bowne nyse ipo-guide

NEW YORK STOCK EXCHANGE

IPO Guide

Legal Accounting

Insurance broker/risk advisor Financial printer Web-based communication tools

Investment bank/depositary receipts Transfer agent Investor relations

Proxy solicitor

NE

W YO

RK

STO

CK

EXC

HA

NG

E IP

O G

uide

PublisherTimothy Dempsey

Consulting publisherBrian Curran, NYSE Euronext

EditorCarolyn Boyle

Consulting editorsNicolas Grabar and Sandra L Flow,Cleary Gottlieb Steen & Hamilton LLP

ProductionRichard Proctor

The NYSE IPO Guideis published byCaxton Business & Legal, Inc27 N Wacker Drive, Suite 601Chicago, IL 60606United StatesTel +1 312 361 0821Fax +1 312 278 0821www.caxtoninc.com

Printed by Bowne & Co, Inc

ISBN 978-1-905783-45-8

The NYSE IPO Guide© 2010 Caxton Business & Legal, Inc

Copyright in individual chapters rests with the co-publishers. No photocopying:copyright licenses do not apply.

DISCLAIMERThis guide is written as a general guideonly. It should not be relied upon as asubstitute for specific legal or financialadvice. Professional advice should alwaysbe sought before taking any action basedon the information provided. Every efforthas been made to ensure that theinformation in this guide is correct at thetime of publication. The views expressed in this guide are those of the authors. The publishers and authors stress that this publication does not purport to provide investment advice; nor do theyaccept responsibility for any errors oromissions contained herein.

The NYSE IPO Guide contains summaryinformation about legal and regulatoryaspects of the IPO process and is currentas of the date of its initial publication (June14, 2010). Although the NYSE IPO Guidemay be revised and updated at some timein the future, the NYSE does not have aduty to update the information contained inthe NYSE IPO Guide, and the NYSE will notbe liable for any failure to update suchinformation. The NYSE makes norepresentation as to the completeness oraccuracy of any information contained inthe NYSE IPO Guide. It is your responsibilityto verify any information contained in theNYSE IPO Guide before relying upon it.

©2009 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE Euronext. NYSE Euronext and its affi liates do not recommend or make any representation as to possible benefi ts from any securities or investments, or third-party products or services. Investors should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its affi liates that are based on the current beliefs and expectations of management, are subject to signifi cant risks and uncertainties, and which may differ from actual results. All data as of September, 2009.

THE LISTINGDESTINATION OF THEEXCHANGING WORLD.

NYSE

NYSE AMEX

NYSE EURONEXT

NYSE ALTERNEXT

NYSE EURONEXT IS THE PREEMINENT DESTINATION FOR LEADING BUSINESSES, PROVIDING ACCESS TO

INVESTOR CAPITAL VIA THE MOST LIQUIDITY OF ANY EQUITY EXCHANGE GROUP IN THE WORLD. OUR

UNRIVALED POSITION AT THE CENTER OF GLOBAL COMMERCE AND OUR ARRAY OF SERVICES, TRADING

VENUES AND PLATFORMS SERVE COMPANIES OF EVERY SIZE FROM EVERY INDUSTRY AROUND THE

GLOBE AT EACH STAGE OF THEIR DEVELOPMENT. THE NEW YORK STOCK EXCHANGE. NYSE AMEX. NYSE

EURONEXT. NYSE ALTERNEXT. THIS IS THE EXCHANGING WORLD. WELCOME TO NYSE EURONEXT. nyx.com

The NYSE IPO Guide

1NYSE IPO Guide

2 NYSE IPO Guide

Preface 3Duncan NiederauerChief Executive Officer, NYSE Euronext

Introduction: Advantages 5of NYSE listingNYSE Euronext

1. Why go public? 91.1 Advantages of executing 10

an IPOJ.P. Morgan

1.2 Potential issues 10J.P. Morgan

1.3 Going public without an offering 10J.P. Morgan

1.4 Foreign private issuers 11J.P. Morgan

2. Preparing to go public 132.1 Choosing advisors 14(a) Retention of advisors/service 14

providersJ.P. Morgan

(b) Identifying investor relations 14services providerThomson Reuters

2.2 Building financial reporting 15infrastructureKPMG LLP

2.3 Preparing a communications 24strategyFD

2.4 Designing the capital structure 25(a) American depositary receipts 25

J.P. Morgan

(b) Anti-takeover defenses and 29other governance mattersCleary Gottlieb Steen & Hamilton LLP

2.5 Providing for employees 30Cleary Gottlieb Steen & Hamilton LLP

3. The IPO process 333.1 Process timeline 34

J.P. Morgan

3.2 SEC registration 35Cleary Gottlieb Steen & Hamilton LLP

3.3 Prospectus 37Cleary Gottlieb Steen & Hamilton LLP

3.4 Underwriting, marketing 41and sale J.P. Morgan

4. Communications 454.1 Investors, analysts and 46

employees(a) Communications with 46

the marketFD

(b) Research analysts 48Cleary Gottlieb Steen & Hamilton LLP

(c) Employee communications 50FD

4.2 Proxy statement and 50annual meetingGeorgeson Inc

4.3 Communication mechanics 55(a) Investor relations tools 55

Thomson Reuters

(b) Other communication 57mechanicsComputershare Limited

4.4 Share ownership mechanics 59Computershare Limited

5. Obligations of a public 63company5.1 Reporting requirements 64

Cleary Gottlieb Steen & Hamilton LLP

5.2 Listing standards 70NYSE Euronext

5.3 Trading and repurchases 70Cleary Gottlieb Steen & Hamilton LLP

5.4 Obligations affecting shareholders 73

(a) Ownership reporting by 73shareholdersCleary Gottlieb Steen & Hamilton LLP

(b) Reporting by insiders 74Bowne & Co, Inc

(c) Related party transactions 75Cleary Gottlieb Steen & Hamilton LLP

6. Managing risk 776.1 Litigation 78(a) Legal standards 78

Cleary Gottlieb Steen & Hamilton LLP

(b) Class actions and 79derivative lawsuitsMarsh Inc

6.2 Indemnification 81Marsh Inc

6.3 D&O liability insurance 83Marsh Inc

6.4 Personal risk management 87Marsh Inc

Appendices 89Appendix I: NYSE listing standards, 90US companiesNYSE Euronext

Appendix II: NYSE listing standards, 92non-US companiesNYSE Euronext

Appendix III: NYSE Amex listing 93standardsNYSE Euronext

Appendix IV: NYSE financial 94continued listing standards, US companiesNYSE Euronext

Appendix V: NYSE Amex continued 96listing standards

Contributor profiles 97

3NYSE IPO Guide

Preface

4 NYSE IPO Guide

market transformation continues to moreclosely align it with the technology sectoras a customer, a developer and acommercial market technology supplier.

For example, the March 24, 2010 IPO of MaxLinear, a provider of radio-frequency and mixed-signal semiconductorsolutions for broadband communicationapplications, priced above its range andsoared 34% on its first day of trading. “Thetools and support the NYSE provided as we headed into the IPO, and post offering,have proven to be incredibly valuable forus,” said co-founder Kishore Seendripu,who is also MaxLinear’s chairman,president and chief executive officer. “OurIPO would not have been the same withoutthe splendor and pageantry that goes withbeing listed on the NYSE, the grandest andmost historically rich bourse in the world.”

Meanwhile, the 2009 IPO ofDigitalGlobe, a leading earth imaging andinformation company, raised $280 millionin gross proceeds. The stock rose 13% onits first day of trading. Chief FinancialOfficer (CFO) Yancey Spruill named severalreasons for choosing the NYSE: “Brand,reputation and higher listing standardsthat are a good filter for company quality.”Now that the company is listed, he saysthat “the association with the NYSE brandis a strong positive with our customers and other stakeholders.” Spruill’s advice to those contemplating an IPO? “Get outahead of the work flow early; for a CFO,this is an additional full-time job, andthere is a lot to do.”

Beyond technology, the NYSE isexperiencing an uptick in non-US IPOs.Investor appetite for the 2009 IPO ofBanco Santander (Brasil) SA showedconfidence in the IPO market and Brazil.The offering, which raised more than $8billion and listed simultaneously in Braziland the United States, was the largest IPOever conducted by a Brazilian company andthe largest in the world since March 2008.

Another Brazilian IPO was that of Gafisa SA, a homebuilding and realestate company that went public in 2007.CFO Alceu Duilio Calciolari notes theadvantages of going public: “The financialbenefit in the form of raising capital is themost distinct advantage. In the case ofGafisa, the capital was used to develop the company mainly through acceleratedorganic growth and M&A opportunities.

As you contemplate the journey fromprivate to public enterprise, the challengesahead might seem daunting. The goal ofthis guide is to demystify the initial publicoffering (IPO) process. We are grateful toour partners on the project, including ourpublisher and expert contributors whoworked tirelessly on this publication.Collectively, we hope to help youunderstand and navigate a complex processthat will ultimately lead to a positive andsuccessful IPO experience.

Crucial to that success is the decision ofwhere to list. Choosing your market is a long-term decision. Your market will be a partner throughout your journey as apublic company well into the future. Byaccessing the US public equity market viayour IPO, you will stimulate job creation andinnovation while tapping an attractivefinancing option to fuel your company’sgrowth. You will also create exciting newinvestment opportunities for individuals andinstitutions, with whom you will need to betransparent through good times and bad.

NYSE Euronext has grown to become a leading marketplace for entrepreneurialcompanies of all sizes and sectors. It maysurprise some to learn that 40% of NYSE-listed companies are small cap (marketcapitalization below $1 billion). Theadoption of a new NYSE listing standard in late 2008 enabled growth-stage,venture-backed companies to list directlyon the “Big Board,” and the acquisition of the American Stock Exchange – re-branded NYSE Amex and now running onthe same technology platform with thesame high-tech, high-touch model –expanded our US listing venue options to companies of all sizes and maturity.

In addition, NYSE continues to showleadership in listing growth-stagecompanies, especially portfolio companiesof leading venture-capital and private-equity firms. Since 2007, nearly 58% of the technology companies that qualified to list on the NYSE chose to do so, raising$7.7 billion in IPO proceeds. Early in 2010NYSE listed some of the most importanttechnology companies undertaking IPOs,such as Sensata Technologies, MaxLinearand Calix. This is in addition to many ofthe most visible tech IPOs of 2009,including Rosetta Stone, SolarWinds andDigitalGlobe. Meanwhile, as an appliedtechnology company, NYSE’s ongoing

Another advantage is an increased publicawareness because IPOs often generatepublicity by making our products known to a new group of potential customers.”Listing on the NYSE, he says, also provided“better access to the financial market andhigher liquidity with lower volatility,making it possible for shareholders to take larger positions in our stock.”

Companies from other emergingmarkets are also finding their way to theNYSE. The IPO of Longtop FinancialTechnologies Ltd, a leading softwaredeveloper and IT services providertargeting the financial services industry inChina, raised $182.6 million in October2007. “We were delighted to join the NYSEand gain access not only to US investors,but to the superior services, market qualityand brand visibility that come with listingon NYSE Euronext markets,” saidChairman Xiaogong Jia. “As an NYSE-listed company, we strengthened ourability to develop our business both insideand outside China.”

Prospective listing applicants can availof a free, confidential review process todetermine their eligibility and whatadditional conditions, if any, might have to be satisfied. A company that qualifiesfor listing can normally expect its shares to be admitted to trading within four to six weeks of filing its original listingapplication. And should the goingsubsequently get tough, NYSE Euronextcan assist further with professional advicefrom its client-service teams and extensivenetwork of professionals. It also providessupport as an advocate on public policyand regulatory issues affecting all marketparticipants. For example, NYSE is workinghard in Washington, DC to represent listedcompanies on issues including corporategovernance, regulatory reform, globalcompetitiveness and tax policies.

I am excited about what the futureholds – the creativity and entrepreneurialspirit that will drive the capital-raisingprocess and help deliver untappedopportunities for issuers and investorsworldwide. We look forward to workingwith you through your IPO journey andwish you success in obtaining thissignificant corporate milestone.

Duncan NiederauerChief Executive Officer, NYSE Euronext

Preface

5NYSE IPO Guide

Introduction:Advantages of NYSE listing

6 NYSE IPO Guide

Introduction: Advantages of NYSE listing

flexibility, judgment, automation andanonymity with minimal market impact.Floor brokers provide human expertise and value-added service to facilitate larger-sized institutional orders (block orders).They have parity with other orders inNYSE’s allocation model and may servicecustomers using algorithms, whichaccounts for one-quarter of their activity.Floor brokers also use their booths as an“upstairs” trading desk to send orders tomultiple markets. The NYSE is in theprocess of replacing the broker booths with modern trading desks to create aunified trading environment for upstairsand on-floor operations, with some firmschoosing to locate their entire operationson the NYSE trading floor.

2. Global reach and visibilityBeyond market structure and marketquality, a market’s size and scope shouldalso be considered when choosing a listingsvenue. The historic merger that resulted in the formation of NYSE Euronext createdthe world’s largest cash equitiesmarketplace. NYSE Euronext is a globalexchange operator with listings of 4,000companies from nearly 55 countries. It operates six cash equities exchanges in five countries and six derivativesexchanges in six countries. Its footprint is broader than that of any other exchangegroup and it offers the most diverse array of financial products and services for issuers, investors and financialinstitutions.

On its exchanges in Europe and theUnited States, NYSE Euronext tradesequities, futures, options, fixed-incomeand exchange-traded products. With about 8,000 listed issues (excludingEuropean structured products), NYSEEuronext’s equities markets – the NewYork Stock Exchange, NYSE Euronext,NYSE Amex, NYSE Alternext and NYSEArca – represent one-third of the world’sequities trading, the most liquidity of anyglobal exchange group. NYSE Euronext also operates NYSE Liffe, one of the leading European derivatives exchangesand the world’s second-largest derivativesexchange by value of trading. NYSEEuronext also offers comprehensivecommercial technology, connectivity and market-data products and servicesthrough NYSE Technologies.

One of the most important decisions inthe IPO process is choosing the rightmarket for listing of the company’ssecurities. The NYSE Euronext marketmodel is designed to maximize liquidity,encourage market activity and helpparticipants trade more efficiently.

NYSE and NYSE Amex offer acombination of cutting-edge, ultrafasttechnology with the volatility buffer ofhuman judgment, when required, andaccountability. This market structureestablishes reliable price discovery at theopening, the closing and during periods of volatility, such as times of marketdislocation. Designated market makers(DMMs) add significant liquidity to the market, which is further enhancedby supplemental liquidity providers (SLPs)and floor brokers equipped with new,algorithmic trading tools.

1. DMMsDMMs are at the center of the NYSE and NYSE Amex markets. DMMs serve as a buffer against market volatility,increase liquidity and are obligated tomaintain a fair and orderly market. TheNYSE features both a physical auctionconvened by DMMs and a completelyautomated auction that includesalgorithmic quotes from DMMs and other market makers.

Today, DMMs are among the mostactive trading firms on the NYSE. Theyhave strong obligations to maintain anorderly market, quote at the National Best Bid and Offer (NBBO) and facilitateprice discovery during openings, closingsand imbalances. New incentive-basedquoting standards by issue have furtherincreased the percentage of time and sizethe DMMs are at the NBBO.

Complementing the liquidity of otherquote providers are SLPs: electronic, high-volume members which are incentivized to add liquidity. Several SLPs may beproviding liquidity per issue. SLPs aretrading firms deploying their own capitalusing proprietary trading models. The SLPprogram began in November 2008.

Also providing liquidity on NYSE andNYSE Amex markets are trading floorbrokers. These brokers leverage theirphysical point-of-sale presence withinformation technologies and algorithmictools to offer customers the benefits of

As an innovative applied technologycompany in the financial space, NYSEEuronext has built a universal tradingplatform that is being deployed to supportnot only its global exchange operations, butalso its customers around the world that areengaged in trading activities and operatingexchanges. Beginning in 2010, twin datacenters in the greater New York and Londonmetropolitan areas, in which NYSEEuronext has strategically invested $500million, will offer one-stop access toliquidity with the highest levels of resilienceand the lowest available latency (the timegap between trade placement and execution)to NYSE Euronext market participants.NYSE Euronext is the only global exchangeoperator to own its own data centers.

Meanwhile, to expand in Asia, NYSEEuronext and its affiliates have offices inBeijing, Tokyo, Hong Kong and Singapore,as well as equity positions in the NationalStock Exchange of India and India’s MultiCommodity Exchange. To expand in theMiddle East, it acquired a 20% stake in the Qatar Exchange, one of the leadingstock markets in the region.

Many companies use NYSE Euronext’sglobal facilities – located in Amsterdam,Brussels, Lisbon, London, New York andParis – for analyst, investor or boardmeetings, product launches, marketinginitiatives and more. The daily openingsand closings also represent an opportunityfor companies to elevate their own brandvisibility. Many listed companies return to the NYSE multiple times a year to useits facilities, including the NYSE tradingfloor, for analyst, investor or boardmeetings, as well as corporateannouncements and events.

NYSE Euronext offers a host of othervisibility programs for its listed companies,including global investor conferences,virtual investor forums and multimediachannels.

NYSE Euronext continues to developenhanced visibility services for Europeancustomers. For example, it created the firstinternational bell ceremony room, in Paris,where NYSE Euronext-listed companiescan celebrate IPOs, transfers, milestones,initiatives and more.

3. NYSE Market Access CenterAnother important factor to consider whenchoosing a listing venue is customer

7NYSE IPO Guide


and lawmakers articulating companies’views on existing or proposed rules andregulations, particularly those designed to make markets more fair, transparent and efficient. It has actively encouraged a more flexible and principles-basedapplication of the internal controlprovisions of SOX, prodded the SEC toaccept International Financial ReportingStandards accounting standards as analternative to US Generally AcceptedAccounting Principles (GAAP), writtencomment letters to the SEC on behalf of non-US companies to oppose theshortening of the allotted time periods for filing financial statements in Englishand led the dialogue on mutual recognitionof comparable regulatory regimes in foreign jurisdictions.

5. Fast-Path listing: gateway to the eurozoneNYSE Euronext has also worked with

service and the quality of products themarketplace offers. Successful companiesrequire significant resources to buildshareholder value. NYSE Euronext’s NYSEMarket Access CenterSM is a full-servicesolution including global visibility andinvestor relations services, which enablesmanagement to remain focused on itsbusiness objectives as a public company.

4. Issuer advocateNYSE Euronext acts as an advocate forlisted companies, championing policiesthat are consistent with the values of fair,efficient and transparent markets – fromshort-sale trading issues to corporategovernance reform; from the cost ofcomplying with the Sarbanes-Oxley Act of 2002 (SOX) to the difficulties ofadhering to the United States’ intricate and idiosyncratic accounting rules.

For example, NYSE Euronext has sentnumerous recommendations to regulators

regulators overseeing its markets in France,the Netherlands, Belgium and Portugal tomake it easier for companies listed on itsUS markets to list on its European markets.A number of issuers have elected to cross-list on Euronext to get closer to theEuropean shareholder base and areinquiring about Asia as well. To facilitatethis, NYSE Euronext has established Fast-Path, a process that allows companieslisted on the NYSE and other US marketsto request admission for listing and tradingon a European regulated market. WithFast-Path, companies listed or about to belisted on the NYSE or NYSE Amex cancross-list on NYSE Euronext’s Europeanmarkets using their filings with the SEC,with or without a simultaneous capitalraising. Euronext regulators now acceptdocumentation previously filed with theSEC to meet the EU Prospectus Directiverequirements, so companies can now avoidthe need to draft and translate a separate

Recent Fast-Path transactions

Company Country Security Currency Listing type Purpose

PartnerRe(Dec 09)

Bermuda Common shares Euro Technical listing In connection with the company’sacquisition of NYSE Euronext-listedParis Re in an all-stock transaction

WeatherfordInternational(Oct 09)

Switzerland Common shares Euro Technical w/ocapital raising

In connection with the company’sredomestication to Switzerland in2009. Provide European fundmanagers with a greater access to the company’s shares.

Cliffs NaturalResources(April 09)

US Common shares Euro Technical w/ocapital raising

Consistent with the company’sgrowth and internationaldiversification strategy. Increaseexposure to a broader investorbase.

Vale(July 08)

Brazil ADS Euro Global offering to qualifiedinvestors

Enlarge investor pool for globalcapital raising and attract greatervisibility.

Philip MorrisInternational(March 08)

US Common shares Euro Spin-offw/o capitalraising

Create a tool for equity-basedcompensation for European-basedemployees and obtain greatervisibility in Europe.

Anheuser Busch(April 08)

US Common shares Euro Transfer fromLSE w/o capitalRaising

Reduce compliance costs andpromote liquidity.

8 NYSE IPO Guide


registered US and foreign (non-EuropeanEconomic Area) companies already listedor about to be listed in the US markets. A Euronext listing can occur at the sametime as a US IPO. Transaction typesavailable on Fast-Path are:• capital raisings (Form S-1 or F-1);• spin-offs (Form 10); and• technical listings (Form 10-K or 20-F).

Recent transactions are outlined in the table on the previous page.

To learn more about the NYSE andNYSE Amex listing standards, please seeAppendices I, II, III, IV and V.

prospectus to be admitted to trading inEurope. Documents filed with andreviewed by the SEC serve as the backbonefor a listing prospectus. The result is quick,easy and cost-effective access to listingand trading on NYSE Euronext, theeurozone’s largest equity market.

Fast-Path is valuable for any companylooking to enhance its global profile,support an international business orexpand its non-US investor base. A Fast-Path listing provides a fast, easy and cost-effective way to gain a presence in theEuropean capital markets. NYSE Euronextis the only exchange group offering a listingprogram with leading markets on both sidesof the Atlantic for its listed companies. Atotal of 50 companies are currently cross-listed on both NYSE and NYSE Euronextmarkets (as of December 2009).

Cross-listed companies enjoy manybenefits, such as:• a simplified way to increase their

visibility to business partners andinvestors in the eurozone, the world’slargest source of capital;

• commitment to a strategicallyimportant region (customer proximity,commercial opportunities);

• branding and product visibilityopportunities in all of NYSE Euronext’sEuropean locations (London, Paris,Amsterdam, Brussels and Lisbon);

• media coverage which can enhancetheir global profile;

• a tool for employee stock purchaseplans or equity incentive plans;

• access to European investors and adiversified shareholder base;

• euro-denominated acquisitioncurrency; and

• a facility for future capital raisingsand/or M&A activity

With Fast-Path, issuers benefit fromsimplified periodic reporting obligations.SEC filings may be used to comply withthe company’s ongoing obligations withEuronext regulators under the EUTransparency and Market Abuse Directives.US GAAP and post-listing filings in Englishare both acceptable. The overall processtakes approximately five weeks oncedocumentation is available. Documentationreview by a European regulator usually takes10 to 15 business days.

Fast-Path is available for SEC-

9NYSE IPO Guide

Why go public?

1

10 NYSE IPO Guide

Why go public?

(d) Public currency for acquisitions Once the company is public, it can use itscommon stock to acquire other public orprivate companies in conjunction with, or instead of, raising additional capital.

(e) Enhanced benefits for current employees Stock-based compensation incentives alignemployees’ interests with those of thecompany. By allowing employees to benefitalongside the company’s financial success,these programs increase productivity andloyalty to the company and serve as a keyselling mechanism when attracting toptalent. Furthermore, issuing equity-basedcompensation will allow the company toattract top talent without incurringadditional cash expenses

1.2 Potential issuesWhile there are numerous advantages togoing public, there are also a fewconsiderations which the company shouldevaluate prior to embarking on the IPOprocess. The most successful companieswith the smoothest IPO processes are thosewhich begin to put in place the necessaryregulatory and compliance requirementsmonths, if not years, ahead of time.

(a) Loss of privacy In order to comply with securities laws,public companies must disclose variousforms of potentially sensitive informationpublicly, which regulatory agencies, as wellas competitors, can then access. Privatecompanies can operate without disclosingproprietary information in a public forum.

(b) Regulatory requirements Correspondingly, public companies mustregularly file various reports with theSecurities and Exchange Commission(SEC) and other regulators. In order tocomply with disclosure requirements,companies often need to completelyrevamp or expand their existingdocumentation policies, which can be costly and time consuming.

(c) Sarbanes-OxleyThe Sarbanes-Oxley Act (SOX) was passedin 2002 as a reaction to a number of majorcorporate and accounting scandals, whichcost investors billions of dollars and shookpublic confidence in the nation’s securitiesmarkets. SOX set new standards for public

1.1 Advantages of executing an IPOWhen considering an initial public offering(IPO), the company should evaluate theassociated pros and cons, as well as themotivations for going public. This evaluationprocess is best conducted in conjunctionwith an investment bank, which can assistthe company in working through the salientissues. There are several advantages to goingpublic, which are detailed below.

(a) Access to capital One of the most common reasons for going public is to raise primary capital tofund organic growth, repay debt or fund anacquisition. Further direct results includethe following:• Once the company is public, it has

access to an entirely new, incrediblydeep and liquid source of capital forany future needs it may have.

• Adding equity to the company’scapital-raising toolkit helps equip the company with the tools to achieveoptimal capital structure.

• After the company has been public for one year, it will be eligible to accessthe equity capital markets on demandvia a more expeditious process througha shelf registration statement.

(b) Liquidity event Listing on the NYSE has numerousbenefits, not only for the company, butalso for its shareholders. The IPO can bestructured such that existing owners ofthe company can exit their position andreceive proceeds for their shares. Inaddition, once the company is public, theexisting owners have a public marketplacethrough which they can liquidate theirholdings in a straightforward and orderlyfashion at any time.

(c) Branding event By listing on the NYSE, the company will receive worldwide media coveragethrough the financial markets, whichprovide constant live coverage on publiclytraded companies. In addition, researchanalysts at broker-dealers will begin towrite reports on the stock and thecompany, thus raising the profile of thecompany. Broader coverage across varioussources will likely enhance the company’svisibility, market share and competitiveposition.

companies, including requirements relatingto accounting, corporate governance,internal controls and enhanced financialdisclosure. SOX compliance can be anincredibly time-consuming and costlyprocess for a newly public company.

(d) Cost Going public is a relatively expensiveprocess, incurring one-off and ongoingcosts for legal counsel, accounting andauditing services, underwriting andprinting, as well as for additionalpersonnel to handle expanded reportingand compliance activities and investorrelations. Further, planning and executingan IPO is a time-consuming process that can distract management from the company’s core business.

1.3 Going public without an offeringIt is possible to go public withoutconducting a simultaneous offering,although this is typically notrecommended by an investment bank. If the company does not conduct asimultaneous offering, its existing sharesare listed on the exchange without beingplaced in the hands of new investors. Two examples of going public without an offering are spin-offs of existingcompanies and foreign issuers listingAmerican depositary receipts (ADRs) in the United States.

(a) Spin-offs A spin-off from an existing companyoccurs when a public listed company spins off a part of its business into aseparate public entity listed on anexchange. Typically, that part can functionas a separate, standalone business, withdistinct characteristics from the parentcompany. In such a transaction, eachexisting investor in the parent companywill receive shares in the spin-off entity pro rata to its ownership in the parent. For example, Investor A, which owns 5% of Parent Company A, will receive 5% ofthe shares outstanding in SpinCo A. In this transaction, liquidity is generallypreserved for the SpinCo, but the investorchurn may be considerable. For example,Investor A may own Parent Company A forits other businesses which still reside inParent Company A, and have no interest inSpinCo A and sell the shares it receives. To

11NYSE IPO Guide

Why go public?

Ready access to world’s largest equitymarket: A US listing affords ready accessto the world’s largest equity market,facilitating future capital raising throughfollow-on, secondary and rights offerings.As the numerous rights offerings by bothforeign and US issuers in 2009 havedemonstrated, such access can be crucial to a company’s capital structure.

Diversification of shareholder base and valuation support: By going public inthe United States and maintaining a listingthere, US investors can more easily investin a foreign issuer. For some foreign issuersa US listing results in higher corporategovernance standards, further increasingits appeal. Attracting US investors helpsbroaden and diversify a foreign issuer’sshareholder base, reducing the issuer’sdependence on investors in its homemarket for its capital needs. Moreover, the incremental demand that US investorscan bring to bear on a foreign issuer’sshares helps drive its market valuation – and hence lowers its cost of capital –over the long term.

US acquisition currency: Because theADRs used to raise capital in the UnitedStates are dollar denominated, they caneventually be used to make stock-basedacquisitions of US companies. Generally,US shareholders are more likely to acceptADRs than foreign shares.

this end, it is difficult to control theinvestor base in a spin-off transaction,whereas during an offering process shares are strategically issued to thoseinvestors known to be interested in owning the name.

(b) Foreign issuers listing ADRs A foreign company that is publicly tradedon an international exchange can list ADRs on the NYSE without conducting an offering. The stock is tied to theunderlying international security andtraditionally trades in tandem with thatsecurity. While the ADR will give thecompany incremental exposure to USinvestors, there are often fund limitationson ADRs similar to internationalinvestments, and typically the liquidity and trading of ADRs can be subpar ascompared to traditional listings.

1.4 Foreign private issuersThrough a US listing, foreign privateissuers can significantly improve theiraccess to the US equity market. During the last decade, demand for foreignequities has grown appreciably among US institutional and individual investorsalike. This demand has been driven by aneed for enhanced portfolio diversification,which holdings of foreign equities canprovide, and a desire to tap into the highereconomic growth rates found in manycountries outside the United States –emerging markets in particular.

The tranche of shares that foreignissuers sell to US investors when goingpublic typically takes the form of ADRs.These instruments subsequently trade just like ordinary shares on the NYSE,another US stock exchange or in the over-the-counter market.

ADRs are often the only way thatcertain institutional funds can invest in foreign issuers while complying with their investment charters, which placelimitations on trading in the ordinaryshares of non-US companies. For bothinstitutional and individual investors,ADRs offer the convenience of dollar-based trading and dividend payments.

(a) AdvantagesFor foreign issuers, going public in theUnited States has numerous advantagesbeyond an initial capital raising.

Stock-based compensation for USemployees: Being dollar denominated,ADRs allow foreign issuers to establishstock purchase and option plans for US-based employees. Absent these plans,foreign issuers can be at a significantdisadvantage when competing for talent in the US labor market. ADRs also allowfor the creation of direct purchase anddividend reinvestment plans, which can enhance the investment appeal of a foreign issuer.

Enhanced corporate visibility in the UnitedStates: Finally, by going public in theUnited States, a foreign issuer can increaseits visibility not just in the US investmentcommunity, but in the commercial andconsumer markets that make up theworld’s largest economy. The majority of US citizens own equities and tend to follow publicly traded companies.Consequently, a US listing can raise aforeign issuer’s corporate profile as well as capital.

US investment in foreign equities (ADR and local shares), 1980-1Q09 ($bn)

0

1000

2000

3000

4000

5000 25%

20%

15%

10%

5%

1980

1981

1982

1983

1984

1985

1986

1987

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

19 17 17 26 26 44 72

95

129

19

7

198

2

79

314

54

4

628

777

1

003

12

08

1

475

2004

18

53

161

3

13

75

127

0

1516

1661

1

958

21

70

218

9

219

3

2520

2

547

2

524

28

21

29

66

3

267

340

6

352

4

394

1

4

110

474

3

490

1

4786

439

3

46

62

36

25

26

78

2

401

3

265

3

941

409

7

Source: Federal Reserve, September 2009

12 NYSE IPO Guide

13NYSE IPO Guide

2Preparing to go public

14 NYSE IPO Guide

Preparing to go public

companies that are contemplating an IPO, there are a number of boutique and regional auditing firms that are wellregarded and talented. The companyshould consider industry expertise,reputation and fit with the company,among other factors, when selecting an auditing firm.

In many cases the company requiresassistance in designing enhancedaccounting processes and controls,preparing financial information subject to audit and supplementing its staff duringthe transition to becoming a publiccompany. The auditor may be unable toperform some of these elements underindependence requirements, so anadditional accounting advisor may benecessary. Accounting advisors provideuseful skills, experience and resources to supplement the company’s accountingand controls functions.

Underwriters: The company shouldcarefully choose its bookrunner(s), alsosometimes referred to as lead manager(s),given the significant role that they playthroughout the process. As the quarterbackof the IPO, the lead bookrunner(s) advisesthe company on all facets of the IPOprocess, assists the company in shaping itsinvestment thesis to be used whilemarketing the transaction, guides thecompany with investors while on the roadand develops the optimal pricingrecommendation for the company. Thebookrunner(s) are closely involved indiligence, drafting Form S-1, crafting themarketing materials, creating the roadshowschedule, pricing the transaction andsupporting the stock in the aftermarket.The bookrunner(s) should be chosen basedon their relationship with the company,industry expertise, expertise in executingIPOs, distribution platform and market-making ability.

The co-managers on an IPO aretypically significantly less involved in theday-to-day advisory role for which thebookrunner(s) are responsible. They are,however, involved in most (if not all) of thediligence conducted. The co-managers’research analysts will also take part in allanalyst diligence that is conducted. Theprimary role of the co-managers is tounderwrite additional shares in theoffering, provide additional research

2.1 Choosing advisors

(a) Retention of advisors/service providersA large team of professionals is typicallyinvolved in the initial public offering (IPO)process, including lawyers, auditors,underwriters and insurance brokers. Thecompany should carefully consider thequalifications of all parties it hires, giventhe importance of the advice they willprovide throughout the process. The key advisors/service providers that thecompany and board need to evaluate and hire are company counsel, auditors and underwriters.

Company counsel: Company counsel work in concert with the company’sgeneral counsel to represent the company’slegal interests throughout the process.They are integrally involved in diligence,drafting Form S-1 and crafting lock-up and underwriting agreements, andgenerally providing legal advice to thecompany throughout the process.

In selecting company counsel, it isimportant to choose a party that hasappropriate industry and sector expertise,as well as a proven track record ofexecuting the IPO process.

Auditors and accountants: Theindependent accountants are involved in performing an audit on certain of the financial statements prepared bymanagement and providing comfort on certain elements derived from thecompany’s records subject to internalcontrols over financial reporting andincluded in Form S-1. The underwritersand lawyers will conduct in-depthdiligence with the accounting firm aroundtheir relationship with the company andthe integrity of the financials.

The decision to hire auditors isincredibly important, given that they willbe integrally involved in the company’sfinancial reporting for many years.Auditors should be hired well in advance of launching the IPO so that the financialstatements have consistent prior yearaudits. The Securities and ExchangeCommission (SEC) requires three years of annual historical audited financials for Form S-1 and it is best for one firm tohave conducted all of the audits. Althougha Big 4 firm is typically recommended for

coverage post-IPO and assist in marketmaking once the stock is public. Co-managers should be chosen based on theirrelationship with the company, industryexpertise and market-making ability.

(b) Identifying investor relations services providerPublic companies have a fiduciaryresponsibility to their stakeholders tomaximize shareholder value. At the sametime, they must promote good corporategovernance and implement effectivedisclosure practices. For companies thathave filed an IPO or that have recently gone public, understanding and complyingwith evolving regulations while attractinginvestment capital and delivering solidresults can be a challenge.

To meet this challenge, companiesoften rely on third parties to provide theinformation, tools and insight they need to navigate the investor relationslandscape. Any third-party investorrelations solutions provider selectedshould be focused on the dual aims ofproviding quick information and contextabout share developments and trendsabout the company, as well as deep insightinto capital markets, sectors, investors andresearch coverage. This will help thecompany accurately identify key areas ofrisk and opportunity, which will in turnhelp it retain and attract long-terminvestors that will ensure its valuation isclosely aligned with its true economicworth. Ultimately, this will help lower thecompany’s cost of capital.

When selecting a third-party investorrelations solutions provider, the followingcriteria should be considered for eachaspect of the company’s workflow.

Understanding market dynamics:• Does the provider have access to the

same information and analytics thatdrive institutional investmentdecisions?

• Does the provider offer services in allglobal regions, given the increasingattractiveness of emerging markets as a source of capital?

• Does the provider have theinstitutional contacts to gatherfeedback on how the company isperceived in the marketplace?

• Does the provider have a team of

15NYSE IPO Guide


stability to continue investing in anddeveloping innovative solutionsdesigned to help the company bettermanage its investors?

2.2 Building financial reportinginfrastructure

(a) Financial informationAn entity making an offering of securitiesregistered with the SEC under theSecurities Act of 1933 must file aregistration statement and distribute aprospectus in connection with the offering.The registration statement and prospectusmust contain financial statements andother financial information regarding thefinancial condition of the company and theresults of its operations.

The Securities Act and the related rulesand regulations set out the requirementsthat the company must follow whenmaking an offer to sell securities that donot meet one of the limited exceptionsfrom registration. This framework includesthe use of forms (in particular, Forms S-1,S-3, S-4 and S-11) for registrations ofoffers. These forms specify theinformation that must be disclosed underRegulation S-X and Regulation S-K.Regulation S-X generally deals withfinancial statement form and content,while Regulation S-K generally deals withnon-financial statement disclosures in thebody of the registration statement. FormS-1 is the basic registration form used for aUS company’s IPO. Form S-3 is generallyused for the registration of securities by acompany that already has securitiesregistered with the SEC, while Form S-4 isgenerally used for the registration of debtor equity securities issued in relation to amerger or acquisition. Form S-11 may beused for the registration of securitiesissued by certain real estate companies,including real estate investment trusts orsecurities issued by other companieswhose business is primarily that ofacquiring and holding for investmentinterests in real estate.

The SEC has specific and complex rules regarding the financial statementsand other financial information that mustbe presented in a registration statement for an IPO. Some of the significant financialstatement information that may berequired includes:

analysts focused solely on thecompany’s sector to act as an extensionof the investor relations team?

• Does the provider have clients acrossthe sector and industry to provideinformation on key institutionalanalysts covering the sector, keysector-based events and emergingcapital market trends?

Anticipating investor activity:• Is the provider able to give insight only

on trading activity that has alreadyoccurred or can it help anticipateinvestor risks and opportunities?

• What methodology or proprietaryalgorithms does the provider use toaccurately identify and prioritize theprospective funds to target?

• Is the provider able to provide insightinto alternative strategies employed bynon-traditional investors such as hedgefunds? Increased volume in derivativemarkets, trading in listed options andcredit default swaps can often drivetrading in equity and fixed incomemarkets.

Communicating with investors:• Does the provider have the investor

relations experience to provide thecompany with proven best practices to incorporate in its investor relationscommunications strategy?

• Does the provider have a distributionnetwork that will ensure investorsreceive company communicationswithout interrupting their workflow?

• Does the provider offer the capabilityto control the creation and distributionof the company’s message?

Measuring the impact of the investorrelations program:• Does the provider have an integrated

IR platform that can track the impactof outreach efforts?

• Does the provider offer detailedreporting tools that gauge the impact of the company’s onlinecommunications and how theycompare to those of its peers?

• Will the provider help track the marketsentiment created by companycommunications and actions of itsinvestor relations program?

• Does the provider have the financial

• audited annual financial statements forrecent fiscal years;

• unaudited interim financial statementsfor the most recently completedinterim period and the correspondingperiod of the preceding year;

• selected financial information (usuallysummarized from the company’sfinancial statements) for the past fivefiscal years and most recentsubsequent interim periods;

• separate audited annual and unauditedinterim financial statements forbusinesses that have been acquired orwill probably be acquired that meetcertain significance thresholds(described below). Depending on thesignificance of the acquisition, thecompany may be required to presentone to three years of audited financialstatements;

• separate audited or unaudited annualfinancial statements for significantinvestments accounted for under theequity method that meet certainsignificance thresholds;

• financial statements of guarantors ofsecurities being offered and affiliateswhose securities collateralize thesecurities being offered;

• pro forma financial information givingeffect to certain events such assignificant business acquisitions/dispositions, reorganizations, unusualasset exchanges and debtrestructurings;

• segment reporting for companies that are engaged in multiple lines ofbusiness or with operations in morethan one geographic area. Requireddisclosures include separate revenuesand operating data for each segment;

• supplemental schedules for particularindustries and circumstances; and

• enhanced disclosure of financial andoperational metrics for companies incertain industries

Companies that are classified in eitherof the following categories have modifiedreporting requirements:• ‘Smaller reporting company’, as defined

by Item 10(f)(1) of Regulation S-K,generally applies to new issuers with an expected market capitalization ofless than $75 million when theirregistration becomes effective.

16 NYSE IPO Guide


registration statement.The preparation of these financial

statements often raises certain datacollection, accounting and auditing issues,such as:• the need to re-evaluate existing

accounting policies and considerexpanding disclosures to comply withreporting requirements for publiccompanies (eg, segment information,tax-rate reconciliation, earnings pershare and general compliance withRegulation S-X and SEC GenerallyAccepted Accounting Principles(GAAP) interpretations);

• the treatment of changes in accountingpolicies or financial statementpresentation that arise during the mostrecent period covered by the financialstatements that may have a retroactiveimpact on the financial statements andother financial information presentedfor previous years; and

• the retrospective presentation ofdiscontinued operations consistentlyacross the periods covered by thefinancial information presented.

Accordingly, a company with financialstatements covering the required numberof years should revisit those financialstatements and ensure that they arecompliant with SEC requirements andrecent SEC staff interpretations. Anymodifications to previously issued auditedfinancial statements will likely require the independent accountant to performadditional procedures.

Age of financial statements: Knowing theperiods for which financial statements will be required to complete a particularfinancing is a critical step in planning anIPO. Financial statements must complywith the SEC’s age of financial statementsrequirements before the SEC staff willcommence review of a filing.

The age of financial statementsincluded in an IPO is measured by thenumber of days between the date ofeffectiveness of the registration statementand the date of the latest balance sheet inthe filing. The latest audited annualfinancial statements included in theprospectus cannot be more than one year and 45 days old.

If more than 134 days have lapsed since

• ‘Foreign private issuer’, as defined bySection 3b-4 of the Exchange Act of1934, generally applies to companiesincorporated outside the United Statesthat meet certain additional criteria.

Some additional details regarding thesetwo categories and some of the differencesin reporting requirements are outlined atthe end of this chapter. The followingdiscussion focuses on the SECrequirements for companies that do notfall into either of the above two categories.

Audited financial statements: Auditedannual financial statements required to be included in the registration statementinclude:• balance sheets as of the end of the two

most recent fiscal years. If the companyhas been in existence for less than oneyear, an audited balance sheet as of adate within 135 days of the date offiling the registration statement isrequired; and

• statements of income, cash flows,changes in shareholders’ equity andcomprehensive income for each of themost recent three fiscal years, or suchshorter period as the company (and itspredecessors – designation of anacquired business as a predecessor isgenerally required where a companyacquires in a single succession, or in a series of related successions,substantially all of the business (or aseparately identifiable line of business)of another entity (or group of entities),and the company’s own operations priorto the succession appear insignificantrelative to the operations assumed oracquired) has been in existence.

Audited financial statements for thecompany and its predecessors must beaccompanied by an audit report issued byindependent accountants that are registeredwith the Public Company AccountingOversight Board (PCAOB) and audited inaccordance with PCAOB standards. If anyof the audited financial statements requiredto be included with the registrationstatement were audited by a predecessorindependent accountant, consent may beneeded from that independent accountantto allow for inclusion of those financialstatements and their audit report in the

the latest audited annual balance sheet,unaudited interim financial statementsmust also be included in the registrationstatement. Whenever updated interimfinancial statements are included, aninterim income statement, statement ofcomprehensive income and statement ofcash flows must be included for thecorresponding period of the prior year.Interim financial statements for the firstand second quarters must each be updatedafter 134 days. Interim financial statementsfor the third quarter must be updated 45days after the fiscal year-end, at whichtime audited financial statements for therecently completed fiscal year are required.

Unaudited interim financial statements:Article 10 of Regulation S-X providesguidance on the form and content ofcondensed interim financial statements.Interim financial statements (also referredto as stub-period financial statements)must be included in the registrationstatement if the period between the date of effectiveness of the registrationstatement and the date of the latest auditedbalance sheet in the filing exceeds aspecified number of days. Interim financialstatements include a balance sheet as of the end of the most recent interim fiscalquarter, statements of income,comprehensive income, shareholders’ equityand cash flows for the period between thelatest audited balance sheet and interimbalance sheet and the corresponding periodof the preceding year. The interim financialstatements can be presented in a condensedformat, but often are presented in a non-condensed format. The interim financialstatements may be unaudited, but thecompany’s underwriters might requestthem to be reviewed by an independentaccountant prior to filing as part of theirrequested comfort letter procedures.

Selected financial information: Item 301 of Regulation S-K requires selected incomestatement and balance-sheet data for eachof the last five fiscal years (or, if shorter,for the life of the company and itspredecessor entities), and the most recentinterim period included in the financialstatements (together with comparativeinformation for the corresponding interimperiod of the prior year). The purpose ofthe selected financial data is to supply

17NYSE IPO Guide


agreements, execution of letters ofintent, conduct of due diligenceprocedures, approvals of the board of directors and/or shareholders andsubmission to appropriate governmentregulators for acquisition approval;

• economic and legal penalties associatedwith failure to consummate, includingcosts incurred to date in pursuing theacquisition; and

• significance of required regulatoryapprovals.

The independent accountant that hasaudited these financial statements neednot be registered with the PCAOB, unlessthe acquired business is a public companyin the United States. The number of yearsof audited financial statements required isdetermined by the size of the acquisitionand its significance relative to thecompany, based on the following threesignificance tests under Rule 1-02(w) ofRegulation S-X:• the amount of the company’s

investment in the acquired business

selected financial data which highlightscertain significant trends in the company’sfinancial condition and results of itsoperations. It must include:• net sales or operating revenues;• income (loss) from continuing

operations;• income (loss) from continuing

operations per common share;• total assets;• long-term obligations and redeemable

preferred stock; and• cash dividends declared per common

share.

The selected financial data may alsoinclude any additional items that wouldenhance an understanding of thecompany’s financial condition and trendsin its results of operations, such as cashand cash equivalent balances, workingcapital balances and summary comparativeincome statements.

Financial statements of an acquiredbusiness: If the company has made or isproposing to make a significant acquisitionof a business, an investment that will beaccounted for under the equity method ormultiple acquisitions of related orunrelated businesses, it may need toinclude audited financial statements of the acquired business plus appropriateunaudited interim financial statements tocomply with Rule 3-05 of Regulation S-X.

Whether a proposed acquisitionrequires inclusion of financial statementsin a registered offering depends on thesignificance of the acquisition and whetherthe acquisition is probable. The SEC hasissued no formal or informal guidance onthe standard of probability for businesscombinations. Generally, the determinationis based on the preponderance of evidencesupporting the conclusion that anacquisition is probable. However, the SECviews public announcement of a businesscombination as strong evidence of aprobable acquisition. The company mustassess the probability of an acquisition byconsidering factors such as the following,in addition to the advice of its securitiescounsel:• progress of the negotiations,

considering such factors as progress ofdiscussions among senior executives,execution of confidentiality

compared to its total assets;• the total assets of the acquired

business compared to the company’stotal assets; and

• the pre-tax income from continuingoperations of the acquired businesscompared to the company’s pre-taxincome from continuing operations(‘pre-tax income from continuingoperations’ is income before incometaxes, extraordinary items and thecumulative effect of a change inaccounting principle exclusive ofamounts attributable to any non-controlling interests). The rules shouldbe consulted as they contain specificinstructions for modifying thecalculation under certaincircumstances.

The test generally is performed usingthe company’s and the target’s most recent audited financial statements priorto the date of acquisition. The table above summarizes the general rules foracquisitions that occurred more than

Acquisition criteria Reporting requirement

The acquisition does not exceed 20% forany of the three significance criteria.

No audited financial statements required.

The acquired business (or multipleacquisitions of related businesses)exceeds 20% but not 40% for any of the three significance criteria.

One year of audited financial statementsrequired.

There have been multiple acquisitions ofunrelated businesses whose significanceis less than 20% individually but morethan 50% for any of the three significancecriteria when aggregated.

One year of audited financial statementsrequired for a mathematical majority ofthe individually insignificant acquisitions.

The acquired business (or multipleacquisitions of related businesses)exceeds 40% but not 50% for any of the three significance criteria.

Two years of audited financial statementsrequired.

The acquired business or any acquisitionthat is probable at the time of the IPOexceeds 50% for any of the threesignificance criteria (or securities arebeing registered to be offered to theshareholders of the acquired business).

Three years of audited financialstatements required, unless the businesshas under $50 million in revenues, inwhich case only two years of auditedfinancial statements required.

General rules for acquisitions more than 75 days pre-IPO

18 NYSE IPO Guide


related party, only one year of incomestatements must be provided if certainadditional textual disclosure is made.Rule 3-14(a) also requires certainvariations from the typical form ofincome statement.

• If the property is to be operated by the company, a statement must befurnished showing the estimatedtaxable operating results of thecompany based on the most recent 12-month period, including suchadjustments as can be factuallysupported. If the property is to beacquired subject to a net lease, theestimated taxable operating resultsshall be based on the rent to be paid for the first year of the lease. In eithercase, the estimated amount of cash tobe made available by operations shallbe shown. An introductory paragraph is required stating the principalassumptions which have been made inpreparing the statements of estimatedtaxable operating results and cash to be made available by operations.

• If appropriate under the circumstances,a table should be provided disclosingthe estimated cash distribution perunit for a limited number of years, with the portion thereof reportable as taxable income and the portionrepresenting a return of capitaltogether with an explanation of annualvariations, if any. If taxable net incomeper unit will become greater than thecash available for distribution per unit, that fact and the approximate year of occurrence should be stated, if significant.

The SEC staff has noted that oneelement used in distinguishing a real estateoperation from an acquired business subjectto Rule 3-05 of Regulation S-X is thepredictability of cash flows ordinarilyassociated with apartment and commercialproperty leasing, which generally includesshopping centers and malls. Nursing homes,hotels, motels, golf courses, autodealerships, equipment rental operationsand other businesses that are moresusceptible to variations in costs andrevenues over shorter periods due to marketand managerial factors are not considered tobe real estate operations. In such cases, theRule 3-05 requirements will apply.

75 days before the offering.An exception to the general

requirements occurs when an individual ormultiple acquisitions that exceed 50% ofany of the significance criteria occur, orwill probably occur, within 75 days of theoffering for which inclusion of financialstatements is required.

In addition, if audited financialstatements are required, applicable interimfinancial information that would berequired according to the guidelinesdescribed in the “Age of financialstatements” and “Unaudited interimfinancial statements” sections above mustalso be included.

Staff Accounting Bulletin No 80 (SAB80) provides a special interpretation ofRule 3-05 of Regulation S-X for IPOsinvolving companies whose operationshave been built by the aggregation ofdiscrete businesses that remainsubstantially intact after acquisition. SAB80 allows first-time issuers to consider thesignificance of businesses recentlyacquired or to be acquired based on the proforma financial statements for the issuer’smost recently completed fiscal year. Whilecompliance with this interpretationrequires an application of SAB 80’sguidance and examples on a case-by-casebasis, this interpretation allows currentlyinsignificant business acquisitions to beexcluded from the financial statementrequirements, while still ensuring that theregistration statement will include not lessthan three, two and one year(s) of financialstatements for not less than 60%, 80%and 90%, respectively, of the constituentbusinesses of the issuer.

The acquisition or probable acquisitionof real estate operations is subject to itsown set of disclosure requirements underRule 3-14 of Regulation S-X, whichaddresses income-producing real estateoperations such as apartment buildingsand shopping malls. Rule 3-14(a) requiresas follows:• Audited income statements must be

provided for the three most recentfiscal years for any such acquisition orprobable acquisition that would be“significant” (generally, that wouldaccount for 10% or more of thecompany’s total assets as of the lastfiscal year end prior to the acquisition).If the property is not acquired from a

Financial statements of an equity methodinvestment: If the company holds aninvestment in unconsolidated subsidiariesor 50% or less owned entities accountedfor under the equity method that exceedssignificance thresholds as defined by Rule3-09 of Regulation S-X, separate financialstatements for the investee company mayneed to be filed with the registrationstatement, including an audit for certainperiods.

Significance of investees is evaluatedunder Rule 1-02(w) of Regulation S-X,based on the following tests:• The company’s and its other

subsidiaries’ investments in andadvances to the investee exceed 20% of the total assets of the company andits subsidiaries consolidated as of theend of the most recently completedfiscal year; and

• The company’s and its subsidiaries’equity in the pre-tax income fromcontinuing operations of the investeeexceeds 20% of such income of thecompany and its subsidiariesconsolidated for the most recentlycompleted fiscal year.

If either of these tests is met, separatefinancial statements of the investee mustbe filed. Insofar as practicable, the separatefinancial statements required shall be as ofthe same dates and for the same periods asthe audited consolidated financialstatements required to be filed by thecompany. The required financial statementsof the investee must be audited only forthose fiscal years in which either of theabove tests is met; the remaining years canbe unaudited. These audited financialstatements may or may not be required tobe audited by an independent accountantregistered by the PCAOB, depending on thelevel of reliance placed on these auditedfinancial statements by the company’sprincipal independent accountant.

Under Rule 4-08(g) of Regulation S-X,for any unconsolidated subsidiaries and50% or less owned entities accounted forunder the equity method that meet any ofthe three Rule 1-02(w) criteria at thegreater than 10% but not more than 20%significance level, summary financialinformation as described by Rule 1-02(bb)must be presented in the notes to thefinancial statements.

19NYSE IPO Guide


balance sheet; and• a condensed pro forma income

statement for the company’s mostrecently completed fiscal year and themost recent interim period of thecompany, unless the historical incomestatement reflects the transaction forthe entire period.

Pro forma adjustments related to thepro forma condensed balance sheet andcondensed income statement must includeadjustments which give effect to eventsthat are:• directly attributable to the transaction;• factually supportable; and• expected to have a continuing impact

on the company (applicable only to thecondensed income statement).

As a result, any pro forma adjustmentsfor expected future cost synergies or othersimilar adjustments that are notspecifically supported by the acquisitiondocuments will generally not be allowed.

If a business or assets are disposed of or planned to be disposed of after thelatest balance sheet presented in theregistration statement, but before theeffective date of the IPO, the effect of the disposal should be reflected in thecompany’s pro forma financial statementsthat are prepared in accordance withArticle 11.

Segment reporting: For companies thatoperate in multiple lines of business orgeographic regions, additional disclosuredata may be required to be presented, whichincludes separate revenues and operatingresults information for each major line ofbusiness or geographic region. FinancialAccounting Standard Board AccountingStandards Codification Topic 280,“Segment Reporting” (ASC Topic 280)requires disclosures regarding segments foreach year for which an audited statement ofincome is provided. Item 101(b) ofRegulation S-K requires disclosure ofcertain financial information aboutindustry segments, including revenuesfrom external customers, profitabilitymeasures and total assets for each of thelast three fiscal years presented.

ASC Topic 280 establishes standardsfor the way that public business enterprisesreport information about operating

Financial statements of guarantors and forcollateralizations: A guarantee of a publicsecurity (eg, a guarantee of a public debt orpublic preferred equity security) is itselfconsidered a security that must beregistered under the Securities Act, absentan applicable exemption. Rule 3-10 ofRegulation S-X requires each guarantor of registered securities to file the samefinancial statements required for thecompany in the filing. If certain criteria are met, condensed consolidating financialinformation may be provided in lieu ofseparate audited financial statements,unless a guarantor is newly acquired.

Under Rule 3-16 of Regulation S-X,audited financial statements must also be filed for each affiliate whose securitiescollateralize any class of registeredsecurities if the greater of the aggregateprincipal amount, par value, book value ormarket value equals 20% or more of theprincipal amount of the secured class ofsecurities being offered.

If any of the above situations isapplicable, Rules 3-10 and 3-16 should be reviewed to determine the extent offinancial information required to beincluded with the registration statement.

Pro forma financial information: Pro formafinancial information may be required toassist investors in understanding thenature and effect of significantacquisitions that have occurred,dispositions, reorganizations, unusualasset exchanges, debt restructurings orother transactions contemplated in theprospectus. In such cases, historicalfinancial information is adjusted in the proforma financial information to reflect thetransactions and the impact of the offeringon the company’s capital structure Allsignificant assumptions must be disclosed.

Guidance regarding pro forma financialinformation is provided in Article 11 ofRegulation S-X. Rule 11-01 of Regulation S-X specifies the circumstances underwhich pro forma financial information isrequired in filings with the SEC and setsforth general guidelines for the content of that information. Article 11 requires:• a condensed pro forma balance sheet as

of the end of the most recent period forwhich a consolidated balance sheet ofthe company is required, unless thetransaction is already reflected in that

segments in annual financial statements,requires those enterprises to reportselected information about operatingsegments in their interim financial reportsand also establishes standards for relateddisclosures about products and services,geographic regions and major customers. It defines an “operating segment” as acomponent of an enterprise:• that engages in business activities from

which it may earn revenues and incurexpenses (including revenues andexpenses relating to transactions with other components of the sameenterprise);

• whose operating results are regularlyreviewed by the enterprise’s chiefoperating decision maker to makedecisions about resources to beallocated to the segment and assess its performance; and

• for which discrete financialinformation is available.

Determining whether the company has multiple operating segments involvesan assessment of how management runsits business. Aggregating two or moreoperating segments may be highlysubjective and involves consideration of the similarities in the economiccharacteristics and in other factors such asthe nature of the products and services, thenature of the production process, customertype or class, distribution channels andapplicable regulatory environment.

The company must provide requireddisclosure information about an operatingsegment if it meets any of the followingthresholds:• Its reported revenue (including both

sales to external customers and inter-segment sales) is 10% or more of thecombined revenue (internal andexternal) of all reported operatingsegments.

• The absolute amount of its reportedprofit or loss is 10% or more of thegreater, in absolute amount, of:• the combined profit of all operating

segments that did not report a loss;or

• the combined loss of all operatingsegments that did report a loss.

• Its assets are 10% or more of thecombined assets of all operatingsegments.

20 NYSE IPO Guide


that must be audited by the company’sindependent accountant:• Schedule I – Condensed Financial

Information of Registrant must be filedwhen the restricted net assets ofconsolidated subsidiaries exceed 25%of consolidated net assets as of the endof the most recently completed fiscalyear. For purposes of this test,restricted net assets of consolidatedsubsidiaries are the amount of thecompany’s proportionate share of netassets of consolidated subsidiaries(after inter-company eliminations)which, as of the end of the most recentfiscal year, may not be transferred tothe parent company by subsidiaries inthe form of loans, advances or cashdividends without the consent of athird party (eg, lender, regulatoryagency, foreign government).

• Schedule II – Valuation and QualifyingAccounts must be filed in support ofvaluation and qualifying accounts (eg,allowance for doubtful accounts,allowance for inventory obsolescence)included in each balance sheet.

• Schedule III – Real Estate andAccumulated Depreciation must befiled for real estate held by companieswith a substantial portion of theirbusiness involving acquiring andholding investment real estate,interests in real estate or interests inother companies a substantial portionof whose business is acquiring andholding real estate or interests in realestate for investment. Real estate usedin the business is excluded from theschedule.

• Schedule IV – Mortgage Loans on Real Estate must be filed by certaincompanies for investments in mortgageloans on real estate.

• Schedule V – SupplementalInformation Concerning Property-Casualty Insurance Operations must be filed when the company, itssubsidiaries or 50% or less ownedinvestees accounted for under theequity method have liabilities forproperty-casualty (P/C) insuranceclaims. The schedule may be omitted if reserves for unpaid P/C claims andclaims adjustment expenses of thecompany and its consolidatedsubsidiaries, its unconsolidated

The company must disclose the factorsused to identify the enterprise’s reportablesegments, including the basis oforganization and the types of products and services from which each reportablesegment derives its revenues. Thecompany must also report for each of itsreportable segment a measure of profit or loss, total assets attributable to thatsegment, revenues from externalcustomers and a reconciliation to thecorresponding consolidated amounts.Furthermore, disclosure of items such asinterest revenue and expense, depreciationand related expense, equity methodinvestments and capital expenditures may be required under ASC Topic 280 if such amounts are included in themeasure of segment profit or loss or in the determination of segment assets, asreviewed by the company’s chief operatingdecision maker on a segment basis.

ASC Topic 280 also requires certainenterprise-wide disclosures regardless of whether the company has multiplereportable segments, if not alreadyprovided as part of the reportableoperating segment information. Thesedisclosures include revenues from externalcustomers for each product and service oreach group of similar products, as well asservices and revenues by geographic area.

For interim periods, disclosure for each segment must include revenues from external customers, inter-segmentrevenues, a measure of profit or loss, areconciliation to the company’sconsolidated information and materialchanges to total assets.

The time and effort required inidentifying, gathering and reportingfinancial information for operatingsegments may be significant. A first-timeissuer should carefully consider therequirements for segment reporting andrevisit its reporting obligations whenever it enters into new lines of business orwhere management begins to analyze itsbusiness in a new or a different way.

Supplemental schedules for certaintransactions: Rule 5-04 of Regulation S-Xrequires that a number of supplementalschedules be provided for particularindustries and under certaincircumstances. Each of these schedulescontains additional financial information

subsidiaries and its 50% or less ownedequity method investees did not, inaggregate, exceed one-half of commonshareholders’ equity of the companyand its consolidated subsidiaries as of the beginning of the fiscal year. For purposes of this test only, theproportionate share of the companyand its other subsidiaries in thereserves for unpaid claims and claimadjustment expenses of 50% or lessowned equity method investees takenin the aggregate after inter-companyeliminations shall be taken intoaccount.

Companies in specific industries,including insurance, may have additionalsupplemental information requirementsthat vary from those listed above. Theschedule information may be providedseparately or in the notes to the auditedfinancial statements.

Industry guides: Item 801 of Regulation S-K sets out five industry “guides”requiring enhanced disclosure of financialand operational metrics for companies incertain industries:• Guide 3 – Statistical Disclosure by

Bank Holding Companies;• Guide 4 – Prospectuses Relating to

Interests in Oil and Gas Programs;• Guide 5 – Preparation of Registration

Statements Relating to Interests in Real Estate Limited Partnerships;

• Guide 6 – Disclosure ConcerningUnpaid Claims and Claim AdjustmentExpenses of Property-CasualtyInsurance Underwriters; and

• Guide 7 – Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations.

New guidance for disclosures forcompanies with oil and gas operations takeeffect for registration statements filed onor after January 1 2010, superseding theguidance of Industry Guide 2 – Disclosureof Oil and Gas Operations. The newguidance is provided in Item 1200 ofRegulation S-K.

Smaller reporting companies: Smallerreporting companies, as defined by Item10(f) of Regulation S-X, may be eligible forscaled reporting requirements. These

21NYSE IPO Guide


of separate financial statements ofinvestees as would be required underRule 3-09, but summarized financialinformation must be disclosed.

If the company qualifies as a smallerreporting company in an initial registrationstatement, it must reassess this status atthe end of its second fiscal quarter in eachsubsequent fiscal year. If the company failsto meet the test, a transition to the largercompany reporting requirementscommences with the first quarter of thesubsequent fiscal year.

Foreign private issuer: A “foreign privateissuer” is any company (other than aforeign government) incorporated ororganized under the laws of a jurisdictionoutside of the United States, except incases where a majority of voting securitiesare directly or indirectly owned by USresidents and either:• the majority of its executive officers or

directors are US citizens or residents;• more than 50% of its assets are located

in the United States; or• its business is administered principally

in the United States.

The financial statement requirementsfor an initial registration statement of aforeign private issuer are found in Items 3,8, 17 and 18 of Form 20-F and in RegulationS-X. The financial statement requirementsdiffer in a number of significant ways fromthose of domestic US issuers. Some of thekey differences in the requirements are asfollows:• Audited financial statements are

required only for the most recent twoyears if the financial statementspresented are prepared in accordancewith US GAAP.

• Foreign private issuers may use GAAPother than US GAAP, but may need toreconcile to US GAAP. Thisreconciliation is not required if thecompany uses International FinancialReporting Standards (IFRS) as issuedby the International AccountingStandards Board (IASB). If the companyuses GAAP other than US GAAP, theaudited financial statements must beaccompanied by an audit report issuedby independent accountants that areregistered with the PCAOB and audited

scaled requirements streamline andsimplify the disclosure requirements tomake it easier and less costly for smallerreporting companies to comply. Under therules, a company qualifies as a “smallerreporting company” if it:• has a common equity float of less than

$75 million; or• has no public float and has annual

revenues of $50 million or less, uponentering the system.

A company registering common equitysecurities in an initial registrationstatement should calculate its public floatas of a date within 30 days of the date itfiles its initial registration statement. Thepublic float is computed by multiplying the aggregate worldwide number ofcommon equity shares held by non-affiliates before the offering plus thenumber of common shares being offered in a Securities Act registration statementby the estimated public offering price ofthe common equity shares. If smallerreporting company status is achieved, theregistration statement may comply withthe SEC’s scaled disclosure system.

The scaled disclosure requirements areintegrated into Regulation S-X (Article 8for financial statement requirements) andRegulation S-K (for non-financialstatement disclosure requirements). A fewof the key differences in financialstatement requirements are as follows:• Audited annual financial statements –

these include statements of income,cash flows, changes in shareholders’equity and comprehensive income forthe past two years, as contrasted tothree years for large companies. Thebalance-sheet requirement is the same.

• Financial statements for significantacquisitions – Rule 8-04 of RegulationS-X requires two years of financialstatements for a business acquired by a smaller reporting company if theacquisition is greater than 50%significant. Under Rule 3-05, a thirdyear is required if the acquisition isgreater than 50% significant and theacquired business had revenues of atleast $50 million in its most recentfiscal year.

• Audited financial statements forsignificant equity method investments– Article 8 does not require the filing

in accordance with PCAOB standards.• The latest audited annual financial

statements included in the registrationstatement must be as of a date notolder than 12 months prior to the datethe registration statement is filed. TheSEC will waive this requirement incases where the company can representadequately that it is not required tocomply with this requirement in anyother jurisdiction outside the UnitedStates, and that complying with therequirement is impracticable orinvolves undue hardship. Regardless,the latest audited annual financialstatements included in the filingcannot be more than 15 months old asof the date the registration statementbecomes effective.

• If a registration statement becomeseffective more than nine months afterthe end of the last audited fiscal year,the company must provide unauditedinterim financial statements inaccordance with, or reconciled to, US GAAP (this reconciliation is notrequired if the company uses IFRS asissued by the IASB) covering at leastthe first six months of the year.

• Foreign private issuers may report inany currency.

• Financial statements of an acquiredforeign business need not be reconciledfrom local GAAP to US GAAP whenthe acquired business is below 30% for any of the Rule S-X 1-02(w)significance tests. This reconciliation is not required if the acquired businessuses IFRS as issued by the IASB.

• Financial statements of a significantequity method investment meeting thesignificance threshold of Rule 3-09 ofRegulation S-X need not be reconciledto US GAAP (or, if applicable, IFRS asissued by the IASB), unless either ofthe two tests is greater than 30% ascalculated on a US GAAP (or, ifapplicable, IFRS as issued by the IASB)basis. A description of the differencesin accounting methods is required,however, regardless of the significancelevels.

Summary: Planning an IPO is a complexundertaking that requires the compilationand collection of numerous financialstatements and related information.

22 NYSE IPO Guide


• documenting processes involvingmajor classes of transactions;

• identifying significant risk points and key mitigating controls;

• providing preliminary assessment ofeffectiveness of design and operation of key controls;

• remediating missing and ineffectivecontrols;

• demonstrating consideration of theregulatory risks and environment; and

• conducting final tests that support anassertion of effective internal controlsover financial reporting.

Chapter 5.1 contains a more detaileddiscussion of the SOX compliancerequirements.

Financial accounting department: Theprocess leading up to filing of theregistration statement requires thegathering of various financial information.The company can utilize external advisorsto assist in gathering this information, butonce an IPO is completed, internalresources should be in place to support the ongoing reporting needs of a publiccompany. The company will need to:• prepare ongoing reports that provide

financial and non-financialinformation at a level of detail and in atimeframe that generally was notrequired in the past;

• develop a public entity organizationalstructure and recruit appropriatepersonnel to satisfy its publicreporting requirements;

• develop sufficient resources orprocesses to perform regular andconsistent financial close andreporting processes to meet reportingrequirements;

• develop or enhance its accounting andreporting policies and procedures;

• enhance the training and skills of itsexisting workforce involvingaccounting and reporting requirementsof public companies;

• develop or enhance its budgeting,forecasting and financial modelingprocesses to reflect its operations as a standalone entity with publicshareholders; and

• change underlying business processesto meet appropriate metrics or best-in-class services.

Knowing what financial statements andother information will be required tocomplete a registration statement is acritical step in planning an IPO. Thecompany should consult the SEC rules andregulations, as well as its auditor and otheradvisors, to determine what financialinformation requirements might beapplicable in its circumstances to allow for the planning of sufficient time andresources to complete the filing withinmanageable timeframes.

(b) Transition to being a public companyThe completion of an IPO marks the startof life as a public company. One of the firstchallenges for a successful transition isadapting to the new, often more complexrequirements of operating as a publiccompany. New processes may need to beadopted, and management must nowconsider how decisions affect a muchlarger group of stakeholders and beconscious of ensuring regulatorycompliance. Some of the transition areasthat should be considered going forwardare outlined below.

Controls and procedures: The level ofinvestor confidence in the reliability offinancial disclosures can be a key factor ina public company’s success. To helpensure investor – and market –confidence, a public company’s internalcontrols systems must comply with allregulatory requirements. Theserequirements include quarterlycertifications by executives and an auditreport on the effectiveness of internalcontrol over financial reporting requiredby Section 404 of the Sarbanes-Oxley Actof 2002 (SOX), typically as of the secondfiscal year-end after the IPO.

Complying with Section 404 requires a significant investment of resources overseveral months to move through a projectplan that includes a number of phases,such as:• assessing financial statement and

general and specific fraud risks;• evaluating the control environment,

entity-level controls, and general ITcontrols;

• identifying significant accounts anddisclosures;

• defining significant locations andbusiness units;

After the registration becomeseffective, the company will be subject tostrict SEC reporting timelines for quarterlyand annual reporting. It will also berequired to file current reports on Form 8-K after the occurrence of certain specifiedmaterial events within four business daysof the occurrence of the event. Manyprivate companies are unaccustomed toformal accounting closes for interimreporting periods and the strict reportingtimelines for both quarterly and annualperiods. In anticipation of going public, the following are some actions that thecompany should take in advance of the IPO:• Evaluate the current financial close

process in light of post-IPOrequirements and consider earlyimplementation of an accelerated closetimeline that will be required of an SECissuer, including the gathering ofdisclosure information for notes to thefinancial statements Reducing thefinancial close cycle time will mostlikely involve changes in processes, ITsystems and possibly resources. Thetransition to an established process can take time, but it is imperative thatthese modifications be in place beforethe first Form 10-Q or Form 10-K isrequired.

• Evaluate the finance and accountingdepartments’ organizational structureand skill sets of key personnel in lightof post-IPO reporting requirements,and identify gaps. Gaps can be filled by recruiting additional staff andproviding training for currentpersonnel.

• Draft an accounting policy manual.Many private companies have informalpolicies and procedures, but publiccompanies should have documentedaccounting policies as a component of their internal control environment.

Budgeting and forecasting: After the IPO,investors will expect the company toimplement the plans presented in theprospectus. The following are some of theorganizational changes that the companyshould consider:• Review business strategies, forecasting

processes and cost infrastructure inorder to help ensure itscompetitiveness and meet shareholderexpectations.

23NYSE IPO Guide


updated semi-annually, but more frequentupdates are preferable. The actual resultsmay prompt changes in strategies,priorities and resource allocation, withsubsequent period forecasts reflecting the impacts of such changes. Ideally, thesubsequent year’s budgeting processshould be embedded in the forecastingprocess during the latter part of thecurrent fiscal year.

XBRL: During 2009 the SEC issued newrules and related guidance that requirepublic companies (both domestic andforeign private issuers) to provide theirfinancial statements to the SEC in aseparate exhibit to certain reports andregistration statements in an interactivedata format using Extensible BusinessReporting Language (XBRL). The rules are designed to make it easier for analystsand investors to locate and compare dataon financial and business performance in a standard format across all publiccompanies. The XBRL rules also requirepublic companies to post their XBRLfilings on their corporate websites. Withinteractive data, all of the items in afinancial statement are labeled with unique computer-readable “tags,” whichmake financial information moresearchable on the Internet and readable by spreadsheet and other software.

The XBRL rules are being phased inover a three-year period beginning withfiscal periods ending on or after June 152009, with timing determined based onthe size of the company’s public float.XBRL is not required for IPOs, but acompany with an IPO that becomeseffective during 2010 will be required tocomply with the XBRL rules commencingwith periodic filings during 2011. The rulesshould be consulted regarding when initialcompliance with the rule commences, asthis will be dependent on the timing of the IPO and the initial subsequentmeasurement date for determination of the company’s public float.

Technology considerations: Informationtechnology is a critical enabler for thecompany in creating value and achievingfinancial reporting and regulatorycompliance. Companies that have notadequately invested in technology andtools for financial reporting and business

• Develop an investor relationshipinfrastructure and resources.

• Develop or enhance budgeting,forecasting and financial modelingprocesses.

• Determine key performance indicatorswhich will be used to communicatebusiness performance to stakeholdersthat are in line with industry practices.

• Design appropriate compensationprograms which align and incentivizeemployee behavior and focus with theoverall business strategy and keyobjectives.

The company’s strategic plan shouldencompass both external and internalfactors that span the entire organization.The plan establishes the framework for theannual budget, providing the top-downdirection, financial targets and keyassumptions.

The annual budget should focus on keyoperational drivers of the business for bothrevenue and cost with key inputs fromsenior management. The budget processshould be flexible and have a short cycletime to accommodate market-drivenchanges.

Forecasting should be a periodic updateto the budget (and strategic plan) thatreflects changes and impacts actually beingexperienced in the marketplace. Althoughimplementation of forecasting is generallythe domain of the finance department,ownership of the process belongs with the recipients of the results, includingoperational management. The processshould involve a focused, bottom-upprocess based on specific, measurabledrivers and should closely involveoperational managers.

If the company does not have adequatesales forecasting, it may consider using keyperformance indicators, industry trends orother third-party data to benchmark targetsales numbers. Similarly, external costtrends and industry averages can helpquantify or even qualify expense forecasts.Creating standardized relationshipsbetween internal and external financial and operational sources can provide bothinsight and consistency in the forecastingprocess, and also identify a baseline tomeasure the company’s performancerelative to the industry.

At a minimum, forecasts should be

operations may struggle with technologyand system limitations in meeting theneeds of a public company. This mayrequire additional resources to ensurebusiness processes are adapted to meetingIT system needs. In addition, the companymay need to implement new technologyand systems or customize existing systemsand reports.

The IT effort required for compliancewith establishing, evaluating and obtainingan audit of internal control over financialreporting should not be underestimated.Information technology plays a large rolewithin the internal control structure and is an integral part of SOX compliance. A systems embedded approach to thefinancial reporting process can includeautomated key controls to reduce theoverall number of controls

IT strategy can be a key driver inaccelerating the accounting close processthrough the reduction or consolidation ofmultiple general ledgers, charts of accountsand reporting systems. For systems thathave disparate interfaces or lack real-timereporting capabilities, modifying theexisting system’s capabilities or buildingthe case for an enterprise resourceplanning system may be warranted.

Greater use of IT systems can alsoenhance the budgeting and forecastingprocess and allow for the leveraging ofinformation more effectively.Communication requirements to keystakeholders after the IPO about theperformance of the company should bealigned with external reporting.Implementation of an integrated systemproviding both external and managementreporting can provide timely, qualityinformation.

(c) SummaryBecoming a public company often requiresmanagement to make numerousimprovements to business processes and the underlying systems as they react to the demands of investors, governmentregulators and other stakeholders.Preparing for this change in status mayrequire considerable time and effort. Toachieve a more seamless transition, thecompany should consider taking steps tooperate and report like a public companybefore the IPO becomes effective, to easethe post-IPO transition.

24 NYSE IPO Guide


boilerplate language, updates toexecutive biographies and the creationof company fact sheets, which can beposted to the website. Additionally, the company should review its pressrelease strategies to maximizeopportunities for a consistent flow of announcements during the quietperiod (ie, establish a baseline of newproduct/client announcements, keymilestone updates and other news toavoid the appearance of “gun jumping”during the registration period).

• Website – as many prospectiveinvestors and covering reporters willvisit the company’s website, it isimportant that the site reflects theimage the company wishes to convey,that corporate information is easilyaccessible and that all data points areconsistent with those provided in theIPO registration statement. In additionto reviewing the site for accuracy, thecompany should consider addinginformation about its mission, visionand values, an online media kit,executive biographies, lists of historicalaccomplishments and other referencedocuments. These materials will beimportant media and investor relationstools to bridge the gap whencommunicators are unable to speakdirectly with their constituents.

• Marketing materials and othercustomer communications – thecompany should review its marketingmaterials and customercommunications to ensure thatmessaging and statistics are consistentwith the language in the IPOregistration statement. Equallyimportant, it should train public-facingemployees (eg, receptionists, salesforce, customer service representativesand others) to respond to externalinquiries within the confines of SECregulations and to forward questionsoutside their respective areas ofresponsibility to the appropriatecommunications representatives.

• Employee communications – as withany major change, an IPO can lead toemployee uncertainty. Employees mayhave questions about how the IPO will affect their jobs, what newopportunities are available and whetherthey will be able to purchase shares.

2.3 Preparing a communicationsstrategy

(a) Reviewing public perception and imageThere is a strong temptation to view IPOcommunications as a listing-day event,meticulously planning for the inevitablepublicity surrounding day-one trading. In reality, preparation should begin wellbefore the registration statement is filed to ensure consistent messaging and astrong baseline of communications before the “quiet period” begins.

While the IPO prospectus will be theprimary selling document for the offering,investors and media will look as broadly as possible for further insight into thecompany, its business and its competitiveposition. The company should thereforeconduct a thorough assessment of itsbrand and reputation, as perceived bycustomers/clients, employees, regulators,industry analysts and other keystakeholders, as early as possible in theIPO process so that any remedial actionscan be taken before it becomes constrainedby quiet period rules.

In particular, the company shouldreview any public commentary about itsfinancial results or growth prospects toidentify discrepancies between whatpreviously was disclosed/anticipated andthe information that will be presented inthe upcoming SEC filings. This isparticularly important in today’senvironment of intense speculation aboutthe intention of private equity firms tospin off their portfolio companies, and for companies that filed registrationstatements before the market deteriorated,which are now preparing amended filings.

The company’s communications reviewshould include the following:• Media relations activities – the IPO

will attract attention from an expandedmedia universe focused onperformance, growth potential andother financial events. While the realwork in building these new mediarelationships begins after the quietperiod, the company should ensure that key industry reporters accuratelyunderstand its business strategies anddifferentiators in advance of the filing.Activities could include a series ofreporter briefings (assuming anappropriate news hook), a review of

Additionally, they must understandthat compliance with disclosure rulesand internal control requirements iseveryone’s responsibility. Moredetailed recommendations onemployee communications are includedin Chapter 4.

(b) Preparing for financial reportingAmong the company’s most importanttasks as it prepares to go public is thedevelopment of a comprehensive strategyto interface with a crucial new audience –the investment community. The way inwhich the company communicates to thefinancial markets significantly impacts itsstatus in its industry, the perceived valueof its business, management credibilityand ultimately the valuation of itssecurities in the markets.

Preparing for an IPO includesestablishing protocols for how thecompany will engage with investors, whatinformation it will provide, how it willreport its financial results and whatcommunications channels it will use. The IPO process will place the companyunder acute public scrutiny and set inmotion a whirlwind of activity. It is criticalthat preparations begin during the pre-IPO phase to allow adequate time forbenchmarking and planning, so thecompany will be ready to go “live” by the time the IPO prices.

Key elements of an effective financialcommunications strategy include thefollowing:• Consistency – investors will be looking

for new information in everyinteraction with management, and anyvariations in messaging, content, toneor frequency/timing ofcommunications can be seen as anindication of changes in the business or outlook that could affect thecompany’s stock price. Consistency in communications is paramount, yetthe company must also allow sufficientflexibility to adjust to businessconditions.

• Benchmarking – an important firststep is establishing a framework forhow the company will communicate tothe financial community. Key to thisprocess is analyzing and benchmarkinghow industry-leading companiescommunicate to their financial

25NYSE IPO Guide


metrics by incorporating businesscommentary, industry and segmenttrends and other non-financialinformation.

• Guidance – guidance continues to be a controversial topic within theinvestment and corporate governancecommunities. However, an importantdriver of equity valuation is the abilityof investors to forecast future earningsand cash flows. How the companyprovides forward-looking commentarythrough guidance can significantlyaffect the valuation of its stock.Research has demonstrated thatrelatively frequent, accurate andgranular guidance is associated with a lower cost of capital; yet the risk ofnot meeting expectations, a possibleduty to update and potential liabilityconcerns demand careful consideration.To be aligned with investorexpectations, guidance policies of peersshould be analyzed and factored intothe decision.

• Online communications tools – theinvestor relations section of thecompany’s website is often the firstlanding spot for investors seeking moreinformation about the company. Assuch, it should be user friendly,interactive and easily accessible.Visitors accessing the site must besupplied with the information theyneed to conduct initial due diligence on the company and help them advancetheir investment decisions about thestock. Information that can bedynamically updated regarding thebusiness, key executives and strategywill help investors better understandthe company and its future prospects.More detailed recommendations oncommunications are included inChapter 4.

• Training – management teams withoutpublic company experience should betrained to communicate with investorswithin the regulatory framework. Themarket will respond favorably toexecutives who are forthcoming andopen about their businesses. However,engaging with investors in real timesubjects executives to the risk ofmaking selective disclosures ofmaterial non-public information,which is prohibited under Regulation

audiences. Investors, the media andother key stakeholders assigncompanies to peer groups againstwhich they evaluate the company’sperformance. It is therefore importantto understand thoroughly the standardsagainst which the company will beevaluated.

This benchmarking study shouldencompass a full range of materialsscrutinized by investors, includingfinancial and regulatory filings, pressreleases and transcripts or webcasts of public events such as earningsconference calls, investor conferencesand analyst events, and should includethe timing of peer group reporting aswell as content. As a general rule, thecompany will be judged on thecompleteness, quality and accuracy ofthe information package it provides tothe financial community.

• Metrics – the company should identifyearly in the process the metrics andother information it plans to provide to investors post-IPO and considerwhether this information can beincluded in the registration statementto provide additional consistency.Specific consideration should be givento the metrics that peers use todescribe their businesses and provideguidance on future performance, aswell as additional supporting materialthey provide. Understanding andaccommodating these standards willkeep the company in synch with whatinvestors are accustomed to receivingfrom industry peers and demonstrate a commitment to open and honestcommunications. Additional financialand operating characteristics critical tounderstanding the nature and strengthof the business can and should beprovided.

• Non-financial disclosures – one of the most frequent and visiblecommunication opportunities is thereporting of quarterly financial results.In addition to meeting SEC disclosurerequirements, investors expectmanagement to interpret results andprovide additional commentary onbusiness developments via the earningsrelease and conference call. Thesecommunications should go beyond theprescribed financials and the financial

F-D. It is critical for executives tounderstand the parameters of whatthey can discuss.

Even as the company seeks to refine itscommunications strategies, it is importantto understand that investors will look wellbeyond its direct investor communicationsfor insight into its business prospects andinvestment potential. In addition totraditional investor relations, the companyshould consider its corporate and mediacommunications strategy as part of anentire communications approach. Thisincludes assessing news trends, buildingrelationships with reporters, influentialbloggers and industry analysts, andunderstanding how peer companies areportrayed in the media.

Developing strategies for disseminatingpositive announcements and managingdifficult news will pay long-termdividends, helping build the company’sbrand, enhance its reputation, buildmanagement credibility and protectvaluation. Companies must have the proper response mechanisms in place to address crisis situations quickly andeffectively, including those crises that may occur while the company is still in the IPO quiet period.

Planning, vigilance and transparencyare the most effective investor relationstools a company possesses. By developing a comprehensive communications strategythat provides for consistentcommunications, meets (or exceeds) peer standards and provides requireddisclosures, the company can prepare, pre-IPO, to thrive in a public environmentand adapt efficiently to the many surprisesand challenges that will inevitably arise.

2.4 Designing the capital structure

(a) American depositary receiptsAmerican depositary shares, commonlyknown as American depositary receipts(ADRs), facilitate foreign issuers’ access to the world’s largest equity market. Theeffectiveness of ADRs is why 158 foreignissuers have used this instrument to raisenearly $55 billion in capital (IPOs only) inthe United States during the past decadealone. As of December 31 2009, 252 foreignissuers had ADRs listed on the NYSE.

The effectiveness of ADRs for raising

26 NYSE IPO Guide


In addition to facilitating capital raisingin the United States, ADRs offer foreignissuers many other benefits, including:• shareholder diversification;• incremental investor demand that

can drive market valuation;• a US acquisition currency;• stock-based compensation for US

employees; and• enhanced corporate visibility in the

United States.

ADR structures: A Level III ADR programlisted on the NYSE (or on another US stock exchange) allows a foreign issuer torealize all of the aforementioned benefitsof ADRs, including raising capital fromindividual investors. Alternatively, capitalcan be raised from qualified institutionalinvestors only via a private placement,known as a Rule 144A offering.

A Level II ADR program allows aforeign issuer to list on a US stockexchange, but not raise capital. Under aLevel I program, the ADRs are not listed,trading instead in the over-the-countermarket.

capital in the United States is due to theirappeal to investors – these instrumentsare a convenient way to directly invest ininternational companies while avoidingmany of the risks typically associated withsecurities held in other countries. For USinvestors, ADRs:• are easier to purchase and hold than a

foreign issuer’s underlying ordinaryshares;

• trade easily and conveniently in USdollars and settle through establishedclearinghouses;

• pay dividends in US dollars;• eliminate unfamiliar custody

arrangements; and• provide notifications of corporate

actions in English.

ADRs allow institutional investorsaccess to foreign securities without theburden of local custody arrangements orhaving to deal in other currencies. Also,many US institutional managers arerequired to buy ADRs to invest in foreignissuers, due to restrictions in theirinvestment charters.

How ADRs are created: ADRs are normallycreated when the shares of a foreign issuer– either those currently trading in its localmarket or newly issued shares inconnection with an offering of securities – are deposited with a depositary bank’scustodian in the issuer’s home market. Thedepository then issues to investors ADRsrepresenting those shares. At any timethereafter, an investor can sell these ADRsin the secondary market (eg, the NYSE), orhave the sponsoring depositary bank cancelthe ADRs and receive the underlyingordinary shares that can be sold in theforeign issuer’s local market.

Setting up an ADR program: Once a foreignissuer has chosen an ADR structure, it will work closely with a depositary bank toestablish and maintain the ADR program.Timeframes and requirements forlaunching a program will vary. However,certain characteristics are common to anyADR structure.

Setting the ADR-to-share ratio: Each ADRissued will represent a certain number ofunderlying ordinary shares held in custodyin the foreign issuer’s home market.

There is no official rule for setting theratio for ADRs. However, the share prices of sector peers should be taken intoconsideration in order to establish a ratiothat will result in an initial price per ADRthat investors will perceive to be“attractive.”

The ratio initially selected may affect thetransaction costs that a foreign issuer’sinvestors will pay. For instance, since feesfor issuance (and cancellation) are assessedin cents per ADR, an ADR that is priced“too low” can add incremental transactioncosts for investors.

Parties that work with the foreign issuer:Establishing an ADR program requiresclose coordination between the foreignissuer, its chosen depositary bank and each firm’s legal counsel. When raisingcapital in the United States, the issuer also relies on other advisors, such asaccountants, investment bankers andinvestor relations firms. The chartopposite summarizes the roles andresponsibilities of each program partner.On page 30 is a sample timetable for the

60% – Asia-Pacific (29,927)

27% – Europe, Middle East and Africa (13,510)

13% – Latin America (6,444)

Diversified (122)

29% – Communications (15,569)

16% – Technology (8,817)

14% – Financial (7,774)

12% – Industrial (6,775)

11% – Energy (6,277)

9% – Consumer, non-cyclical (4,830)

6% – Consumer, cyclical (3,296)

2% – Basic materials (1,136)

1% – Utilities (688)

Capital raised using ADRs (by region – 2000 to 2010)

Capital raised using ADRs (by sector – 2000 to 2010)

27NYSE IPO Guide


establishment of a Level III ADR program.

The deposit agreement: As a first steptoward establishing an ADR program, theforeign issuer and its chosen depositarybank negotiate a deposit agreement. Thiscontract details the legal relationship andobligations of the depositary bank and theissuer, describes the services thedepositary and issuer will provide, and setsforth the rights of ADR holders and thefees they must pay the depositary bank.While some terms are standard, depositagreement provisions may vary fromprogram to program, depending on thelegal requirements of the foreign issuer’shome market, the objectives of thedepositary bank and individual issuerspecifications.

The deposit agreement includesprovisions relating to the following:• deposit of the issuer’s shares;• execution and delivery of the ADRs;• issuance of additional shares by the

issuer in compliance with applicablesecurities laws;

• transfer and surrender of the ADRs;• setting of record dates by the

depositary;• voting of the foreign issuer’s

underlying shares (ie, the sharesevidenced by the ADRs);

• obligations and rights of the depositarybank and the holders of the ADRs;

• distribution by the depositary of cashdividends, stock dividends, rights toacquire additional shares of the issuerand other distributions made by theissuer;

• circumstances in which reports andproxies are to be made available to ADRholders;

• tax obligations of depositary receiptholders;

• fees and expenses to be incurred by theissuer, the depositary and ADR holders;

• pre-release of ADRs; and• protections for the depositary and the

issuer (ie, limitations on liabilities)

ADR certificate: The ADR certificate (seespecimen on page 31) is attached as anexhibit to the deposit agreement. A typicalADR certificate resembles an ordinaryshare certificate and contains the generalterms and conditions of the ADRapplicable to ADR holders.

Depositary• Provide advice/perspective on type of program, exchange or

market on which to list or quote.• Advise on ratio of depositary shares to ordinary shares.• Appoint custodian.• File Form F-6 if Level I, II or III program.• Review draft registration statement or offering memorandum,

depending on type of program to be established.• Coordinate with all partners to complete program implementation

steps on schedule.• Coordinate with legal counsel on deposit agreement and

securities law matters.• Prepare and issue certificates and/or direct registration statements.• Solicit market makers (Level I ADR only). • Announce DR program to market (brokers, traders, media,

retail/institutional investors via news releases and internet.

Custodian• Receive local

shares inissuer’shomecountry.

• Confirmdeposit ofunderlyingshares.

• Hold sharesin custody forthe accountof depositaryin the homemarket.

Legal counsel (depositary’s and issuer’s)• Prepare draft deposit agreement

(depositary bank’s counsel) and filerequired registration statementswith the SEC.

• Manage compliance with USsecurities laws, rules and regulationsand perfect any securities lawexemptions (if Rule 144A/RegulationS program) (issuer counsel).

Accountants (Level II/III/Rule 144A/Regulation S ADRs only)• Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP.• Review registration statement or offering circular.

Investor relations advisor/firm• Develop long-term plan to raise awareness of issuer’s program in the US.• Develop communications plan and information materials for launch activities

(roadshow and presentations to investors, meetings with financial media etc).• Coordinate with issuer’s advertising and public relations teams on specific

program plans to support and develop company image in the US.

Investment banks/underwriters (Level II/III/Rule 144A/Regulation S ADRs only)• Advise on type of program to launch and exchange or market on which to list or quote.• Advise on ratio of depositary shares to ordinary shares.• Cover issuer through research reports/promote DRs to investors.• Advise on roadshows, investor meetings, investors to target.• Advise on capital market issues.• Where applicable, advise on potential merger/acquisition candidates, and other

matters such as rights offerings, stock distributions, spin-offs andproxy contests.If concurrent public offering:• Advise on size, pricing and marketing of offering.• Act as placement agent or underwriter in offering.• Conduct roadshows with management/introduce issuer to institutional and

other investors.• Line up selected dealers and co-underwriters for offering.

Issuer• Provide depositary and custodian with

notices of dividends, rights offerings andother corporate actions, including noticesof annual and special shareholder meetings.

• Ongoing compliance with stock exchangeand SEC regulations, including disclosureand reporting (coordinating with legalcounsel/accountants).

• Execute US-focused investor relationsplan.

Establishing an ADR program: roles and responsibilities of foreign issuer, depositary bank and other parties

28 NYSE IPO Guide


Sample timetable for establishing a Level III ADR program

Action

Establish and organize transaction team.

Begin US roadshow and ongoinginvestor relations program: createcommunications materials, targetinstitutional investors, organize directpurchase programs and establishemployee ownership plans. Select ratio.

Underwriter conducts preliminary duediligence.

Prepare and submit to SEC offeringcircular/prospectus and Form F-1.Commit to file Form 20-F within 12months (if not already being filed inconjunction with an existing Level IIADR). Resolve any and all mattersinvolving registration and disclosure.

Negotiate deposit agreement.

Submit exchange listing application and agreement. Receive approval.

Prepare Form F-6 and submit to SECwith deposit agreement.

Receive SEC comments on Form F-1and other forms.

Complete requirements for trading andsettlement; obtain DTC eligibility, CUSIPnumber and ticker symbol; and prepareADR certificates.

Receive SEC declarations ofeffectiveness on Forms F-1 and F-6.Execute deposit agreement.

Conduct roadshow meetings with USinvestors (group and one-on-one).

Print final prospectus, price offering, and sell ADRs. ADRs are listed and begin trading.

Closing. Underwriter delivers cashproceeds to issuer, depositary’s custodianreceives underlying shares, anddepositary delivers ADRs to syndicate.

Distribute press release and brokerannouncements to media and investment community

Place tombstone advertisement.

OngoingI

•

•

•

•

•

•

•

•

•

•

•

•

•

•

D

•

•

•

•

•

•

•

•

•

•

•

•

•

L

•

•

•

•

•

•

•

•

•

•

A

•

•

IB

•

•

•

•

•

•

•

•

•

•

IR

•

•

•

•

1 2 3 4 5 6 7 8 9 I0 11 12 13 14

Timeframes provided are indicative. Regulator’s involvement and issuer’s program specifics may vary and can materially affect timing. The SEC generally providescomments on Form F-1 registration statements within 30 days of the date filed.Key to parties involved: I = Issuer; D = Depositary bank; L = Legal counsel (for depositary and/or issuer); A = Accountant; IB = Investment bank; IR = Investor relations firm

29


investors? Are there likely to be any hedgefunds or shareholder activists? Goingforward, these characteristics of theshareholder base will be an importantelement of investor relations. Governancematters have become a central focus ofactivist shareholders, as well as investmentadvisory firms such as RiskMetrics andGlass Lewis, which evaluate a company’sgovernance structure in makingshareholder voting recommendations.

Board of directors and board committees:A public company’s board composition and structure are often very different fromthose of a private company. A US publiccompany must comply with governancerequirements imposed by stock exchangelisting requirements and SEC rules, as well as related disclosure requirements. For more information about theserequirements, see Chapter 5.2.

In particular, the stock exchanges,including the NYSE, require that the boardof directors comprise a majority ofindependent directors within one year of listing. In addition, post-IPO, thecompany must have an audit committeemeeting SEC and stock exchange rules oncomposition, independence and financialexpertise, and under the NYSE rules mustalso have compensation and nominatingcommittees made up of independentdirectors. Some of these governancerequirements can be phased in followingthe IPO, but the company generally mustbe fully compliant within one year.“Controlled companies,” or companieswith a majority shareholder, are exemptfrom most of these requirements exceptthe audit committee rules, as are foreignprivate issuers. Other SEC and US tax rulesalso typically influence the composition ofthe compensation committee, as discussedin Chapter 2.6, as well as “interlocking”relationships with other companies.

Beyond the required structures, thecompany should carefully consider theright mix of board member qualifications;and a larger board, with more than seven or eight members, might warrant theformation of other standing committees,such as a finance committee or a publicaffairs committee.

Anti-takeover defenses: Anti-takeoverdefenses are a key element of pre-IPO

SEC registration: As a US-listed company,a foreign issuer must comply with theregistration provisions and continuedreporting requirements of the ExchangeAct, as amended, as well as certainregistration provisions of this act.

For more information about the SECregistration and reporting requirements,please refer to Chapter 5.

(b) Anti-takeover defenses and othergovernance mattersBefore going public, the company will needto ensure that its governance structuremeets SEC and stock exchangerequirements. This is the ideal time for the company to consider organizationalmatters more generally, implement desiredchanges to the company’s jurisdiction oforganization, subsidiary framework andcapital structure, and put in place a strongboard and governance structure, includinganti-takeover defenses:• Changes after the IPO will be very

visible, likely requiring disclosure,governance document posting andpotential filings.

• Post-IPO changes may requireshareholder approval, which may bedifficult to obtain.

• Some governance requirements, suchas identifying independent directors,should be initiated early in the process,as they may take considerable time.

It is important that the company workclosely with the underwriters to develop aproperly balanced board and governancestructure, as certain elements may impactinvestor interest and ultimately pricing.The company should also anticipate themake-up of its shareholder base. Whatpercentage of shareholders are likely to beinstitutional investors compared to retail

governance planning, particularly in lightof the current economic environment, inwhich decreased stock prices haveheightened concerns about hostiletakeovers. Achieving the right balance isimportant, as too strong a defense profilemay be disfavored by investors, whichoften benefit from stock price premiums in a takeover context; many of theseprotections may attract negativeshareholder attention and proposals forchange down the road. The defenses anIPO company may consider include thefollowing:• Poison pill (“rights plan”) –

increasingly a focus of pressure frominstitutional shareholders, the poisonpill remains the most potent structuraltakeover defense. Under a typicalpoison pill or rights plan, the companyissues rights to the existingshareholders. These rights allowholders (other than a bidder) topurchase stock in the target or in theacquiring company at a steep discount(usually half price) if a hostile bidderacquires a certain percentage (usually15% or 20%) of the outstanding shares.This dilutes the voting power of thebidder and makes it more expensive to acquire control of the target.

Although their terms andconditions vary considerably, thepurpose of a poison pill is to forcepotential bidders to negotiate with thetarget’s board of directors. The rightsusually have redemption provisionsthat permit the company to redeem the rights at a nominal price. If theacquisition is friendly and the boardapproves the deal, it may use thisfeature to redeem the pill or otherwiseexempt the transaction.

• Controlling changes to the board ofdirectors – various charter or bylawprovisions related to changes indirectors can make it more difficult for hostile bidders or dissidents toinfluence and control a board ofdirectors. For example, with a typicalclassified or staggered board havingthree classes of directors, each electedfor a three-year term, only one-third ofthe directors are up for renewal at eachannual meeting. The company maywish to avoid other provisions thatmake it easier for an insurgent group to

ADR certificate

NYSE IPO Guide

30 NYSE IPO Guide


company stock by an interestedshareholder.

• Business combinations with interestedshareholders – under Delaware law, an“interested shareholder” (generally aholder of 15% or more of the votingstock) is generally prohibited fromengaging in a business combinationwith the company for three years afterthe holder became an interestedshareholder. Although a Delawarecorporation can expressly elect in itscharter not to be subject to this“freeze-out” statute, it can be aneffective anti-takeover defense.

• Issuance of shares – the companyshould ensure that it has a sufficientamount of common and “blank check”preferred stock authorized under itscharter. In many jurisdictions, thecompany may include in its authorizedand unissued stock a certain amount of undesignated preferred shares. Theboard will be authorized to issuepreferred shares in one or more seriesand to determine and fix thedesignation, voting power, preferenceand rights of each series. The existenceof blank check preferred stock allowsthe board to issue preferred stock withsupervoting, special approval, dividendor other rights or preferences without ashareholder vote. However, NYSE rulesgenerally require shareholder approvalby majority of votes cast before issuing20% or more of the outstanding votingpower outside a public offering. Also, if there is a poison pill, the companyshould make sure it has sufficientauthorized shares for the shares to be issued if the pill is triggered.

• Change of control provisions – acommon feature of loan agreementsand other significant contracts is aprovision restricting a change ofcontrol of the company, resulting in an event of default if breached. Theseprovisions protect the lender or othercontracting party, but reduce thecompany’s flexibility, particularly in restructuring efforts or friendlytakeover transactions, as well asmaking it less attractive to a potentialacquirer. In a recent case, San AntonioFire & Police Pension Fund v AmylinPharmaceuticals, Inc, the DelawareChancery Court raised questions

force changes in directors and thus gaincontrol, such as cumulative voting,which can result in the election of adirector with the support of only asmall percentage of shareholders, andprovisions allowing shareholders toremove directors without cause,increase the number of directorswithout limit and fill board vacancies.

The company should also considerwhether to adopt a plurality or majorityvoting standard for director elections.While plurality voting generallyincreases the likelihood thatmanagement’s director nominees willbe elected, majority voting provides for a more democratic process and hasgained in popularity over the pastseveral years, with a strong focus byactivist shareholders and investmentadvisory firms.

• Shareholder action provisions – thecompany can improve its defensiveposture by regulating the methods bywhich a hostile bidder can call for andobtain a shareholder vote on directorelections or other proposals that mayfacilitate a takeover. Charter and bylawprovisions can be used to limit theability of the hostile bidder to callspecial meetings or bypass the meetingrequirement altogether by the use of awritten consent of the shareholders.The company may also wish toconsider provisions requiringshareholders to give adequate advancenotice and supply information beforetheir proposals are added to the agendaof a regular or special meeting.

• Supermajority voting –“supermajority” voting requirementsmay be imposed for mergers and otherspecified transactions between thecompany and an “interestedshareholder,” which may be defined, forexample, as a holder of more than 10%of the outstanding shares. Thus, an80% vote might be required to effectan acquisition of the company by amajor shareholder, instead of the moretypical 50% or 66%. A fair pricecondition may be incorporated into thesupermajority provision, requiring asupermajority vote, for example, whenan interested shareholder proposes amerger at any price less than thehighest price paid for any share of

regarding the interpretation andvalidity of certain of these provisions,as a contractual term that could affectthe shareholder franchise. Thecompany should carefully considerthese provisions in its existing andproposed agreements, including at the board level if they cannot beeliminated.

Corporate housekeeping: In anticipation ofgoing public, the company should reviewand clean up documents that contemplatea private company (eg, charter documentsand shareholder agreements). Similarly, itis important for the company to reviewcorporate minutes and other records, toconfirm that corporate formalities havebeen observed and properly documented,including for the issuance of stock of thecompany and its subsidiaries.

2.5 Providing for employeesIn preparing for an IPO, the companyshould review all of its employeecompensation and benefits arrangementsin light of the opportunities afforded byand the responsibilities resulting from theIPO. The major opportunity is the abilityto compensate employees with publiclytraded stock. Among the responsibilities is becoming subject to tax and securitieslaws that did not previously apply,including Section 162(m) of the InternalRevenue Code of 1986, as amended, thecompensation disclosure rules and Section16 of the Exchange Act. The company’scompensation committee might considerhiring a compensation consultant to helpstructure new arrangements in light of the IPO.

(a) Equity compensationIncentive plans: Having publicly tradedstock opens up new avenues forcompensating employees of the company.In connection with its IPO, the companyshould strongly consider putting into placea new equity incentive compensation planor reviewing and revising any existingplans in light of its status as a publiccompany. Any post-IPO plan should allowthe company sufficient flexibility in termsof types of awards and their terms andconditions. The plan should state theaggregate number of shares available to beissued under it. The company needs to

31NYSE IPO Guide


both to confirm proper accountingtreatment and, with respect to stockoptions or stock appreciation rights, to confirm that they were granted withexercise prices equal to (or greater than)fair market value in light of Section 409A and Section 422 of the InternalRevenue Code.

The company may wish to make equity grants in connection with the IPOto its executives and other employees.These grants would permit the employeesto participate in the increase in value of the company following the IPO. Thecompany will need to determine theamount and the type of equity award, andmay be required to disclose the aggregateamounts and also specific amounts withrespect to its named executive officers in the registration statement, as well as a description of the plan.

Other plans: While not as commonlyadopted in connection with an IPO asequity incentive plans, the company could consider adopting a stock purchaseplan permitting employees to purchasestock from the company through payrolldeductions either at market price or at adiscount. Stock purchase plans may bedesigned to allow for employee favorabletax treatment under Section 423 of thecode. Adopting a stock purchase plan prior to an IPO provides grandfatherbenefits under stock exchange listing rules and Section 423 of the code similar to those for equity incentive plans. Inaddition, if the company has a definedcontribution plan for its employees (eg, a 401(k) plan), following the IPO, the company could consider makingcompany contributions in stock or adding a company stock fund as aninvestment option; but either action must be very carefully reviewed prior to implementation.

Form S-8: The company may register the sale of stock to employees, directorsand certain independent contractors undera compensatory plan on a short-formregistration statement – Form S-8. FormS-8 incorporates by reference companyinformation from Exchange Act filings.The prospectus delivered to participantsneed not be filed with the SEC andprimarily addresses the terms of the plan.

consider carefully shareholder dilutionconcerns and estimated burn rates whendetermining this number. The companymay also wish to hire a firm specializing in stock plan administration to handle the logistics of its equity compensationprogram.

Any adoption of new plans or changesto existing ones should occur prior tocompletion of the IPO and, if possible,should be approved by the shareholders of the private company. A plan that hasbeen adopted prior to the IPO may takeadvantage of grandfather provisions understock exchange listing rules, enabling it togrant all of the stock reserved under theplan without seeking public shareholderapproval of the plan until it either runs out of shares or is materially modified. A plan that has been adopted and approvedby the shareholders of the company priorto the IPO will also not require furtherapproval by shareholders after the IPO togrant employee tax-favorable “incentivestock options” pursuant to Section 422 of the code until the earlier of 10 yearsfrom the date of adoption or amendmentof the plan to add additional shares orchange eligibility for participation. Pre-IPO plan adoption also provides anadvantage under Section 162(m) of thecode, as discussed below.

If the company has previously grantedcompensation to its employees in the formof equity awards pursuant to exemptionsfrom registration under the Securities Actand Exchange Act, it should review theprior grants to ensure that no action isrequired (or that any action that may berequired is taken) by the company to adjustthe terms of the awards as may benecessary or appropriate. For example, ifthe pre-IPO company is a limited liabilitycompany, the awards should be amended to refer to common stock, with any furtheradjustments necessary to maintaineconomic equivalency. If pre-IPO awardswere subject to conditions common toprivate company equity (eg, a repurchaseright upon termination of employment),the company should consider deletingthose provisions if they do not ceaseautomatically in accordance with theirterms, keeping in mind potential tax andaccounting issues. The company shouldalso carefully review its equity valuationmethods with respect to pre-IPO grants,

(b) Section 162(m) of the InternalRevenue CodeFollowing the IPO, the company will besubject to Section 162(m) of the InternalRevenue Code. Under Section 162(m), thecompany may not take a deduction in itsUS taxes for compensation paid to a“covered employee” to the extent itexceeds $1 million for the taxable year(subject to certain exceptions). Coveredemployees include the chief executiveofficer and the three most highlycompensated officers of the company(other than the chief executive officer(CEO) and the chief financial officer) onthe last day of the taxable year, determinedin accordance with the Exchange Act’sexecutive compensation disclosure rules.

Transition relief: Section 162(m) providestransition relief for a company thatbecomes subject to Section 162(m) throughan IPO (so long as such company was notpreviously part of an affiliated group thatincluded a company with common stockregistered under the Exchange Act).

If compensation is paid by thecompany pursuant to a plan or agreementthat existed prior to the companybecoming publicly held and was disclosedin the IPO prospectus “in compliance withall applicable securities law”, thecompensation is not subject to thededuction limit until the earliest of thefollowing:• expiration of the plan or agreement;• material modification of the plan or

agreement;• issuance of all employer stock and

other compensation allocated underthe plan or agreement; or

• the first shareholder meeting at whichdirectors are to be elected after the endof the third calendar year following theyear of the IPO.

This transition relief also applies toany compensation received pursuant to theexercise of a stock option or substantialvesting of restricted stock granted undersuch a plan or agreement, so long as thegrant occurred on or before the earliest of the specified events.

Performance-based compensation:Performance-based compensation is notsubject to the deduction limit of Section

32 NYSE IPO Guide


(d) Executive compensation and other arrangementsThe company should also review itsexecutive employment, severance andchange in control agreements, if any, andconsider the pros and cons of adopting oramending those agreements in light of thecompany’s changed circumstances. Whenmaking its decision, the company shouldkeep in mind the detailed compensationdisclosure that will be required both in theIPO prospectus and, going forward, in itsannual proxy statements, and the intensescrutiny that disclosure will receive. Inaddition, the company should review anyarrangements that may be considereddirect or indirect loans or other extensionsof credit by it to any of its executiveofficers or directors, as these must beterminated prior to effectiveness of theregistration statement filed with the SECto comply with SOX.

162(m). To qualify as performance-based,the compensation must be paid solely onaccount of the attainment of one or morepre-established, objective performancegoals, and the following requirements must be satisfied:• Certain actions are taken by a board

compensation committee consistingsolely of two or more “outsidedirectors” (as defined in Section162(m)).

• The performance goal:• is established in writing by the

committee before 25% of theperformance period has elapsed and in no event later than the 90thday of the performance period;

• is substantially uncertain to beachieved at the time it isestablished;

• is objective such that a third partyhaving knowledge of the relevantfacts could determine whether it is met; and

• precludes discretion to increase theamount of compensation payablethat would otherwise be due uponattainment of the goal.

• The material terms of the performancegoal are disclosed to, and approved by, a majority vote of shareholders beforethe compensation is paid, including the performance goal criteria and themaximum amount of compensation a participant could receive during astated period.

Although a newly public company will initially benefit from the IPOtransition relief, it will eventually need its compensation committee to becomprised of outside directors forpurposes of this performance-basedcompensation exception and to conformits plans and practices to the extentnecessary.

(c) Section 16 of the Exchange ActUpon the IPO, directors and officers (asdefined in Section 16) of the company and10% beneficial owners of company stockwill become “Section 16 insiders” subjectto the reporting and short-swing profitprovisions of Section 16 of the ExchangeAct. For more information about Section16 filings, see Chapter 5.4.

33NYSE IPO Guide

The IPO process

3

34 NYSE IPO Guide

The IPO process

(c) Weeks 2 to 4Drafting: The registration statement (orprospectus) that is created when goingpublic is a Form S-1 filing and has the dual purpose of registering the securitieswith the SEC and acting as a marketingtool when selling the IPO to investors. As such, the entire syndicate is involved in the Form S-1 drafting process, and thecompany relies heavily on the investmentbank to craft an appropriate marketingstory. The document details the following:• offering overview;• a description of the company, including

its main products and services, generalcorporate developments over the pastfew years, growth strategy and keystrengths;

• industry overview, trends and how thecompany fits in;

• risk factors;• use of proceeds for the offering;• description of the security;• underwriting;• financial statements, including:

• three years of audited financialstatements and select financialstatement info for the previous five years;

• interim (“stub”) unaudited financialinformation for the current year,depending on the timing of theIPO; and

• capitalization table;• management discussion and analysis

(MD&A) of the company’s performanceover the past three years, including:• analysis of historical financial

results;• future operational trends;• successes or failures of specific

operations;• liquidity trends;• capital and expenditures;• expected sources of funding; and• any additional relevant information;

• management, governance, boardcomposition and committees, including:• compensation disclosure and

analysis for executives and boardmembers; and

• composition of audit,compensation, nominating andcorporate governance committees;

• capital stock, including voting, pre-emptive, piggyback, dividend or otherrights currently in place;

3.1 Process timelineThe process of planning and executing aninitial public offering (IPO) is timeintensive and typically takes 12 to 16 weeksfrom start to finish. The exact time takento complete an IPO can vary widely anddepends on market conditions, thecomplexity of the transaction, thecompany’s readiness prior to embarking on the IPO process and many other factors. There is typically a large team of professionals involved in the IPOprocess, including the company, legalparties, auditors and underwriters. The key workstreams are drafting, diligence,other documentation (including legal andfinancial) and marketing. The process canbe broken down into the following stages.

(a) Prior to official IPO process launchDecision to go public: The companyshould evaluate its internal readiness,including industry position, growthtrajectory and potential use of IPOproceeds, to determine whether it is readyto go public.

Internal controls: Once the decision hasbeen made to prepare for an IPO, thecompany should select a board of directorsthat is appropriate to guide the companythrough the IPO process, prepare auditedfinancials (with an auditor that has anational office and experience executingIPOs), and begin establishing internalcontrols compliant with the Sarbanes-Oxley Act (SOX) and Securities andExchange Commission (SEC) regulations.

Selection of advisors: The company shouldcarefully select its IPO advisors, includingthe investment bank that will quarterbackits IPO process and its company counselfor the offering.

(b) Week 1Organizational meeting: All keyconstituents of the IPO should meet todiscuss the offering specifics, timing, keytasks, roles and responsibilities for the IPOprocess so that everyone is on the samepage. The meeting is typically held at thecompany’s headquarters or companycounsel’s offices, with 20 to 40 peopleattending. The investment bank willprepare an organizational book whichdetails all of the aforementioned items.

• beneficial shareholder informationdetailing all current ownership of thecompany by 5% or greater holders,officers and executives;

• related party transactions detailing any material agreements in place,particularly where there may be actualor perceived conflicts; and

• other information:• any current or pending litigation;• taxation; and• other relevant issues of which the

SEC and/or investors should beaware.

Due diligence: The purpose of due diligenceis to ensure the accuracy, completeness andtruthfulness of the company’s registrationstatement. Due diligence is conducted by all relevant parties to ensure that all facetsof the company and its marketing documentare covered.

The investment bank will conductintensive business and financial diligence,focusing primarily on the company,operations, procedures, financials (bothhistorical and prospective), competitiveposition and business strategy, as well as the management team and key boardmembers. Within this process, theinvestment bank (including the assignedresearch analyst) will have detaileddiscussions with the company, customers,suppliers and any other relevant parties, as well as looking at documentationassociated with agreements with any of the aforementioned parties, workforce,creditors or other related parties.

The legal parties involved (bothcompany and underwriters’ counsel) willconduct legal due diligence, focusingprimarily on verifying the company’s legalrecords, material contracts, any litigationand compliance with local, state andfederal laws and regulations.

Legal and other documentation: In additionto the prospectus, the company andunderwriter’s counsel will work with theinvestment bank, the company and theauditors to draft and complete thefollowing documentation:• underwriting agreement;• lock-up agreements for existing

shareholders;• legal opinions;• comfort letter; and

35NYSE IPO Guide

The IPO process

process with the SEC, which can takeanywhere from two to six weeks,depending on numerous factors.

(g) Weeks 9 to 12• Continue filing Form S-1 amendments,

responding to SEC comments, andreceiving incremental comment lettersuntil the SEC is comfortable with theregistration statement and has grantedeffectiveness.

• Continue drafting legal documentation.• Continue drafting the roadshow

presentation, including rehearsals withthe chief executive officer (CEO)/chieffinancial officer (CFO).

• Continue valuation discussions.

Discuss offering structure: The company, inconjunction with the investment bank,should determine the appropriate proceeds toraise in the IPO in order to be well capitalizedfor 18 to 24 months after the IPO. In addition,the company should solicit interest fromselling shareholders on any potential sharesthat they may want to sell as part of the IPO.

Discuss marketing strategy: The companyand the investment bank should decidewhich regions (on a global basis) it shouldvisit on the IPO roadshow, the length ofthe roadshow and which specific cities andinvestors to target as potential buyers ofthe IPO.

(h) Week 13• Finalize Form S-1; SEC grants

effectiveness on the Form S-1registration statement.

• Finalize legal documentation.• Finalize the roadshow presentation,

including final roadshow presentationrehearsals.

• Finalize offering size and structure.• Finalize marketing strategy.

(i) Weeks 14 to 16• File Form S-1 with price range (‘red

herring’).• Launch roadshow with management

presentations to the investment bank’sequity sales force.

• Conduct eight to 12 days of investormeetings.

• Price the IPO.• Finalize the directors’ and officers’

liability insurance program.

• press releases announcing the filing,launch and pricing of the transaction

Determine listing venue: Although notrequired, it is advised that the companydetermine whether it is eligible to list on the NYSE or other exchange, holddiscussions with the exchange and reservea ticker symbol.

(d) Week 5Public filing: Form S-1 should be filedpublicly with the SEC.

Valuation update with the investmentbank: It is prudent to have relativelyfrequent valuation updates with theinvestment bank, particularly as marketconditions change and as the companyachieves key milestones throughout theIPO process. This way, all parties arecontinuously aligned and the valuationconversation immediately prior tolaunching the IPO is a relativelystraightforward conversation.

Legal documentation: Continue draftinglegal documentation.

(e) Weeks 6 to 7Roadshow presentation: While the syndicateof IPO advisors awaits comments from theSEC on the prospectus, it is prudent to begin crafting the marketing story for theimpending roadshow. The investment bankwill spearhead this process, while workingclosely with the company, to create a short,detailed PowerPoint presentation to bedelivered to investors while on the road. The presentation is typically 20 to 30 slidesin length and details the offering, thecompany’s products and services, key selling points, industry trends and growthopportunities, competitive positioning and financial performance.

Legal documentation: Continue draftinglegal documentation.

(f) Week 8Initial comments on prospectus from SEC:The SEC takes approximately 30 days toreview the registration statement, at whichpoint it will respond to company counselwith a comment letter, asking for revisionsto the document. The initial commentletter is the beginning of an iterative

• The company begins publicly trading on the NYSE, rings the opening bell and hosts other key marketing eventsassociated with being a public company.

• Closing of the IPO, including executionand delivery of all final legaldocumentation.

3.2 SEC registrationBefore undertaking an IPO, the companymust file a registration statement with the SEC and the SEC must declare theregistration statement effective. Theregistration statement includes theprospectus which is provided toprospective investors and other materialthat is also publicly available. Theregistration statement is the company’sresponsibility, even if the IPO is entirelysecondary and the company will not sellany shares or receive any proceeds.

The preparation of the registrationstatement is a principal focus of the IPOprocess. It has three different aspects:• Regulatory – the registration

statement must comply with detailedSEC rules governing its content andwill be subject to intensive review bythe SEC staff.

• Marketing – the prospectus, which ispart of the registration statement, isthe central item in the marketing of the offering, so it must effectivelyconvey the arguments for investing in the company.

• Liability protection – a materiallymisleading statement or omission can result in liability to purchasers for the company, the underwriters and other participants, so particularcare should be taken with the contentsof the registration statement and theprospectus.

Reconciling these three aspects of theregistration statement is an importantchallenge for the IPO working group.

(a) Statutory frameworkThe IPO process can be divided into threemain stages based on the regulatoryframework set forth in Section 5 of theSecurities Act of 1933. The first stage isthe “quiet period” before the registrationstatement is filed, when no offers may bemade. The second stage is the “waitingperiod” between filing and effectiveness

36 NYSE IPO Guide

The IPO process

(c) SEC review and declaration ofeffectivenessThe IPO cannot be completed until theregistration statement is effective, whichgenerally requires an affirmativedeclaration by the SEC staff. Beforeproviding this declaration, the staff reviewsthe registration statement, providescomments and requires that its commentsbe addressed to its satisfaction. Thecomments are provided in writtencomment letters. The company’s responsegenerally takes the form of an amendmentto the registration statement, accompaniedby a response letter explaining how thecompany has addressed the matters raisedin the staff’s comment letter.

SEC review of an IPO registrationstatement is very thorough, and the processof responding to the comments is a majordriver of the timing of the IPO and oftenthe content of the disclosure. The staffusually provides the first comment letterwithin four to six weeks of filing. Afterthat, the amount of time required to reacheffectiveness can vary widely, depending on the nature of the comments and thework required to resolve them. Difficultaccounting comments can take months toresolve and can substantially change theinformation content of the prospectus.

In some IPOs, it may be useful to raiseissues with the SEC staff before the firstfiling by requesting a pre-filing conference.This is most common where there is aquestion of accounting or financialpresentation that will shape the financialstatements, or where an accommodationunder the SEC’s rules will be needed. TheSEC staff is willing to provide this kind ofguidance in advance, subject to reviewingthe implementation in the filing. Often apre-filing conference leads to an exchangeof letters to document the precise contoursof the staff’s guidance.

The first filing of the registrationstatement in an IPO is typically a “quietfiling,” meaning that the preliminaryprospectus, although publicly available, is not actually sent to investors. It mayomit the price range, but if so it must beamended to include a price range beforethe marketing can begin. Only after theSEC comment process is complete (ornearly so) does the marketing of theoffering begin, using the preliminaryprospectus included in the most recent

of the registration statement, when theshares can be offered, but cannot yet besold. Only in the third stage, after theregistration statement becomes effective,can the shares also be sold.

The preliminary prospectus – oftencalled a “red herring,” because of the redlegend on the cover indicating itspreliminary nature – is the principalinstrument for marketing the sharesduring the waiting period. Copies of thepreliminary prospectus are distributed tothe sales force of the underwriting andselling syndicate members and provided to prospective buyers. It is substantiallycomplete, except for the key points that are determined at the end of the marketingperiod: the price, the actual proceeds, theunderwriting commitments and relatedmatters. Since the price is not yet available,the preliminary prospectus includes anestimated range for the final price.

The “final” prospectus, with finalinformation on pricing and underwriting,must be filed within two business days ofpricing. It is often delivered to investors as well, though this is no longer required.

(b) Gun jumpingAs this summary shows, the law regulatesoffers as well as sales. During the quietperiod, no offers may be made, whetherwritten or oral. During the waiting period,no written offers may be made except bymeans of the preliminary prospectus.Violations of the restrictions on offersduring each stage are sometimes referredto as “gun jumping” and can result in theSEC imposing a delay or “cooling-offperiod” to allow the effects of theimpermissible offer to dissipate.

These rules can take an IPO participantby surprise, particularly because of thebroad definitions given to the terms“offer” and “written.” For example, undersome circumstances a discussion of thecompany’s business prospects could beconstrued as an offer and a discussion with a journalist who plans to publishcould be construed as a written offer.Because the terms are so broad, offeringparticipants must be careful to distinguishbetween permissible communications andillegal offers, and must not engage incommunications and activities that mightbe viewed as impermissibly affecting themarket for the securities to be offered.

amendment of the registration statement.The declaration of effectiveness is not

actually required until the underwriters areready to complete sales to investors, afterthe marketing is complete and the IPO hasbeen priced. The usual practice in an IPO is for the registration statement to bedeclared effective just before pricing. Thecompany then has up to 15 business daysafter effectiveness to file the finalprospectus reflecting the pricing andunderwriting details. Occasionally,however, this final prospectus is filed in a “pricing amendment” just before thedeclaration of effectiveness.

(d) Contents of registration statementThe registration statement for an IPO is on Form S-1 for a US issuer, Form F-1 for a foreign private issuer or Form F-10 forcertain Canadian issuers. The registrationstatement must be signed on behalf of thecompany and, in their individual capacities,by the company’s principal executiveofficer or officers, its principal financialofficer and its controller or principalaccounting officer. It must also be signedby a majority of the board of directors,though usually every director signs.

The principal sections of theregistration statement are a simple coverpage, the prospectus (called Part I in theSEC’s forms) and Part II. The contents of the prospectus are discussed in Chapter 3.3.

Part II contains additional informationthat must be filed with the SEC and madepublic, but need not be provided toprospective purchasers. It includes certainrequired undertakings on the part of thecompany that are required to implementSEC policies, signatures, consents fromauditors, counsel and other experts, andsome additional disclosures required bythe SEC’s forms.

The most important element of Part IIis the requirement to file exhibits. Theseinclude charter documents, theunderwriting agreement, employee benefitplans, a list of subsidiaries and opinions ofcounsel. They also include the company’smaterial agreements, which can include awide range of agreements relating to, forexample, employment arrangements, jointventures, licenses, financing, acquisitionsand arrangements with suppliers orcustomers.

37NYSE IPO Guide

The IPO process

is filed. Registration fees are a major sourceof the agency’s funding and are establishedby the SEC based on annual revenue targets.They are based on the aggregate offeringprice of the securities registered. For theSEC’s 2009-2010 fiscal year, they stood at$71.30 per million dollars, so for a $100million IPO they would amount to $7,130.

The fee must accompany the initialfiling, but since the price and size of theoffering are not yet known, the amount isbased on good-faith estimates. The SECwill not refund fees if the total dollar valueactually offered falls short of the amountregistered, so the company should take carenot to overestimate. On the other hand, ifthe total dollar value actually offeredexceeds the amount on which fees werepaid, the company must amend theregistration statement and pay additionalfees. It is not unusual in an IPO to payadditional fees during the process as theestimated dollar value is refined, but it isimportant not to be surprised at the lastminute by the need to pay additional fees.

3.3 Prospectus

(a) Required disclosuresThe prospectus constitutes Part I of theregistration statement used to register anIPO with the SEC and is also the centraldocument used to market the IPO toprospective investors. It contains disclosureabout the company’s business, operations,financial condition, management and otherissues. The financial and businessinformation included in the prospectus isvery similar in scope to what is included in an annual report on Form 10-K for a USissuer or Form 20-F for a foreign privateissuer. However, the level of detail is oftenmuch greater in an IPO prospectus than inthe periodic reports of established publiccompanies.

An IPO prospectus must meet allrequirements of the applicable SEC form(Form S-1 for a US issuer, Form F-1 for aforeign private issuer), but it is presentedas a freestanding document and does notinclude the text of the form itself or evenfollow the order of items in the form.Instead, the organization of an IPOprospectus is typically based on acombination of the SEC’s form, theexpectations of the SEC staff and marketcustoms developed in prior IPOs. Against

(e) Filing and confidentialityThe company must file the registrationstatement electronically using the SEC’selectronic document system, EDGAR. Inorder to do so, the company must have acentral index key number, which is anaccount number obtained from the SEC for filing purposes. The financial printerwill typically handle the mechanics offiling. Although documents are filedelectronically, paper “courtesy copies” areusually provided to the SEC reviewing staff.

Once it has been filed, the registrationstatement is available to the public, as iseach subsequent amendment.Correspondence with the SEC staffconcerning the registration statement isalso filed through EDGAR, but it is notmade publicly available immediately.Instead, the SEC makes it all publiclyavailable a short time – generally 45 days– after the IPO.

The SEC will not ordinarily review anIPO registration statement until it hasbeen filed. As a result, the back and forthbetween the company and the SEC is amatter of public record. There is, however,a longstanding exception for foreignprivate issuers, under which the SEC staffwill review a draft registration statementand complete the comment process on aconfidential basis before the first filing.

The public nature of SEC filings canpresent problems for the company, becausesometimes the exhibits or the commentcorrespondence includes material that thecompany would prefer to keep confidential.If public disclosure would result incompetitive harm to the company, it maysubmit a request to the SEC staff forconfidential treatment for portions ofmaterial contracts included as exhibits tothe registration statement. The grounds for confidential treatment are narrow,however, and may not cover everything thecompany considers sensitive. The SECstaff processes confidential treatmentrequests filed with IPOs concurrently withthe review of the registration statement.All issues must be resolved and theconfidential treatment request must becomplete before the acceleration ofeffectiveness of the registration statement.

(f) Filing feesThe company must pay a filing fee to theSEC at the time the registration statement

this background, there is some limitedscope for innovations in organization orpresentation based on the particularcircumstances or investment thesis of the company.

The balance of this section discussessome of the major elements of theprospectus, but space does not permit an exhaustive review.

Prospectus drafting style: Under the SEC’srules, all information in a prospectus mustbe presented “in a clear, concise andunderstandable manner,” and the coverpage, back page, summary section and riskfactors section must follow “plain Englishprinciples.” In its rules and elsewhere, theSEC has fleshed out what theserequirements mean, including suchfeatures of good expository writing asshort sentences; definite, concrete,everyday language; use of the active voice;no legal jargon; no double negatives; andtabular and bullet point presentations.

More generally, prospectus draftingshould avoid bullish rhetoric and “puffery”by using neutral language, being balancedand complete, and avoiding any factualstatements that cannot be substantiated.An overly cautious approach is notnecessarily desirable either, and wholesalerepetition of risks and qualifications isunnecessary. Discussions of the businessoutlook, or of the company’s futureperformance, must be handled withparticular care. These kinds of “forward-looking statements” are usually necessary,but they are limited in scope to limitpotential disclosure liability. They must becarefully worded, so that descriptions ofthe company’s beliefs and expectations will not be mistaken for statements of fact,and they are accompanied by discussionsof the factors that could cause actualoutcomes to differ from those anticipated.

Summary “box”: The prospectus mustinclude a summary. This is typicallypresented with a border around themargins of each page and is consequentlyoften referred to simply as the “box.” Itusually describes the offering and brieflydescribes the company, with a focus on itsmost distinctive features. The summarydescription of the company is usuallytreated as the most important part of theprospectus from a marketing point of view.

38 NYSE IPO Guide

The IPO process

of what other comparable companies havecovered. The forms specificallycontemplate the following topics:• principal products produced and

services rendered, and methods ofdistribution;

• sources and availability of rawmaterials;

• intellectual property;• dependence on single customers or

suppliers;• competitive conditions;• material effects of the regulatory

environment;• research and development

expenditures; and• number of employees.

Management’s discussion and analysis:Management’s discussion and analysis(MD&A) is among the most importantdisclosures in the prospectus. It takes itsname from the beginning of thecumbersome title used in the SEC’s rules,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations;” the corresponding item for aforeign private issuer is called “Operatingand Financial Review and Prospects,” but is still referred to as MD&A.

MD&A serves to provide investors withthe information necessary to understandthe company’s financial condition, changesin financial condition and results ofoperations. Complementing the financialstatements, the MD&A explains thecompany’s performance and its financingto investors “as seen through the eyes ofmanagement” (as the SEC has put it). Inaddition to discussing performance in pastperiods, the MD&A must address anyknown ways in which future performancecould differ and identify trends anduncertainties that may affect the companygoing forward. It should discuss eachsegment separately if material to anunderstanding of the business as a whole.

Three elements are the core of everyMD&A:• Overview – there should be a synthetic

discussion of the most importantissues affecting the company’s past and future economic performance. This discussion is ordinarily at thebeginning, and it varies widely in scope and breadth.

• Discussion of results of operations –

Financial information: The prospectusmust include audited financial statementsand, depending on the age of the auditedfinancial statements, unaudited interimfinancial statements. It must also includeselected financial information covering fivefull years, if the company has been inexistence that long. These requirementsare discussed in detail in Chapter 2.3.

A typical IPO prospectus provides themost important financial informationthree times. In addition to the financialstatements themselves, there is a requiredsection providing selected financialinformation going back five years and thereis also a summary in the summary box. Inthe selected financial information and thesummary, information from the financialstatements is often accompanied by otherkey statistics about the company’soperations or performance.

The prospectus must also include acapitalization table. This summarizes thecompany’s capitalization as of a recent dateand shows how the capital structure will beaffected by the IPO and the application ofthe IPO proceeds.

Risk factors: A prospectus must set forthunder the caption “Risk factors,” rightafter the summary box, the mostsignificant factors that make the offeringspeculative or risky. Some establishedissuers take the position that there are norisk factors, but an IPO prospectusinvariably includes this section. It shouldinclude a discussion of the mostsignificant risk factors for the company,not an exhaustive list of every conceivablerisk. The discussion should be concise andwell organized, with headings thatadequately describe each risk described,and should avoid boilerplate.

Business of the company: The businesssection of the prospectus sets forth astraightforward discussion of thecompany’s business and operations. This section usually begins with a briefoverview and continues with apresentation of the company’s distinctivefeatures, often described as its strengthsand its strategy. It then goes on to describethe business in full. The SEC’s formsprovide broad guidance on how to do this,but most of the content of the discussionis based on common sense and on a review

there must be a detailed comparativediscussion of results for each of thepast three years and any subsequentinterim period. This discussion mustzero in on the major drivers of financialperformance and on the factors thatmight cause future results to differfrom those in past periods.

• Discussion of liquidity and capitalresources – there must be a fulldiscussion of the company’s liquidity,its funding requirements and itsanticipated sources of funds. Thisdiscussion must focus on thecompany’s ongoing requirements more than on its past performance.

In addition, MD&A must addressseveral other specifically mandateddisclosures, including a table of contractualobligations and a discussion of any off-balance sheet arrangements.

Other matters: The following additionaltopics concerning the company must alsobe addressed in the prospectus:• dividend policy;• material legal proceedings;• directors, senior management and

advisors;• related party transactions (see Chapter

5.4);• terms of the shares being offered; and• principal property.

The prospectus will include a descriptionof the offering, including the proposed useof proceeds, dilution resulting from theoffering, underwriting arrangements andselling shareholders, if any.

The requirements of the applicable SECform do not limit what should be includedin a prospectus. In addition to theinformation expressly required to beincluded, a general rule under the SecuritiesAct requires the company to include suchfurther material information, if any, as maybe necessary to make the requiredstatements, in the light of the circumstancesunder which they are made, not misleading.

Industry guides: The SEC requires specialdisclosures from companies in certainindustry sectors, as set forth in fiveindustry guides. In particular, banks andbank holding companies, casualty insurersand mining companies must supply

39NYSE IPO Guide

The IPO process

A review of comparable disclosure andissues raised in comment letters can helpidentify the significant disclosure issues of relevance to the company’s offering andmay provide a roadmap for how best toaddress these issues. Judicious borrowingfrom comparable sources provides a helpfulshortcut in what can otherwise be anarduous process.

Financial printer: A financial printershould be selected early in the IPOplanning stages. Drafts of the registrationstatement will undergo several revisionsover the course of the due diligence periodand as comments from the SEC staff areincorporated into the document. At thebeginning stages of the process, thecompany’s counsel will take the lead inreflecting any such changes in theregistration statement. However, as theregistration statement nears completion, it is the role of the financial printer to:• work with the company to ensure that

the registration statement is formattedin the way required by the SEC and anyother regulatory institutions;

• process requested changes to theregistration statement until the finaldraft;

• prepare EDGAR-suitable versions ofdocuments that need to be submittedelectronically to the SEC on thecompany’s behalf; and

• print and distribute hard copies of the preliminary prospectus and finalprospectus.

In choosing a financial printer, severalfactors should be considered. An IPO mayrequire the participation of constituents in multiple countries and time zones. Thefinancial printer should have a sufficientlybroad and secure distribution network, andequipment that is accessible 24 hours aday. Customer service should be reliableand capable of supporting a deal ofinternational scope. The financial printershould make use of technology tools tostreamline delivery of the project, whichmay require making use of best practices in manufacturing concepts, analyticaltechniques, process management andstandardized procedures. Following theIPO, the financial printer should beequipped to handle annual compliance andfuture transaction needs. The benefit of

enhanced disclosure subject to therequirements of the guides. Compiling theinformation necessary to comply with theindustry guides can be a substantialundertaking requiring specialized expertise

(b) Drafting processDrafting logistics: Primary responsibilityfor drafting the prospectus, other than thefinancial statements, usually falls to thecompany’s counsel, working with companypersonnel. Underwriters and their counselusually draft the plan of distribution,which describes contractual and regulatoryaspects of the IPO. Sometimesunderwriters and their counsel also preparefirst drafts of sections that will be key to the marketing effort, such as thedescription of the company’s strengths andstrategy that leads off the summary box.

The core working group reviews,comments and participates in draftingsessions that include representatives of thecompany and its auditors, the company’scounsel, the underwriters and their legalcounsel. A foreign private issuer mayinvolve both local counsel and USsecurities counsel. These drafting sessionsare often conducted at in-person meetings,though they can also be held byvideoconference or conference call. Inaddition to advancing the draft, the draftingsessions serve as a core component of thedue diligence process by allowing the coreworking group to go meticulously throughall content of the prospectus

After the bulk of the due diligence has been conducted, the core working group distributes an advance draft of theregistration statement to all directors and key officers and, depending on thecircumstances, also to selling shareholdersand other key shareholders. Theunderwriters should satisfy themselves that the company has established adequateprocedures for collecting and evaluatingcomments on the document from thosepersons to whom it has been furnished. This is particularly important for MD&Aand for any forward-looking statements thatare included in the registration statement.

‘Benchmarking’ is an important aspectof the drafting process. It involvesdetermining what comparable issuersdisclose in their prospectuses and periodicreports, and what issues the SEC staff hasraised in comment letters to such issuers.

using the same financial printer for futureneeds is that it reduces the time requiredfor data collection and ensures that formerproject knowledge is properly applied.

(c) Due diligence investigationThe process of verifying that theinformation in the prospectus and theregistration statement is materiallycomplete and accurate is broadly referredto as “due diligence.” While the guidingpurpose is to limit the risk of liability, the accuracy and completeness of theprospectus are essential goals for otherreasons as well. For the company and itspersonnel, they provide the foundation for applying best disclosure practices and building the confidence of investors.For underwriters, a robust due diligenceexercise is required under a formal internalapproval or commitments process designedto protect against reputational risks and tomeet other institutional goals. Anunderwriting firm has a vital reputationalinterest in the soundness of the company’sbusiness plan and a disclosure documentthat completely and accurately describesthe risks associated with that plan. Similarreputational concerns apply to directorsand shareholders. In addition, duediligence can help identify business issuesthat need to be addressed, such asnecessary third-party consents and waiversfor the transaction.

Although these additional goals areimportant, the due diligence process isdriven by the risk of liability. The partiesthat may be liable if there are materialmisstatements and omissions in theprospectus and registration statement(including documents incorporated byreference) include the company, itsdirectors, the officers who sign theregistration statement, the company’sauditors, any selling shareholders and theunderwriters. Controlling shareholdersmay also be liable. A further discussion of the risk of liability facing directors and officers is set out in Chapter 6.

The company itself faces strict liability,but underwriters, directors and officersmay assert a defense if they performed areasonable investigation and believed theregistration statement and prospectus werematerially accurate and complete. Thisdefense is often referred to as the “duediligence defense.” The applicable liability

40 NYSE IPO Guide

The IPO process

management. Specific questions about thebusiness should be asked. Moreover,additional information may be gleaned and inconsistencies identified by askingdifferent members of management thesame questions. Back-up data for industrydata and statistics should also be requestedand reviewed. Specialized consultants maybe called upon to assist in the investigationwhere the nature of the business or aparticular issue warrants it.

Although the investment bankers andtheir staff will conduct the lion’s share ofthe financial due diligence, it is importantfor the lawyers to be actively involved inthe process, to understand the financialstatus of the company and identifypossible problems presented in thefinancial statements.

Legal due diligence: Underwriters’ counselwill generally take the lead in conductinglegal due diligence by preparing a documentrequest list that exhaustively identifiesmaterials they wish to review. During thepreparation process, it may be helpful toreview document request lists forcompanies in the same industry or fromthe same country. The list should be usedas a checklist and aid to organizing the duediligence process, rather than an inflexibleset of bureaucratic requirements or limitsfor the due diligence investigation.

Legal due diligence will often involvethe following:• discussions with company personnel

about the company’s legal affairs;• closing documents, including officer

certificates, public authoritycertificates such as certified chartersand good standing certificates; and

• document review by the company’s and underwriters’ counsel, including:• charter documents of the company

and its material subsidiaries;• minutes of meetings of

shareholders, the board of directorsand key committees, and materialsprepared for board and committeemeetings;

• material contracts, includingshareholders’ agreements and jointventure agreements, and forms ofcontracts;

• filings, correspondence and othercommunications with supervisoryand regulatory authorities;

standards – and some subtleties applicableto the liability of particular IPOparticipants – are discussed morespecifically in Chapter 6.1.

In practice, the due diligence processrequires an organized approach to verifyingthe information in the prospectus andregistration statement and to askingquestions about the company. Key generalquestions to explore at the beginning ofthe process include the following:• What are the strengths and weaknesses

of the company’s business plan? Is itsmanagement capable of executing theplan?

• What internal or external events ortrends could jeopardize success?

• What is there that, a year or two fromnow, with the benefit of hindsight, thecompany might wish it had disclosed?

Financial and business due diligence:Financial and business due diligenceinvolves extensive review and discussion of the company’s historical financialinformation, operations, current business,business plans, projections and other data.It is generally carried out through:• formal due diligence sessions with key

members of management;• informal meetings with key members

of management;• drafting sessions;• facility visits;• preparation and review of forecasts;• “sensitivity” analysis;• discussions with key customers,

suppliers, creditors and investors;• review of securities analyst reports;• review of industry information and

disclosure regarding comparablecompanies (eg, SEC filings and annualreports of other companies in the sameindustry, research reports on industryand competitors, trade publications);

• meetings with auditors and auditorcomfort letters;

• third-party reports, where appropriate;and

• involvement of specialized counsel,where appropriate (eg, issues ofintellectual property, mining rights orregulatory matters).

In carrying out business due diligence,underwriters and their counsel shouldconduct extensive interviews with

• materials relating to intellectualproperty, including licenses, patents and trademarks;

• materials relating to pendinglitigation, including counsel’slitigation letters to auditors;

• auditors’ letters to management;• D&O questionnaires; and• other documents that may further

the legal due diligenceinvestigation.

Corporate governance due diligence:Underwriters and their counsel typicallyreview the company’s corporategovernance policies and SOX complianceprograms. Issues to be considered mayinclude:• the company’s disclosure controls and

procedures and internal controls;• the company’s code of ethics,

exemptions to the code and pastwaivers;

• the independence of the board ofdirectors;

• the company’s policy on handlingwhistleblower complaints;

• the company’s document retentionpolicy; and

• non-audit services provided by thecompany’s independent auditors.

Legal opinion and negative comfort letter:It is typically a condition to closing theIPO that counsel for the company and theunderwriters provide both a legal opinionand a negative comfort letter, or Rule 10b-5 letter. The due diligenceinvestigation provides counsel with thebasis for these letters and the letters inturn form part of the due diligence processon which offering participants rely.Opinions usually cover such matters asobservance of corporate formalities,existence of the company and materialsubsidiaries, and matters relating to thesecurities themselves. They may alsoaddress compliance with materialcontracts, among many other matters.

The negative comfort letter generallysays that nothing has come to theattention of counsel that would causecounsel to believe that the registrationstatement or prospectus is false ormisleading in any material respect.

Identifying potential problems: The due

41NYSE IPO Guide

The IPO process

confidentiality is paramount, as is theprovider’s ability to understand thetransactional business environmentand assign project managers that areeducated and experienced in thespecific transaction at hand.

• Global production facilities – choosinga provider with document-scanningfacilities in cities around the world willensure that accelerated documentcapture is quick and efficient.

• User support – it should be possible tomake changes and address questionsimmediately, for all users and inmultiple languages.

• Security – security processes onapplication, staff and infrastructure,SAS 70 Type II, multi-location datahosting with zero-downtime networkguarantee, database replication atmultiple locations and a corecompetency in handling sensitivefinancial and business information arecritical. (A SAS 70 Type II serviceauditor’s report includes the serviceauditor’s opinion on the fairness of thepresentation of the serviceorganization’s description of controlsthat had been placed in operation, thesuitability of the design of the controlsto achieve the specified controlobjectives, and the service auditor’sopinion on whether the specificcontrols were operating effectivelyduring the period under review.)

• Rapid deployment – top-tier providersshould be able to provide the tools tocreate indexes in minutes, not days,and enable document review in realtime as documents are captured,processed and posted.

• Simplified user rights – managementof user rights should allow for easyrestriction and access functionalityquickly and easily.

• Data management – multiple fileuploads should be possible, to save time.

• Collaboration tools – tools such asemail alerts, document notes and Q&Acapabilities enhance the collaborativeefforts of reviewer groups.

• Site customization – there should beenough flexibility to customize the siteto the owner’s specific requirementsand to integrate corporate branding.

• Intuitive interface – this should besimple enough that next to no training

diligence process also aims to identifypotential impediments to the transaction.Examples include contractual rights ofanother party that the IPO could trigger ormodify, because it results in a change in thecompany’s share ownership. Provisions ofthis kind may exist in financingdocumentation, agreements with or amongthe company’s shareholders (eg, pre-emptiveor registration rights), or other importantcontracts or governmental authorizations.The process should also identify risks tofuture financial performance or competitiveposition and limitations on operational orfinancial flexibility. Examples includeupcoming expiration or renewal dates, orearly termination provisions, in customer orsupplier contracts, governmentauthorizations, or IP licenses.

Paper data room v virtual data room: Asecure repository for the documents to bereviewed during the due diligence process iscritical. The company’s legal firm may host a“paper data room.” It is in this room orrooms that hard copies of proprietarybusiness documents and financial data aremade available for inspection. The paperdata room has obvious limitations, giventhat participants may be spread acrossseveral cities, states or countries. Not only isinspection limited to the hours of operationof the host, but review of documents forout-of-town participants is inconvenient.

The “virtual data room” provides anexcellent solution to the challengespresented by a traditional paper data room.Virtual data rooms can offer secure, web-based access documents, particularly inconvenient PDF format, and parallel accessfor each of the review groups. Moreover,the use of a virtual data room eliminatesthe need for travel and increasesefficiencies by making documents availablearound the clock.

The following points can be importantfactors in selecting a virtual data roomprovider:• Established track record – the provider

should have proven technology and astrong customer-focused background.

• Leading technology – the idealsolution should integrate leadingtechnology, support industry standardsand work with globally accepted dataformats.

• Project management expertise –

is required and users can quickly finddocuments.

• Expanded rights management – thisshould be robust enough that the dataroom owner can administer the site forthose seeking complete control.

3.4 Underwriting, marketing and sale

(a) UnderwritingAdvising the company: There are manycomplexities in an IPO process, including:• IPO sizing, including primary versus

secondary component;• leverage levels and overall capitalization

structure post-IPO;• co-manager selection;• comparable company selection;• valuation;• exchange selection;• roadshow presentation and investment

thesis development; and• marketing strategy and roadshow

logistics.

Shaping the investment thesis: Perhaps themost important contribution that thebookrunner(s) make during the IPOprocess is helping the company shape itsinvestment thesis. From the Form S-1 thatis filed with the SEC to the roadshowpresentation that is delivered to investors,the marketing message that the companyuses during the IPO is critical to its initialsuccess as a public company. Throughintensive diligence and drafting sessions,the bookrunner(s) will become well versed in the company’s strategy and key sellingpoints, and will assist the company ineffectively communicating those messagesto investors. The Form S-1 and theroadshow presentation are the two mostimportant marketing documents, allowinginvestors to quickly absorb the equity storyand evaluate their investment decision.

Marketing the transaction: Whiledeveloping the marketing materials, thebookrunner(s) will also develop a cohesiveinvestor marketing strategy for thecompany. In order to maximize the successof the offering, the bookrunner(s) willdetermine the most important regions tovisit with the goal of reaching the largestnumber of high-quality investors whichwill become meaningful long-termshareholders for the company.

42 NYSE IPO Guide

The IPO process

concerns, developing the roadshow andmarketing strategy, and ultimatelyassisting in a pricing recommendation.

• The sales force act as the front line ofthe investment bank in dealing withinvestors, calling clients in order toschedule meetings, soliciting feedbackon the transaction (both qualitative andquantitative), and ultimately enteringorders. They work closely with thetraders in order to determine supplyand demand and execute trades for theinvestors.

Role of the co-managers: The co-managerson an IPO are typically significantly lessinvolved in the day-to-day advisory role forwhich the bookrunner(s) are responsible.They are, however, involved in the majority(if not all) of the diligence conducted. Theco-managers’ research analysts will alsotake part in all analyst diligence that isconducted. The primary role of the co-managers is to underwrite additional sharesin the offering, provide additional researchcoverage post the IPO and assist in marketmaking once the stock is public.

(b) RoadshowThe roadshow is the pivotal portion of the IPO process, where the company(accompanied by representatives from thebookrunner(s)) conducts a series of one-on-one and group meetings with investors thatwill potentially purchase the shares beingoffered in the IPO. Several weeks prior tolaunching the roadshow, the bookrunner(s)will work with the company to determinethe length and scope of the roadshow, andto identify specific investor targets.

Once the prospectus has been filedwith the price range on the cover, theroadshow typically launches with amanagement presentation to thebookrunner(s) sales force. Thebookrunner(s) will also create an internalsales force memo that will be used by thesales team. The memo is used as a “cheatsheet” by the salesperson when speakingto investors and gives him or her sufficientbackground to answer general questionsbefore moving on to more in-depthquestions that will require the assistanceof the research analyst.

The bookrunner(s) handle all roadshowlogistics for the company. The roadshowtypically lasts eight to 12 days, depending

Developing the price: Prior to beingmandated and throughout the IPOpreparation process, the bookrunner(s) willkeep the company apprised of marketconditions and trading valuations of its key comparables, as well as the subsequentimplications for the proposed company’sIPO valuation. The bookrunner(s) will use a combination of comparable companies’values, broad market conditions and recentIPO value to determine the appropriatevalue for the company. Once the appropriateequity value range is determined, thebookrunner(s) will advise whether thecompany should execute a reverse stocksplit to come up with an IPO price range,which typically falls in the high teens.

Key players in the investment bank:• The investment banking coverage team

consists of industry experts whotypically own the client relationship.This team will be the key point ofcontact for the company throughout its lifecycle for any investment bankingadvice or assistance it may need,including on the IPO, mergers andacquisitions, debt, capital structure and many other issues. As such, theteam will be or become experts on thecompany, its needs, its strengths andareas for development, as well as itsoverall vision and strategy. Thecoverage team will act as a liaison with the company and the equitycapital markets professionals, who will be the captains of the IPO process,as well as any subsequent equityissuance that is desired.

• The equity capital markets team sitsbetween the investment banking teamand the syndicate, sales and trading,and research functions, acting as aliaison between the private and publicsides. This team advises the companyon all of the execution-relateddecisions, liaises with research tocollect public-side feedback, andcoordinates with the sales and tradingfunctions on market and investor color.

• Within most equity capital marketsgroups lies a syndicate function, whichis the main point of contact during theroadshow. The syndicate coordinateswith sales in entering investor ordersinto the book, speaking directly withinvestors regarding questions or

on the size of the IPO, the scope of thebusiness and the desires of themanagement team, among other things.

The roadshow typically consists ofsome combination of the followingcities/regions globally:• New York;• Boston;• Mid-Atlantic (Philadelphia, Baltimore);• Mid-West (Chicago, Minneapolis,

Kansas City, Denver);• Texas (Dallas, Houston);• West Coast (San Francisco, Los

Angeles, Salt Lake City, Seattle);• London;• Frankfurt/Milan; and• Hong Kong/Singapore.

A typical roadshow day involves:• five to seven one-on-one meetings

and/or conference calls;• a group breakfast and/or lunch; and• travel to the next day’s city

Each investor meeting typically lastsapproximately 45 minutes, and can take theformat of either a formal managementpresentation of the roadshow slides withsubsequent Q&A or simply informal Q&A,depending on the investor’s familiaritywith the prospectus and/or the roadshowslides. Investors have access to themanagement presentation (audio andvideo), as well as the roadshow slides, viaNetRoadshow, a system by which theinvestment bank makes these documentsavailable to relevant investors utilizing apassword-protected system. It is alsorequired by the SEC to make similarinformation available to retail investors viaretailroadshow.com, where only themanagement slides are available. Bothsystems make the management slidesavailable during the marketing period only;upon pricing, all materials are taken downand no longer accessible by any parties.After each investor meeting, the sales forceperson responsible for covering eachrespective account will follow up with theinvestor to get feedback on the meeting,the company, modeling/valuation and whether it is inclined to place an order.

(c) Book-building processThe goal of the investment bank is toconvert accounts into the order book asearly as possible. Europe is generally the

43NYSE IPO Guide

The IPO process

bank will look to allocate is known asallocable demand.

(d) Pricing, trading and closingThe pricing meeting which takes place onthe last day of the roadshow typicallyincludes the company and key sellingshareholders, as well as the investmentbank. In advance of the offering, the boardestablishes a pricing committee to formallyapprove the offering. When pricing a deal,numerous factors that occurred over theroadshow are taken into account. Marketconditions during the roadshow and theperformance of the overall market and thecompany’s peers will affect how muchdemand and what price investors will comein at.

Additionally, new issuance activity and the performance of recent precedenttransactions will have an overall effect onthe company’s IPO price, either positivelyor negatively. After reviewing the roadshowsummary – which includes an overview ofaccounts with which management met, thehit ratio/success rate from these meetingsand key feedback themes, as well as grossdemand, allocable demand and pricesensitivity in the order book – theinvestment bank will communicate theprice/share recommendation to thecompany and give the pricing committeetime to deliberate on the recommendation.The ultimate goal of the pricingrecommendation is to achieve the bestpossible price for the company whileallocating to the highest-qualityshareholder base and ensuring that theinvestor base is achieving attractivevaluation and will receive an IPO first daytrading performance on the first andsubsequent days of trading. It is in the bestinterests of the company, key beneficialshareholders and the investment bank thatthe stock trades well in the aftermarket.

Once the company and its pricingcommittee have formally agreed on an IPOprice with the investment bank, theinvestment bank begins the allocationprocess overnight, determining exactlywhich accounts to allocate stock to and howmuch. The goal of the allocation process isto create a high-quality, long-term focusedshareholder base for the company. Onceallocations to each account have beenagreed upon by the investment bank andthe company, the syndicate “breaks” prior

first region met during a roadshow andEuropean accounts can come into the orderbook early in the process. When the bookbegins to build, investors will fall into twocamps: those without a price limit (“marketorder”) and those that have scaled orders atvarious prices. For example, if the IPO filingrange is $16 to $18 per share and Investor Ahas a market order of 1 million shares, theorder stands at 1 million shares at $16, $17,$18 and potentially even above the filingrange. A scaled order by Investor B, incontrast, would indicate 1 million shares at$16, 750,000 shares at $17 and 500,000shares at $18, for example. The goal of theinvestment bank is to get as many marketorders as possible in order to maximizeprice for the company, while still balancingappropriate value for the investors andachieving a first day trading “performance”of approximately 15%. Retail orders are alsoimportant to the order book, but typicallythe retail component is not relevant to theoverall pricing mechanics as retail investorsdo not drive pricing.

Key points are emphasized to investorsthroughout the roadshow in order toindicate the strength of the order book and therefore the success of the IPO. Keyterms include “level of subscription” or“subscription rate,” which details thenumber of shares in the order book versusthe number of shares being offered. Whenthe offering is oversubscribed, investorswill know that the demand for the offeringis high and that their order will likely becut back. The amount of price sensitivityin the book is another key benchmark.Another key metric of success for thecompany is the “hit ratio,” which is thepercentage of investors with which thecompany held a roadshow meeting thatconverted into orders. The goal of thecompany and the investment bank is toachieve as high a hit ratio as possible,indicating that the management team hassuccessfully told a compelling story toinvestors on the road.

For most IPOs, the majority of orderswill come in the last two to three days ofthe roadshow. On pricing day, theinvestment bank will “scrub” the demandto identify which orders are “real” versusthose that have been placed to “game” theallocation process. The overall demand inthe order book is known as gross demand,while the actual shares that the investment

to the market open the day after pricingand allocations are communicated to eachof the individual investors.

On the first trading day, the NYSE will coordinate a time at which the newlypublic stock will officially open. Thedesignated market maker is responsible foropening the stock at that time. In addition,the stabilization agent is the investmentbank chosen to open the trading in thestock post the offering and to providesupport to the stock price. The market will look to the stabilization agent as thesyndicate bid in trading support for theoffering. The stabilization agent maycommit capital to provide liquidity in thecommon stock market if the stock ormarket comes under pressure immediatelyafter the offering, and can also utilize thegreenshoe option granted by the companyto stabilize the offering in the aftermarket.The greenshoe provides the stabilizationagent with immediate capacity to buy inthe secondary market up to 15% of theshares offered if the stock price should fall below the offer price, thus helping tostabilize the price in the aftermarket.

The IPO will officially close three days after the first trading day of the stock (T+3). At that point, all of the fundswill be wired, the stock will officially betransferred, the legal documentation willbecome official and the IPO will officiallybe closed.

44 NYSE IPO Guide

45NYSE IPO Guide

Communications

4

46 NYSE IPO Guide

Communications

outcomes. Furthermore, Regulation F-D(Fair Disclosure) provides that ifmanagement discloses material non-publicinformation to some investors, it mustmake the same information available to all investors. In practice, this requiresmanagement to provide access to materialinformation simultaneously to allinvestors, necessitating careful attention to the timing, content and deliverymechanism of each communication.

One key example of how Regulation F-D affects financial communications isthe decision by many companies to instatean earnings “quiet period” in the weeksleading up to the reporting date, duringwhich they will not meet with or talk toinvestors. This quiet period mitigates therisk of inadvertently communicatingsensitive or non-public information –through body language, tone of voice or the inability to respond directly to aquestion – at the awkward time when the company’s results are known bymanagement, but not yet reported publicly.

When companies have reported resultsand are ready to resume meeting withinvestors, they generally not only file theearnings information with the Securitiesand Exchange Commission (SEC), but alsopost it to their investor relations websitesto ensure equal access for all interestedparties. If an inadvertent disclosure ofmaterial non-public information doesoccur, it is important for the company tomake that information public promptly.Regulation F-D defines “promptly” tomean as soon as reasonably practicable, butin no event after the later of 24 hours orthe commencement of the next day oftrading. (Regulation F-D is discussedfurther in Chapter 4.1(b).)

Developing a strong platform: Essentially,the company’s shareholders are placing abet on its future success. Accordingly, idealcommunications provide a roadmap to thefuture and then maintain an ongoing flowof information about the company’sprogress in achieving its goals. Developingand maintaining a core message platformthat clearly communicates the company’sgoals, market opportunities and growthstrategies is critical for ensuring that thevalue drivers are well articulated andconsistently delivered across itscommunication vehicles and channels.

4.1 Investors, analysts and employees

(a) Communications with the marketWhile an initial public offering (IPO)marks a significant milestone in acompany’s history, it is only the beginningof an ongoing process of building value forits shareholders.

The company’s operating performancewill be an important driver of valuecreation. However, financial markets in theirrole as a discounting mechanism assignvalue to the company’s future earnings and cash flows supported by, among otherthings, intangible factors such as investors’confidence in the business model, theirbelief in management’s ability to executethe stated strategy and their perceptions ofthe company’s credibility, transparency andcorporate governance structure. All theseintangibles are greatly influenced by howthe company communicates to thefinancial community.

From management’s perspective, thegoals of investor communications are to:• optimize the value of the company’s

equity (or conversely, minimize thecost of equity capital) over time withinthe context of both the company’sperformance and macro-economic and industry trends; and

• protect management’s credibility andreputation within the financialcommunity.

Since investors have no role in theoperations of the company, they rely onmanagement to protect their investmentand keep them informed on the status ofthe business. This requires a commitmentof management to engage the financialcommunity in a credible, honest dialogue.

Regulatory parameters for communicatingto investors: Communications strategiesmust accommodate not only theinformation that must be filed with theSecurities and Exchange Commission(SEC) under securities regulations, but alsobroader communications “best practices”that can be more complex and demanding.In particular, management must determinewhether a development or change inoutlook is material and must be reported;this determination can be difficult whenthere is uncertainty about the future or awide range of variability around potential

These messages should build on thosedeveloped in the pre-IPO phase to dispelany lingering concerns or misperceptionsabout the company’s positioning in themarket, its performance within the currenteconomic climate and the issuessurrounding the industry as a whole.

In developing this message platform, itis imperative that the company accuratelyunderstands investors’ perceptions.Specifically, the company should conductresearch that:• ascertains the investment community’s

current views of the company,management team, strategy andprospects;

• identifies areas of potentialmisunderstanding of the company’spositioning/prospects; and

• compares its own communicationsefforts with those of the peer group toidentify areas that may require furtherexplanation going forward.

Based on these findings, the companycan tailor messages – and, in some cases,the actual financial disclosures – to moveperceptions closer to the desired state.Once refined, key messages shouldpermeate all communications targeted to investors.

Disclosure guidelines and processes: Asthe visibility and sponsorship of thecompany increase, the volume of incominginquiries and demands on managementtime and attention will likely escalate. It isimportant to understand that all audiencesare interconnected and information flowsfreely among them, and that investors mayact on information or perceptions thatexist in any domain. This argues for closecoordination between all people chargedwith speaking to the public.

To ensure consistency of message andprotect against improper disclosure, it isstrongly recommended that managementestablish at the very beginning a formaldisclosure policy and protocols to manageincoming inquiries about financial andinvestment topics, as well as the flow ofoutgoing information. This policy shouldinclude guidelines on when the companywill speak to investors, what information is allowed to be communicated and whichmembers of management or the investorrelations team are authorized to speak for

47NYSE IPO Guide

Communications

for conveying the company’s investmentand business propositions and maintainingan ongoing dialogue with investors:• Quarterly earnings – reporting

earnings to investors is perhaps themost important medium for providingcommentary about the business to thefinancial community. The typicalearnings process includes a pressrelease with financial data, or anadvisory directing investors to thecompany’s website for details, as wellas a conference call and Q&A withinstitutional investors. The related SECfiling – Form 10-Q or Form 10-K – ismore formal and much more extensive;some companies make it concurrentlywith the earnings release, while othersmake it later (particularly for year-endresults). These importantcommunications provide anopportunity to demonstrate opennessand candor through the way thatmanagement speaks to the company’ssuccesses and challenges, how itsstrategy is succeeding and whatinvestors can expect in terms of futureperformance. Effective preparation iscritical to ensure that management hasanticipated investor questions and caneither proactively or reactively addressissues, as appropriate.

For many IPO companies, the initialearnings period brings uniquechallenges as they find themselvesreporting results for the first timewhile still in a quiet period. It is criticalto effectively balance quiet periodrestrictions with the desire to set astrong precedent for transparency andgood corporate governance.

• Investor meetings – there are multipleforums in which management canpersonally engage investors: • non-deal roadshows, where the

company meets with institutions in one-on-one or group meetings;

• sell-side brokerage firm andinvestment bank investorconferences, often with a grouppresentation, followed by one-on-one or small group breakoutmeetings for more detaileddiscussions; and

• company-sponsored events such as analyst/investor days on-site toshowcase the broader leadership

the company. All employees should bemade aware of these guidelines, and oftheir obligations to maintain theconfidentiality of material non-publicinformation. The guidelines should bereviewed regularly.

Importantly, disclosure policies shouldbe designed not only to manage the flow ofinformation, but also to ensure its quality,accuracy, consistency and timeliness. Inaddition to ensuring reliable, rigorouscommunications, this will help to reducethe risks of liability that can arise from anymaterially false, misleading or incompletepublic disclosures.

Setting expectations: The company’ssuccess will be measured by executionagainst expectations. These expectationsneed to be sufficiently ambitious so as todemonstrate a robust business, yetachievable and realistic so they can be met consistently. Expectations can beestablished by providing quantitative andqualitative guidelines such as growthtargets, margins and market share overvarying timeframes, depending on thevisibility into and predictability of thebusiness. Once these parameters areestablished, the company must carefullyconsider whether a variance fromexpectations is material enough to warrantproactive disclosures and, if so, whatconstitutes the proper timing of theannouncement and the forum fordiscussing it.

It is important for newly publiccompanies to understand that resultsoutside the anticipated ranges – be it onthe upside or the downsides – cansignificantly impair managementcredibility for effectively communicatingwith The Street and potentially lead to amisperception that the company’s resultswill be unpredictable or volatile, neither of which is constructive for the stock’svaluation. While many companiesmistakenly believe that earnings that beatexpectations will propel their stock priceforward, the benefits are often short lived,as they encourage shorter-term investorsto bet on the company’s ability to beatStreet estimates, rather than focusing onthe long-term strategy and value creation.

Forums for communicating with investors:There are a number of important forums

team and company facilities.Companies are increasingly usingwebcasts to expand the live and on-demand global attendance at suchevents.

Regardless of the format, thesemeetings provide valuableopportunities to contextualize financialresults, explain growth strategies anddevelop relationships with investors.Yet even under the best conditions,management cannot meet with all thebest firms and the best contacts at anyone event. As investor relations teamswork to establish the meeting schedulefor the period immediately after theIPO quiet period is lifted, the priorityshould be to meet underweightedcurrent investors and “on the fence”targets which did not buy at theoffering. These targets should then besupplemented with appropriate long-term investors that did not participatein the roadshow. Building theserelationships creates a new level ofpotential buyers of the stock when“bridge” institutions or insiders wantto sell their shares.

• Press releases– even routine companyannouncements have the ability toimpact the company’s stock price, andall press releases should be developedwith an eye toward what the contentmeans for the business and how thenews will be perceived by theinvestment community. Wheneverpossible, press releases should tie newsevents to the company’s stated strategyand demonstrate momentum andprogress against its long-termobjectives. If the announcement willimpact the company’s expectations for the quarter or year, these issuesalso should be addressed in theannouncement.

• Depending on the importance andcomplexity of the announcement, it mayalso be necessary to hold a conferencecall or webcast for the investmentcommunity. These allow management to provide additional color on the eventthat prompted the announcement,discuss how it will affect the companygoing forward and respond to questions.Clearly explaining complicatedinformation and, when possible,allowing investors to pose questions

48 NYSE IPO Guide

Communications

natural attrition of shareholders asportfolio managers shift assignments andmarket conditions change. Ongoingdiligence is required to identify the mostimportant holders, monitor changes in thecomposition of the shareholder base andengage holders in dialogue to help keepthem informed about the business andanticipate their future actions.

Beyond these efforts, there is anongoing need to replenish the pipeline byidentifying and courting new investors.The ideal target group consists of long-term investors that have a track record forinvesting in the company’s industry andwhose portfolio holdings have businessand financial characteristics similar tothose of the company. While there willlikely be interest from the company’scovering analysts to market the companyto prospective investors, managementshould take responsibility for managingthe investor base and targeting potentialnew holders.

In order to increase visibility amongthe buy side, the company should developsell-side sponsorship to generateindependent financial models, determinean appropriate multiple that will help drivethe long-term valuation of the companyand market the investment story to thebuy-side investment community. Oncepublic, management should strive to secureresearch coverage by non-syndicateanalysts, who will be viewed as moreimpartial. An ideal mix of analysts wouldinclude quality bulge-bracket firms thatadd credibility and cache to the company’sprofile, combined with strong tier-tworegional firms that take a more active rolein analyzing and covering the company.

Conclusion: An investor once said, “Wedon’t shoot the messenger, we shoot thecheerleader.” The financial community canbe remarkably perceptive and insightful;information – especially that which ismarket moving – flows through it rapidlyand it has a long institutional memory.Regular, consistent and opencommunications with investors areinstrumental in achieving an appropriatevaluation and high regard for thecompany’s management.

(b) Research analystsFinancial analysts play a key role in

that can be addressed in real timebolsters management’s credibility andmitigates the risk of misunderstandings.

• Financial, business and trade media –print and broadcast media allow thecompany to communicate informationto a much wider audience, while alsobolstering credibility throughcommentary by objective third parties.Whether it is positioning financialresults or underscoring themes relatedto management strength and marketposition, effective media relationsstrategies can influence investmentdecisions and provide a reputationalcushion in difficult times.

• Social and online media – mediainfluence has been extended further associal media takes a more prominentrole in companies’ communicationstrategies – and particularly in theinvestor relations strategies ofcompanies in technology-centricindustries and those with larger retailinvestor bases. Each day, more than 5million people participate in live,passionate, authentic conversations via social media forums and blogs.These communications channels allowcompanies to engage directly withstakeholders, but they also come withserious responsibilities in terms ofdisclosure requirements and theassumption that companies willcontinue to communicate through goodtimes and bad. It is essential thatonline media strategies are executedwith the same level of foresight andlegal supervision as traditional mediastrategies.

Managing the shareholder base: Sinceinvestors have differing perspectives onwhat creates value in the markets, it iscrucial to ensure that the investment style,holding period and industry focus of thecompany’s shareholder base are alignedwith, among other things, its businessmodel and the investment proposition.

Managing the company’s shareholderbase is an active process. Investors that arepoorly informed about the company orwhose investment style is at odds with theinvestment thesis are more prone to selltheir positions, creating downwardpressure on the stock price and increasedmarket volatility. Furthermore, there is a

securities markets, and publicly heldcompanies regularly brief them and answertheir questions to help them understandcompany results and business trends.However, these communications presentpotential legal risks that must be managedin order to preserve the benefits ofdialogue with analysts.

Good relations with analysts are veryimportant, and open communication withthe market is encouraged by exchange rulesand, as a practical matter, unavoidable. Itis, however, not legally required.

If the company does disclose corporateinformation (voluntarily or otherwise),Rule 10b-5 of the Securities Exchange Actof 1934 requires that those disclosuresneither contain misleading statements ofmaterial information nor omit materialfacts necessary to make the statementsmade not misleading.

Management should not participate in the preparation of analysts’ reports,because there is potential Rule 10b-5liability if company officials become so“entangled” with a report that the reportcan be attributed to the company.

Finally, when divulging material non-public information, company officials maynot disclose it selectively – for example,exclusively to securities analysts – butrather must make the information availableto the general public, if those officialscould be found to have gained a personalbenefit from the selective disclosure.Selective disclosure can lead to liability for the company and for company officialsthemselves for insider trading by personsreceiving the disclosure.

Regulation F-D: In August 2000 the SECadopted rules that prohibit US issuersfrom selectively disclosing material non-public information to market professionalsand generally to security holders. All USissuers that file periodic reports with theSEC under the Exchange Act are subject tothe regulation. Although Regulation F-Ddoes not apply to foreign issuers, many ofthem look to Regulation F-D for guidanceas a matter of best practice and because itreduces their risk of potential liabilityunder Rule 10b-5.

The key provisions of Regulation F-Dare as follows:• The regulation applies to

communications with market

49NYSE IPO Guide

Communications

non-exclusionary distribution of theinformation to the public.” The mostcommon method is by press release.Posting information to the companywebsite is also sufficient for mostcompanies if they regularly use the websitefor that purpose, the information is postedin a manner calculated to reach investorsand it remains posted for a reasonableperiod of time so that it can be absorbedby investors. If the company wishes tomake public disclosure of material non-public information by means of aconference call or webcast, it must giveadequate public notice, including the date,time, subject matter and dial-ininformation for the call. Disclosure at ashareholder meeting, even one that is opento the public, is not sufficient if themeeting is not webcast or broadcast byelectronic means, and the presence of thepress at an otherwise non-public meetingdoes not render the meeting public.

The SEC has aggressively investigatedcases under Regulation F-D, resulting inseveral enforcement proceedings. SECpersonnel have indicated that they look for egregious violations involving theintentional or reckless disclosure ofunquestionably material information. The enforcement actions also confirm that the SEC will look to market reactionas an indicator of the materiality ofselective disclosure. One significantsimilarity among the enforcement actionsis that visible and sometimes dramaticchanges in stock trading price and volumeoccurred in the aftermath of the selectivedisclosures, and the SEC has stated that a very significant market reaction toselectively disclosed information requirespublic disclosure of that information.

Some practical guidelines are asfollows:• Designate one company executive to

communicate with analysts.• Make each presentation to analysts

on the basis of a prepared text that has been reviewed by senior executivesand by counsel.

• Do not disclose material non-publicinformation to analysts unless theinformation is disclosed to the publicat the same time; this can be done bypermitting the public, on reasonableadvance notice, to participate in anycall with analysts during which

professionals (broker-dealers,investment advisors and managers, and investment companies), and withsecurity holders that will reasonablyforeseeably trade on the basis of thedisclosed information. It focuses onwhat the SEC believes to be the coreproblem – selective disclosure to thosethat will trade on that information orprompt others to do so. The regulationdoes not apply to communicationswith, among others, mediarepresentatives, advisors in arelationship of trust or confidence withthe company (eg, legal advisors andinvestment bankers), rating agencyrepresentatives, employees andgovernment officials.

• The regulation applies tocommunications by senior officials andofficers, employees or agents of thecompany who regularly communicatewith market professionals or securityholders.

• The regulation applies to selectivedisclosures of material non-publicinformation. “Materiality” is notfurther defined in Regulation F-D, butit is the subject of extensive case lawand SEC guidance in other contexts.

• Whenever the company makes an“intentional” disclosure of materialnon-public information, simultaneouspublic disclosure is required. Adisclosure is intentional if the companyknows or is reckless in not knowingthat the information being disclosed isboth material and non-public.Whenever the company learns that ithas made a non-intentional selectivedisclosure, it must make publicdisclosure of that informationpromptly (generally within 24 hours).

• Violations of Regulation F-D aresubject to SEC enforcement actions,but do not give rise to Rule 10b-5liability or private causes of action.They also do not result in ineligibilityfor short-form registration or the Rule144 safe harbor for resale of securities.

Public disclosure for purposes ofRegulation F-D can be made by filing orfurnishing Form 8-K or by disseminatingthe information through a method orcombination of methods that is“reasonably designed to provide broad,

material non-public information maybe discussed.

• Refrain from responding to analysts’inquiries in a non-public forum unlessit is certain that the response does notinclude material non-publicinformation.

• If asked about a matter that has notpreviously been disclosed, simply say,“No comment.”

• If requested by an analyst to review a research report, do not commentexcept to correct errors of fact. Do notcomment in any way on an analyst’sforecasts or judgments, including bysaying you are “comfortable” withthem, that they are “in the ballpark” or other words to similar effect. Toavoid entanglement, be cautious aboutdistributing analysts’ reports orincluding hyperlinks to them on thecompany’s website

• Avoid favoring one analyst overanother.

• Review public statements to identifyany non-Generally AcceptedAccounting Principles (GAAP) financialmeasures. If disclosure contains non-GAAP financial measures, include apresentation of the most directlycomparable financial measurecalculated and presented in accordancewith GAAP and a quantitativereconciliation of the two measures. To avoid reconciliation of non-GAAPfinancial measures in publicpresentations given orally,telephonically, by webcast or broadcast,or by similar means, provide the mostdirectly comparably GAAP financialmeasure, with the requiredreconciliation, on the company’swebsite and include the location of the website in the presentation. Ifmaterials distributed (electronically or in hard copy) during a publicpresentation contain non-GAAPfinancial measures, provide the mostdirectly comparable GAAP measuresand provide the requiredreconciliations in close proximity tothe non-GAAP financial measures.

• Do not make specific forward-lookingstatements, unless:• you set out the assumptions on

which the forecast is based;• you indicate the factors that could

50 NYSE IPO Guide

Communications

online chat rooms, blogs and other socialmedia channels that accelerate the speedwith which employee comments can reacha seemingly endless universe of potentialrecipients.

Key considerations that affect how thecompany interacts with its employeesduring the IPO period and beyond includethe following:• It is critical for employees to

understand securities laws and SECregulations prohibiting insider tradingor tipping – particularly if they aregiven opportunities to participate inthe offering. Employees need tounderstand there will be a zero-tolerance policy on these issues.

• To maintain consistency in theircommunications with the market andavoid any inappropriate disclosure ofmaterial non-public information, thecompany should designate and train avery limited group of spokespersons,whose role is to discuss business andfinancial results with the public.Employees should be instructed toforward all external inquiries to thesetrained communicators and investorrelations representatives.

• In compliance with Regulation F-D, US public companies must provide the financial community with equaland timely access to financial andoperational data. The company willnow issue quarterly and annualfinancial reports, and even moreroutine corporate announcements will assume increased importance.However, many companies can nolonger provide employees with thesame level of access to financial andoperational data they might havereceived in the past. Employees need tounderstand this new reality, know theyare still important and valued membersof the team, and have confidence thatthe company will continuecommunicating with them as openlyand honestly as possible going forward.

• Sarbanes-Oxley regulations requirepublic companies to maintaintransparency and accountability indocumenting financial controls. Inmany instances, these processes will beestablished well ahead of the IPO. Thelisting provides an opportunity toremind employees of their

prevent the forecast from beingrealized;

• you make the statements to thepublic at the same time; and

• you are always prepared to evaluatethe need to update the statementwhen circumstances change.

The steps contemplated in the first twopoints above can be effected by referring toa filed document that contains the relevantinformation.

(c) Employee communicationsEmployees are the company’s most valuedambassadors. Engaging them as part of theIPO process creates a culture ofunderstanding that helps ensure clear andconsistent communication with all otherstakeholder groups.

Unfortunately, IPOs are potentiallydisruptive from a cultural standpoint.Executives and staff of private companiesoften are accustomed to receiving financialand operational data that can no longer beshared under SEC regulations after thecompany goes public, and some employeeswill be asked to take on modified roles.

To manage this transition, thecompany must realign its people around its go-forward strategies and growthprospects, while simultaneously preparingthem for new communications constraints.Employees should be educated about therationale for a public listing, how it canbenefit them (eg, new career opportunities,employee stock purchase plans), and –perhaps most critical – what newresponsibilities the company must assumeas a publicly traded entity.

Compliance with SEC and exchangerules needs to be a company-wide effort,and employees must understand that evencasual comments made to outside parties(eg, “I made a big sale today” or “Businesshas been picking up lately”) can take onadditional meaning for the company’s newfinancially minded stakeholders. Under the watchful eye of investors, financialanalysts, regulators and financial andbusiness media, employee actions have thepotential not only to affect the company’scorporate reputation, brand and stockprice, but also to subject both the companyand employees to risk and liability frominappropriate disclosures. This risk hasbeen exacerbated as employees engage in

responsibility to protect sensitive data,including client/customer information,performance statistics and any otherinformation not available to the generalpublic.

4.2 Proxy statement and annualmeeting

(a) Annual meeting requirements andpreparationHolders of common stock, by virtue oftheir ownership interest in a corporation,are generally entitled to one vote per shareon certain corporate matters on policydecisions. To allow shareholders to casttheir votes, all US states require thatissuers hold annual shareholder meetingswhere shareholders can cast their voteeither in person or via proxy. Annualmeetings offer a once-a-year opportunityto communicate with shareholders face toface and to approve certain corporateactions and company changes critical tothe company.

The company will determine when anannual meeting should be held based on itsfiscal year end. Depending on the state ofincorporation notice, requirements for anannual meeting will vary. The annualmeeting requires considerable planning,preparation and coordination with severalparties: the transfer agent, the SEC, theDepository Trust Company (DTC), thebroker distributor/proxy solicitor and thefinancial printer.

(b) TimelineA number of important events in thepreparation for and lead-up to the annualmeeting require compliance with statelaws, government regulations and otherregulatory agency policies.

The annual meeting responsibilitiesflowchart overleaf outlines the primaryfunctions that should be performed duringthe annual meeting season, as well as theparties responsible for those functions.Scheduling diagrams show the majorregulatory requirements, starting at theend of the fiscal year through the annualmeeting date.

(c) Phase one: preparationNotification: To ensure a smooth annualmeeting, all parties – the company, itstransfer agent and its broker

51NYSE IPO Guide

Communications

distributor/proxy solicitor – must clearlycommunicate with each other. Below aresome of the initial steps that should betaken for the annual meeting:• Submit letter of instruction to DTC.• If the company is a current registered

user of security position reports via theDTC website, re-authorize third-partyagents (broker distributor, proxysolicitor) to electronically receive thereports from DTC.

Street search: The street search is an SEC-mandated process and should be initiatedat least 20 business days prior to therecord date. A broker distributor/proxysolicitor is typically responsible for thisfunction. It is recommended that thecompany work with a proxy solicitor toperform this search. During the streetsearch process, the brokerdistributor/proxy solicitor will contactBroadridge and other institutional holdersto determine how many annual reports andproxy statements will be printed for theproxy mailing.

Analyze the need for a proxy solicitor:With recent changes to NYSE regulations,achieving successful voting percentagesmay become more difficult. A professionalsolicitation firm can help navigate themaze of tactics, procedures and challengesinvolved in soliciting proxies. Keep in mindsome of the current issues, such asincreased influence of activists and third-party advisory firms, multiple levels ofshare ownership and ever-changingregulations, which have made proxysolicitation more complex and hence morecrucial in addressing these controversialissues. Companies with non-routine ballotitems (ie, equity plans or shareholderproposals) should especially considerretaining a professional proxy solicitationfirm to help negotiate the proxy process.

Web hosting of materials: Since January2009 all companies soliciting proxiesunder SEC rules are required to postannual meeting materials to the Internetand notify shareholders of availability.Ensure that the transfer agent provides aweb hosting service that meets all SECrequirements for shareholder privacyprotection and accessibility of materials.

Suggested action items and timeline before record date

Days before record date Action item

100 Begin design, copywriting and printing/posting of annual

report.

90 Decide whether you will need a proxy solicitation campaign

based on vote projections.

60 Review first draft and cover design of annual report.

30 Conduct broker search.

25 Print annual report.

20 Notice and inquiry – work with proxy solicitor to discuss

printing and EDGAR requirements for proxy statement,

proxy card and Form 10-K.

15 Receive preliminary search results from banks and brokers.

10 Confirm annual meeting material transportation logistics.

Notify stock exchange of record date.

5 Begin typesetting and EDGAR conversion of proxy

statement, proxy card and Form 10-K.

Order NOBO and registered tape.

Begin shareholder composition and contact list.

Day 0 Record date.

+5 days post record date Mail notices for notice and access option.

+7 days post record date Mail date.

+45 days post record date Annual meeting.

Suggested action items and timeline post record date

Days after record date Action item

0 Begin shareholder composition and contact list.

5 Receive final search results from banks and brokers.

5 Receive NOBO and registered tape.

5 Deliver materials to proxy solicitor.

5 Begin phone number look-up.

5 Mail notices for notice and access option.

10 Mail proxy materials.

10 Complete shareholder composition and contact list.

20 Begin phone calls.

30 Conduct reminder mailing.

30 Receive first ADP vote.

30 Proxy advisor report issued.

35 Prepare draft of meeting script.

35 Broadridge daily voting begins.

40 Finalize master ballot, meeting ballot and affidavit of

mailing.

45 Conduct annual meeting.

50 Receive final inspector of election report.

52 NYSE IPO Guide

Communications

Issuer Issuer or Transfer agent DTC Broker distributor Broker/nomineestransfer agent proxy solicitor Broadridge

Annual meeting responsibilities flowchart

Coordinate withemployee planproviders andtrustees for fileand votinginstructions.

Annualshareholdermeeting.

Declaration ofmeeting andrecord date.

Arrange forprinting of proxystatement andannual report.

Print proxycards withcompany textand shareholderinformation, andnoticedocuments ifnotice andaccess mailingalternative isbeing used.

Receive votedproxies fromregisteredshareholders fortabulation.

Send proxymaterials tobeneficialshareholders.

Supply proxymaterials tobrokers/nominees toBroadbridge.

Collect searchinformation.

Notify allapplicableparties ofmeeting dates.

Determinewhether toutilize the noticeand accessproxy mailingalternative.

Arrange for web hosting ofannual meetingmaterials(required for allissuers Jan 12009).

Provide securityposition reportand omnibusproxy listing.

Respond tobroker searchrequest.

Mail brokersearch card.

Deliver proxymaterial to allmailing agents.

Provide votingresults to client.

Mail proxymaterial andnotice andaccessdocuments (ifnotice andaccess mailingalternative isbeing used) toregisteredshareholders.

Collect andcount frombeneficialshareholders.

53NYSE IPO Guide

Communications

brokerage firms may vote their clients’undirected shares, was amended to preventbrokers from voting their clients’ shares onboard of director elections unless specificdirection (a proxy card) is given by theirclient. This now makes the vote ondirectors a non-routine item.

(d) Phase two: proxy mailingForm preparation and printing: There aredesign specifications for proxy forms. Forexample, the location of the voting boxeson the proxy card must be in the correctspace so that the transfer agent’s scannerscan accurately read the voting marks. Thetransfer agent or proxy solicitor will assistwith the design and printing of the proxycard to increase accuracy and reduce therisk of non-compliance with the printspecifications.

Mailing: See Chapter 4.2(f).

(e) Phase three: annual meeting and votetabulationAnnual meeting: Some important logisticsconcerning the annual meeting should beborne in mind in order to avoid potentialproblems:• Annual meeting script review – provide

a copy of the script to the transferagent and inspector of elections a fewdays before the meeting. This ensuresthat all parties understand their roles at the meeting. It is also recommendedthat written rules of conduct and anagenda be established at this time.

• Results review – prior to the meeting,review with the transfer agent and/orproxy solicitor the specific types ofnumbers/voting results that will beread during the meeting.

• Required documents – have availablebefore the meeting:• inspector’s oath – a statement by

the inspector of election that he or she will perform the dutiesimpartially and to the best of his or her ability.

Have available during the meeting:• shareholder ballot – the form that

allows a shareholder to vote his orher shares at the meeting. Whileshareholders infrequently vote byballot, this form should be availableat all times in the event the needarises;

Electronic distribution of materials: TheSEC allows for issuers to electronicallydistribute annual meeting materials toshareholders that have consented to suchdelivery.

Consent to electronic document delivery:Shareholders are offered the opportunity to access their documents electronically.Consents may be promoted via hard-copycommunications such as the proxy card,proxy statement and annual report.Shareholders can also sign up for electronicdelivery of materials when they voteonline, which offers printing and postagecost savings (SEC Release Nos 33-7233, 34-36345, 33-7288, 34-37182, 33-7289 and34-37183; and 33-7856, 34-4278).

Notice and access: The SEC allows issuersthat have posted proxy materials to theInternet to send holders a simple noticeproviding information on how to access the materials – without prior consent forelectronic delivery. The SEC requires that a notice of the internet availability ofmaterials be sent, either separately or as partof the proxy materials. Issuers must providehard-copy sets of materials on request (SECRelease Nos 34-55146 and 34-56135).

Electronic voting option: Check with the transfer agent to ensure it provideselectronic voting services to complementthe traditional method of paper proxyvoting. Internet and telephone-basedvoting affords shareholders convenienceand the immediate recording of votes.Electronic voting also reduces the postagecosts associated with proxy voting byeliminating the need to return the votedproxy card.

Householding: To further reduce thenumber of printed annual reports andproxy statements required, the SECpermits issuers to mail one set of materialswhen two or more shareholders with thesame last name live at the same address.Implementing this process also requires a consent mailing to shareholders 60 days prior to the proxy mail date (SEC Rule 14a-3 under the Exchange Actfor proxy materials).

Changed regulations: On January 1 2010NYSE Rule 452, which governs how

• record date shareholder file – a report that lists shareholdersholding shares as of the record date that are entitled to vote at the meeting;

• affidavit of mailing – a documentattesting to the date on which themailing commenced from the mailhouse; and

• proxy committee ballot – a formthat allows the proxy committee toformally vote the shares for whichproxies have been submitted.

Have available after the meeting:• certificate of vote tabulation –

a document that shows the finalvote results.

Vote tabulation and reporting: In general,the majority of the company’s outstandingshares are held by beneficial holders in“street” name. Thus, the mailing andvoting services provided by Broadridge arecritical to the voting results. Broadridgemails and votes proxies on behalf of almostall banks and brokers. The first votetabulation from Broadridge is typicallysubmitted electronically to the transferagent 10 to 15 days prior to the annualmeeting.

The transfer agent tabulates the sharesvoted by registered holders directly. Thevoting percentage may appear low until thefirst votes from shares held in street nameare received from Broadridge. To remain ontarget for achieving the desired quorumpercentage, it is recommended that a votereview be conducted approximately twoweeks prior to the annual meeting. Ifapproximately the same vote return isreceived as in prior annual meetings, it isreasonable to assume that a similar returnwill be obtained for this meeting. If thevoting results appear to be lagging, a moreproactive effort by a proxy solicitation firm may be warranted.

See Chapter 4.4 for more detail onbeneficial versus registered holders.

The transfer agent or other proxyservice provider selected by the companywill tabulate the votes of registered andbeneficial shareholders. The company maybe able to view real-time vote tabulationonline if the transfer agent offers thisservice and is asked to perform the finaltabulation.

Votes of beneficial shareholders are

54 NYSE IPO Guide

Communications

house and printer, proxy agents (eg, banksand brokers holding shares for holders instreet name), and employee equity planmanagement provider will each have a role.

To determine whether an issue iscontroversial or to obtain a vote projection,the corporate secretary and corporate legalcounsel should confer with a proxysolicitation firm. With recent changes toregulations and the growing influence ofproxy advisory firms, achieving successfulvoting percentages is becoming a morechallenging task.

Targeting: Where a proxy solicitationcampaign is launched, the proxysolicitation firm will need to determine the composition of the shareholder base,also known as a shareholder analysis, so it can efficiently reach the largest numberof holders and target those most likely tobe persuaded to vote favorably.

Persons and entities entitled to vote at a shareholder meeting are those whosenames appear on the company’s books asregistered holders or beneficial holders ofvoting securities at the close of businesson a specific date declared by the board ofdirectors (the “record date”). Because mostshares are held in nominee names (banks,brokers, proxy agents), the process oflocating and reaching the actual holders isbest managed by a proxy solicitation firm.

As with any voting campaign –witness recent successful politicalcampaigns – it is important to identify the target and focus resources accordinglyto maximize the likelihood of a positiveoutcome. A proxy solicitor can analyze theshareholder base, then drive the campaignefforts accordingly.

Executing an effective campaign: With ashareholder analysis, the corporatesecretary can help position the messagingon the proxy statement – not just an SECrequirement, but essentially a publiccompany’s most broad and direct investorrelations communications tool.

Today, corporate governance practicesare top of mind for most shareholders andthere are few indications this will changeany time soon. This means that governancepractices should align with holders’ (as wellas proxy advisory firms’) expectations,especially if there is a contentious proposalor issue at stake or the company is

tabulated by the street-side proxy servicesprovider, which may transmit thebeneficial vote count directly to thecompany’s transfer agent. If the transferagent tabulates the final votes, votingpercentage may appear low until the firstvotes from shares held in street name arereceived from beneficial holders. The firstvote totals for beneficial holders aretypically submitted electronically to thecompany’s transfer agent 10 to 15 daysprior to the annual meeting. If thecompany has received approximately the same vote return as in prior annualmeetings, it is reasonable to assume thatthe company is on track for a similarreturn for this meeting. If the votingresults appear to be lagging, a proactiveeffort by a proxy solicitation firm may be warranted.

Registered and beneficial holders’ votetotals are provided by proxy service firmsto the inspector of election for reporting at an annual meeting.

(f) Proxy statement and solicitationApproximately less than 30% ofshareholders vote in response to initialproxy material distributions. With theincreasing influence of activist elements,high-profile individuals, multiple levels of share ownership and ever-changingregulations, proxy solicitation is becomingmore complex and more necessary.

Professional proxy solicitation firm versusin-house: Most public companies in theUnited States work with professionalproxy solicitors, whether it is to manageone aspect of the solicitation or to managethe complete proxy solicitation campaign.A solicitor may simply consult on bestpractices of corporate governance that leadto favorable vote outcomes or may managethe entire solicitation and outreach to allholders: broker, bank and individualaccounts.

Proxy solicitation team: Whether using a proxy solicitation firm or managing the shareholder outreach in-house, themembers of the company generallyresponsible for the solicitation are thecorporate secretary, the corporate legalcounsel and the corporate financial,investor and public relations staff. Thetransfer agent, proxy material mailing

performing below industry peersfinancially. This needs to be done wellbefore the messaging on the proxystatement: it should be done on a continualbasis as the company’s and marketsituations change. Meeting with investorsregularly to understand their priorities and concern will help address potentialconflicts before the annual meeting.

Third-party proxy advisory firms: Third-party proxy advisory firms provideguidelines to institutional investors onhow to vote their shares. Because Rule30b1-4 of the Investment Company Actrequires that most registered managementinvestment companies disclose how theyvote their proxies, following the guidelinesof proxy advisory firms alleviates theresearch burden and provides clearreasoning on voting practices. The threemajor proxy advisory firms areRiskMetrics Group, Glass, Lewis, & Co,LLC and PROXY Governance, Inc. For someinstitutional investors, the advisory firmwill also vote their proxy along with theirpublished recommendations.

“Notice and inquiry”: This is essentiallythe beginning of the shareholder outreach.Rule 14a-13(a) of the Exchange Act requiresthat the company send a “notice andinquiry” or “search card” to all agents andparticipants known to be holding shares ofrecord of the company’s voting securities.The notice and inquiry includes questionsso the proxy materials can be managed incompliance with SEC rules and regulations.Not all exchanges have the same timelinesfor the notice and inquiry, but the NYSErequires listed companies to furnish thenotice and inquiry at least 10 calendar daysprior to the record date for an annual orspecial shareholder meeting. That said,with all the different layers and complexityof ownership, the company should sendout the notice and inquiry as soon aspractical. The proxy solicitor can assist inproviding the correct content and formatfor the notice and inquiry.

Proxy statement: The SEC requires that the company send shareholders a proxystatement prior to a shareholder meeting.The information contained in thestatement must be filed with the SECbefore soliciting a shareholder vote on the

55NYSE IPO Guide

Communications

Companies interested in all the detailsand rules of a solicitation should obtain“The Manual of Solicitation of Proxies”published by the Society of CorporateSecretaries & Governance Professionals.

4.3 Communication mechanics

(a) Investor relations toolsAs the company transitions to a publicentity, it is even more important for theinvestor relations team to:• comply with regulations;• provide the investment community

with increased transparency into theorganization;

• analyze competitive and industryintelligence;

• monitor what analysts are saying about the company and its peers;

• communicate the company’s story to employees and the investmentcommunity; and

• measure the effectiveness of outreachand communications efforts.

To succeed, the company shouldleverage the information, analytics andworkflow solutions designed to increasethe effectiveness of its investormanagement program. With best-in-classinvestor relations tools, the company canmonitor and understand factors impactingits share price, anticipate investor behavior,communicate with key stakeholders andmeasure the impact of its investorrelations program.

Be transparent and compliant: Prior to theForm S-1 filing, a dedicated investorrelations section should be created on thecorporate website. With this investorrelations website, the company can gainglobal reach, meet regulatory requirementsand provide a rich multimedia experienceto investors looking to access up-to-dateinformation about the company. Consideroutsourcing the development, hosting andmaintenance of the investor relationswebsite to a third-party provider with theexperience and investor knowledge toincorporate best practices and the ability to distribute website updates to theinvestment community.

According to the SEC, 80% of retailinvestors now have access to the Internetin their homes. Thomson Reuters research

election of directors and the approval ofother corporate action. Proxy statementsmust disclose all important facts about theissues on which shareholders are asked tovote, such as:• the time, date and location of the

meeting;• the issues to be voted on at the annual

meeting;• the positions on the board of directors

to be voted on and backgrounddescriptions of director candidates; and

• compensation of directors andauditors.

The company’s proxy solicitor willusually assist in the preparation of theproxy statement.

Web hosting needs: Because shareholdermaterial must be available on a publiclyaccessible website other than the SEC’sEDGAR, company materials must be hostedin accordance with SEC regulations. Thetransfer agent or proxy solicitor should beable to provide solutions that meet withthe notice and access requirements.

Solicitation of banks, brokers and proxyagents: Banks, brokers and proxy agentsmay vote all securities registered on thebooks of the company at the close ofbusiness on the record date in their ownname or nominees’ names (for brokers andproxy agents, not beneficially owned bythem), and all securities for which votingauthority has been properly assigned tothem by another.

The transfer agent or proxy solicitorwill provide assistance on the proper wayto transmit materials and record votesfrom this group.

Solicitation of individual holders:Individual holders are entitled to vote allsecurities registered on the books of thecompany at the close of business on therecord date in their own name(s) and allsecurities for which voting authority hasbeen properly assigned to them by another.Individuals may vote securities in personor by proxy. While some holders willattend the shareholder meeting and vote by ballot, the overwhelming majority ofsecurities voted by individual holders willbe voted by proxies returned in proxyreturn envelopes.

has also found that 75% of institutionalinvestors access investor relations websitesat least on a weekly basis, while 90% ofinstitutional investors find that acompany’s website influences theirperception of that company. To helpestablish a positive perception, here are a few guidelines to follow:• Keep the website current and accurate.• If hyperlinks to outside information

are included, make sure they are clearlylabeled.

• Don’t promote some outsideinformation sources over others.

• Add summary information, clearlylabeled, to provide investors with aquick overview.

• Confirm that the website can handle a considerable amount of traffic.

Because an effective disclosure programshould not be limited to what is required bylaw, here are a few best practices to addressthe most common needs of visitors to theinvestor relations website:• Use the investor relations home page

to tell investors why they should investin the company. Emphasize what thecompany does that is valuable from aninvestor’s point of view, as well as howit differs from key competitors. Includelinks to other sections of interestdirectly from the investor relationshome page. Many companies use thisreal estate to highlight recent news,upcoming webcasts, broker conferencepresentations and their current stockprice.

• Use a vanity URL to make the investorrelations website easy to find andremember. And link to the site fromthe company’s corporate home page. To make the website easy to use,remember the little details such asoffering printer-friendly functionality,offering a section dedicated todisclosure information, breaking outpress releases by year, categorizing SECfilings and making them searchable.

• Include the prospectus, filingsinformation (eg, Form 10-K, Form 10-Q, Form 8-K, Section 16 filings),analyst estimates, online investor kits,ownership information and companyfundamentals on the investor relationssite.

• As an IPO, set up a separate section

56 NYSE IPO Guide

Communications

Promote the investor relations websiteas the main source of investor informationby including the URL in all press releases,webcasts and periodic reports. In additionto ensuring that the company is meetingregulatory disclosure requirements,posting information online will help saveon printing and mailing costs. If investorsare sought from various global regions,ensure that the site can accommodate alllanguages.

To further reinforce the company’scommitment to corporate integrity, alsooffer an anonymous web-based forum foremployees to submit suggestions, askquestions or report an issue. To beeffective, it should be possible to view allsubmissions, converse anonymously withthe submitter and maintain a record ofeach exchange.

Gather intelligent informationAs the company’s corporate story and thekey messages to communicate to theinvestment community are developed, it isimportant to understand the competitivelandscape and key developments across the industry and sector. View unbiasedsummaries and transcripts of competitors’earnings and conference calls to learn howthey are guiding analysts. The transcriptscan also help to anticipate questions fromanalysts and investors. Most companiespost their call transcripts on their website,but searching through individual sites canbe time consuming and inefficient. Toaccelerate knowledge gathering, work witha provider that consolidates transcripts ona single platform.

Also understand how peers areperceived by the sell side. Access brokerresearch and estimates to learn what thesell side is saying about the company andits competitors – although research on the company may not be available untilcoverage is initiated by one or morebrokers. In such cases, a partnership with a third-party provider which has theinstitutional contacts to conduct detailedinterviews may help to reveal how thecompany is perceived in the marketplace.The interview should be customized toallow stakeholders’ perceptions of thecompany’s value creation strategy and keymessages to be benchmarked. Thisinformation can also be used to identifyany disconnects between what the

on the investor relations website forhistorical information that may not beincluded in the prospectus. Ensure thehistorical information is clearly dated.

• Create a dedicated corporategovernance section of the investorrelations website to promote corporateintegrity and regulatory compliance,and maximize investor confidence. The information posted on this sectionshould include the governanceguidelines, committee charters andcode of conduct.

• Establish a web page dedicated to proxyinformation where interactive, HTMLand PDF versions of all proxy materialscan be posted. Ensure that the sectionon which the proxy materials are posteddoes not infringe on the anonymity ofthose accessing it through cookiepostings or other ways of virtuallycollecting user information. Shareholderemail addresses obtained fordistributing proxy materials should beused solely for such purpose. Also offerinvestors a way to order hard copies ofthe proxy materials through theinvestor relations website or toll-freenumber.

• Disclose compensation informationfound in the Form 10-K and proxyfilings on the investor relationswebsite. To be fully transparent,highlight the key disclosures in thecorporate governance section of theinvestor relations website as well.

• Include corporate debt information and give fixed income analysts thebenefit of rich information and easyaccess, just as equity analysts are given.Consider including credit ratings, debtanalyst coverage, debt maturityschedule and information pertaining to asset-backed securities, such aspending transactions, CUSIP look-up,prospectus and more.

• Take active steps to immediatelydistribute updates and newinformation posted on the site to theinvestment community. Utilize RSSfeeds and email alerts so investors canbe alerted when new content isavailable. Also partner with a thirdparty which has the distributionnetwork to make updates available toinvestors on the platforms they use aspart of their daily workflow.

company is saying and what theinstitutional investment community ishearing.

Company fundamentals should beanalyzed to determine how the company’sfinancials compare with those of its peers.To facilitate such comparisons, use“standardized,” summary fundamentals,meaning that the financials are presentedin the same format across the company.

Once the company is public, it will alsobecome important to identify currentinvestors at risk of selling their shares inthe company. Work with a provider thatoffers a proven and back-tested ownershipmodel incorporating key factors that willhelp accurately identify both risks andopportunities across the investor base. Themodel should be transparent and proven,facilitating an understanding of whyspecific funds are likely to buy or sell thecompany’s shares, and should be dynamicto adjust to evolving market conditions.

To deepen knowledge of the company’sindustry and sector, tap into experts andinformation sources that can provide:• timely and accurate news on market-

moving developments within thesector;

• updates on upcoming events within thesector – analyst days, earnings reportsor industry conferences;

• qualitative feedback about companypresentations made during industryconferences;

• monthly, sector-focused feedback fromthe institutional community whichcould highlight recent trading patterns,valuation metrics, expectations forperformance, interpretation of earningsresults and more;

• intelligence on institutional moneyflows within the sector to helpunderstand how current buying andselling patterns may impact the stock’svalue and trading dynamics; and

• information about sector specific sell-side analysts and institutions obtainedfrom daily interactions with theinstitutional community.

Communicate the company’s story tointernal and external stakeholders: Armedwith unparalleled insight into competitors,industry and sector, the company shouldcommunicate key messages andcompetitive differentiators to the

57NYSE IPO Guide

Communications

an effective means of communicating thecorporate strategy to employees, furtherempowering them to be the brand stewardsof the company. A Watson Wyatt studyfound that firms with highly effectivecommunications delivered a 47% highertotal return to shareholders. In anotherstudy, Towers Perrin highlighted thatcompanies with high employeeengagement had a 19% increase inoperating income and almost a 28% growth in earnings per share.

Measure the impact of communications:In addition to knowing who attended thelive webcast and who downloaded thearchive from the investor relations website,measure the impact of communicationsthrough detailed analytics. Work with awebcast provider that can generate a reportfollowing the webcast with answers to keyquestions such as the following:• How did the webcast attendance

compare with those of the company’speers?

• What has been the impact of thewebcast on the price and coverage ofthe company’s stock and that of itspeers?

• Of those who attended the webcast,which are current owners of companystock?

• Did any bulls, bears or rotators attendthe webcast?

• What was happening in the market on the day of the webcast?

• How was the company’s messageperceived by the investmentcommunity? What sentiment did itgenerate?

• What action(s) are investors likely to take in response to the company’smessage?

Coupled with comprehensive analyticson attendees – such as when individualattendees signed on and off the webcast –it is possible to effectively gauge how wellthe company’s message resonated with theinternal and external audiences. If aperception study was conducted ahead ofthe communications, interviews with theinstitutional investment communityfollowing the webcast will help identifyany change in market perceptions of thecompany. In general, when announcing keycorporate actions and developments,

investment community. To ensurecompliance with Regulation F-D (FairDisclosure), use webcasting as the meansof communication. Webcasting offers acost-effective, engaging and measurablemeans of reaching a global audience.

To maximize viewership of thewebcast, publish all planned disclosures to the online calendar and enable visitorsto the site to download these events into their own planners or to receive email reminders of these events. Toaccommodate different time zones, archivethe webcast and transcribe the content.Post both the archive and transcript on theinvestor relations website, making themeasy for investors to view at theirconvenience.

To introduce senior executives to theinvestment community, include a video orphotos of the presenters within thewebcast. Also provide viewer-controlledPowerPoint slides that reiterate the keymessages being presented. Research showsthat people remember only 10% of whatthey read and 20% of what they hear, butthey remember 50% of what they see andhear. Links within the webcast tosupporting material such as press releasesand financial information further reinforcethe key messages. Where global investorsare sought, include subtitles or translatethe content into multiple languages.

To ensure that the communication isefficient, productive and successful, workwith a webcast provider that offers aplatform which allows easy control of whocan attend the webcast. Also leverage thepolling, Q&A and survey functionality ofthe webcast player to gather audiencefeedback. When selecting a webcastprovider, inquire about its proprietarydistribution networks. The ideal providercan further expand the reach of thecompany’s message by distributing thewebcast directly to the desktops ofinstitutional and retail investors.

But the investment community is notthe only audience that should be targeted;communicating with employees is just asimportant. In a study conducted by theCorporate Executive Council, employeescited the most important driver to theircommitment to the firm as a company’sability to lay out a clear vision of itsstrategy and direction that is linked totheir day-to-day lives. Webcasting offers

leverage message analytics that can helptrack and monitor investor feedback andsentiment related to the announcement.

Use the detailed reports and metrics to modify the message as needed and todevelop follow-up communications plans.This information can also help to shapeoutreach efforts to actively targetprospective investors, while mitigating any selling pressures.

(b) Other communication mechanicsThe SEC requires that all US publiccompanies provide proxy materials prior to a shareholder meeting. While foreignprivate issuers are not subject to the SEC’sproxy rules, foreign private issuers listedon the NYSE are required to solicit proxiesfrom their US shareholders. Proxymaterials may include:• a proxy statement (described in

Chapter 4.2(f));• a proxy card for registered holders or

a voting instruction form for beneficialowners;

• a notice of internet availability; and• the annual report/Form 10-K

The company’s transfer agent oftendistributes and collects the necessaryproxy materials for the company and sendsthem to registered shareholders directly.

The company provides materials toproxy service providers selected bybrokers, which then subsequentlydistribute them to beneficial holders.

The company may mail either a full setof proxy materials, a notice-only mailingor a combination. If the company elects tosend a full set of proxy materials, it mustboth file with the SEC and send out toshareholders a complete set of proxymaterials approximately five weeks before the shareholder meeting, to allow sufficient time for shareholders to review and act.

To determine which shareholdersshould be sent proxy materials, thecompany should refer to a list of theshareholders that held stock on a certaindate. This “annual meeting record date” is also referred to when determining which holders should receive dividends.

For investors holding shares through an intermediary such as a broker, thecompany must provide the proxy packageto the intermediary in sufficient time to

58 NYSE IPO Guide

Communications

meetings in person unless they obtain alegal proxy from their broker or bank.

See Chapter 4.4 for more detailregarding beneficial versus registeredholders.

Notice and access: As of January 1 2009, theSEC’s “Internet Availability of ProxyMaterials” rules – commonly known as the “notice and access” or “e-proxy” rules– require that issuers and registeredinvestment companies soliciting proxiesprovide access to an electronic version of their proxy materials on a public websiteand send notice of the materials’ availabilitywith the URL to access the materials.

The website providing access to proxymaterials – which must be different fromand in addition to the SEC’s EDGARwebsite – must meet certain requirementsfor accessibility of materials, as well as forshareholder privacy protection. Theprivacy requirements stipulate that thematerials must be hosted “in a manner thatdoes not infringe on the anonymity of aperson accessing that Web site,” includingprohibiting the website from installing“cookies” that may be used to identify theshareholder and requiring that trackingfeatures on the website be disabled. Thismay require segregating those pages fromthe rest of the company’s regular websiteor creating a new website.

The company may elect to send a one-page notice document to holders – the“notice-only” option – informing them ofthe online location of the proxy and annualmeeting materials. Notice-only mailingssave the print and mail cost of sending fullproxy materials in hard-copy format, andbenefit the environment by eliminatingpaper used in printing and energyresources used in shipping. However, onaverage, fewer shareholders vote if theyreceive a notice-only mailing rather than a full-set mailing.

If the company selects the notice-onlyoption, it must create and file a Notice ofInternet Availability of Proxy Materials(DEFA14A) at least 40 days before theannual meeting. This notice must also bemailed to shareholders at least 40 daysbefore the meeting date.

Because the notice contains essentialinformation on how to vote, intermediariessuch as brokers must prepare their ownnotices and customize them to provide

ensure that the intermediary can meet the35-day target for sending shareholdermailings. The company must reimburseintermediaries for associated costs.

To help reduce the number of printedannual reports and proxy statementsrequired, the SEC permits the company tomail only one set of materials to a singleaddress when two or more shareholderswith the same last name live at thataddress. Implementing this process, knownas “householding,” also requires a mailingto shareholders 60 days prior to the proxymail date.

Proxy voting: The proxy materials alsoinclude a proxy card or, in the case of streetvoters, a voter instruction form, whichallows shareholders to vote their shares.

By checking the appropriate boxes andthen signing, dating and returning theproxy card, registered shareholders can cast their votes.

For beneficial holders, the votingprocess is more complex. Voting rights forbeneficial holders are assigned to DTC, asstreet-side holdings are recorded on thecompany register in DTC’s nomineeaccount, Cede & Co. DTC passes on thevoting rights to the brokers and banksthrough an omnibus proxy. The brokersand banks retain voting rights, but reachout to beneficial holders to find how theywant their shares to be voted via a votinginstruction form. Beneficial shareholdersthen return the voting instruction form to inform their brokers to vote their shares as indicated.

In addition to the voting methodsoutlined above, internet and telephone-based voting may be provided toshareholders for added convenience andquick tabulation of votes. Internet andtelephone voting also reduce the postagecosts associated with proxy voting byeliminating the need to return the proxycard or voting instruction form. Securityfeatures for the electronic voting site, suchas authentication and encryption, shouldbe reviewed in detail when assessingsolutions from vendors.

As an additional option, registeredshareholders present at the meeting mayalso be able to vote from a handset, ifavailable, to cast their vote during thecourse of the meeting, or with a physicalballot. Beneficial holders cannot vote at the

information on how clients can providevoting instructions to the intermediaries.The company must thus provide the othernotice information to these intermediariesor their agents in advance of the 40-daymailing deadline. For companiesincorporated in a state, such as California,where the record date may be not more than50 days before the event, there will be a verytight window for beginning the process.

The notice-only option is not allowedfor proxy votes regarding businesscombinations, such as mergers oracquisitions, as defined by the SEC.

While the SEC requires the company to provide a method of voting as of thedate when the notice is sent, it prohibitsthe inclusion of a proxy card with thenotice. Instead, the company may chooseto perform a second mailing containing the same notice and a proxy card 10 days or more after the first mailing.

The company must provide full sets of proxy materials upon request toshareholders, free of charge. The proxymaterials must be sent via first-class mailwithin three days of receipt of the request.Effectively, the company will have toestimate to how many shareholders willwant to receive paper copies – the“fulfillment rate” – with the decision basedon historical data, if available. Based on thelast two years, shareholders asking for papercopies has been in the 1% to 3% range.

The company can also choose toinclude the notification of internetavailability with a traditional proxy mailingto holders – the “full-set delivery” option– informing them of the online location ofthe materials. This notice can be a separateitem or can be included in the proxypackage mailing.

The company may choose to send a full set of paper materials to some holdersand use the notice-only option for othersfor the same meeting. This approach mayallow the company to reap some of thecost-saving and environmental benefits of using a notice-only mailing, whilemaximizing the rate of shareholders voting.

SEC-required content: In addition to therequirements above, current SECregulations require that all notices containa prominent legend containing the exactlanguage specified by the SEC.

The SEC allows companies to include

59NYSE IPO Guide

Communications

other routine communications to itsshareholders, including: • statements with details of holdings and

or/transactions;• tax forms, including W9,W8BEN and

1099;• letters confirming other transactions,

such as address-change confirmations;and

• company information.

4.4 Share ownership mechanics

(a) Beneficial and registered shareholdersThere are two types of shareholders:“registered” and “beneficial.” A beneficialshareowner has stock held in the name ofan intermediary such as a broker, banknominee or other third-party nominee.When shares are kept in this manner, it isoften referred to as keeping the shares in“street name.” The vast majority ofshareholders are beneficial shareholders.

A registered shareholder, also known asa “shareholder of record,” is a person,group or other entity that holds sharesdirectly in its own name on the companyregister. The company, or its transfer agent,then keeps the records of ownership forthe shareholder and provides services suchas transferring shares, paying dividendsand coordinating shareholdercommunications.

Additionally, beneficial owners are alsodesignated as objecting beneficial owners(OBOs) and non-objecting beneficialowners (NOBOs). By “objecting,” OBOsshield their identity from the company and may be contacted by the company only via a third party, such as the holder’sbroker. NOBOs waive this right and may be contacted directly by the company,including shareholder communicationssuch as proxy statements andannual/quarterly reports. Lists for ancompany’s NOBOs may be requested from an intermediary.

When a shareholder opens a brokerageaccount and has its securities put in streetname, the broker is required to give it theopportunity to designate itself as an OBOor NOBO. If it does not elect to be aNOBO, it will often by default be listed as an OBO.

Printed certificates and book entry:Shares can be held either electronically,

supplementary materials with the noticethat provide additional information aboutproxy materials and voting.

Delivery preferences and electronicdelivery: The notice and access rulesrequire that shareholders be offered anopportunity to indicate a future preferencefor email or internet communication, aswell as paper copies, and shareholders willcontinue to receive information via themethod they choose until they changetheir preferences. Over time, the companycan use this information to fine-tune itsprinting and mailing requirements to morespecifically match shareholder preferences.This can be expected to help reduce thecosts associated with printing andwarehousing more materials than neededor with rush printing of additional copiesto meet fulfillment needs.

If a shareholder consents to receivematerials electronically for future mailings,the company may send annual meetingmaterials via an email with hyperlinks toview the company’s annual report andproxy statement online. Other companycommunications, such as statements, taxforms and press releases, can also bedelivered to shareholders via electronicdelivery.

Electronic delivery allows for quickaccess to voting materials for shareholdersand also provides for significant costsavings in comparison to the printing and mailing of paper documents. If thecompany wishes to maximize shareholderenrollment in electronic delivery,shareholder consent for electronic deliverymay be promoted via hard-copycommunications such as the proxy card,proxy statement and annual report.Consent may also be solicited throughother means, such as during an onlinevoting process or via email campaigns toshareholders with email addresses on file.

The company must receive positiveconsent from the shareholder to sendproxy materials to the shareholderelectronically, and must not use an emailaddress provided by a shareholder for anypurpose other than to send a copy of proxymaterials to that shareholder.

Additional shareholder communications:In addition to proxy-relatedcommunications, the company may send

in “book entry,” or with printedcertificates. All beneficial shareholders’shares are held in book entry. Registeredshareholders’ holdings may be in bookentry or certificated form.

Book entry has many advantages: itallows for a faster and more efficienttransfer of shares, and mitigates the risksof holding and losing paper certificates.Book entry is also necessary for“dematerialization” – a movement, longsupported by the SEC, toward thereduction of paper certificates.

As of 2002, the company also has theoption of producing print-on-demandcertificates: physical certificates that cancost effectively be printed with low printvolumes, eliminating the need to store pre-printed engraved certificates.

Recordkeeping and the transfer agent:Transfer agents maintain a record ofownership, including contact information,of the company’s registered shareholders,while brokers maintain the records ofbeneficial shareholders.

Transfer agents’ responsibilities alsoinclude the transfer, issuance andcancellation of the company’s shares.Although transfer agents are commonlyassociated with the transfer of shares ofcommon stock, they may also handle othertypes of securities whose ownership isregistered, such as bonds

One of a transfer agent’s primaryduties is assisting registered shareholdersand fulfilling their requests for transferringtheir shares. Other core duties of a transferagent include:• dividend payments;• tax reporting;• annual meeting services;• direct stock purchase/dividend

reinvestment plan administration;• escheatment and lost shareholder

search and report filing;• issuance for secondary offerings;• stock option issuance;• restricted stock transfers; and• communication with shareholders on

behalf of the company, including sending:• proxy materials;• statements with details of holdings

and or/transactions;• tax forms, including Forms W9,

W8BEN and 1099-DIV, 1099-B;and

60 NYSE IPO Guide

Communications

Transfer agents are also subject to thelaws of the states of incorporation for boththe company and its shareholders,including those pertaining to abandonedproperty and privacy. Transfer agents areadditionally required by Internal RevenueService (IRS) regulations to track andreport the dividend income and share saleactivity they facilitate on behalf of issuersvia Form 1099 reporting. Transfer agentsmust also work with the IRS to work toresolve incorrect taxpayer identificationnumbers and begin/cease tax withholdingas directed by the IRS where appropriate.

The duties of a transfer agent andregistrar may be performed in-house.However, in most companies with widelyheld share ownership, keeping track of stockissuance and ownership is a considerabletask in today’s increasingly complexregulatory environment. As a result, morethan 90% of issuers outsource this functionto a commercial transfer agent.

(b) Dividends and other corporate actionsDividends: Dividends are paymentsrepresenting a portion of the company’sprofits paid to shareholders out of thecompany’s current or retained earnings.Alternatively, capital dividends may also bepaid out of return on capital. Dividends aretypically paid on an annual, semi-annual orquarterly basis. Dividends must bedeclared by the board of directors eachtime they are paid. Dividends may be paidin cash or in equity (shares of stock).

When the company declares thedividend, it sets both:• a “payable date” – the date on which

holders are paid the dividend; and• a “dividend record date” – the date on

which shareholders must be on thecompany’s books as a shareholder toreceive the dividend.

Once the record date is set, the stockexchanges or the National Association of Securities Dealers, Inc fixes the “ex-dividend date,” normally two business days before the record date. Holders thatpurchase a stock on its ex-dividend date or after – with the trade settling post-record date – will not receive that dividendpayment; the seller will receive it instead.Holders that acquire stock before the ex-dividend date will be entitled to receive thedividend.

• letters confirming othertransactions, such as address-change confirmations

Transfer agents may also provideadditional services for shareholders andissuers, including online account access,employee equity compensation servicesand corporate action services.

Transfer agents additionally act as aregistrar, to help ensure that the companydoes not issue more shares of stock thanhave been authorized. While previously theduties of a registrar were segregated fromthose of a transfer agent, today these dutiesare frequently performed by the transferagent alone. In this capacity, transfer agentsmaintain records of the total authorizedshares outstanding and track the issuanceand cancellation of shares.

Transfer agents and registrars areappointed by resolution of the board ofdirectors.

Since the mid-1970s, transfer agentshave been subject to federal regulation bythe SEC in accordance with the ExchangeAct. Transfer agents must comply with allapplicable rules of the SEC and otherregulators, including strict requirementsfor the accuracy and timeliness ofprocessing shareholder transactions. Givenwide fluctuations in trading volume andshareholder inquiries, transfer agents mustbe prepared to handle associated periods ofpeak transfer volume. Activities that aregoverned by these regulations include:• turnaround times for processing;• prompt response to inquiries;• accuracy of recordkeeping;• retention of records;• posting, transportation and destruction

of certificates;• safeguarding of funds and securities;• evaluation of internal accounting

controls; and• searches for “lost” shareholders.

Securities industry participants, suchas transfer agents, must also comply withregulations designed to prevent fraud inconnection with missing, lost, counterfeitand stolen securities, in addition to otherdata security requirements. These datasecurity requirements also extend toindustry participants’ employees, whomust be fingerprinted and undergobackground checks.

Transfer agents in most cases act asthe company’s paying agent for dividends,receiving and holding funds from thecompany and then disbursing the funds.Registered shareholders are then sent theirfunds by the transfer agent, by eitherelectronic funds transfer or check. Fundsfor dividends paid to beneficial holders arefirst sent by the company to the transferagent, which then distributes the funds toDTC, which in turn forwards the fundselectronically to the brokers fordistribution to the shareholders.

If it is a stock rather than a cashdividend, the transfer agent will generallyissue shares in book-entry form and sendstatements to the shareholders. Issuance inpaper certificate form is still an option, butis rare in today’s environment. Paymentagents may also make other distributionson the company’s behalf, such as payingout interest to bondholders.

The company may choose to sponsor a dividend reinvestment plan, so thatshareholders’ dividends may beautomatically applied to the purchase ofadditional shares of stock of thecorporation, with fractional shares appliedto the holders account in book entry form.

The dividend reinvestment plan caneither be sponsored through a transferagent program, which does not require SECregistration, or be registered directly withthe SEC. Which method the companyshould choose depends on the respectiveimportance of various factors, such as theflexibility to use original issue shares ortreasury shares to raise capital, the abilityto market to specific groups, or the optionto offer easy and inexpensive access to thecompany’s shares. Dividend reinvestmentplan shares may be purchased through theplan on the open market or issued by thecompany from treasury or reserve,depending on the plan design.

Dividend reinvestment plans allowregistered shareholders to purchaseadditional shares without having to gothrough a broker, in addition to enablingthem to reinvest their dividends. Someagents provide advanced purchasingoptions for shareholders to buy shares,such as purchasing shares on a regularschedule utilizing electronic fund transfers.

Share issuance: In addition to sharesissued during an IPO, the company may

61NYSE IPO Guide

Communications

pre-determined price;• a subscription agent, inviting equity

security holders of the company tosubscribe to new issuance of additionaldebt or equity;

• a paying agent, paying proceeds due;• a conversion agent, converting debt

securities into equity securities; or• an escrow agent, holding an asset on

behalf of a first party for delivery to asecond party upon specified conditionsor events.

(c) Transferring shares and votingproceduresTransferring shares: The Depository Trust& Clearing Corporation, through itssubsidiary DTC, is a repository throughwhich stocks are transferred electronicallybetween brokers and agents and whichprovides electronic storage andclearinghouse services.

DTC was established to reduce thevolume of physical stock certificatetransfers necessary for the trading ofsecurities. DTC holds eligible securities for financial institutions such as brokeragefirms and banks, collectively referred to as “participants.” Participants then mayrequest a debit and corresponding credit totheir DTC accounts to enact a transfer. Inthis manner DTC facilitates share transferson behalf of shareholders, via their brokersor transfer agents.

Transfers can be accomplished throughthe following three DTC systems:• Fast Automated Securities Transfer

(FAST) system – in 1975, DTCintroduced the FAST system, whichenables agents to provide electronictransfer, deposit and withdrawal servicesmore quickly and efficiently. For theFAST system, DTC establishes anaccount with the transfer agent for eachissue. This account is registered to Cede& Co, DTC’s nominee, and represents,on the transfer agent’s books, the sumtotal of shares for that issue held by thebroker. Brokers maintain correspondingbooks representing their shareholderaccounts. The transfer agent or brokercan then use deposit and withdrawal-by-transfer orders to debit/credit theseaccounts: the balance on the transferagent’s books is increased and decreasedby on a daily basis, and broker accountsare adjusted accordingly by DTC. The

choose to issue additional stock,subsequent to an IPO. Post-IPO massissuances are known as secondaryofferings: proceeds go to the company and dilute the ownership position ofshareholders for existing shareholders.

Companies may also issue sharesthrough a direct stock purchase plan.Through a direct stock purchase plan,shareholders can cost-effectively purchaseshares directly from the transfer agentinstead of opening a brokerage account.Prior to the advent of direct stock purchaseplans, if an investor wanted to buy sharesin a company and enroll in a dividendreinvestment plan, the investor first had to buy shares from a broker.

A waiver plan, in most cases inconjunction with a direct stock purchaseplan, offers a controlled opportunity forraising capital without the costs oftraditional underwriting. Normally, a directstock purchase plan has a set limit on themaximum dollar amount per investment.The limit allows the company to controlthe investment in new shares. However, ininstances where capital is needed, thecompany may waive the dollar limitation –hence the term “waiver” plan. Thecompany may also offer a discount to theshares’ current market price to enticeadditional share purchases.

The company controls the keyelements of the program, including theminimum price the market shares mustmeet or exceed before new shares areissued, who may participate and thepurchase limit.

Other activities by the company mayrequire issuance, such as employee stockpurchase plans, stock options and companyawards.

Corporate actions: In the case of acorporate action such as a merger,acquisition or capital reorganization,exchange agents must receive and replacethe stock of the new or acquiring companyand replace it with the stock of the new oracquiring company or cash, as applicable.The exchange agent function is oftenperformed by the company’s transfer agent.

In addition, the transfer agent may actin many different roles, including as:• a tender agent, collecting shares

surrendered from shareholders andmaking payments for the shares at a

transfer agent and the company mustmeet specific DTC criteria in order toutilize FAST.

• Deposit or Withdrawal by Custodian(DWAC) – DTC’s DWAC program isused to transfer shares for companyholdings such as for stock options andemployee plan shares. The companymay perform DWAC transactions byproviding instructions to the broker,which initiates the transaction, and thetransfer agent, which matches up theinstructions and accepts the DWACtransaction. DWACs offer theadvantage of real-time share movementbut are manually intensive to process.

• Direct Registration System (DRS) –DTC’s DRS system, established as anaddition to the FAST system in 1996,enables shares to be held on records ofthe transfer agent in book-entry form.Previously, book-entry shares could beheld only in the name of the broker onDTC’s FAST system or through adividend reinvestment plan.

DRS also enables shares to betransferred electronically to and fromthe transfer agent and the brokercommunity, resulting in debits andcredits to FAST accounts, through thefollowing methods:• transfers of shares to street name

from a transfer agent account; and• transfers of shares to a transfer

agent account from street name.All new issuers must be “DRS eligible”as of January 2007. To do so, theymust:• have bylaws authorizing the use

of book-entry shares;• arrange for their securities to be

on the DTC’s FAST and PROFILEsystems; and

• if employing a transfer agent,employ one that is a “limitedparticipant” of DTC and operates inthe DTC Direct Registration System.

To process transactions and to“participate” in DRS, issuers must:• participate in a surety program to

initiate DRS Profile ModificationSystem transactions through DRS;and

• default all withdrawal-by-transferrequests to “S” for statement,unless specifically requestedotherwise by the investor.

62 NYSE IPO Guide

Communications

of holding, such as an abandoned bankaccount. The information provided in this section refers specifically to theescheatment of stock and the associatedcash of registered shareholders, such as for dividend payments.

Some states also require that, prior toescheatment of property, the shareholder ofthe property also be considered to be “lost,”defined by the SEC as having twosuccessive pieces of mail returned.

In all cases shareholders’ property maybe escheated only after a period ofinactivity passes on the account or asset.This “dormancy period,” as well as the typeof shareholder action that constitutes avalid contact, varies in length by each state.

The company and its transfer agentmust conduct various due diligencemailings and database searches prior to the property being escheated, as requiredby the states or the SEC, per SEC Rule17ad-17.

A more in-depth “deep search” to findlost shareholders and the owners ofabandoned property may also beundertaken prior to escheatment, at thediscretion of the company, usually by third-party vendors for shareholder-paid fees.

After due diligence requirements havebeen satisfied, the company and its transferagent file unclaimed property reports withthe states and the property is turned overto the states.

Records must be kept carefully by the transfer agent to comply with lostshareholder and escheatment regulations,and to ensure either that shareholderproperty is not turned over to the stateunnecessarily or that the applicableproperty is escheated as required. Someagents make preliminary reports forcommon stock dividends, returned stockcertificates, un-cashed checks and returnedchecks available for review prior to theescheatment deadline. In order to keeprecords as up to date as possible, sometransfer agents may choose to performregular database searches for changedaddresses, such as with the national changeof address product of the US Postal Service.

After property has been escheated,records must be maintained in case anindividual shareholder, at a later time,attempts to retrieve the property. Theshareholder can reclaim the assets bycontacting the individual state directly.

Processing paper certificates: If ashareholder loses a stock certificate, theold certificate must be cancelled and newshares issued, in either certificated orbook-entry form. The shareholder mustpay a fee to the transfer agent and presentan open-penalty surety bond, whichindemnifies the company and transferagent, in order for the transfer agent toissue new shares. Most transfer agentsfacilitate the bond purchase process for theshareholder for convenience, utilizing athird-party surety provider. The lostcertificate is reported to the SecuritiesInformation Center, which maintains adatabase on behalf of the SEC. Brokers canthen reference this database when acertificate is presented to ensure thecertificate is valid.

A “transfer” is the industry term for achange in the registered owner of stock.When a stock certificate is presented fortransfer, the transfer agent must determinethat the registered owner has properlyassigned the ownership of the securitypresented for transfer and that thecertificate is authentic. The certificatepresented must be secured by a medallionguarantee, which is a guarantee by thetransferring financial institution that thesignature is genuine and that the financialinstitution accepts liability for a forgery.Medallion guarantees protect shareholdersby preventing unauthorized transfers andpotential investor losses. They also limitthe liability of the transfer agent thataccepts the certificates.

Other types of transactions that do not result in a change in ownership includecombining or splitting certificates into largeror smaller denominations, consolidating likeaccounts and converting shares held viacertificate to book-entry form.

Lost shareholders, abandoned property and escheatment: The United States,Puerto Rico, Washington, DC and other US territories require that financialinstitutions, issuers and their transferagents report when property is deemed tobe “unclaimed” or “abandoned.” Thisproperty may be considered unclaimedbased on the age of on outstanding check orunissued credit or due to inactivity on anaccount. Escheatment – the process oftransferring abandoned property to thestate or territory – can apply to any type

63NYSE IPO Guide

Obligations of a public company

5

64 NYSE IPO Guide


exit these reporting categories are differentfrom those used for the initialdetermination.

The periodic reports contemplate asystem of “integrated disclosure,” in whichportions of the various reports may beincorporated by reference into otherreports to avoid repetition. Thisincorporation by reference is not required,but is very common in US companyreports, particularly Form 10-K and theproxy statement. Incorporation byreference is also a concept that permitsmore streamlined disclosure for securitiesofferings, in particular after the companyhas been public for at least a year and iseligible to use a registration statement on Form S-3 or F-3 for public offerings.Existing and future reports that thecompany files with the SEC will beincorporated into Form S-3 or F-3, keepingthe information current and eliminatingthe need to include detailed disclosureabout the company in a prospectus for an offering.

5.1 Reporting requirements

(a) Ongoing reporting requirementsAfter the initial public offering (IPO), thecompany must file regular “periodic” andother reports with the Securities andExchange Commission (SEC) in accordancewith the requirements of the SecuritiesExchange Act of 1934. The reports requiredfor a US company differ somewhat fromthose required for a foreign private issuer,as shown in table 1 below.

The timing and some of the requiredcontent of these reports will depend on thecompany’s reporting category, which islargely based on the size of its worldwide“public float,” or the market value of thevoting and non-voting common equity heldby non-affiliates, as of the last business dayof the most recent second fiscal quarter.This is illustrated in table 2 below.

In many cases a non-accelerated filerwill also qualify as a smaller reportingcompany, with scaled-back informationrequirements. The thresholds to enter and

For more information about the financialstatements that are required for thecompany’s various reports, see Chapter 2.2.

(b) Reporting for US companiesA US company must file an annual reporton Form 10-K with the SEC after the endof each fiscal year. A non-accelerated filermust file Form 10-K no later than 90 days after the end of the fiscal year. This deadline shortens to 75 days for an accelerated filer and 60 days for a large accelerated filer. As noted above,following an IPO, the company will be anon-accelerated filer for the first year.

The contents of Form 10-K are largelysimilar to the IPO prospectus, with severalimportant differences, outlined below.

Internal control over financial reporting:Beginning with the second Form 10-K filedby the company, Form 10-K must include a management report on the effectivenessof internal control over financial reporting(ICFR) and a related auditors’ attestation, as described in more detail below.

Disclosure controls and procedures:Disclosure about management’s evaluationof the effectiveness of disclosure controlsand procedures, as described in more detailbelow, is also required, without anytransition period.

Certifications: The company’s chiefexecutive officer (CEO) and chief financialofficer (CFO) must certify Form 10-K, asdescribed in more detail below.

Unresolved SEC staff comments: Anaccelerated or large accelerated filer mustinclude disclosure of any unresolved SECstaff comments on its periodic or currentreports that the company received at least180 days before the end of the fiscal year.

Stock repurchases and use of proceeds:The company must disclose its stockrepurchases (for more information, seeChapter 5.3), as well as the use of theproceeds from the IPO.

Incorporation by reference from proxystatement: Most of the required disclosureabout the company’s management andgovernance arrangements, including thedetailed disclosure of executive

Table 1

Table 2

US company Foreign private issuer

Periodic reporting:• Annual reports on Form 10-K • Annual reports on Form 20-F• Quarterly reports on Form 10-Q or Form 40-F

Current reporting:• Current reports on Form 8-K • Current reports on Form 6-K

Shareholder meetings and proxy solicitations:• Proxy statements• Rule 14a-3 “glossy” annual report

Reporting category Public float

After at least 12 calendar months of reporting, including at least one Form 10-K:

• Large accelerated filer $700 million or more• Accelerated filer $75 million or more (but less than

$700 million)Non-accelerated filer All others

65NYSE IPO Guide


If the agenda includes the election ofdirectors, the proxy statement must beaccompanied or preceded by an annualreport. This can be Form 10-K, but moretypically is a separate “glossy” report withpictures and other investor-friendlyinformation, which is also often used forother investor relations purposes. Somecompanies choose to combine the two,creating a “wrap” for Form 10-K to createthe “glossy.”

For proxy solicitation purposes, theannual report (also known as the “Rule14a-3 annual report”) must contain auditedfinancial statements, management’sdiscussion and analysis (MD&A), selectedfinancial data and disclosure about marketrisk, stock prices and dividend payments,as well as a brief description of thecompany’s business, a stock performancegraph and a list of the directors andexecutive officers.

Until recently, the proxy statement and annual report had to be mailed to allshareholders; however, recent SEC “e-proxy” rules permit the company to postproxy materials on a publicly accessiblewebsite and mail only a notice toshareholders. This process is known as“notice and access.” The stock exchangesalso used to require a physical mailing ofan annual report to shareholders, but nowpermit website posting, and the NYSErecently eliminated the need for a pressrelease about the posting in most cases.Although e-proxy procedures are lessexpensive, many companies still choose to physically mail these documents toshareholders, primarily for investorrelations purposes.

Quarterly reports on Form 10-Q: A UScompany must file quarterly reports onForm 10-Q with the SEC after the end ofeach of the first three quarters of eachfiscal year. A non-accelerated filer mustfile Form 10-Q no later than 45 days afterthe end of the fiscal year. This deadlineshortens to 40 days for accelerated andlarge accelerated filers.

Form 10-Q largely consists of interimfinancial statements and the relatedMD&A. It also includes disclosure abouteffectiveness of disclosure controls andprocedures, changes in internal controlover financial reporting (but not a fullassessment as in Form 10-K), and CEO and

compensation arrangements, is typicallyincorporated by reference from the proxystatement.

XBRL: The financial statements containedin Form 10-K must also be filed in anexhibit using the Extensible BusinessReporting Language (XBRL) interactivedata format (see Chapter 2.2).

Proxy statement: Following the IPO, a UScompany will be subject to the proxy rulesunder the Exchange Act. The companymust furnish a proxy statement toshareholders before soliciting votingauthority for a matter submitted toshareholder vote. The stock exchangelisting rules typically require a listedcompany to hold a regular annualshareholder meeting, for which thecompany will solicit proxies, so mostcompanies prepare an annual proxystatement.

The proxy statement must containinformation about the shareholdermeeting, the matters to be considered(including shareholder proposals, if any)and voting procedures. The companyshould be sure to consider anyrequirements imposed by its charter,bylaws or state law, in addition to SEC and stock exchange requirements.

The most common item on themeeting agenda is the election of directors.In this case the proxy statement willcontain much of the same disclosure aboutthe company’s management andgovernance arrangements that wasincluded in the IPO prospectus, includingthe detailed disclosure of executivecompensation arrangements and thecompensation discussion and analysis.There are also several items that were notincluded in the IPO prospectus, includingofficer and director compliance withSection 16 filings (for more information,see Chapter 5.4), and information aboutcode of ethics compliance and waivers.

Other typical agenda items include theapproval or ratification of the company’sauditors, which requires disclosure aboutfees paid to the auditors, and the adoptionor amendment of equity compensationplans, for which the material terms mustbe described together with a tablesummarizing all of the company’s equitycompensation plans.

CFO certifications, as well as informationabout risk factors, legal proceedings andcompany stock repurchases, among otherthings. In contrast to any interim financialstatements included in the IPO prospectus,unaudited interim financial statementsincluded in quarterly reports on Form 10-Q must be reviewed by an independentaccountant prior to filing. As for Form 10-K, the financial statements must also beincluded in XBRL format.

Current reports on Form 8-K: The USsecurities laws generally do not requirecurrent reporting of all material companyevents, unlike in some other jurisdictions,unless the company is buying or sellingsecurities or makes other disclosure forwhich information about the materialevent is needed to make that disclosurecomplete and accurate. Instead, a UScompany must file a current report onForm 8-K with the SEC only for certainspecified events and generally within fourbusiness days. The more common, day-to-day events that trigger this reportinginclude:• an earnings release or other

information about historical results of operations and financial condition;

• the entry into or amendment ortermination of a material definitiveagreement;

• a significant acquisition or dispositionof assets (which may also require proforma financial information);

• the creation of a material directfinancial obligation or a contingent off-balance sheet obligation or a related triggering event;

• costs associated with exit and disposalactivities, or material impairments;

• unregistered sales of equity securitiesor material modifications of the rightsof security holders; and

• various governance items, such as thedeparture or election of directors andexecutive officers, results ofshareholder votes, amendments tocharter documents and amendments to or waivers of the code of ethics.

Form 8-K is also used for informationdisclosed to ensure compliance withRegulation F-D (Fair Disclosure), as well as for other information the companyconsiders important for investors.

66 NYSE IPO Guide


Press releases: In addition to SECreporting requirements, the stockexchanges impose reporting requirementson listed companies. It was these rulesthat in part drove the issuance of pressreleases to announce annual and quarterlyresults, which most companies dogenerally as a matter of good investorrelations (see Chapter 4.4).

Stock exchange rules typically requiretimely disclosure of material eventsbeyond those covered by Form 8-K. Forexample, under NYSE rules, a listedcompany is expected to:• release quickly to the public any news

or information that might reasonablybe expected to materially affect themarket for its securities; and

• act promptly to dispel unfoundedrumors that result in unusual marketactivity or price variations.

Examples of events that NYSE expectswould result in prompt disclosure includeannual and quarterly earnings, dividendannouncements, mergers, acquisitions,tender offers, stock splits, majormanagement changes and any substantiveitems of an unusual or non-recurrentnature. These announcements may bemade by any method that constitutescompliance with Regulation F-D(discussed below), although the NYSEencourages use of a press release. Thecompany may generally exercise judgmentas to the timing of a public release oncorporate developments where disclosurewould endanger the company’s goals (eg,in the M&A context) or provideinformation helpful to a competitor.

(c) Reporting for foreign private issuersThe primary report for a foreign privateissuer is the annual report on Form 20-F.(Canadian companies may also use Form40-F.) Foreign private issuers are notsubject to the proxy rules and need notprepare a proxy statement, although they often choose to publish a “glossy”annual report in addition to Form 20-F.Foreign private issuers also need not file Form 10-Q or Form 8-K, but caninstead submit reports on Form 6-K toprovide information that they provide to investors under their home countryrules or otherwise.

January• Press release announcing Q4 earnings

call/webcast (c 1 week in advance).• Q4 earnings release and Form 8-K.• Q4 earnings call/webcast.

February• Submit SEC no-action requests to

exclude shareholder proposals fromproxy (at least 80 calendar days beforedefinitive proxy filed).

• File Form 10-K (no later than 60 days afterfiscal year end – that is, by March 1 or 2).

• File “glossy,” if incorporated byreference into Form 10-K, and print/post on website.

March• File preliminary proxy with SEC (unless

contains only certain specified matters),at least 10 calendar days beforedefinitive proxy filed, but review maytake up to 30 days).

• March 31 – Q1 quarter end.

April• Press release announcing Q1 earnings

call/webcast (c 1 week in advance).• Q1 earnings release and Form 8-K.• Q1 earnings call/webcast.• File and post/mail definitive proxy (no

later than 120 days after year end ifincorporated into 10-K; at least 40 daysbefore annual meeting if using e-proxy“notice and access”).

May• File Q1 Form 10-Q (no later than

40 days after quarter end – that is, by May 10).

June• Annual shareholders’ meeting.• June 30 – Q2 quarter end.

July• Press release announcing Q2 earnings


August• File Q2 Form 10-Q (no later than 40

days after quarter end – that is, byAugust 9).

September• September 30 – Q3 quarter end.

October• Press release announcing Q3 earnings


November• File Q3 Form 10-Q (no later than 40

days after quarter end – that is, byNovember 9).

• Notify shareholder proposal proponents of eligibility or proceduraldefects in proposal (within 14 days of receiving proposal).

December• Deadline for shareholder proposals

(120 days before date of prior year’sproxy statement).

• Send directors’ and officers’questionnaires to board members andexecutive officers (for proxy preparation).

• December 31 – year end.

Sample summary annual reporting cycle for US large accelerated filer(calendar year end)

67NYSE IPO Guide


Duty to update: If the company discoversthat a public statement was inaccurate ormisleading when made, it must promptlycorrect the statement. Even if accuratewhen made, forward-looking statementsmay need to be updated if circumstanceschange and the statements becomeinaccurate or misleading. Currently, the US courts are split on whether a duty toupdate exists. In any event, the companyshould be careful about making forward-looking statements and consider whetherthey may need to be updated over time.

Selective disclosure and Regulation F-D:The company should take care to avoidselective disclosure of material non-publicinformation to market professionals and toinvestors under circumstances in which it isreasonably foreseeable that the recipient willtrade on the basis of the information, bothbecause of potential insider trading liability(see Chapter 6.1), and because of RegulationF-D. As a result of these concerns, thecompany must be very careful when itcommunicates with individual investors and research analysts (see Chapter 4.1).

Regulation F-D requires that if thecompany discloses material non-publicinformation, it must make general publicdisclosure of that information at the sametime. This disclosure may be made byForm 8-K, press release, public webcast(announced in advance) or other meansdesigned to provide broad, non-exclusionary access to the information; but mere posting on the company websiteoften will not suffice.

Regulation F-D does not apply tocommunications with mediarepresentatives, advisors in a relationshipof trust or confidence with the company(eg, legal advisors and investment bankers),persons who expressly agree to keep theinformation confidential, rating agencyrepresentatives, government officials andemployees. It also does not apply tocommunications made in the context of a registered public offering of securities,although it does apply in the privateoffering context. Foreign private issuers are not required to comply with RegulationF-D, although many do so voluntarily orlook to it for guidance as a “best practice.”

Non-GAAP financial measures: Specialdisclosure rules apply when the company

Annual report on Form 20-F: Form 20-F mustbe filed with the SEC within six months ofthe close of each fiscal year. In 2012, thisperiod will be shortened to four months.

As with Form 10-K, the contents ofForm 20-F are very similar to the IPOprospectus. Many of the key differences are the same as for Form 10-K: disclosuresabout controls and CEO and CFOcertifications, as well as information aboutstock repurchases and use of the proceedsfrom the IPO. XBRL requirements are alsobeing phased in for the financialstatements contained in Form 20-F. Otherdifferences from the IPO prospectusinclude items that a US company reportson a current basis on Form 8-K, such asmaterial modifications of the rights ofsecurity holders and changes inaccountants, or in the proxy statement,such as information about the code ofethics and other governance information.

Current reports on Form 6-K: A foreignprivate issuer must submit current reportson Form 6-K with any materialinformation that is, or is required to be:• made public in its home country;• publicly available as a result of a filing

with any stock exchange on which itssecurities are listed; or

• distributed to shareholders.

Unlike Form 8-K, Form 6-K does nothave a specific deadline, but instead mustbe filed “promptly.” Form 6-K is a verysimple form, consisting simply of a coverand signature pages to which the relevantinformation is attached. The informationneed not be in English, but a full Englishtranslation is required for press releases,annual or interim financial informationand information sent directly to securityholders. For other information, an Englishsummary will suffice.

Foreign private issuers are alsogenerally required to comply with the stockexchange rules requiring prompt disclosureof material events discussed above.

Rule 12b-20 under the Exchange Act: Asnoted above, the company’s publicdisclosures must include any additionalinformation “as may be necessary to makethe required statements, in light of thecircumstances under which they are made,not misleading.”

presents certain financial information in away that is different from the financialstatement presentation. Information thattriggers these SEC rules is referred to as“non-Generally Accepted AccountingPrinciples (GAAP) financial measures.” Use of non-GAAP financial measures in apublic statement (whether written or oral)is subject to Regulation G, which requiresthat the disclosure be accompanied by:• a presentation of the most directly

comparable financial measurecalculated and presented in accordancewith the company’s generally acceptedaccounting principles (GAAP); and

• a reconciliation (by schedule or otherclearly understandable method) of thedifferences between the non-GAAPfinancial measure and the most directlycomparable GAAP measure.

More stringent requirements apply ifthe company uses non-GAAP financialmeasures in a report filed with the SEC orin an earnings release. Although RegulationG may not apply in some cases todisclosures by foreign private issuers thatdo not use US GAAP, the more stringentrequirements for a report filed with theSEC apply to foreign private issuers.

(d) Disclosure controls, internal controlsand certificationsOne of the most significant challenges for the company after going public is therequired control framework and relateddisclosures. Perhaps the best-knownelement of that framework, oftenaccompanied by considerable cost, ismanagement’s report on the effectivenessof ICFR and a related auditors’ attestation.This requirement was imposed as a resultof Section 404 of the Sarbanes-Oxley Actof 2002 (SOX) and is often referred to as“Section 404 reporting,” or even “SOXreporting” (although the act provided formuch more than this). Separately,management is also required to report onthe effectiveness of disclosure controls and procedures, and the CEO and CFO are required to certify the company’speriodic reports.

ICFR: ICFR is a set of processes designedto provide reasonable assurance of thereliability of financial reporting and thepreparation of financial statements in

68 NYSE IPO Guide


As for ICFR, disclosure controls andprocedures must be designed by, or underthe supervision of, the CEO and the CFO,who must include statements about themin their certifications (discussed below).Management must evaluate and disclosethe effectiveness of disclosure controls andprocedures regularly (US companies mustdo so quarterly and foreign private issuersannually).

Disclosure controls and proceduresshould generally be documented in writingand tailored to reflect the operations of thecompany and its particular risk profile. The starting point for creating a system ofdisclosure controls and procedures shouldbe an inventory of the company’s existingpractices. The company should develop itsdisclosure controls and procedures inconsultation with its auditors and outsidecounsel, and ensure their compatibilitywith the company’s internal controls andother compliance policies and procedures.

Many companies choose to create adisclosure committee as part of theirdisclosure controls and procedures. Thiscommittee is responsible for consideringthe materiality of information anddetermining disclosure obligations on atimely basis, and typically includes:• the principal accounting officer or

controller;• the general counsel or other senior

legal officer with responsibility fordisclosure matters;

• the principal risk management officer;and

• the chief investor relations officer.

CEO and CFO certifications: As a result ofSOX, the company’s periodic reports mustinclude two types of CEO and CFOcertifications: Section 302 certificationsand Section 96 certifications. Thesecertifications must reproduce the requiredstatements exactly – they may not bechanged in any respect, even if the changeappears inconsequential in nature, althoughcertain portions of the certifications willnot be required until the company issubject to Section 404 reporting.

Under Section 302, each Form 10-K,Form 10-Q or Form 20-F must includestatements by the CEO and CFO, or personsperforming similar functions, certifying that:• he or she has read the report;• based on his or her knowledge, the

accordance with GAAP. These proceduresmust be designed by, or under thesupervision of, the CEO and the CFO, whomust include statements about them intheir certifications (discussed below).

Once Section 404 reporting is required,the company’s Form 10-K or Form 20-Fmust include a management reportcontaining:• a statement of management’s

responsibility for establishing andmaintaining adequate ICFR for thecompany;

• a statement identifying the frameworkused by management to evaluate theeffectiveness of ICFR;

• an assessment by management of theeffectiveness of ICFR as of the end ofthe most recent fiscal year, including a statement as to whether ICFR iseffective; and

• a statement that the auditors of thefinancial statements included in thereport have issued an audit report onthe effectiveness of ICFR.

The auditors’ report must also beincluded in Form 10-K or Form 20-F. Any material weaknesses in ICFR must be disclosed, and management and theauditors may not conclude that ICFR iseffective if there are one or more materialweaknesses. US companies must alsodisclose material changes in ICOFR inForm 10-Q.

A newly public company typically neednot comply with the Section 404 reportingrequirements until its second Form 10-Kafter the IPO. Currently, a non-acceleratedfiler need not provide the auditors’ report,but will be required to do so starting withits first Form 10-K for a fiscal year endingon or after June 15 2010.

Disclosure controls and procedures: Thecompany must also maintain disclosurecontrols and procedures. These arecontrols and procedures designed to ensurethat information required to be disclosedin the reports that the company files orsubmits under the Exchange Act(discussed above) is recorded, processed,summarized and reported in a timely andaccurate manner. They will overlap withICFR, but disclosure controls andprocedures cover both financial and non-financial information.

report contains no materialmisstatements or omissions;

• based on his or her knowledge, thefinancial statements and other financialinformation fairly present in allmaterial respects the financialcondition, results of operations andcash flows of the company as of and forthe periods presented in the report;

• the CEO and the CFO are responsiblefor establishing and maintainingdisclosure controls and procedures andICFR for the company, and have:• properly designed the disclosure

controls and procedures, or causedsuch disclosure controls andprocedures to be designed undertheir supervision;

• evaluated the effectiveness of thedisclosure controls and proceduresas of the end of the period coveredby the report;

• presented in the report theirconclusions about the effectivenessof the controls and proceduresbased on that evaluation; and

• disclosed in the report any changein the company’s ICFR thatoccurred during its most recentfiscal quarter (the fourth fiscalquarter in the case of an annualreport) that has materially affected,or is reasonably likely to materiallyaffect, the company’s ICFR; and

• the CEO and CFO, based on their mostrecent evaluation of ICFR, havedisclosed to the audit committee andthe company’s auditors:• all significant deficiencies and

material weaknesses in the designor operation of ICFR which arereasonably likely to adversely affectthe company’s ability to record,process, summarize and reportfinancial information; and

• any fraud (whether or not material)involving persons having a significantrole in the ICFR of the company.

Under Section 906, each periodicreport containing financial statements filedby the company must be accompanied by astatement by the company’s CEO and CFO(or equivalent thereof) certifying that:• the report fully complies with the

requirements of the Exchange Act; and• the information contained fairly

69NYSE IPO Guide


presents, in all material respects, thefinancial condition and results ofoperations of the company.

(e) Foreign Corrupt Practices ActA significant source of new compliancerequirements for the company following anIPO is the Foreign Corrupt Practices Act(FCPA). The FCPA comprises two sets ofprovisions. One set, the accountingprovisions, requires the company to keepaccurate books and records, and tomaintain a system of internal accountingcontrols. These procedures are designed to eliminate the ability of companies toconceal unlawful payments (although theaccounting provisions can be violated if no bribery is involved). The other set ofprovisions, the anti-bribery provisions,prohibits the bribery of non-USgovernment officials, who include:• officers and employees of a foreign

government, or of any governmentdepartment, agency or instrumentality(eg, a state-owned enterprise), or of apublic international organization (eg,the World Bank); or

• any person acting in an official capacityfor or on behalf of any suchgovernment department, agency orinstrumentality, or for or on behalf ofany such public internationalorganization.

Accounting provisions: The FCPA requiresthe company to maintain books, recordsand accounts that, in reasonable detail,accurately and fairly reflect thetransactions and dispositions of the assetsof the company, and to devise and maintainan adequate system of internal accountingcontrols. This system must be sufficient toprovide assurances that:• transactions are executed in accordance

with management’s authorization andrecorded as necessary to permit thepreparation of financial statements inconformity with the applicable criteriaand maintain accountability for assets;

• access to assets is permitted only inaccordance with management’sauthorization; and

• recorded accountability for assets iscompared with the existing assets atreasonable intervals and appropriateaction is taken with respect to anydifferences.

The SEC has adopted two rulesintended to promote compliance with theFCPA. The first rule prohibits all personsfrom directly or indirectly falsifying anybook, record or account of any companysubject to the FCPA. The second rulegenerally bars the company’s directors andofficers from making materialmisstatements, or omitting material factsfrom statements they make, to accountantsin connection with audits of the companyor examinations of the company’s financialstatements or SEC filings, and barsdirectors, officers and persons acting undertheir control from coercing, manipulating,misleading or fraudulently influencing theauditors if the person engaging in theconduct knew or should have known thatdoing so could render the company’sfinancial statements materially misleading.

The accounting provisions also applyto subsidiaries when the company owns orcontrols more than 50% of the votingpower of the subsidiary.

Anti-bribery provisions: The FCPAprohibits the company from using USinterstate commerce to corruptly make anoffer, pay, promise to pay or authorize thepayment of any money, gift or anything ofvalue to a foreign official, a foreign politicalparty or an official thereof. It furtherprohibits candidates for foreign office fromdoing any of the following to obtain orretain business for or with, or directbusiness to, any person:• influence any official act or decision;• fail to perform their official duties or

secure any improper advantage (eg, atax rate lower than one allowed by law);or

• use their influence with a foreigngovernment or instrumentality thereofto influence any act or decision of thatgovernment or instrumentality.

The types of payments described abovecannot be made or offered through a thirdparty if the payor knows that all or a portionof the payment would be made or offered to a non-US official. The company may bedeemed to “know” of improper payments to intermediaries even without actualknowledge of a bribe. A person isconsidered to “know” of improperpayments if circumstances exist, or if theperson has a firm belief that they exist,

indicating that the prohibited conduct issubstantially certain to occur. Consciousdisregard or deliberate ignorance of knowncircumstances that should reasonably alert one to the high probability of a bribecan lead to liability. If the company ignoreswarnings or “red flags” indicating that itsfunds were being used to bribe foreignofficials, the company may be subject toprosecution. The nature of those red flagsvaries depending on the circumstances, butenforcement authorities likely will expectcompanies to be particularly vigilant whenactive in industries (eg, the oil business) orgeographical areas (eg, certain countries inAfrica) known for corruption, or with partiesthat have a history of ethical problems.

The anti-bribery provisions apply toany acts of the company involving USinterstate commerce. If the company islocated or has its principal place ofbusiness in the United States, it is subjectto the anti-bribery provisions regardless of any other tie to the United States.Individual directors or employees of thecompany that are US citizens or residentsare subject to the anti-bribery provisionsregardless of any other connection withthe United States.

Exclusions from FCPA: The FCPA containsan important exception: it permits so-called“grease” payments. A grease payment is apayment whose purpose is to facilitate orexpedite “routine governmental action.”Examples of such actions include obtainingpermits, processing visas and providingpolice protection. “Routine governmentaction” does not include a decision by a non-US official to award new business or tocontinue business with a particular company.

The FCPA also has two affirmativedefenses:• The payment at issue was lawful under

the written laws of the foreign country;or

• The payment was made for a reasonable,bona fide business purpose, such astravel and lodging expenses, for thepromotion, demonstration orexplanation of a product (eg, paying thereasonable expenses of a non-US officialwho comes to the United States for ademonstration of a company product).

Enforcement and penalties: The FCPA isenforced by the US Department of Justice

70 NYSE IPO Guide


and the SEC. Penalties can be severe:• Accounting provisions – if convicted

of knowing violations, individuals maybe sentenced to up to 20 years’imprisonment and fined up to $5million for each violation, whilecompanies may be fined up to $25million for each violation.

• Anti-bribery provisions – convictedindividuals may be sentenced to up tofive years’ imprisonment and up to a$250,000 fine for each violation. Thecompany employing the individual maynot pay this fine on the employee’sbehalf. Convicted companies may befined $2 million or twice the applicablegross gain or loss, whichever is greater,for each violation.

When settling FCPA cases in recentyears, the Department of Justice hasfrequently required companies to hire anFCPA compliance monitor that periodicallyreports to the government on thecompany’s efforts to improve its anti-corruption policies.

In the past few years, the size of thepenalties imposed for FCPA violations hassignificantly increased, including a $44million penalty against Baker Hughes in2007, $800 million against Siemens in2008, $579 million against KBR andHalliburton in 2009, and $400 millionagainst BAE Systems in 2010.

5.2 Listing standardsWhen a company’s shares are listed on theNYSE or NYSE Amex, investors can expectcompliance with ongoing financialstandards, disclosure policies andcorporate governance practices designed to promote integrity and accountability.

(a) Financial and distribution standardsThe NYSE and NYSE Amex haveestablished quantitative and qualitativestandards for initial listing of US and non-US companies. The financial standards foroperating companies listing on the NYSEor NYSE Amex are summarized on thechart on page 73. Standards reflect thedifferent types of issues and issuers. Listedcompanies must meet continued listingstandards on an ongoing basis. These tooare outlined on page 74. Once companiesfall below continued listing standards,generally they are afforded a period of time

to return to compliance. Please see theappendices for more details, including thealternative listing standards for non-UScompanies included in Appendix II.

(b) Governance requirementsIn addition to these quantitative listingstandards, the company must meet NYSEor NYSE Amex corporate governance listingstandards, as applicable. The company mustcomply with corporate governancerequirements at the time of listing andthroughout the life of its listing. As withthe quantitative standards, differentstandards are applicable to different typesof issuers. In addition, for a companylisting in conjunction with an IPO, certainof the corporate governance requirementscan be phased in. Governance requirementsfor NYSE Amex listed companies, designedto accommodate smaller companies, differfrom NYSE requirements.

To learn more about the NYSE andNYSE Amex financial, distribution andgovernance requirements, please refer tothe complete requirements outlined in theNew York Stock Exchange Listed CompanyManual, the comprehensive rulebook forlisted companies, which can be accessedonline at http://nysemanual.nyse.com/lcm,or to the NYSE Amex Company guide,which can be referenced athttp://nyseamexrules.nyse.com/amex/companyguide. Alternatively, contact the NYSEor NYSE Amex directly.

5.3 Trading and repurchasesMany public companies repurchase theirshares from time to time – for example, to offset dilution from stock optionexercises or generally to return value toshareholders. These repurchases, as well assales of the company’s stock by directors,officers and other affiliates, should becarefully structured so as not to give rise to potential liability under the USsecurities laws.

(a) Tender offersAny tender offer by the company for itsequity securities is subject to Section 13(e)of the Exchange Act and Rule 13e-4thereunder. Whether a stock repurchaseconstitutes a tender offer depends on acomplex, fact-specific inquiry. If thecompany does conduct a tender offer, itmust comply with extensive disclosure

and other obligations, including openingthe tender to all holders of the class of thesecurities sought in the offer and payingthe same price to all holders whosesecurities are purchased. The company canavoid the tender offer rules by conductingrepurchases of its equity securities eitherthrough customary market transactions orin individually negotiated privatetransactions (in either case, in accordancewith the provisions of Rule 10b-18discussed below).

(b) Stock repurchase programsAnother concern when the companyrepurchases its stock is that this will beviewed as market manipulation (seeChapter 6.1 for further discussion aboutmarket manipulation and related liability).Rule 10b-18 under the Exchange Actprovides a safe harbor from this liability.As a result, companies generally adhere tothe provisions of Rule 10b-18 whenrepurchasing stock, and in particular when conducting a program of repurchasesover a period of time. Rule 10b-18 requiresthe following:• Single broker or dealer – on a given

day, the company must make allrepurchases either through one brokeror from one dealer.

• Timing – no repurchase should beeffected at the opening of the stockexchange on which the stock lists orwithin the last half-hour of trading on that stock exchange.

• Maximum price – no repurchaseshould occur at a price exceeding thehigher of the last sale price for thesecurities and the current bid price for the securities.

• Volume – the total volume ofrepurchases by the company or anyaffiliated purchaser on any given daymust not exceed 25% of the tradingvolume for the security. However, onceeach week, the company may insteadeffect a single purchase of a “block” of securities.

The SEC recently proposed somerelatively technical adjustments to theserequirements, but they have not yet beenfinalized. The safe harbor provided by Rule10b-18 is not available at any time duringwhich the company is engaged in a“distribution” of its securities in the

71NYSE IPO Guide


NYSE original listing standards* NYSE continued listing standards*

Standard 1Earnings

$10 million aggregate pre-tax earnings (as adjusted)for the last three fiscal years, with at least $2 millionin each of the most recent two fiscal years andpositive amounts in all three years.or$12 million aggregate pre-tax earnings (as adjusted)for the last three fiscal years, with at least $5 millionin the most recent fiscal year and $2 million in thenext most recent fiscal year.

A company falls below compliance if its global marketcap falls below a $50 million 30-day average and at thesame time it has less than $50 million in shareholders’equity.

Standard 2Option AValuation/revenue withcash flow

$500 million global market cap.

$100 million revenues over the most recent 12 months.

$25 million aggregate cash flow (as adjusted) for the last three fiscal years, all years positive.

A company falls below compliance if:• its global market cap falls below a $250 million 30-day

average and at the same time it has less than $20million revenues over the most recent 12 months;

or• its global market cap falls below a $75 million 30-day

average.

Standard 2Option BPure valuation/revenue test

$750 million global market cap (IPO valuation orthree-month average).

$75 million revenues in the most recent fiscal year.

A company falls below compliance if:• its global market cap falls below a $375 million 30-day

average and at the same time it has less than $15million revenues for the most recent fiscal year;

or• its global market cap falls below a $100 million 30-day

average.

Standard 3Affiliatedcompany


12 months’ operating history.

Parent or affiliated company is a listed company in good standing.

A company falls below compliance if the parent/affiliateno longer “controls” the company or such parent/affiliatefalls below continued listing standards and the company’sglobal market cap falls below a $75 million 30-dayaverage and at the same time it has less than $75 millionin shareholder’s equity.

Standard 4Assets/equity


$75 million total assets.

$50 million shareholders’ equity.

A company falls below compliance if its global marketcap falls below a $50 million 30-day average and at thesame time it has less than $50 million in shareholders’equity.

*The company must have an IPO stock price or a public market price at the time of initial listing of $4.00 per share and will fall below continuedlisting requirements if its stock price falls below $1.00 on a 30-day average. At the time of original listing the company must have:i) 400 round-lot holders (ie, holders of 100 shares) and 1.1 million publicly held shares; and ii) a market value of publicly held shares of $40 million(in the case of an IPO, spin-off or company listing under the affiliated company standard) or $100 million (all other listings). Shares held bydirectors, officers or their immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publiclyheld shares. The company is subject to immediate delisting proceedings if its global market cap falls below a $15 million 30-day average.

72 NYSE IPO Guide


United States, and does not protect againstliability under Rule 10b-5 if the companyrepurchases its securities while inpossession of material non-publicinformation.

The company will often disclose plannedrepurchase activity in its periodic reports orearnings releases and may be required todisclose significant repurchase transactionsby press release. The company’s periodicreports must also include specific disclosureabout all of its stock repurchases over theperiod covered by the report.

Accelerated share repurchase plans:The company may use accelerated sharerepurchase plans to buy back shares fromthe market. A typical accelerated sharerepurchase involves the combination of a buyback of common stock from aninvestment bank, which typically borrowsthe shares from investors, and a forwardcontract with the investment bank on the

NYSE Amex continued listing standards

A company will be below continued listing requirements if it has:

• Stockholders’ equity less than:• $2 million and losses in two out of the three most recent fiscal years;• $4 million and losses in three out of the four most recent fiscal years; or• $6 million and losses in the five most recent fiscal years.

A company that falls below any of the above will continue to be deemed incompliance with listing standards if it meets the following requirements:

• Market capitalization of $50 million; OR total assets AND total revenue of $50million each in most recent fiscal year or two of the three most recent fiscal years.

• 1.1 million shares, a market value of publicly held shares of $15 million, 400round-lot shareholders.

• Less than 200,000 publicly held shares.

• Less than 300 public shareholders.

• A market value of publicly held shares of less than $1 million (over 90 consecutive days).

NYSE Amex original listing standards

Requirement Standard 1Section 101(a)

Standard 2Section 101(b)

Standard 3Section 101(c)

Standard 4Section 101(d)

Stockholders’ equity $4 million $4 million $4 million n/a

Pre-tax income $750,000 in last fiscalyear or in two of the lastthree fiscal years

n/a n/a n/a

Market capitalization n/a n/a $50 million • $75 million;or• total assets and total

revenue of $75 millioneach (in most recentfiscal year or two oflast three fiscal years).

Minimum stock price $3 $3 $2 $3

Market value of publiclyheld shares

$3 million $15 million $15 million $20 million

History of operations n/a Two years n/a n/a

Publicshareholders/publiclyheld shares*

Option 1 – 800/500,000Option 2 – 400/1,000,000Option 3 – 400/500,000

*Public shareholders and public float do not include shareholders or shares held directly or indirectly by an officer, director, controllingstockholder or other concentrated (ie.,10% or greater), affiliated or family holdings. Option 3 requires a daily trading volume of 2,000 sharesduring the six months prior to listing.

73NYSE IPO Guide


shareholders that directly or indirectlycontrol management or policies of thecompany, are considered “restricted,” andresales must either be registered with theSEC or be effected pursuant to anexemption. Securities acquired by a non-affiliate in a private transaction are alsoconsidered restricted securities for aperiod of up to one year.

Rule 144 under the Securities Act is acommon exemption used by affiliates toresell their company securities, with thefollowing requirements:• Holding period – the affiliate must

hold the shares for at least six monthsbefore resale. One exception is forshares obtained pursuant to a writtencompensatory plan or contract. In thatcase, Rule 701 under the Securities Actallows resale under Rule 144 withoutany holding period. This resale mustoccur at least 90 days after theeffective date of the IPO.

• Volume limitation – in any three-month period, sales by the affiliate maynot exceed the greater of 1% of thecompany’s total outstanding shares orthe average weekly reported volume inthe securities on the exchange duringthe four weeks preceding the sale.

• Current public information – thecompany must have timely filed allrequired reports with the SEC.

• Manner of sale – the sale must bemade through a broker-dealer or incertain other specified transactionsthrough a stock exchange.

In some cases when using Rule 144, anaffiliate must file Form 144 with the SECand the stock exchange on which thesecurities trade.

5.4 Obligations affecting shareholders

(a) Ownership reporting by shareholdersAfter the IPO, the company’s majorshareholders (or groups of shareholdersacting together) will be required to complywith certain reporting and otherrequirements under the Exchange Act.These requirements are in addition to thoseapplicable to officers, directors and 10%shareholders under Section 16 of theExchange Act. The company’s managementusually encounters these requirements intwo ways. First, a company with a

company’s common stock. Settlement ofthe forward contract is indexed to thecompany’s common stock. Acceleratedshare repurchase plans allow the companyto exchange a fixed amount of money forshares of its stock immediately,transferring the risk of changes in theshare price to the investment bank andgenerally permitting immediate accountingrecognition of the repurchase for earningsper share purposes.

The company cannot benefit from theRule 10b-18 safe harbor when usingaccelerated share repurchase plans, becausethe rule protects only traditional open-market stock repurchases and not theforward contracts upon which such plansare based.

(c) Rule 10b5-1 plansAs discussed in Chapter 6.1, insidertrading liability is triggered by the sale or repurchase of a company’s shares by aparty that trades while aware of materialnon-public information about thecompany. This liability could apply to atransaction by the company or its officers,directors or other insiders. One way toconduct trades in the company’s securitiesduring a “blackout” window (eg, in advanceof the company’s earnings release),without risking violation of theprohibition against insider trading, is toenter into a Rule 10b5-1 plan.

A Rule 10b5-1 plan is a contract topurchase or sell securities established priorto any trades. The plan must have beenadopted in good faith during an opentrading window and without knowledge of material non-public information. It may also be modified only at those times,although it can be terminated at any time.The insider may not influence the person orentity responsible for executing the plan, which is generally an investment bank.

Anyone that is routinely exposed tomaterial non-public information that areasonable investor would use to buy, sell or hold shares of company stock is acandidate for a Rule 10b5-1 plan. Thisincludes the company itself, directors,officers and other employees, and largeshareholders.

(d) Resales by affiliatesCompany securities held by affiliates,including officers, directors and large

controlling or principal shareholder willoften monitor that shareholder’scompliance with these requirements.Second, filings under these requirementsoccasionally provide important informationabout transactions by major shareholders.

Schedule 13-D filers: Pursuant to Sections13(d) and 13(g) of the Exchange Act, and therelated SEC regulations, each person (orgroup of persons acting together) acquiringany voting equity securities registeredunder the Exchange Act as a result ofwhich such person or group beneficiallyowns more than 5% of such securitiesmust file with the SEC, within 10 days ofthe 5% threshold being crossed, a reporton Schedule 13-D, and must send copies tothe company and relevant exchanges. Asdiscussed below, some shareholders maybe able to file instead on Schedule 13-G,which requires less information.

Schedule 13-D requires disclosure of:• the identity of the acquirer (or each

member of the group), including itsmanagement, directors and controllingentities;

• the source and amount of funds used to acquire the securities;

• the purpose of the acquisition,including any plans or proposals theacquirer may have for future purchasesor sales of target stock or for anychanges in the target management orboard of directors, or any majorcorporate transaction affecting controlof the target, such as a tender offer orbusiness combination;

• the amount and percentage of targetsecurities held by the acquirer anddetails about transactions in suchsecurities during the 60 days prior to filing of the Schedule 13-D (or, ifshorter, for the period since the mostrecent Schedule 13-D filing); and

• the nature of any arrangements towhich the acquirer is a party relating to the target’s securities.

Documents relating to the financing ofthe acquisition and any contemplatedextraordinary transaction involving thecompany must be filed as exhibits to theSchedule 13-D filing.

Schedule 13-D filings can be quite longand complex. In the event of a contest forcontrol, there can be litigation challenging

74 NYSE IPO Guide


Schedule 13-G;• the amount and percentage of target

securities that it holds; and• the identity of the persons on whose

behalf it owns the securities or thatcompose an acquiring group.

A qualified institutional investorgenerally need not file its Schedule 13-Guntil 45 days after the end of the calendaryear in which the acquisition occurred, andonly if it remains above the 5% thresholdat the end of the calendar year. Thereafter,the filing must generally be amendedannually. It must also be amended within10 days of the end of the first month inwhich the qualified institutional investor’sdirect or indirect beneficial ownershipinterest exceeds 10% of the class, andthereafter within 10 days of the end of anymonth in which its interest increases ordecreases by more than 5% of the class.

A non-qualified passive investor mustfile its Schedule 13-G within 10 calendardays of crossing the 5% threshold. It mustalso amend its filing “promptly” if itacquires beneficial ownership of more than10% of the subject class of securities.After it exceeds the 10% threshold and so long as its percentage of beneficialownership remains below 20%, anadditional amendment to the non-qualified passive investor’s report onSchedule 13G must also be filed“promptly” to reflect any increase ordecrease in beneficial ownership of morethan 5% of the class of subject securities.

If a non-qualified passive investorincreases its ownership above 20%, it mustfile a Schedule 13-D within 10 days, and isprohibited from purchasing any additionalshares or voting the securities subject tothe Schedule 13-D filing until 10 days afterthe filing. Similarly, both a qualifiedinstitutional investor and a non-qualifiedpassive investor must convert to aSchedule 13-D within 10 days of theirintentions being no longer passive and areprohibited from purchasing any additionalshares or voting the securities subject tothe Schedule 13-D filing until 10 days afterthe filing.

Comparable non-US institutions maybe permitted to report their beneficialownership on a short-form Schedule 13-Gto the same extent as their UScounterparts, subject to certain conditions.

the accuracy of the filing, and especially ofstatements describing the acquirer’spurpose and plans. Filers often try topreserve as much flexibility as possible bydescribing a wide variety of options.

A report on Schedule 13-D must beamended “promptly” (which can meanalmost immediately in somecircumstances) in the event of a materialchange in the information disclosed in theschedule, including a change in – or, in theview of the SEC, the selection of oneparticular purpose from – the previouslydisclosed options. Any acquisition ordisposition of 1% or more of the relevantclass of securities is deemed material forthis purpose, while a lesser change inholdings may be material, depending onthe circumstances.

Schedule 13-G filers: An existingshareholder that already owns more than5% of the company at the time the sharesare initially registered is required to file areport on Schedule 13G within 45 days ofthe end of that calendar year. Thereafter, theshareholder must amend its report within45 days of the end of each calendar year toreflect any changes, as of that year-end, inthe reported information. It must convert toreporting on Schedule 13-D within 10 daysof its ownership percentage increasing bymore than 2% in any 12-month period, butit need not amend its Schedule 13-G or filea Schedule 13-D merely by reason of achange in its intentions or plans.

There are two other types of investorsthat may report on Schedule 13-G insteadof Schedule 13-D, provided that they haveacquired shares in the ordinary course ofbusiness without the purpose or effect ofchanging or influencing control of thecompany:• a “qualified institutional investor” that

falls within certain specified categoriesof institutions; and

• a “non-qualified passive investor” thatdoes not fall within the specifiedcategories but beneficially owns lessthan 20% of the shares.

Schedule 13-G requires much morelimited information than Schedule 13-D.The principal disclosures required bySchedule 13-G include:• the identity of the holder;• the basis for its eligibility to use

(b) Reporting by insidersCertain “insiders,” including executiveofficers, directors and investors owningover 10% of the shares of the company, willgenerally be required to file disclosurereports under Section 16(a) of the ExchangeAct regarding changes in their beneficialownership of the company’s shares withintwo days of the transaction on the SEC’sEDGAR system. The reports must also beavailable on the company website. They willalso be subject to the “short-swing profitrecapture” provisions under Section 16(b)of the Exchange Act designed to limit theirability to reap profits from any purchasesand sales within six months of each other.Section 16(c) of the Exchange Act and therules thereunder generally prohibit suchinsiders from effecting short sales andtaking short positions in derivativesecurities with respect to the company’sshares. In connection with the IPO, thecompany should determine who, in its view,are its “executive officers” for Section 16and proxy purposes.

It can be challenging to manage all ofthe moving parts included in filing Forms3, 4 and 5 with the SEC. The company cantake complete control of the filing processby utilizing a web-based filing solutionwhich allows it to file the forms directlyfrom its own computers. Alternatively, itcan outsource the filings to a financialprinter that has the resources andexperience necessary to ensure that thesefilings meet the tight SEC deadlines.

Summary of Section 16 for foreign privateissuers: Directors and officers of a UScompany with a class of equity securitiesregistered under the Exchange Act, andbeneficial holders (whether or not USholders) of more than 10% of any class ofequity securities of such company,generally must file reports regarding theirownership of such securities. They are alsosubject to short-swing profit recaptureprovisions designed to recapture for thebenefit of the company profits realized onpurchases and sales of equity securitiesregistered under the Exchange Act withinany six-month period. These requirementsdo not apply to directors, officers and largeshareholders of foreign private issuers.

Excerpts on other Section 16 information:A number of transactions in securities in

75NYSE IPO Guide


reporting obligation under Section 13(d)with respect to the underlying securities. If such derivative securities are, within 60days, convertible into or exercisable formore than 10% of a security, such holderwill also be deemed an insider of thecompany of such security subject to thereporting obligations under Section 16(a).

(c) Related party transactionsIt is not uncommon, pre-IPO, for thecompany to do business informally withfamily members or without giving dueconsideration to whether certaintransactions are done at an arm’s-lengthdistance. Once the company conducts itsIPO, however, it needs to be careful aboutso-called “related party transactions”because they can present potential or actualconflicts of interest and create theappearance that decisions are based onconsiderations other than the best interestsof the company and its shareholders.

Definition: The SEC defines a “relatedparty transaction” as:• any individual or series of transactions,

including any financial transaction,arrangement or relationship;

• in which the company participates;• where the amount involved exceeds

$120,000; and• in which any related person had or

will have a direct or indirect materialinterest.

A “related person” includes:• any director or executive officer of

the company;• any nominee for director, if the

information is being provided in aproxy statement;

• any beneficial owner of more than 5%of any class of the company’s votingsecurities; and

• any immediate family member of thepeople listed above (ie, any child, step-child, parent, step-parent, spouse,sibling, mother-in-law, father-in-law,son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such people,and any person (other than a tenant oremployee) sharing the household ofsuch people).

Reasons for concern: The company shouldcare about related party transactions for a

which an insider has a pecuniary interestare exempt from reporting under Section16(a). For example, an increase or decreasein the number of securities held as a resultof a stock split or stock dividend applyingequally to all securities of a class and anacquisition of securities pursuant to adividend or interest reinvestment plan areexempt from reporting under Section 16(a),subject to certain conditions. In addition,changes in beneficial ownership pursuantto transactions that are exempt fromshort-swing profit recapture under Section16(b) are generally reportable on Form 5rather than Form 4 (although certain ofsuch transactions must be reported onForm 4, pursuant to Rule 16a-3(f)).

To the extent that an exemption existsfrom the reporting requirements of Section16(a) in respect of any transaction in asecurity, the short-swing profit recaptureprovisions of Section 16(b) likewise do notapply to such transaction (see Rule 16a-10).Rule 16a-10 does not apply in the reverse;an exemption from the short-swing profitrecapture provisions of Section 16(b) does not automatically provide anexemption from the reportingrequirements of Section 16(a).

An insider must file Form 4 with theSEC and with each national securitiesexchange on which any security of thecompany is listed within 10 days of the end of each month in which any reportablechange in position occurs with respect toany security as to which it has a direct orindirect pecuniary interest. Everytransaction during such month must bereported, even if acquisitions anddispositions during such month even out.

For purposes of beneficial ownership, aperson can be deemed to own beneficiallynot only securities owned directly by suchperson, but also securities underlyingderivative instruments convertible into orexchangeable for securities. For example,the holder of an option convertible intosecurities within 60 days will be deemed,for the purposes of Section 13(d) (anddetermining a person’s status as an insiderunder Section 16(a)), to indirectlybeneficially own the underlying securities,whether or not the option has beenexercised. Thus, derivative securitiesowned by an insider which are, within 60days, convertible into or exercisable formore than 5% of a security will create a

number of reasons:• It makes good business sense – related

party transactions may involve termsthat are not as competitive as mightotherwise be achieved, preventing thecompany from best accomplishing itsfinancial or strategic goals.

• Some related party transactions areprohibited – under the securities laws,the company is prohibited from makingloans to directors or executive officers.Any such loans would have to beunwound prior to the company’s IPO.

• Shareholders care – related partytransactions signal a possible conflictof interest to investors. They can callinto question whether the companyputs the best interests of the companyand its shareholders first, tarnishingthe legitimacy of management anddamaging valuation of the company’ssecurities.

• The SEC cares – the SEC identifiesdisclosure regarding related partytransactions as integral to a materiallycomplete picture of financialrelationships with the company. As aresult, securities regulations requiredetailed disclosure on thesetransactions in proxy statements,annual reports and registrationstatements, including Form S-1. The disclosure must cover suchinformation as the name of the relatedperson and the basis on which theperson is a related person, the relatedperson’s interest in the transactionwith the company, the approximatedollar value of the transaction and anyother information regarding thetransaction that is material to investorsin light of the circumstances of theparticular transaction.

• Stock exchanges care – the listing rulesof the various stock exchanges requirethe company to think carefully aboutrelated party transactions. For example,NYSE-listed companies must adopt acode of business conduct for officersand employees that address conflicts of interest.

• Auditors care – auditors are obligatedto have sufficient understanding of thecompany’s business activities to assesswhether the company’s disclosures onrelated party transactions are adequate.Accounting requirements dictate

76 NYSE IPO Guide


who are responsible for applying suchpolicies and procedures – the companyshould consider the board committeeresponsible for administering thepolicy. Usually the audit committee ischarged with this task, but it may alsomake sense for the nominating andcorporate governance committee to beresponsible for matters relating todirectors. Also, the company shouldestablish when the responsible personswill review related party transactions.Although subsequent review may beacceptable, best practice mandatesprior review.

In order to enable board members ordelegates to make informed advancedecisions on related party transactions,company procedures need to ensure thatthe information presented to them issufficient in scope and quality:• Sources of information – the first

source of information should be therelated parties themselves. Forexample, the directors’ and officers’questionnaire should capture basicinformation about transactionsbetween directors and officers, theirfamily members and the company.Furthermore, directors and officersshould have an ongoing obligation toinform the company in advance of anypotential related party transaction andto provide updates of parties related to them, their employment andrelationships with charitableorganizations. The company may alsoconsider instituting independentinformation-gathering procedures,which may include periodic review of news articles or internet searches.

• Application of information – thecompany may consider developing a related party master list to bedistributed, with any updates, to therelevant members of management suchas the CFO and business unit anddepartment leaders responsible forpurchasing or selling. The companymay also develop a “watch list” ofpotentially related persons, using thesources of information described aboveto check whether their status changes.

Tasks: In preparing for IPO, the companyand its lawyers should do the following:

certain disclosures about related partytransactions. Audit rules set forthspecific auditing procedures on how to determine the existence of relatedparties and transactions with them,how to examine identified related partytransactions and how to respond tomanagement’s representations that atransaction was consummated at arm’slength. These audit procedures arequite detailed and can involve a reviewof the company’s board minutes, proxyinformation and other material filedwith the SEC, shareholder listings andother potential sources of information.

How to deal with the issue: The companyshould develop policies and procedures forthe review, approval or ratification ofrelated party transactions. The securitieslaws require the company to have a relatedparty transaction policy and describe it incertain filings. Clear policies are alsoessential to provide directors and officerswith guidance on related party transactionsand how the company will deal with them.Although the securities laws do notmandate the specific features of the policy,they do suggest that it may be appropriateto include the following:• Types of transactions covered by the

policies and procedures – the companyshould consider what makes mostsense given its business requirements,corporate structure and operating style.Also, it pays to be aware of “hot-button” issues when describing thetypes of transactions covered. Forexample, the SEC is especially sensitiveabout transactions involving familymembers, so the company mayconsider developing a nepotism policy.

• Standards to be applied pursuant to thepolicies and procedures – policiesshould hold all related parties to thesame standards as third parties.Although there may be situations wherea limited market makes it difficult toestablish what the terms and manner ofsettlement of a particular transactionwould be with a third party, thecompany should nevertheless attemptto set forth objective business criteriaagainst which the related partytransaction can be reviewed.

• The persons (or groups of persons onthe board of directors or otherwise)

• Review both existing related partyarrangements and any plans for newones as soon as possible. Consider theimpact of such arrangements ondisclosure and governance standards.

• Identify arrangements between officers,insiders and their close relatives on theone hand, and the company on theother; these arrangements willgenerally have to be disclosed.

• Confirm that the compensationcommittee approves all elements of compensation paid to executiveofficers. Compensation exceeding$120,000 paid to executive officersmust be disclosed if not approved (or recommended for approval) by thecompensation committee or a group of independent directors performingthat function.

• Unwind loans to directors and officersbefore the initial IPO registrationstatement is filed with the SEC.

• Develop written related partytransaction policies and procedures. If the company already has a code ofconduct or other policies addressingthis issue, it may be preferable tointegrate related party transactionspolicies with such existing policies.Although the securities laws do notrequire that policies and procedures be in writing, best practice mandateswritten policies.

77NYSE IPO Guide

Managing risk

6

78 NYSE IPO Guide

Managing risk

is required to make and keep books,records and accounts which, inreasonable detail, accurately and fairlyreflect the transactions anddispositions of its assets. The SECregularly uses this as a basis forenforcement proceedings, and thecompany, its officers and directors andother parties who control the companymay be subject to civil or criminalpenalties, including fines andimprisonment, if they are found tohave violated this provision.

• Market manipulation – transactions in the company’s own securities couldraise concerns about the possiblemanipulation of the market price.Manipulation would expose thecompany to a variety of civil andpotentially criminal liabilities.

The individual states have securitiesstatutes that are analogous to the federalsecurities law statutes. Federal law pre-empts state law to a degree in certain areas(eg, registration of offers and sales, classactions), but generally not with regard tosecurities fraud or misrepresentation. All US states (other than New York) havestatutes that allow investors to sue torescind transactions or recover damageswhen securities are sold by means ofmaterially misleading offering documents.In approximately 35 states, including anumber with a significant investor base,sellers must show they exercisedreasonable care to avoid liability. However,state securities laws are unlikely to providea basis for the nationwide class actions orother large-scale proceedings that havemarked securities litigation under thefederal securities laws.

Finally, the corporate laws of theindividual states impose basic “fiduciary”duties on directors and officers, with theseduties being owed to the company itselfand its shareholders. Directors have twofundamental fiduciary duties: the duty ofcare and the duty of loyalty. Directors mustact in good faith, with the care of a prudentperson and in the best interest of thecompany. They must refrain from self-dealing, usurping corporate opportunitiesand receiving improper personal benefits.Decisions made on an informed basis, ingood faith and in the honest belief that theaction was taken in the best interests of

6.1 Litigation

(a) Legal standardsSources of liability: The main potentialsources of liability for public companiesand their officers, directors and otheremployees are the federal securities laws,state securities laws and state corporatelaw of fiduciary duty.

The principal areas under whichlitigation arises under the federalsecurities laws are as follows:• Disclosure liability provisions –

several specific provisions of thefederal securities laws impose liabilityfor written or oral statements aboutthe company or its securities thatcontain a material misstatement ormake a material omission. The preciseliability standard and burdens of proofvary among statutes, as do the availabledefenses based on the defendant’sexercise of reasonable care or theplaintiff’s non-reliance on thedisclosure. Depending on the specificprovision, the Securities and ExchangeCommission (SEC) may bring criminalor civil penalties against the company,its directors and officers; and privateparties may also rely on these laws toassert claims for damages or rescission.

• Anti-fraud provisions – the companyand others may face liability underbroadly worded statutes andregulations addressing fraud in thesecurities markets. The mostimportant of these are Section 10(b) of the Securities Exchange Act of 1934and Rule 10b-5 thereunder, which applyin connection with purchases and salesof securities. Rule 10b-5 broadlyprohibits fraudulent and deceptivepractices and untrue statements oromissions, both written and oral, ofmaterial fact in connection with thepurchase and sale of any security. Rule10b-5 applies not only to documentsfiled with the SEC, but also to anyinformation released to the public bythe company, including press releasesand annual reports to shareholders.This catch-all anti-fraud provision has been widely used in securitieslitigation by private parties and theSEC alike.

• “Books and records” requirements –under the Exchange Act, the company

the company will be protected by the“business judgment rule.” Generally,officers owe similar fiduciary duties asdirectors. Officers also may owe a duty to keep the board informed. Officers withgreater knowledge and involvement may be subject to a higher standard of scrutinyand liability.

Directors and officers can be held liableto the company for violations of theseduties. The shareholder derivative suitprovides a means by which a privatelitigant can enforce duties on behalf of the company.

Types of proceedings: Remedies andsanctions for improper securities activitiescan be sought in three basic ways:• Civil (including class actions and

derivative suits) – private parties seekto recover losses allegedly suffered as aresult of the defendant’s conduct, orrequest relief to compel or to stopcertain actions. Government agencies,such as the SEC, may also bring civilactions to force the defendant to giveup illegally obtained profits or paymonetary penalties, or to compel orstop certain actions.

• Administrative – government agenciesbring administrative proceedings beforeadministrative judges, who follow therules promulgated by the applicableagency. For certain violations of thefederal securities laws, the SEC maybring administrative proceedings toimpose civil penalties or an order tobring immediate halt to allegedlyimproper conduct.

• Criminal – only the Department ofJustice can institute federal criminalproceedings. Defendants who areconvicted in criminal proceedings facesubstantial fines and, in the case ofindividuals, terms of imprisonment.

None of these mechanisms is exclusiveand a party may be forced to defend againstmore than one type of proceeding.

Liability for corporate disclosures: Thesecurity laws do not impose a general dutyto disclose material information about thecompany. Rather, such disclosure isrequired only when there is a legal duty todo so. This duty arises in connection withthe purchase and sale of securities,

79NYSE IPO Guide

Managing risk

• Trade only in “window periods” incompliance with any internalprocedures, after all importantcorporate developments have beendisclosed to the market.

• Trade pursuant to a Rule 10b5-1 plan(see Chapter 5.3).

Sarbanes-Oxley provisions: The Sarbanes-Oxley Act of 2002 (SOX) enhanced theSEC’s enforcement powers, expanded areasof personal exposure for directors andexecutive officers and created new criminalprovisions. These provisions include:• giving the SEC the authority to freeze

possible “extraordinary payments” todirectors, officers, agents andemployees during the course of aninvestigation involving “possible”violations of the federal securities laws;

• mandating forfeiture of certain chiefexecutive officer (CEO)/chief financialofficer (CFO) bonuses and profits inconnection with restatements;

• giving the SEC the authority to seekequitable relief for the benefit ofinvestors, which it has invoked to seekdisgorgement of all compensationreceived after alleged occurrence offraud, not just bonuses and incentivecompensation;

• giving the SEC the authority to barpersons from serving as directors orofficers of public companies in ceaseand desist proceedings; and

• creating civil and criminal penalties for false certifications by officers ofperiodic reports.

Corporate compliance programs: Acorporate compliance program is a writtenand operational commitment to company-wide compliance with all applicable laws. Acompliance program protects the companyand management in three major ways:• It reduces the chance that employees

will engage in criminal misconduct.• If employees do break the law, it can

help mitigate the consequences for thecompany. The Department of Justice,the SEC and many other agencies aremore lenient on companies witheffective compliance programs whenmaking charging decisions andassessing penalties.

• It establishes behavioral andprofessional expectations for

whether in registered or private offeringsor in secondary market trading. Thecompany and its directors and officers can be liable for material misstatementsand omissions in public disclosures. Thisliability risk is mitigated by conductingappropriate due diligence prior to theinitial public offering (IPO) andestablishing robust internal reporting and disclosure controls and procedures in connection with ongoing reportingobligations.

Liability relating to insider trading: Insidertrading liability arises under Rule 10b-5when a party trades the company’ssecurities (or “tips” others to do so) whileaware of material non-public information.The number of insider tradingenforcement actions by the SEC hasincreased steadily over the last five yearsand it is expected that this aggressiveenforcement trend will continue. To reducethe risk that trading by those parties in itssecurities may be claimed to violate theprohibition against insider trading, thecompany should observe the followingguidelines:• Only trade during “window periods”

tied to the release of the company’sinterim and annual earnings reportsand other material information and thepublic filing of such information withthe SEC and the relevant securitiesexchange.

• Develop and promote a written policyand code of ethics with clear guidelinesprohibiting insider trading andaddressing general standards ofconduct, protection of confidentialinformation and whistleblowing.

• Develop robust compliance programs.• Conduct periodic training on

contemporary regulations,requirements and developments for all employees, including directors,officers and other management.

Meanwhile, directors, officers andemployees should observe the followingguidelines:• Do not trade when aware that a

material event or trend is developing or will occur, but is not yet ripe fordisclosure.

• Do not selectively disclose materialnon-public information to others.

employees, allowing the company to set standards in advance andfacilitating termination of employeesfor misconduct when rules are notfollowed.

(b) Class action and derivative lawsuitsImagine the shock if the newly publiccompany were to be served with a federalsecurities class-action lawsuit within 10days of the IPO. This happened to a newissuer in July 2008. In fact, most securitiesclaims are filed within three years of anIPO and there is a significantly higherprobability that a class action will arise ifan IPO is involved. So when managing riskin a newly public company, it is critical tounderstand the primary civil liabilityexposures faced by directors and officers.

Direct class actions: The primary exposurefor directors and officers of US-listedcompanies continues to come from federalsecurities laws, in particular sections ofthe Securities Act of 1933, the ExchangeAct and SOX. Claims made againstdirectors and officers under these statutesare frequently brought as class actionlitigation, where damage and settlementproceeds go directly to shareholdersallegedly harmed. There are also statutesthat may have industry-specificapplication.

The intent of the Securities Act is toprevent fraud in securities offerings and toassure that investors receive full disclosurein connection with the offer and sale ofsecurities by the company. As such, itimposes a high standard of conduct ondirectors and officers of the company.Section 11(a) of the act states that a personthat purchased a security covered by aregistration statement (eg, an IPO andsecondary public offering of equity ordebt) may recover damages from, amongothers, the company and its directors andofficers who signed the registrationstatement if the registration statement:• contained a misstatement of material

fact; or• omitted to state a material fact that

either was required to be stated or wasnecessary in order for the registrationstatement not to be misleading (thisincludes anyone who has consented tobe a director of the company and isnamed as a director in the registration

80 NYSE IPO Guide

Managing risk

15 provides that any person who is deemedto control any person found liable underSection 11 or 12 will share liability for thedamages imposed on the controlled person.Companies undergoing an initial publicoffering might seek such affirmativecoverage, in particular companies whosedirector and officers might be deemed tobe control persons following the IPO.

Turning to the Exchange Act, theobjective of this legislation is to increasethe information available to publiccompany investors through theimplementation of disclosure requirementsand to prevent unfair practices in USsecurities markets. As discussed earlier,Rule 10b-5 involves broad liability andincludes statements or omissions in thecompany’s Exchange Act filings (eg, Forms10-K, 10-Q and 8-K). The rule makesillegal any practice to defraud investors,including making any untrue statement ofmaterial fact or omitting a material fact inthe company’s filings. Actions may bebrought against the company and/or itsofficers or directors by private parties, the SEC or the Department of Justice. In general, Rule 10b-5 liability is broaderthan Section 11 liability as applied to thedirectors and officers of the company.Moreover, plaintiffs’ lawyers mustdemonstrate “scienter,” which is anintention by a defendant director or officerto defraud.

Shareholder derivative suits: Anotherfrequent source of liability and expense iswhat is commonly called a “derivativesuit.” These are lawsuits by shareholderson behalf of the company againstindividual directors and officers forviolations of state and common lawfiduciary duties owed to the company andother wrongdoing. Most shareholderderivative suits are resolved throughpayment of fees to plaintiff’s counsel andby the company’s adoption of certain corporate governance andmanagement reforms negotiated betweenthe company and the plaintiffs, thepurposes of which are to strengthenprotections for investors and enhanceshareholder value.

Until recently, derivative actions rarelyresulted in substantial monetary recoveries.However, within the last two years therehave been a number of derivative actions

statement, not just those who havesigned the registration statement).

While the company is strictly liable for violations of Section 11, directors andofficers may avoid liability if they aresuccessful in establishing their owndefense. If the misstatement or omissionoccurred in a part of the registrationstatement not passed upon by an expert(eg, an auditor’s report), the director orofficer must demonstrate that he or shehad, after reasonable investigation,sufficient grounds to believe that thedisclosure statements were true or thatmaterial statements were not omitted. Ifthe misstatement or omission occurred ina part of the registration statement passedupon by an expert, a director or officerneed merely show that he or she had noreasonable grounds to believe that thatportion was materially untrue or omittedto state a material fact. There is norequirement under Section 11 to show that directors and officers intended todefraud investors.

A series of related court decisions have been the subject of controversy anddiscussion related to whether a directors’and officers’ (D&O) liability insurancepolicy covers certain losses as a result ofviolations of Section 11 (Level 3Communications, Inc v Federal Insurance Co,272 F3d 908 (7th Cir 2001); Conseco, Inc vNational Union Fire Insurance Company,Case No 49D130202CP000348, MarionCircuit Court, Marion County, Indiana(December 31 2002)). Taken together, thedecisions have generally been interpretedby some practitioners of D&O liability todistinguish between coverage for thecompany (or issuer) and coverage forindividual directors and officers. D&Oinsurance coverage for individualdefendant officers and directors isgenerally viewed not to be endangered bythese decisions; however, the effect of thecollective decisions may affect the natureand breadth of D&O insurance coverageafforded to the company and such coveragemay require modifications to assureaffirmative coverage for potentialviolations of Sections 11 and 12.

A related but separate issue is whetherD&O insurance policies should alsoinclude affirmative coverage for violationsof Section 15 of the Securities Act. Section

with settlements exceeding $50 million.When monetary settlements or damagesare involved, such awards generally go tothe benefit of the company itself and notdirectly to shareholders. Shareholderderivative lawsuits usually settle in tandemwith outstanding class action litigation andare often called “companion” or “tagalong”cases. Shareholder derivative suits can bebrought in multiple jurisdictions and may,at times, involve inconsistent outcomes (InRe Oracle Corp Derivative Litigation, 2003WL 21396449 (Del Ch June 17 2003)). Thetwo broad bases of shareholder derivativeliability include the duty of care and theduty of loyalty, discussed in more detailbelow, but may also include excessiveofficer compensation, proxy violations,option plan violations, related partytransactions, misappropriation of corporateopportunities and corporate waste:• Duty of care – directors and officers

owe the company and its shareholders a duty of care. They must act on aninformed basis and in a manner thatthey reasonably believe to be in thecompany’s best interests, exercising the degree of care that an ordinarilyprudent person in a similar positionwould exercise. The duty of carefocuses on the decision-makingprocesses. When directors are accusedof breaching their duty of care,generally the “business judgment rule”shields their decision by presumingthat in making the decision, thedirectors and officers were informed,acted in good faith and honestlybelieved that the decision was in thebest interests of the company and itsshareholders. To help avoid liability,directors and officers generally shouldbe proactive and attentive, regularlyattend board meetings, meaningfullyevaluate alternatives and deliberate as a board with adequate and completeinformation. To the extent appropriate,the board of directors should retainfinancial advisors, counsel and otherexperts to provide input and guidance.

• Duty of loyalty – directors and officersowe the company and its shareholders a duty of loyalty. Again, they must actin good faith and in the reasonablebelief that their actions are in the bestinterests of the company. Loyalty issuesarise when a director has a conflict of

81NYSE IPO Guide

Managing risk

decisions concerning directors’ andofficers’ liability (D&O) insurance,including the appropriate limits topurchase and the nature of coverage to seekand can add insight into premium trends.(Note: The information that follows isprovided by NERA Economic Consulting,an affiliate of Marsh Inc and a unit ofOliver Wyman Group, an MMC company.)

In 2008 federal securities class-actionfilings hit a five-year high, increasing 37%to 259 – the highest level since 2002 –driven by the surge in litigation related tothe credit crisis. Through November 302009 there were 215 federal securities classaction filings. Annual filings on averageover 2008 and 2009 are on pace to beabove the average level of 230 over the1997 to 2004 period. Sixty one of the 215filings to November 30 2009 –approximately 30% – involved allegationsrelated to the credit crisis. That representsa slight decrease on 2008, whereapproximately 40% of the total filingsrelated to the credit crisis.

Settling securities class actions can becostly. Since the enactment of the PrivateSecurities Litigation Reform Act of 1995,median settlement values have remained

interest or lacks independence withregard to a particular business decisionor personally profits from anopportunity at the expense of thecompany. In evaluating claims ofbreaches of fiduciary duty, the courtwill inquire into the decision-makingprocess, but may at certain times alsoevaluate the substance of the businessdecision to determine fairness to thecompany and its shareholders. To helpavoid liability, interested directorsshould disclose conflicts andopportunities to other directors andabstain from deliberations and votingon such decisions.

Frequency and severity of securities classaction suits: The average public companyfaces a 6.4% probability that it will face asecurities class action lawsuit in a givenfive-year period. And if an IPO is involved,class action lawsuits settlements are onaverage 35% higher.

It is important to note recent trends in securities class action litigation. Forexample, in 2007 18% of securities classactions involved an IPO. An understandingof such trends ultimately impacts

under $10 million, and 2009 was noexception. Through November 30 2009 themedian settlement was $9 million, anincrease of $1 million on the 2008 median.Typically, plaintiffs’ attorneys’ fees andexpenses make up approximately one-thirdof the settlement value.

Excluding settlements of $1 billion andthe 309 IPO laddering suits, the averagesettlement value for the year was also $42million, an increase from $31 million in2008. After the passage of SOX in 2002,the average settlement has been almost $29million, compared to an average of $12million in the pre-SOX period.

6.2 IndemnificationGenerally, indemnification of officers anddirectors is governed by the law of thestate of incorporation. All 50 statesprovide for corporate indemnification andaddress situations where the company mayindemnify its officers and directors, andsituations where the company mustindemnify its officers and directors. Tounderstand when indemnification ispermitted by the company, look to thecompany bylaws or charter.

In Delaware, for example, the statute

Projected

Other cases

Cases related to credit crisis

Options backdating cases

“Ponzi” scheme cases

Standard cases

1996

Note: Other cases include IPO laddering, mutual fund timing and analyst cases.

Num

ber

of f

eder

al fi

lings

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

100

200

300

400

500

600

Percentage of federal filings by sector and year (Jan 1 1996 – Nov 30 2009) Allegations in federal filings (Jan 1 2007 – Nov 30 2009)

26.2% Product/operational defects

4.0% Customer/vendor issues

1.8% Merger integration issues

10.1% Other

12.2% Insider trading

7.0% Breach of fiduciary duty

3.5% “Ponzi” scheme

20.9% Accounting

12.2% Company-specificearnings guidance

2.3% Industry-related

82 NYSE IPO Guide

Managing risk

Delaware General Corporation Law requiresa corporation to indemnify a director orofficer when the person to be indemnifiedhas prevailed with respect to a claimagainst him or her. In other words, if thedirector or officer defends the claim on themerits and is vindicated of any wrongdoing,it is mandatory that the companyindemnify that individual for the costs andexpenses, including attorneys’ fees,incurred in connection with the claim.

What is the nature of the conduct requiredfor the company to indemnify its directorsand officers? Under Section 145(a) of theDelaware General Corporation Law, acorporation may (but need not) indemnifya director or officer only “if such personacted in good faith and in a mannerreasonably believed to be in or not opposedto the best interest of the corporation.” Inthe criminal context, a director or officermust also have had no reason to believe hisor her conduct was unlawful in order to beindemnified. The company may, and oftendoes, provide broader indemnificationprotections, such as authorizing languagepermitting indemnification to themaximum extent permitted by law.

Even if a director’s or officer’s conductis of the type that can be indemnified, theability of the company to indemnify him orher may be limited or prohibited by statestatute. The Delaware statute authorizesthe company to indemnify directors andofficers only for expenses incurred bythem in defending shareholder derivativesuits brought by or on behalf of thecompany. The Delaware statute does notauthorize indemnification of settlementsor judgments in such actions. The rationaleis that if the company indemnified thedirectors or officers for amounts they owed to the company, the result would be a return of funds back to the company,rendering the debt owed to the companymeaningless.

To what extent is an individual’s liabilitylimited as a matter of law? The state inwhich the company is incorporated willdetermine the extent to which a director’sor officer’s liability is limited as a matterof law. Almost all states have adoptedstatutes that limit the liability of directors– and, in some instances, officers – understate law. Like Delaware, many states allow

merely authorizes indemnification, meaninga director or officer is not necessarilyentitled to indemnification unless thecompany charter or bylaws containnecessary authorizing language to permit indemnification. Delawarecorporations may structure their certificatesof incorporation to limit the liability oftheir directors to situations involving:• breaches of their duty of loyalty

(including improper personal benefit)to the company and its shareholders;and

• acts or omissions not in good faith orthat involve intentional misconduct ora knowing violation of the law.

It is important for directors andofficers of public and non-publiccompanies to seek counsel on andunderstand the indemnification provisionsand/or indemnification agreements towhich they will be subject. Review of theprovisions and/or agreements should occurnot simply prior to an IPO, but on aperiodic basis as well.

Be mindful of features in the companybylaws, charter or corporateindemnification agreements (or theabsence of features) that impair one’srightful claim to indemnification proceeds.Three examples of hostile provisions are:• a provision that fails to obligate the

company to reimburse a director’s orofficer’s claim for costs and expensesfor enforcing the company’s obligationto indemnify;

• a provision that forces a director orofficer to bear the burden of proof todemonstrate entitlement toindemnification; and

• a provision which limitsindemnification to actions to which the indemnified party is a defendant,which would prevent directors andofficers from being indemnified forfees and expenses incurred by them in successfully prosecuting anyindemnification action (see Cochran vStifel Financial Corp, No CIV A17350,2000 WL 286722 (Del Ch 2000).

Several common questions that ariseregarding indemnification follow.

When must the company indemnify itsdirectors and officers? Section 145(c) of the

companies in their charters to limit oreliminate the personal liability of directorsfor damages in claims by the company andits shareholders (Section 102(b)(7) of theDelaware General Corporation Law).Notably, the Delaware statute does noteliminate liability for conduct not taken ingood faith or for breach of a director’s dutyof loyalty.

From whom does a director or officer seekindemnification? In short, it depends.

Indemnification is never self-executing. The company bylaws, charterand any corporate indemnificationagreement between a director or officerand the company will govern:• who evaluates and approves requests

for indemnification; and• whether a director or officer may be

indemnified in a particular case and, if so, whether such director or officermay receive an advancement from thecompany to pay for expenses incurredin defending oneself.

In the absence of specific provisionsrelated to who evaluates and approvesrequests for indemnification, the decisionis generally made by a majority vote ofdisinterested (non-defendant) directors, a committee of disinterested (non-defendant) directors or independent legalcounsel in a written opinion.

If the company is either unwilling orunable to indemnify a director or officerfor expenses, damages or settlementamounts, the director or officer may beable to seek payment directly frominsurers, depending on the nature andbreadth of insurance coverage under thecompany’s directors’ and officers’ liabilityinsurance policy under insuring agreementA of such policy (commonly called “sideA”). Notably, the ability of a director orofficer to seek timely reimbursementdirectly from insurers may differsignificantly, depending on the exactterms, conditions, exclusions and limitsthat are purchased by the company.

Does the company have to advance thecosts and expenses required to defendagainst a claim made against a director orofficer? This is one of the most importantissues to understand and with which to becomfortable. The ability of the company to

83NYSE IPO Guide

Managing risk

consent of the director or officer.

6.3 D&O insuranceIt is clear that companies and their boardsof directors may well face lawsuits at somepoint. While most boards take theirresponsibilities seriously and try toexecute them properly, that intent does not confer immunity. Shareholders andother stakeholders – often prompted by an aggressive plaintiffs’ bar – will suewhen they see themselves as having beenwronged. Thus, in addition to doingeverything possible to execute theirresponsibilities properly and effectively,those charged with corporate governancemust also protect themselves with D&Oinsurance.

Most D&O insurance policies forpublic companies provide financialprotection to more than just individualdirectors and officers. They also afford asignificant degree of protection for certainfinancial obligations of the company. As aresult of this dual protection, directors and

advance defense costs in a timely mannerto its directors and officers is critical inattracting independent directors becausethe cost of defending a lawsuit isimmediate and substantial, and maydirectly influence both the nature andquality of the defense presented bydirectors and officers.

Rights to advancement are governedunder a combination of state law andbylaws of the company, and are separateand distinct from the obligation ofindemnification. For example, a right toadvancement of defense costs may bebroader and less restrictive than anindividual’s right to indemnification.Because the determination as to whetheran officer’s or director’s conduct isindemnifiable generally cannot be madeuntil the end of a claim or proceeding,Section 145(e) of the Delaware GeneralCorporation Code permits (but does notrequire) a corporation to advance defensecosts, including attorneys’ fees, to defendagainst a claim for something that, if true,would be an indemnifiable claim; but onlyif the claimant submits to the company awritten undertaking to repay the amountsadvanced if it should be determined that heor she is not entitled to indemnification.Specific attention needs to be paid to otherconditions that may have to be met inorder to receive timely advancement.

A note of caution: in light of the recentDelaware court decision in Schoon v TroyCorp (948 A 2d 1157 (Del Ch 2008)), it isimportant for companies that are relyingon indemnification bylaws to make certainthat:• the bylaws include language stating

that the rights of directors and officersto advancement of legal expenses vestupon commencement of service;

• these rights are contract rights; and• the bylaws cannot be amended

retroactively to impair those rights.

Although Delaware has since amendedits corporations code to reverse the effectof Schoon v Troy Corp, it serves to highlightthe potential importance for directors andofficers to consider separateindemnification agreements with thecompany that specifically addressadvancement of expenses, includingprovisions that prohibit modifications tosuch an agreement without the written

officers must be aware that at certaintimes, their interests and those of thecompany may diverge, particularly if claimsare made that may approach or exceed theshared limits of liability for all the insuredstaken as a whole. Directors and officersneed to understand the basic coverage andlimits of their particular policies.

D&O policies are generally written on a“claims-made” basis. Under such policies,the making of a claim against the insuredduring the term of the policy – not theoccurrence of injury or damage – is theoperative threshold event to which thepolicy responds. Some policies also requirethat the insured report the claim to theinsurer within the policy period (or withina brief window of time thereafter). MostD&O insurance policies have one or moreof the following three basic insuringagreements:• Side A: personal asset protection for

officers and directors – insuringagreement A, also called “side A,”covers a loss incurred by individual

D&O insuranceInsuring agreement A:

individual insureds

D&O insuranceInsuring agreement B:

corporate reimbursementof individual insureds

D&O insuranceInsuring agreement C:

corporate entity coverage(for securities claims only)

Personal assets Corporate assets Corporate assets

InsuredsDirectors and officers

Side A Side B

Side C

Insured corporate entityas a defendent

(securities claims only)Insureds

Corporate balance sheet

No Yes

Indemnification

Covered claimagainst directors

and officers

Covered claimagainst corporate

entity

What is the structure of the D&O policy post-IPO – typical “ABC” policy example

84 NYSE IPO Guide

Managing risk

rescinding coverage. Rescission resultswhen the insurer voids coverage under the policy for all insureds and returns thepremium paid by the company. Rescissionof an insurance policy by an insurer mayresult in severe consequences for thecompany and its directors and officers. A successful rescission results in all or aportion of the D&O insurance policy beingnull and void and, ultimately, results in aloss of coverage for all named insureds onthe policy, including innocent directors and officers. Certain D&O policies todaycan be negotiated to make certain insuringagreements non-rescindable.

Severability of the application: Rescissionraises the concept of severability. In thiscontext, severability simply relates to thequestion of whether the knowledge of alimited number of covered officers ordirectors will result in a loss of coveragefor all the insureds named in a policy(including the company itself). Severabilityimposes a limit on the extent to which theknowledge of one individual insured isimputed to the company and other insuredindividuals. For example, sometimes theknowledge of specific officers (eg, the CEOand CFO) may be imputed to all otherinsured individuals and to the companyitself. This remains a critical issue fordirectors and officers because coverage forall insured persons (including innocentinsureds) could be rescinded if thespecified officer had knowledge of factsnot disclosed in an application for D&Oinsurance, depending on the structure ofthe program. As a result, a D&O insurancepolicy often contains a provision whichstates that no insured person’s knowledgewill be imputed to any other insured andlimits the identified individuals whoseknowledge will be imputed to the company(as an insured itself). As another – andperhaps better – alternative, the companyshould seek a policy that is not rescindablefor any reason.

Frequently, the company’s periodicsecurities filings and financial statementunder the Exchange Act and registrationstatements under the Securities Act areexpressly made part of the application forD&O insurance. Claims of inaccurate orincomplete disclosure in such filingsincorporated into the application forinsurance may be the basis for claims made

directors and officers resulting fromclaims for which the company has notindemnified them. Generally, a directoror officer need not pay a retention ordeductible in the event side Ainsurance proceeds are sought if thecompany is unable to indemnify theindividual director or officer directly.

• Side B: corporate reimbursementinsurance – insuring agreement B, alsocalled “side B,” protects the companyagainst a loss incurred by the companyin indemnifying an officer or directorfor claims made against him or her. A deductible or retention applies forclaims made under side B.

• Side C – insurance agreement C, alsocalled “side C,” protects the companyagainst a loss resulting from securitiesclaims made directly against it. Adeductible or retention also applies forclaims made under side C.

A number of different structuralvariations in building a policy may meetthe particular demands of a publiccompany and its officers and directors.Many companies, however, commonlypurchase a D&O insurance policy where asingle limit of liability is shared equallyamong all three insuring agreements. Theeffect of this is that a single policy limitprotects both the personal assets ofdirectors and officers and certain financialobligations of the company. Companiesalso frequently purchase additional,dedicated limits of side A coverage inaddition to the shared limits. Companiespurchase these additional limits for anumber of reasons, includingconsiderations related to premium pricing,philosophical predispositions, balance-sheet strength and the broader protectionafforded individual officers and directors.

(a) D&O policy provisionsCertain provisions in a D&O policy mayaffect the extent to which the policyresponds favorably to protect individualdirectors and officers. Some of the keyconcepts are discussed below.

Rescission: Material misrepresentations ornon-disclosure of material information inthe course of the application process for aD&O insurance policy may result in theinsurer seeking the drastic remedy of

by insurers that the application wasmaterially false or misleading. As a result,accounting restatements – depending ontheir nature, scope and magnitude – mayprovide insurers with increased leverage torescind a D&O insurance policy.

Conduct exclusion: Almost all D&Opolicies contain exclusions barringcoverage for certain “bad conduct” bydirectors or officers. Generally, theyinclude:• intentionally dishonest acts or

omissions;• fraudulent acts or omissions;• criminal acts;• willful violations of any statute, rule

or law;• an insured’s obtaining an illegal profit;

and• an insured’s obtaining an illegal

remuneration.

Each exclusion can, and ideally should,be limited as much as possible. Forexample, it is important to considerenhancements to a policy so that theconduct of any one insured director orofficer will not be imputed to any otherinsured. This should limit the eliminationof coverage to the individual directors orofficers who actually committed theexcluded conduct, while maintainingcoverage for innocent insureds.

It is also important to clarify the point atwhich coverage exclusions apply or aretriggered. Certain policies state that theexclusions apply if the excluded conduct “infact” occurred. This can be troublesomebecause of the ambiguity involved ininterpreting what “in fact” actually means.Insureds should consider seeking a moreclearly defined parameter for determiningwhen a conduct exclusion may apply. Policiesstating that the exclusions apply only if theexcluded conduct occurred in connectionwith a “final adjudication” of the underlyingclaim generally better protect directors andofficers. However, although “pure” finaladjudication language provides broadprotection for individual directors andofficers, it could result in the depletion oflimits, leaving less in available limits toprotect non-defendant directors and officers.

Priority of payment provisions: Unlikemany other types of insurance, traditional

85NYSE IPO Guide

Managing risk

a deductible) that under ordinarycircumstances would not apply. This issometimes called a “presumptiveindemnification” requirement. Under thiscircumstance, the self-insured retentionwould have to be paid by an officer ordirector prior to accessing any proceeds of a D&O policy. In some cases, the self-insured retention may be substantial.Directors and officers should seekclarification from their insurance brokersand counsel on the extent to which theirD&O insurance policies allow directors andofficers to access the policy proceeds in theevent the company is able but unwilling toindemnify them.

A properly constructed D&O policygenerally is meant to provide a level ofprotection for individual directors andofficers in the event the company’sindemnification obligation inadequatelyprotects them. Outlined below are somespecific circumstances where an individualofficer or director may expect suchprotection.

Derivative suit judgments or settlements:The ability of the company to indemnifyits officers and directors for judgments orsettlements resulting from a shareholderderivative action may be significantlylimited or prohibited by statute in thecompany’s state of incorporation. Forexample, Delaware generally does not allow indemnification of settlements orjudgments in an action brought by or onbehalf of the company unless the courtpermits such action. In suchcircumstances, side-A coverage may apply as long as the conduct of individualdirectors and officers also complies withthe limitations and exclusions of theinsurance policy.

Public policy prohibition againstindemnification: Indemnification forclaims related to registration of securitiesand anti-fraud provisions of the federalsecurities laws (and other federal statutessuch as the Racketeer Influenced andCorrupt Organizations Act and antitrustlaws) may be precluded by public policy.The SEC’s view is that suchindemnification is against public policy.However, the SEC does not regard themaintenance of D&O insurance as againstpublic policy, even where the company pays

D&O policies protect two distinct sets ofbeneficiaries: the company and thecompany’s individual directors andofficers. Because there is a limit of liabilityfor D&O insurance programs, situationsmay arise in which insurance proceeds mayhave to be prioritized among the insuredparties. Typically, a priority of paymentsprovision requires that the claims againstthe individual directors and officers besatisfied first, before claims against thecompany are satisfied.

However, sometimes this provisionmay have unintended consequences. Forexample, a situation may arise in which anumber of concurrent claims are madeagainst the company and its individualdirectors and officers. This could includeshareholder derivative suits (settlements of which may not be indemnifiable by thecompany) and securities class actions(settlements of which are indemnifiable). If the securities class action suits aresettled before the shareholder derivativeactions, insurers may delay payment of anyproceeds under the policy for a securitiesclaim until settlement of the shareholderderivative action. A delay in payment mayadversely affect timing or funding of asettlement of such a claim.

“Insured v insured” exclusion: Many D&Opolicies contain a so-called “insured vinsured” exclusion, which bars coverage for a claim brought by one insured againstanother. Since the company and theindividual directors and officers are“insureds” under a D&O policy, a suitbrought by an individual director againstthe company or by the company againstindividual officers or directors may beexcluded.

(b) D&O insurance and indemnificationDirectors and officers no doubt find itespecially troubling when the company isfinancially able to indemnify them, butchooses not to or simply ignores theirrequest. Many directors and officersincorrectly assume that in such acircumstance, the company’s D&Oinsurance policy would respond. However,in a traditional D&O policy, if the companyis permitted to indemnify an officer ordirector, but chooses not to, the insureroften will first seek the application of a“self-insured retention” (in other words,

the premium. As a result, insurance mayrespond to protect individual directors andofficers in such circumstances whereindemnification from the company isprohibited as a matter of public policy.

Conduct not in “good faith” and“reasonable belief”: The company mayindemnify a director or officer only if suchperson acted in good faith and in a mannerthat he or she reasonably believed to be in,or not opposed to, the best interests of thecompany. As a result, acts that do notsatisfy the “good faith” and “reasonablebelief” standard may not be indemnified by the company. In such circumstances,claims made against an individual directoror officer may be insurable so long as theconduct of such individual also complieswith the limitations and exclusions of theinsurance policy.

Refusal by board to indemnify: If the board or other authorized designee eitherdeclines in writing to indemnify anindividual or fails to make or initiate adetermination to indemnify an individual,insurance may respond to protectindividual directors and officers, but it may be subject to a retention or deductibledepending on the structure of the program.

To avoid a circumstance where anindividual insured might be personallyresponsible to pay a retention, many publiccompanies today purchase a variation ofSide A insurance often referred to as SideA DIC (the “DIC” refers to the “differencein conditions” provisions that arecontained in this type of insurance policy).Side A DIC insurance provides broadercoverage and is often purchased in additionto and in excess of the traditional D&O(Sides A, B and C) insurance describedabove. In a circumstance where the boardor other authorized designee declines toindemnify an individual as describedabove, Side A DIC insurance could becalled upon to provide directors’ andofficers’ coverage.

Near insolvency: Should the companyapproach insolvency, it will approach the“zone of insolvency,” where officers anddirectors may owe certain fiduciary dutiesto creditors. Although not yet insolvent,the company might choose not toindemnify a particular director or officer

86 NYSE IPO Guide

Managing risk

lawsuit, what might it cost to settle?• What limits and structures do the

company’s peers purchase?• How can the balance between coverage,

limit and price be optimized?• What is the overall financial stability

of each insurer on the program?• How can the program address exposure

for foreign directors and officers?

Constructing a D&O liability programleading into an IPO is a dynamic process.The goal is to understand the choices andtradeoffs, and to achieve an optimalbalance that properly reflects the values ofthe company and its directors and officers.For example, many companies purchasepolicies that protect both the company andthe individual directors and officers fornon-indemnifiable claims. This structureinvolves a shared limit of liability thatprotects the company and its directors and officers. If a very large claim is madeagainst the company, it may exhaust thelimits made available to individualdirectors and officers. One potentialsolution is to purchase additional limits of coverage dedicated solely to protectindividual directors and officers.Alternatively, dedicated coverage may also be purchased solely for independentdirectors of the board, excluding non-independent board members and officers.

Selecting the right level of limits isnow more science than art. Peerbenchmarking data is one thing to considerin choosing the right amount of insurance.Analysis of the company’s susceptibility tosecurities class actions and projections ofrealistic settlement amounts can providegreater confidence in limit decisions.

Recent turbulence affecting thefinancial condition of insurers has raisedconcerns regarding insurer stability,making the decisions on which insurers to partner with more challenging. An in-depth comparative analysis of an insurer’screditworthiness and financial strength is a precursor to an assessment of thecompany’s counterparty risk. Just asimportant is the ongoing monitoring of the financial condition of the company’spartner insurers.

One of the more complex and evolvingareas of D&O coverage involvessubsidiaries located outside the UnitedStates. It is important to understand the

for fear that such act may be a breach offiduciary duty owed to creditors of thecompany or may be the subject of an orderby a bankruptcy trustee to return suchproceeds. Insurance may respond if limitsof the policy are not otherwise eroded.

Actual insolvency or bankruptcy: Thecompany either may be insolvent or, in thecontext of US bankruptcy laws, may beunable or unwilling to indemnify an officeror director if the bankruptcy trusteedetermines that such indemnification iseither unwarranted or improper. Moreover,assuming that such indemnification of anofficer or director was warranted andproper, the proceeds of the policy may bedeemed an asset of the “estate” andsubject to an automatic stay. Theobligation to indemnify may be deemed anunsecured obligation, placing the affectedofficer’s or director’s interest behind theinterests of secured creditors and on parwith other unsecured creditors awaitingpayment or settlement.

If there is some risk that the companymay avail itself of the protection of USbankruptcy laws, it will be useful to seekan explanation from the company’sinsurance broker and counsel as to how the company’s D&O insurance policy mayrespond to a number of potential issues.Key issues to understand would includeidentifying any issues related to:• how limits in the policy are either

allocated or prioritized to coverageother than coverage of claims madeagainst a director’s or officer’s personalassets;

• whether the design of the company’sD&O insurance program is such thatdirectors or officers will not be subjectto a retention or deductible if thecompany is permitted to but fails toindemnify such an individual; and

• what – if any – language exists in thepolicy to waive an automatic stay asregards the company’s policy.

Choosing a D&O policy structure, limits,retention and insurers: The companyshould consider several questions beforeselecting the limits and structure of itsD&O policy, including the following:• How susceptible is the company to a

class action lawsuit?• If the company suffers a class action

tax, regulatory and coverage issuesassociated with D&O exposures outsidethe United States to ascertain whetherexposure exists. There are a number ofsolutions to address such exposure,depending on location and magnitude,some of which may impact the company’schoice of primary insurer.

(c) Timing the D&O liability insurancepurchase for an IPOA D&O policy for a newly public companybecomes effective on the date of thecompany’s securities trade. The processand timeline leading up to thecommencement of the policy period differdepending on the situation, and can betailored to meet the specific needs of thecompany. The following is a suggestedtimeline for meeting key milestones in the process of obtaining D&O coverage.

D&O strategy meeting: In the monthleading into filing of Form S-1, it isrecommended that the company meet withits insurance brokers and outside counsel,if needed, to strategize on D&O programdesign options, selection of carriers,coverage issues, limit analysis, timelineand cost. Being beneficiaries of D&Oinsurance, the entire board of directors or certain key members may need to beengaged.

Filing of Form S-1: Once the company’sregistration statement is filed, asubmission can be made to theunderwriters, which would include thedraft Form S-1. The submission, combinedwith calls and/or face-to-face meetingswith the underwriters, will allow theinsurers to assess the company’s D&O risk profile.

Meetings with underwriters: It is generallyexpected that representatives of thecompany will meet with the underwriters,either in person or by teleconference,before a premium quotation will be givenfor a D&O policy. It is an opportunity forthe insurers to better understand thecompany’s financial and operatingcondition and its prospects, and to speakdirectly with management about corporategovernance issues and concerns. Thesemeetings typically take place during theroadshow detailed in Chapter 3.

87NYSE IPO Guide

Managing risk

are among everyday activities that canexpose you to legal liability. Your increasedpublic prominence may lead some tobelieve you have “deep pockets,” makingyou a target for expensive lawsuits.

A personal excess liability insurancepolicy is designed to protect againstmultimillion-dollar settlements resultingfrom personal injury, bodily injury orproperty damage lawsuits.

Consider a recent example, in whichthe teenage son of a wealthy businessowner was involved in an automobileaccident with a bicyclist. Although therewas no indication that the driver actedirresponsibly, the court awarded a $20million judgment to the bicyclist. Theinsured carried only $5 million in excessliability insurance, meaning his family’sfinancial situation may be severely harmedfor years to come.

Consulting with a personal riskmanagement expert can help you setappropriate liability limits for yourlifestyle.

Personal property: As you acquire wealth,it’s likely you will acquire high-endproperty and assets. Key areas of risk toconsider include the following:• Homeowners – high-value homes are

often built with unique materials andfeatures. Not all insurance policiesprovide for appropriate replacementcosts in their loss settlementprovisions.

• Automobiles – luxury, exotic orcollector vehicles require specializedinsurance.

• Valuables – most standard insurancepolices have low dollar limitations for

Analysis: Once quotes have been submittedto the insurers, insurance brokers –sometimes working in concert withoutside counsel – provide the company’smanagement and/or board with detailedcomparative analysis to allow the companyto ultimately make a number of decisionson the nature of its D&O program,including the appropriate structure, limits,retentions, coverage and insurers.

Binding of insurance: Once decisions havebeen made by the company, insurancebrokers will execute those decisions tobuild the D&O program and bind theinsurers in time for the company’ssecurities to begin trading.

6.4 Personal risk managementAn IPO will certainly have an impact onyour professional life, but it will also havea considerable effect on your personallifestyle. The complexity of a high-net-worth lifestyle requires a new way ofthinking about risk and customizedsolutions to help address it. Many ultra-wealthy individuals and families find theybenefit by working with a personal riskmanager that can provide comprehensiveresources to properly align protection fortheir property, liability, family and lifestyle.

And because you and your companywill now be more prominent, it isimperative to have total coordinationbetween your business estate plans.

(a) Protecting yourself and your assetsPersonal liability: Entertaining guests atyour home, letting your teenage child driveyour car and serving on a board of directors

loss of high-value items such asjewelry, art and other collectibles.

Specialized coverage can help properlyprotect these assets and investments.

Benefits of a broker: When wealthyindividuals accumulate new property andnon-liquid assets, protection for each isoften purchased as needed with a localagent. However, working with variousagents or brokers in different statesgenerally leads to gaps or overlaps incoverage. Additionally, the distinctiveaspects of high-value items requirespecialized solutions that often are notavailable through local agents. By workingwith a broker that specializes in addressingthe risks associated with the high-net-worth lifestyle, you will benefit fromexpertise, comprehensive coverage,innovative solutions and access to broad,customized coverage.

Protecting yourself and your business:There’s no doubt that you are now lookingto the future with the anticipation thatyour business and family will long benefitfrom all of your hard work. Now is thetime, however, to consider the effects thatevents beyond your control – such asdeath and disability – may have on yourbusiness. It is critical to evaluate the risksinherent in your business and in yourestate plan. Coordination of the two willhelp protect the business and ensurecontinuity of the legacy you have created.

Wealth transfer: It is important to evaluatethe IPO’s impact on your estate plan,including the risks in transferring wealthto succeeding generations. Those riskscome from: • significant taxes at your death; and/or • unwise dissipation by heirs, their

divorcing spouses and creditors.

Properly drafted and executed wills andtrusts can protect your assets from taxesand creditors. Many wealthy individualschoose to fund trusts with assets as well as with life insurance.

Owned by a trust outside the estate,life insurance can supply an income-tax-free benefit to the trust free of estate tax.Careful planning in this manner can allowwealth and assets you’ve created to pass to

-45 to 0 days

D&O strategymeeting

0 days

InitialS-1 filed

Commentsfrom SEC

AmendedS-1 filed

Roadshow IPO

30-40 days 35-50 days 45 to 60 days 60-75 days

Information tounderwriters

Narrow fieldof underwriters

Bind publiccompany

D&O policy

Initial feedbackfrom client

Underwritercalls andmeetings

Underwritercalls andmeetings

Timeline

88 NYSE IPO Guide

Managing risk

your family intact and free from risk ofliquidation for the payment of estate taxes.

Key person: You may be the “brains behindthe business,” but you also may haveirreplaceable employees. If somethingunexpected happened to a key employee,would your business suffer? Key personinsurance helps you cover additional costswhen such a situation arises. You even maybe able to combine protection for yourbusiness with an agreement designed toreward a vital employee for continuedemployment.

These are just some of the concernsthat may arise as a result of your newwealth. Again, you may benefit greatly byworking with a personal risk manager todesign the right protection for your familyand your business.

89NYSE IPO Guide

Appendices

90 NYSE IPO Guide

Appendices

Distribution and size criteriaMust meet all three of the following:

Round-lot holders(a) 400 US

Publicly held shares(b) 1,100,000

Market value of publicly held shares:(b)

IPOs, spinoffs, carveouts, affiliates $40 million

All other listings $100 million

Stock price criteriaAll issuers must have a stock price or IPO price of at least $4 at the time of listing

Financial criteria Must meet one of the following standards:

Alternative #1 – Earnings

Aggregate pre-tax income for the last three fiscal years $10 million

Minimum in each of the two most recent fiscal years $2 millionPositive amounts in all years

Or

Aggregate pre-tax income for the last three years $12 million

Minimum in the most recent year $5 million

Minimum in the next most recent year $2 million

Alternative #2a – Valuation/revenue with cash flow

Global market capitalization(c) $500 million

Revenues (most recent 12-month period) $100 million

Adjusted cash flow:Aggregate for the last three years $25 millionAll three years must be positive

Alternative #2b – Pure valuation/revenue test


Revenues (most recent fiscal year) $75 million

Alternative #3 – Affiliated companyFor new entities with a parent or affiliated company listed on the NYSE


Operating history 12 months

Parent or affiliate is a listed company in good standing. Parent or affiliate retains control of the entity or is under common control with the entity

Alternative #4 – Assets and equity


Total assets $75 million

Stockholders’ equity $50 million

Real estate investment trusts

Stockholders’ equity $60 million

Closed-end funds and business development companies (BDCs)

Market value of publicly held shares(b) $60 million (alsorequire a totalmarket cap of $75million for BDCs)

Appendix I: NYSE original listing standards, US companies

Domestic listing requirements call for minimum distribution of the company’s shares within the United States, as well as minimum financialcriteria. Distribution of shares can be attained through US public offerings, acquisitions made in the United States or other similar means.This chart is to be used for an initial evaluation only. For a more complete discussion of the minimum numerical standards applicable to UScompanies, see Section 102.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

(Continued opposite)

(a) The number of beneficial holders of stock held in “street name” will beconsidered in addition to the holders of record.(b) Shares held by directors, officers or their immediate families and otherconcentrated holding of 10% or more are excluded in calculating the number ofpublicly held shares and market value of publicly held shares.(c) Global market capitalization for existing public companies is represented by themost recent three months of trading history in the case of the pure valuation/revenue test. For all other standards, the measurement is at a “point in time” foran existing public company. For IPOs, spinoffs and carveouts, it is represented bythe valuation of the company as represented by, in the case of a spinoff, thedistribution ratio as priced, or, in the case of an IPO/carve-out, the as-pricedoffering in relation to the total company’s capitalization.

91NYSE IPO Guide

Appendices

Special purpose acquisition companies The NYSE will consider, on a case-by-case basis, theappropriateness for listing of special purpose acquisitioncompanies (SPACs) with no prior operating history that conduct an initial public offering if the following criteria are met:

Proceeds held in trust upon IPO 90%

Fair market value of acquisitions 80% of net assets

Aggregate market value $250 million

Market value of publicly held shares $200 million

Additional considerationsIn addition to meeting the minimum numerical standards listedabove, other factors must necessarily be considered. The company must be a going concern or be the successor to a going concern.

The NYSE has broad discretion regarding the listing of acompany. The NYSE is committed to listing only those companiesthat are suited for auction market trading and that have attained the status of being eligible for trading on the NYSE. Thus, the NYSE may deny listing or apply additional or more stringent criteria based on any event, condition, or circumstance that makes the listing of the company inadvisable or unwarranted in the opinion of the NYSE. Such determination can be made even if the company meets the standards set forth above.

Appendix I continued

92 NYSE IPO Guide

Appendices

Appendix II: NYSE original listing standards, non-US companies

The NYSE offers two sets of standards – worldwide and domestic – under which non-US companies may qualify for listing. Both standardsinclude distribution and financial criteria. A company must qualify for both the distribution and financial criteria within that particularstandard.

This chart is to be used for an initial evaluation only. The NYSE will work with each company to determine which standards are bestsuited to that entity. For a more complete discussion of the minimum numerical standards applicable to non-US companies, see Section 103.01 of the ListedCompany Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

Criteria Requirements Worldwide Domestic

Distribution Round-lot holdersTotal stockholders

May satisfy either A, B or C:

5,000 A – 400 US round-lot shareholdersB – 2,200 total stockholders and 100,000

shares monthly trading volume (mostrecent six months)

C – 500 total stockholders and one millionshares monthly trading volume (mostrecent 12 months)

Publicly held shares 2.5 million 1.1 million

Market value of publicly held shares $100 million

IPOs, carveouts and spinoffs n/a $40 million

All other listings n/a $100 million

(Continued opposite)

93NYSE IPO Guide

Appendices

Appendix II continued

Criteria Requirements Worldwide Domestic

Financials Earnings

Aggregate pre-tax income for last three fiscalyears

$100 million $10 million

Minimum pre-tax income in each of two mostrecent fiscal years

$25 million $2 million (positive amounts in all threeyears)

Or

Aggregate pre-tax income for last three years n/a $12 million

Minimum in the most recent fiscal year n/a $5 million

Minimum in the next most recent fiscal year n/a $2 million

Valuation/revenue testMay satisfy either A or B

A – Valuation/revenue with cash flow test

Global market capitalization $500 million $500 million

Revenues (most recent 12-month period) $100 million $100 million

Aggregate cash flow for last three fiscal years $100 million $25 million (positive amounts in all threeyears)

Minimum cash flow in each of two mostrecent fiscal years

$25 million n/a

B – Pure valuation/revenue test


Revenues (most recent fiscal year) $75 million $75 million

Affiliated companyFor new entities with a parent or affiliatedcompany listed on the NYSE


At least 12 months of operating history

Affiliated listed company is in good standing

Affiliated listed company retains control of theentity

Yes

Yes

Yes

Yes

Yes

Yes

94 NYSE IPO Guide

Appendices

NYSE Amex has established certain quantitative and qualitative standards for initial listing of US and foreign companies, as follows.To learn more about NYSE Amex quantitative, distribution and governance requirements, please refer to the complete requirementsoutlined in the NYSE Amex Company guide, which can be referenced at http://nyseamexrules.nyse.com/amex/companyguide.

Appendix III: NYSE Amex original listing standards

Criteria Original listing standards

Standard 1 Standard 2 Standard 3 Standard 4

Pre-tax income1 $750,000 n/a n/a n/a

Market capitalization n/a n/a $50 million $75 millionOR At least $75 million intotal assets and $75million in revenues

Market value of publiclyheld shares

$3 million $15 million $15 million $20 million

Minimum stock price $3 $3 $2 $3

Operating history n/a 2 years n/a n/a

Stockholders’ equity $4 million $4 million $4 million n/a

Distribution 800 public shareholders and 500,000 shares publicly held; OR

400 public shareholders and one million shares publicly held; OR

400 public shareholders, 500,000 shares publicly held and average daily trading volume of 2,000 shares forprevious six months.

1Required in the latest fiscal year or two of the three most recent fiscal years.

95NYSE IPO Guide

Appendices

The NYSE has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, the NYSE will reviewthe appropriateness of continued listing. The following is a summary of the NYSE’s financial continued listing standards. For a morecomplete discussion of the NYSE’s continued listing standards, as well as the procedures followed when a company falls below any of thecontinued listing criteria, see Section 802.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.

Appendix IV: NYSE financial continued listing standards, US companies

Price criteria

Average closing price of a security is less than $1.00 over a consecutive 30 trading-day period

Numerical criteria for capital and common stock

For companies that listed under the “earnings” standard or “assets and equity” standard

Average global market capitalization over a consecutive 30 trading-day period is less than $50 million

and

Total stockholders’ equity is less than $50 million

or

Average global market capitalization overa consecutive 30 trading-day period is less than $15 million

For companies that listed under the pure valuation with cash flow/revenue test

Average global market capitalizationover a consecutive 30 trading-day period is less than $250 million

and

Total revenues for the most recent 12 months are less than $20 million

or

Average global market capitalizationover a consecutive 30 trading-day period is less than $75 million

For companies that listed under the pure valuation/revenue test


and

Total revenues for the most recent fiscal year are less than $15 million

or


For companies that listed under the affiliated company test

The listed company’s parent/affiliated company ceases tocontrol the listed company or such parent/affiliated companyitself falls below the numerical criteria; and average globalmarket capitalization over a 30-day trading period is less than$75 million.

The NYSE has separate criteria for closed-end funds, real estate investment trusts, special-purpose acquisition companies,bonds and preferred stocks. See Section 802.01B of the ListedCompany Manual.

96 NYSE IPO Guide

Appendices

NYSE Amex continued listing standards

A company will be below continued listing requirements if it has:

• Stockholders’ equity less than:• $2 million and losses in two out of the three most recent fiscal years.• $4 million and losses in three out of the four most recent fiscal years• $6 million and losses in the five most recent fiscal years

A company that falls below any of the above will continue to be deemed in compliance with listing standards if it meets the following requirements:• Market capitalization of $50 million; OR total assets AND total revenue of $50 million each in most recent fiscal year

or two of the three most recent fiscal years.• 1.1 million shares, a market value of publicly held shares of $15 million, 400 round-lot shareholders.

• Less than 200,000 publicly held shares

• Less than 300 public shareholders

• A market value of publicly held shares of less than $1 million (over 90 consecutive days)

Appendix V: NYSE Amex continued listing standards

97NYSE IPO Guide

Contributor profiles

98 NYSE IPO Guide


Bowne & Co, Inc55 Water StreetNew York NY 10041United StatesTel +1 212 924 5500www.bowne.com

Anne BarberDirector of [email protected]

Anne Barber is the director of marketing atBowne & Co, Inc, where she is responsiblefor the marketing and businessdevelopment efforts in Canada and the US central region of Bowne’s CapitalMarkets and Compliance Division. Based in Vancouver, BC, Ms Barber joined Bownein 1986 and has also held various sales and customer service positions throughouther career. In recent years Ms Barbercoordinated the publication of Bowne’sCanadian guidebook series coveringsecurities laws and compliance regulationsin Canada. Ms Barber received her salesand marketing management diplomathrough the Sauder School of Business at the University of British Columbia.

Susan FlattumDirector of [email protected]

Susan Flattum is the director of marketingof Bowne & Co, Inc, where she isresponsible for the marketing and businessdevelopment efforts of the western regionof Bowne. Prior to working at Bowne, Ms Flattum was a vice president in thewealth management group at AllianceBernstein. Prior thereto, Ms Flattum was an attorney at Latham & Watkins in LosAngeles specializing in corporate finance,primarily representing bulge-bracketinvestment banks in initial public offerings(IPOs) and high-yield deals. Ms Flattumreceived her JD from GeorgetownUniversity Law Center and her BS inbusiness from the University of SouthernCalifornia.

Cleary Gottlieb Steen & Hamilton LLPOne Liberty PlazaNew York NY 10006United StatesTel +1 212 225 2000www.clearygottlieb.com

Nicolas [email protected]

Nicolas Grabar focuses on internationalcapital markets and securities regulation,as well as the representation of largereporting companies, leading LatinAmerican companies, Fortune 100companies and global investment banks.He has extensive experience ininternational financings in public andprivate markets, including US securities law applicable to foreign issuers andreporting regulations. He specializes in the telecommunications and naturalresource sectors, and has advised onacquisitions and restructuring. IFLR1000,Chambers Global, Chambers USA andChambers Latin America recognize him asone of the world’s best capital marketslawyers. Mr Grabar chairs the annual PLIprogram on foreign issuers and USsecurities regulation, and is the chair of the Financial Reporting Committee of theNew York City Bar Association. Based inthe New York office, he became a partner in 1991. Mr Grabar is a member of the Bar in New York and has been admitted topractice in France.

Sandra L [email protected]

Sandra Flow’s practice focuses on capitalmarkets transactions and corporategovernance, including the representation of US and international issuers, as well asunderwriters, in a variety of Securities andExchange Commission (SEC) registeredand private securities offerings, anddomestic and cross-border listings. Hercorporate governance practice includesadvising companies on their disclosureobligations and governance matters,including compliance with SECrequirements, the Sarbanes-Oxley Act and listing standards of the NYSE andNasdaq. She has also advised a number

of companies on issues relating to financialstatement restatements. Based in the New York office, Ms Flow became a partnerin 2004. She is a member of the Bar in New York.

Cleary Gottlieb associates CatherineSkulan, Femi Austin, Colleen Harp, NicolePuppieni and Carsten Fiege providedinvaluable assistance in preparing materialsfor this guide. All of the associates focus oncorporate and financial matters, and arebased in New York.

99NYSE IPO Guide


the stock transfer industry. He is the current president of the Securities TransferAssociation, which is a member of theShareholder Communications Coalition. He is also an active member of theindustry’s Joint DRS Committee and is a past president, director and nationalrepresentative of the Northeast SecuritiesTransfer Association.

Computershare250 Royall StreetCanton, MA 02021United StatesTel + 1 781 575 2000www.computershare.com

Jay McHalePresident, Equity [email protected]

Jay McHale is president of Equity Services,the largest of Computershare’s businessesin the United States. As a member of theUS leadership management team, he ischarged with building on Computershare’sexcellence in the transfer agent industry. To date, he has introduced severalinnovative service offerings amid achallenging regulatory and financialenvironment, and continues to position the business as the premier serviceprovider in the marketplace.

Throughout his 29 years of experience in the financial services industry, Mr McHale has presided over numerouscomplex business integration projects,including significant acquisitions,divestitures and reorganizations. Prior tojoining Computershare in August 2007, he was the chief operations officer forHarris Investment Management, where inaddition to ongoing operations, he wasresponsible for portfolio accounting, tradeprocessing and systems. Mr McHale’s rolesalso included direct management of theshareholder services and trust divisions atBank of Montreal/Harris. He earned a BS in finance from DePaul University and an MBA in finance from the University of Chicago.

Charles V RossiExecutive Vice President, Client [email protected]

Charlie Rossi is the executive vicepresident of Client Services atComputershare Investor Services. Mr Rossi’s role at Computershare includesa focus on client relationships, prospectsand industry issues. He has over 25 yearsof experience in corporate stock andmutual funds operations management at Boston Financial, Shawmut Bank,BankBoston and EquiServe.

Mr Rossi maintains a high profile in

FDA Member of FTI Consulting, IncWall Street Plaza, 88 Pine StreetNew York NY 10005, United StatesTel +1 212 850 5600www.fd.com

Gordon McCounVice [email protected]

Gordon McCoun is vice chairman of FD, with a focus on the firm’s North AmericanCapital Markets Communications Practice.He spent more than 20 years as an equityresearch analyst and portfolio managerbefore joining FD in 1998.

Mr McCoun has published white papersand client memoranda on topics relevant to capital markets issues such as theincreasing importance of cash dividends, the impact of Financial Accounting Standard123(R) on valuation models and portfoliodecisions, Regulation F-D, emerging trends in sell-side research coverage and financialdisclosure and corporate governance.

Prior to joining FD, Mr McCoun was a vice president in the equity researchdepartment at Brean Murray & Co. He wasalso a portfolio manager with The Bank ofNew York, Citibank, Prudential and Mutual of America. He received an MBA in financefrom New York University’s Stern School ofBusiness and a BA in sociology from theUniversity of Pennsylvania.

Shannon StuckyVice President, Special Situations [email protected]

Since joining FD in March 2007, ShannonStucky has been instrumental in developingand executing communications programssupporting clients’ efforts to raise capital,restructure, manage their corporatereputation, overcome crises and emerge as thought leaders.

Ms Stucky has supported the initial publicofferings of Sensata Technologies, MF Global and RiskMetrics Group; representedConstellation Energy, Teva PharmaceuticalIndustries and the Chicago Board of Trade in M&A assignments; managedcommunications for the Chapter 11bankruptcy filings of Fairfield Residential LLCand Tropicana Entertainment; and supportedAIG Worldwide Life during the announcement

100 NYSE IPO Guide


of AIG’s plan of restructuring, amongothers. Additionally, she oversees FD’straining and professional developmentprogram across the Americas and assistswith thought leadership activities emanatingfrom the Special Situation Practice.

Previously, Ms Stucky worked with theTorrenzano Group, driving ongoing thoughtleadership and transaction communicationsprograms for industry-leading clients. A 2003graduate of Ohio University’s EW ScrippsSchool of Journalism, Ms Stucky holds a BSin journalism, magna cum laude, from theUniversity’s Honors Tutorial College.

Scott KozakVice President, Capital MarketsCommunications [email protected]

Scott Kozak joined FD in 2004 and currentlyserves as a vice president based in theChicago office. He has extensive capitalmarkets and financial communicationsexperience, with particular emphasis in theindustrials, basic materials, businessservices, real estate and healthcare sectors.Mr Kozak also contributes significantly toFD’s Thought Leadership Committee, whichdrafts capital markets-related white paperson emerging industry trends, and hasextensive responsibilities designing andimplementing internal training anddevelopment programs, as well as firm-wideknowledge share collaboration initiatives.

Prior to joining FD, Mr Kozak worked as a financial analyst at RCM CapitalManagement, where he contributed to thefirm’s financial planning and analysis function.He graduated cum laude from AmericanUniversity in Washington, DC with dualdegrees in economics and internationalrelations. Mr Kozak also received acertificate in finance, earned with honors,from the University of California, Berkeley.

Georgeson Inc199 Water St, 26th FloorNew York NY 10038-3650 United States

www.georgeson.com

David [email protected]

David Drake is president of Georgeson, a pre-eminent proxy solicitation firm. Mr Drake supervises a staff of seasonedprofessionals, many with more than 20years of experience. He also works directlywith clients to help them obtain favorableshareholder vote results on friendly mergersand acquisitions, unsolicited takeovers,proxy contests, restructurings, shareholderproposals, compensation plans and othercorporate governance matters.

Prior to joining Georgeson in 1997, Mr Drake served as vice president anddirector of US research and senior analystfor Institutional Shareholder Services (nowrenamed as RiskMetrics). He led a team ofresearch analysts producing proxy researchreports for institutional clients, advisingthem on corporate transactions, proxycontests and other shareholder issues.

Mr Drake is a frequent speaker and writer on proxy fights, investor activism,corporate governance and compensationissues. He earned a BA in political sciencefrom George Washington University and an MBA in finance from The AmericanUniversity in Washington, DC.

Joseph F SpedaleExecutive Vice President and Chief Operating [email protected]

Joseph Spedale is a senior member of the Georgeson M&A Advisory Group. He specializes in special situations,including friendly mergers and acquisitions,unsolicited takeovers, proxy contests,restructurings and corporate governanceconsulting.

During his 30-year career, Mr Spedalehas done extensive work in developingsuccessful campaign strategies incommunicating with security holders. He has worked on numerous contestedcampaigns, including Openwave Systems

Harbinger Capital Partners; Value ActCapital v Acxiom Corporation; ImageEntertainment, Inc v Lions GateEntertainment Corp and PeopleSoft Inc v Oracle Corp. He also represented BankOne Corp in its $55 billion merger withJPMorgan Chase; Aetna Inc in its $8.8billion merger with US Healthcare; and First Data in its $7 billion merger withConcord EFS, among others.

Mr Spedale was president and chiefoperating officer of Kissel-Blake, a proxysolicitation firm that was acquired byGeorgeson in 1998. Prior to that, he was avice president at DF King & Co for 10 years.

FD continued

101NYSE IPO Guide


across all industry sectors. He hasmanaged many of J.P. Morgan’s mostimportant equity financing mandates,including the $19.7 billion IPO of Visa; the $12.6 billion equity offering for Wells Fargo in connection with itsacquisition of Wachovia; GE’s $12.2 billionequity offering in 2008; and CVRD’s $12.2billion equity offering. In 2008, J.P.Morgan’s Equity Capital Markets Groupwas named “Global Equity House” and“Americas Equity House” by InternationalFinancing Review.

Ivan M PeillVice President, Investor Relations,New York (Chase Manhattan Plaza)[email protected]

Ivan M Peill is a vice president in theinvestor relations advisory services team of J.P. Morgan’s Depositary ReceiptsGroup. He has 14 years of investor relationsexperience. Prior to J.P. Morgan, Mr Peillwas an advisor at Georgeson & Co,Thomson Financial and Capital MS&L,where he counseled issuer clients from avariety of industries and of varying marketcapitalizations. His expertise also includesfinancial media relations.

Mr Peill advises J.P. Morgan depositaryreceipt clients on various aspects ofinvestor relations, such as investor relationsstrategy, investor communications,targeting and institutional ownership. In addition, he is the editor of J.P. Morgan’sDR Advisor Quarterly, a publication focusedon investor relations and other issuesimportant to DR issuers. He also writespapers on regulatory developments.

Mr Peill holds an MBA with honors from Fordham University and is a memberof the National Investor Relations Institute.

Michael MillmanManaging Director, Head of Technology,Media and Telecommunications EquityCapital Markets, San [email protected]

Michael Millman is a managing director and head of J.P. Morgan’s Technology,Media and Telecom (TMT) Equity CapitalMarkets Group. Mr Millman spearheads the firm’s equity capital-raising services for TMT clients globally. Mr Millman joinedJ.P. Morgan in 1996 and oversees a varietyof equity mandates including structuringand executing IPOs, follow-on offerings,convertible security offerings and equityprivate placements. He has managed many of J.P. Morgan’s most importantequity financing mandates. He hasstrategic relationships with buy-sideinstitutions, financial sponsors and venture firms. Mr Millman holds a BA in economics/statistics from RutgersUniversity and an MBA from ColumbiaUniversity.

David TopperVice Chairman, Investment Banking,New York (Madison Ave)[email protected]

David Topper joined J.P. Morgan in 2005 as co-head of equity capital markets and is a vice chairman of investment bankingand chairman of the Equity CommitmentCommittee. Since joining J.P. Morgan, MrTopper has worked on a long list of high-profile financings across many sectors,including technology, financial institutions,retail and energy. Prior to joining J.P. Morgan,Mr Topper spent 22 years at Morgan Stanley,where he was co-head, managing directorand chairman of the Equity CommitmentsCommittee from 2001 to 2005. Prior to that,Mr Topper was responsible for equitycapital markets coverage of the media andtelecommunications sectors. Before joiningthe Equity Capital Markets Group, he heldsenior leadership positions in fixed-incomederivatives, corporate coverage, mergersand acquisitions and high-yield capitalmarkets. Mr Topper holds a BA from Duke University and an MBA from Stanford University.

Kevin WillseyHead of Global Equity Capital and DerivativeMarkets, New York (Madison Ave)[email protected]

Kevin Willsey began his career with J.P. Morgan in 1989 working in the firm’sMergers and Acquisitions Department,before moving to the Equity CapitalMarkets Group in 1994. He was namedmanaging director in 1997 and in 1999 was named head of equity capital marketsfor J.P. Morgan. Mr Willsey’s capitalmarkets career has involved capital-raisingassignments for clients in the UnitedStates, Europe, Asia and Latin America. He has managed a wide range of financingmandates for clients, structuring andexecuting IPOs, follow-on equity offerings,convertible security offerings andstructured derivative solutions for clients

J.P. Morgan & Co383 Madison Avenue, 28th FloorNew York NY 10179United States

1 Chase Manhattan Plaza, 58th FloorNew York NY 10005-1401United States

560 Mission Street, 20th Floor San Francisco, CA 94115United States

102 NYSE IPO Guide


Aamir HusainPartner, New [email protected]

Aamir Husain is a partner in the firm’s New York office, where he is the leader of the IPO advisory practice. He has morethan 17 years’ experience providing capitalmarkets advisory services to global privateequity funds, investment banks and otherstrategic investors. Mr Husain providestechnical and project management adviceon complex accounting and financereporting issues associated with the SECregistration process, IPOs, Rule 144a debtofferings, carve-outs and conversions toand from international financial reportingstandards (IFRS) and US GenerallyAccepted Accounting Practices. He hasextensive experience in cross-bordertransactions and has assisted majorinternational institutions in the UnitedStates, Europe and Asia list on the NYSE.Mr Husain has worked on over 20 IPOs. He received his BA from Boston Universityand is a member of the American Instituteof Certified Public Accountants and theInstitute of Chartered Accountants inEngland and Wales.

Michel MearaDirector, New [email protected]

Michel Meara is a member of KPMG’sTransaction Accounting Services Groupand a director in the firm’s New York office.He has worked on a variety of equityofferings, including IPOs and other SEC-registered offerings. Mr Meara regularlyadvises public companies on financialreporting and regulatory issues, includingSEC filings, restatements, IFRSconversions, post-merger integration and the redesign of financial reportingprocesses. Prior to joining the TransactionAccounting Services Group, he heldfinancial management positions in Fortune1000 companies, where he was responsiblefor SEC reporting and corporate financial

reporting areas. Mr Meara received his BBA from the University of Texas atAustin and his MBA from Thunderbird. He is a member of the American Institute of Certified Public Accountants.

Brian HecklerPartner, [email protected]

Brian Heckler leads KPMG’s TransactionAdvisory Services Group and is a partner in the firm’s Chicago office. He specializesin financial accounting and reportingmatters for public companies registeredwith the SEC. Mr Heckler provides servicesfor IPOs, spin-offs, sales of minorityinterests, joint venture formations and debtfinancings. He formerly was a partner in thefirm’s Department of Professional Practiceand was a professional accounting fellow at the SEC.

David HoriManaging Director, Silicon [email protected]

David Hori is a member of KPMG’sTransaction Accounting Services Groupand a managing director in the firm’s Silicon Valley office. Mr Hori specializes in transaction or special event-basedadvisory services, including IPOs, business combinations, spin-offs, financialrestatement assistance, IFRS conversionsand technical on-call accounting. Mr Horiadvises companies on a variety of SECreporting matters. He formerly was a seniormanager in the firm’s Department of Professional Practice.

KPMG LLP345 Park AvenueNew York NY 10154-0102United StatesTel +1 212 758 9700

303 East Wacker DriveChicago IL 60601-5212United StatesTel +1 312 665 1000

500 East Middlefield RoadMountain View CA 94043United StatesTel +1 650 404 5000

www.kpmg.com

103NYSE IPO Guide


David HongManaging Director, Financial &Professional Practices Group, San [email protected]

David Hong is the Bay Partnership practiceleader of Marsh’s FINPRO. He is a seniorclient advisor specializing in directors’ andofficers’ (D&O) liability. He advises clientson D&O insurance design, coverage andrelated corporate governance issues. Mr Hong joined Marsh in 2004, prior towhich he was a securities attorney for nineyears in New York and San Francisco,specializing in mergers and acquisitions,public and private debt and equityplacements, corporate governance andsecurities compliance. In his nine years as a securities lawyer, Mr Hong has beenthe general counsel for a software andcommunications company and was anattorney with Morrison & Foerster LLP. He acts as an advisor and broker forcompanies in a variety of industries,including technology, manufacturing,transportation and aerospace and defense.Mr Hong graduated with a JD fromGeorgetown University Law Center and isadmitted to practice law in New York andCalifornia. He earned a BA from ColumbiaUniversity.

Kate Sampson Senior Vice President, FINPRO, San [email protected]

Kate Sampson joined Marsh in 1996 and isa senior D&O client advisor in Marsh’s SanFrancisco office. Her clients include bothpublic and private companies and largeprivate equity firms. Ms Sampson routinelyadvises private equity and venture-backedcompanies on D&O liability issues and risk associated with initial public offerings.She is recognized as an industry expertregarding transactional risk insuranceproducts (representations and warrantiesinsurance, tax insurance and contingent

liability insurance), and private equityinsurance products. She also serves as growth leader for Marsh’s FINPROproducts for the Western United States. In this capacity she works with clients,prospects and Marsh offices, leading andcoordinating the growth efforts of FINPROfor a variety of solutions including D&O,employment practices liability and personalliability insurance. Ms Sampson earneddegrees in economics and political sciencefrom the University of Massachusetts,Amherst.

Stephen DascoleSenior Vice President, Private ClientServices Practice, New [email protected]

Stephen Dascole leads the asset protectionconsulting and insurance services offeredto high-net-worth individuals and familiesthroughout the Private Client ServicePractice’s Western region. Mr Dascole hasmore than 30 years of experience in theinsurance industry. He spent the first 20years of his career with Marsh PrivateClient Services and rejoined Marsh in 2007.He holds a bachelor’s degree in marketingfrom St John’s University.

Eugene C “Tripp” SheehanManaging Director, US D&O PracticeLeader, [email protected]

Eugene “Tripp” Sheehan is responsible forthe directors’ and officers’ liability productline for Marsh in the United States.Previously, he led the New York MetroFinancial and Professional Practices Group(FINPRO) division. He began his career with Marsh in 1993. The FINPRO productlines include directors’ and officers’ liability(D&O), pension trust liability, fidelity,employment practices liability, internet/e-commerce liability, intellectual property,litigation buy-outs, merger and acquisitionfacilitation products and relatedprofessional liability coverage forcommercial and financial institutions. Mr Sheehan is a founding member andcurrent chairman of Marsh’s Global D&OAdvisory Board and a member of theFINPRO Operating Committee. Mr Sheehanbegan his insurance career in 1986 as aD&O underwriter for Chubb & Son, Inc inSan Francisco. Before that, he spent a year as a marketing manager for the LosAngeles Clippers and was a basketballtraining site manager for the 1984 SummerOlympics. He received a BA in economicsfrom the University of California in 1984.

Marsh1166 Avenue of the AmericasNew York NY 10036United States

99 High St Boston, MA 02116 United States

345 California Street, Suite 1300San Francisco, CA 94104-2679United States

www.marsh.com

104 NYSE IPO Guide


NYSE Euronext11 Wall StreetNew York, NY 10005United StatesTel +1 212 656 2400

Scott CutlerExecutive Vice President and Co-head of US Listings and Cash [email protected]

Scott Cutler is responsible for the Americaslisting business and manages the NYSE’srelationship with over 2,100 companies inCanada, Latin America and the UnitedStates. He is also responsible for theNYSE’s relationship with the investmentbanking, private equity, venture capital andlegal communities to attract new listings. In addition, he oversees the capital marketsbusiness, including IPOs for operatingcompanies, structured products, closed-end funds and real estate investment trustslisting on the NYSE or NYSE Amex. MrCutler has an extensive background ininvestment banking and corporatesecurities law. Before joining NYSEEuronext, he was an investment bankerfocused on technology at SG Cowen & Coand Thomas Weisel Partners. He was also a corporate securities lawyer at CooleyGodward, focused on mergers andacquisitions, IPOs, venture fund formationand venture capital representation. Hegraduated with a BS in economics fromBrigham Young University and earned a JDfrom the University of California, HastingsCollege of Law.

Thomson Reuters3 Times SquareNew York NY 10036United States

www.thomsonreuters.com

Eric R WarnerVice President – Investor RelationsServices; Corporate [email protected]

Eric Warner is the commercial manager of the investor relations business offered by the Corporate Services division ofThomson Reuters. In this role, Mr Warner is responsible for commercial strategy andpolicy, strategic alliances, partnerships andoperational execution related to servicesand solutions targeted to investor relationsprofessionals in the Americas.

Prior to his current role, Mr Warner was head of the global businessdevelopment team within the CorporateServices business. He has also held avariety of management positions focusedon delivering sales results, forging strategicalliances, implementing training andintegrating acquired companies.

Mr Warner holds a BA from the Universityof Massachusetts at Amherst and an MBAfrom Northeastern University.

Thomson Reuters is the world’s leadingsource of intelligent information forbusinesses and professionals, withoperations in 100 countries. The CorporateServices business of Thomson Reutersprovides more than 6,000 companies –including 90% of the Fortune 500 – withsolutions that increase the efficiency andeffectiveness of business decision-makingacross the investor relations, businessintelligence, public relations and corporatecommunications functions.

PublisherTimothy Dempsey

Consulting publisherBrian Curran, NYSE Euronext

EditorCarolyn Boyle

Consulting editorsNicolas Grabar and Sandra L Flow,Cleary Gottlieb Steen & Hamilton LLP

ProductionRichard Proctor

The NYSE IPO Guideis published byCaxton Business & Legal, Inc27 N Wacker Drive, Suite 601Chicago, IL 60606United StatesTel +1 312 361 0821Fax +1 312 278 0821www.caxtoninc.com

Printed by Bowne & Co, Inc

ISBN 978-1-905783-45-8

The NYSE IPO Guide© 2010 Caxton Business & Legal, Inc

Copyright in individual chapters rests with the co-publishers. No photocopying:copyright licenses do not apply.

DISCLAIMERThis guide is written as a general guideonly. It should not be relied upon as asubstitute for specific legal or financialadvice. Professional advice should alwaysbe sought before taking any action basedon the information provided. Every efforthas been made to ensure that theinformation in this guide is correct at thetime of publication. The views expressed in this guide are those of the authors. The publishers and authors stress that this publication does not purport to provide investment advice; nor do theyaccept responsibility for any errors oromissions contained herein.

The NYSE IPO Guide contains summaryinformation about legal and regulatoryaspects of the IPO process and is currentas of the date of its initial publication (June14, 2010). Although the NYSE IPO Guidemay be revised and updated at some timein the future, the NYSE does not have aduty to update the information contained inthe NYSE IPO Guide, and the NYSE will notbe liable for any failure to update suchinformation. The NYSE makes norepresentation as to the completeness oraccuracy of any information contained inthe NYSE IPO Guide. It is your responsibilityto verify any information contained in theNYSE IPO Guide before relying upon it.

©2009 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE Euronext. NYSE Euronext and its affi liates do not recommend or make any representation as to possible benefi ts from any securities or investments, or third-party products or services. Investors should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its affi liates that are based on the current beliefs and expectations of management, are subject to signifi cant risks and uncertainties, and which may differ from actual results. All data as of September, 2009.

THE LISTINGDESTINATION OF THEEXCHANGING WORLD.

NYSE

NYSE AMEX

NYSE EURONEXT

NYSE ALTERNEXT

NYSE EURONEXT IS THE PREEMINENT DESTINATION FOR LEADING BUSINESSES, PROVIDING ACCESS TO

INVESTOR CAPITAL VIA THE MOST LIQUIDITY OF ANY EQUITY EXCHANGE GROUP IN THE WORLD. OUR

UNRIVALED POSITION AT THE CENTER OF GLOBAL COMMERCE AND OUR ARRAY OF SERVICES, TRADING

VENUES AND PLATFORMS SERVE COMPANIES OF EVERY SIZE FROM EVERY INDUSTRY AROUND THE

GLOBE AT EACH STAGE OF THEIR DEVELOPMENT. THE NEW YORK STOCK EXCHANGE. NYSE AMEX. NYSE

EURONEXT. NYSE ALTERNEXT. THIS IS THE EXCHANGING WORLD. WELCOME TO NYSE EURONEXT. nyx.com

NEW YORK STOCK EXCHANGE

IPO Guide

Legal Accounting

Insurance broker/risk advisor Financial printer Web-based communication tools

Investment bank/depositary receipts Transfer agent Investor relations

Proxy solicitor

NE

W YO

RK

STO

CK

EXC

HA

NG

E IP

O G

uide