject to the reporting requirements of the '34 Act.

   2. Once a company goes public, many facts about the company and its officers that previously were confidential will be disclosed in Commission filings.

      • This openness is mandated by § 15(d) of the '34 Act, which requires any issuer who has filed a registration statement, regardless of the size of its assets or the number of its shareholders, to comply with the periodic reporting requirements of § 13 of the '34 Act.

      • Other issuers may become subject to § 13 reporting requirements because their public offering pushes them above the asset ($10 million) and holder (2,000) limits for registration under § 12(g) or because their shares subsequently become listed on a national exchange.

   3. Three Periods

      • The Pre-Filing Period

        • § 5 imposes restrictions on the freedom the issuer and underwriters have to promote the offering until the registration statement is filed.

        • Activities likely to produce investor interest in the offering may violate § 5, at least until the registration statement is filed.

      • The Waiting Period

        • Once the registration statement is filed and the Commission's staff begins its review, a efforts to promote the registered offering can commence.

        • With the filing of the registration statement, underwriters can sample investor interest by aggressively soliciting their offers to buy.

        • § 5 bars any sales until the registration statement becomes effective.

      • The Post-Effective Period

        • Once the registration statement becomes effective, sales can commence.

2. Preparing the Registration Statement for Filing

   1. The burden of assuring that the registration statement is prepared in accordance with the Commission's regulations falls squarely on the shoulders of the registrant's attorney. See Rule 408

      • This includes not only whether all the information sought by Regulation S-K has been provided, but also whether other information must be disclosed to assure that no material omission or half-truth is committed. See Rule 408

   2. The Process

      • Preparing the Registration Statement

        • The "quarterback" in preparing the registration statement is normally the attorney for the company.

          • Drafts are circulated to all concerned.

        • Company counsel is principally responsible for preparing the non-financial parts of the registration statement.

        • The managing underwriters and their counsel generally play an active role in drafting various sections of the prospectus, particularly those that will assist in marketing the shares.

        • There are normally at least a few "all hand" drafting sessions prior to filing the registration statement, attended by"

          • The management personnel of the company

          • Counsel for the company

          • The company's auditors

          • Representatives of the managing underwriters

          • Underwriters' counsel

        • It is essential for the issuer and other involved to understand the role of Company Counsel:

          • Counsel normally assists the company and its management in preparing the document and in performing their "due diligence" investigation to verify all disclosure for accuracy and completeness.

          • Counsel often serves as principle draftsperson of the registration statement.

          • Counsel typically solicits information both orally and in writing from a great many people, and exercises judgment in evaluating the information received for accuracy and consistency.

          • Company counsel must have a certain degree of healthy skepticism.

            • The lawyer should insist upon backup documentation and ask for essentially the same information in different ways from different sources.

          • The normal scope of a professional engagement does not contemplate that the lawyer will act as the ultimate source to investigate and verify all disclosures in the registration statement or to assure that the document is accurate and complete in all respects.

            • In many cases, the lawyer would lack the expertise to assume the responsibility.

            • In some cases, the lawyer may lack even the technical background necessary even to frame the proper questions and must depend upon his client for education about the nature of the business.

          • Counsel does not routinely check information received against the books of original entry or source documents, as auditors do, nor does counsel generally undertake to consult sources external to the client to obtain or verify information supplied by the client.

      • Preliminary Preparation

        • For the average company to go public, a very substantial amount of preliminary work is required that does not relate to preparing the registration statement as such:

          • To have a vehicle for the offering, the business going public normally must be conducted by a single corporation or a parent corporation with subsidiaries.

            • In most cases, the business is not already in such a neat little package.

          • Even when there is a single corporation, a recapitalization almost always is required so that the company will have an appropriate capital structure for the public offering.

          • A decision must be made regarding the proportion of the stock to be sold to the public.

          • Among other common projects in preparing to go public, it is often necessary to:

            • enter into, revise, or terminate employment agreements;

            • adopt stock option plans and grant stock options there-under;

            • transfer real estate;

            • revise leases;

            • rewrite the corporate charter and by-laws;

            • engage a transfer agent and registrar;

            • rearrange stockholdings of insiders;

            • draw, revise, or cancel agreements among shareholders;

            • etc.

      • Timetable

        • The average first public offering normally requires two to three months of intensive work before the registration statement can be filed.

          • This is because:

            • The preliminary steps discussed above

            • Drafting the prospectus normally begins before the financials are available; thus, rewriting of the non-financial portions of the prospectus is par for the course in order to harmonize the financial and non-financial portions after the financial statements are ready.

        • After the registration statement is filed with the Commission, the waiting period begins

          • The Commission reviews the registration statement and finally issues its letter of comments.

          • There is wide variation in the time required for the SEC to process a registration statement.

          • The SEC's current policy calls for the issuance of an initial letter of comments within 30 days.

            • The delay is longer and at times has exceeded 100 days but at certain times the wait is less than 30 days.

        • The overall time lapse between the beginning of the preparation of a company's first registration statement and the final effective date may well exceed six months.

          • Rarely will it be less than three months.

3. Review by the SEC's Staff: The Letter of Comment

   1. In General

      • Upon filing the registration statement with the SEC and paying the filings fees, under § 8(a) the registration statement can, barring any other actions, become effective 20 days after filing.

      • In reality, unseasoned issuers and other problem companies can expect a much longer wait than 20 days before their registration statements become effective.

   2. Review of Registration Statements

      • After the registration statement has been filed with the Commission, the registration statement is assigned to one of the operating branches of the Commission's Division of Corporate Finance.

      • The Commission's staff reviews the registration statement to determine its compliance with the informational requirements of the 1933 Act and the forms, regulations, and policies of the staff.

      • After commenting on (or determining not to review) the registrations statement, and determining that any amendments filed complies with the staff's comments, the staff, on behalf of the Commission, will issue an order declaring the registration statement effective and the company will commence the public offering.

      • The '33 Act does not specifically provide for this type of review of registration statements:

        • § 8(a) provides that a registration statement will become effective automatically twenty days after it is filed, or twenty days after any amendment to the registration statement is filed with the commission

        • Under § 8(b), the Commission may issue an order refusing to permit the effectiveness of a registration statement if the registration statement appears to the Commission to be incomplete or inaccurate in any material respect.

        • After the registration statement has become effective, § 8(d) provides that the Commission may issue a stop order suspending the effectiveness of an effective registration statement if the Commission determines that the registration statement includes an untrue statement of material fact or fails to state a material fact required to be stated or necessary to make the statements in the registration statement not misleading.

      • Once the Commission determined that the formal process of challenging registration statements was not the best method, the Commission developed the Letter of Comment method:

        • Under this method, the Commission's staff reviews the initial filing of a registration statement and issues a detailed letter of comment advising the issuer's counsel of any deficiencies in the registration statement that the staff believe needs correcting.

        • This new method was so successful that it received explicit Congressional approval by incorporation in the Investment Company Act of 1940.

        • In course of the process, registration statements are usually amended at least once...