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The IPO process<br />
by the SEC. The registration statement<br />
includes the prospectus that is provided<br />
to prospective investors and other<br />
material that is also publicly available. The<br />
registration statement is the company’s<br />
responsibility, even if the IPO is made up<br />
entirely of shares being sold by existing<br />
shareholders (a “secondary” offering) and<br />
the company will not sell any shares or<br />
receive any proceeds.<br />
The preparation of the registration<br />
statement is a principal focus of the IPO<br />
process. It has three different aspects:<br />
• Regulatory—The registration statement<br />
must comply with detailed SEC rules<br />
governing its content and will be subject<br />
to intensive review by the SEC staff.<br />
• Marketing—The prospectus, which is<br />
part of the registration statement, is<br />
the central item in the marketing of the<br />
offering, so it must effectively convey<br />
the arguments for investing in the<br />
company.<br />
• Liability protection—A materially<br />
misleading statement or omission can<br />
result in liability to purchasers for the<br />
company, the underwriters and other<br />
participants, so particular care should be<br />
taken with the contents of the registration<br />
statement and the prospectus.<br />
Reconciling these three aspects of the<br />
registration statement is an important<br />
challenge for the IPO working group.<br />
Somewhat different rules apply to<br />
the registration process for an emerging<br />
growth company (described in Chapter 4)<br />
and a foreign private issuer (see Chapter 9).<br />
The remainder of this chapter describes<br />
the registration process for a U.S. domestic<br />
company that does not qualify as an EGC.<br />
(a) Statutory framework<br />
The IPO process can be divided into<br />
three main stages based on the regulatory<br />
framework set forth in Section 5 of the<br />
Securities Act. Before the registration<br />
statement is filed there is a “quiet period,”<br />
when no offers are permitted. Between<br />
filing and effectiveness of the registration<br />
statement, there is a “waiting period,”<br />
when offers may be made, but written<br />
offers are subject to content regulation<br />
and filing requirements. Only in the third<br />
stage, after the registration statement<br />
becomes effective, are sales to investors<br />
permitted.<br />
The preliminary prospectus—often<br />
called a “red herring” because of the<br />
red legend on the cover indicating its<br />
preliminary nature—is the principal<br />
instrument for marketing the shares during<br />
the waiting period. Copies of the preliminary<br />
prospectus are distributed to the salesforce<br />
of the underwriting and selling syndicate<br />
members and provided to prospective<br />
buyers. It is substantially complete, except<br />
for the key points that are determined at<br />
the end of the marketing period: the price,<br />
the actual proceeds, the underwriting<br />
commitments and related matters. Although<br />
the price is not yet available, the preliminary<br />
prospectus includes an estimated range for<br />
the final price.<br />
The “final” prospectus, with final<br />
information on pricing and underwriting,<br />
must be filed within two business days after<br />
pricing. It is often delivered to investors as<br />
well, though this is no longer required.<br />
(b) Gun jumping<br />
The law regulates offers of securities (and<br />
particularly written offers) as well as sales.<br />
During the quiet period, no offers may be<br />
made, whether written or oral. During the<br />
waiting period, no written offers may be<br />
made except by means of the preliminary<br />
prospectus. Violations of the restrictions<br />
on offers during each stage are sometimes<br />
referred to as “gun jumping” and can result<br />
in the SEC imposing a delay or “coolingoff<br />
period” to allow the effects of the<br />
impermissible offer to dissipate.<br />
These rules can take an IPO participant<br />
by surprise, particularly because of the<br />
broad definitions given to the terms<br />
offer and written. For example, under<br />
some circumstances a discussion of the<br />
company’s business prospects could be<br />
construed as an offer, and a discussion<br />
with a journalist who plans to publish<br />
could be construed as a written offer.<br />
Because the terms are so broad, offering<br />
participants must be careful to distinguish<br />
between permissible communications and<br />
illegal offers and avoid any conduct or<br />
communications that could be construed<br />
as impermissibly conditioning the market<br />
for the securities to be offered.<br />
(c) SEC review and declaration of<br />
effectiveness<br />
The IPO cannot be completed until<br />
the registration statement is effective,<br />
which generally requires an affirmative<br />
declaration by the SEC staff. Before<br />
providing this declaration, the staff<br />
reviews the registration statement,<br />
provides comments and requires that its<br />
comments be addressed to its satisfaction.<br />
The comments are provided in written<br />
comment letters. The company’s response<br />
generally takes the form of an amendment<br />
to the registration statement, accompanied<br />
by a response letter explaining how the<br />
company has addressed the matters raised<br />
in the staff’s comment letter.<br />
SEC review of an IPO registration<br />
statement is very thorough, and the<br />
process of responding to the comments is<br />
a major driver of the timing of the IPO and<br />
often the content of the disclosure. The<br />
staff usually provides the first comment<br />
letter within four to six weeks of filing.<br />
After that, the amount of time required<br />
to reach effectiveness can vary widely,<br />
depending on the nature of the comments<br />
and the work required to resolve them.<br />
Difficult accounting comments can take<br />
months to resolve and can substantially<br />
change the information content of the<br />
prospectus.<br />
In some IPOs, it may be useful to raise<br />
issues with the SEC staff before the first<br />
filing by requesting a prefiling conference.<br />
This is most common where there is<br />
a question of accounting or financial<br />
presentation that will shape the financial<br />
statements or where an accommodation<br />
under the SEC’s rules will be needed. The<br />
SEC staff is willing to provide this kind of<br />
guidance in advance, subject to reviewing<br />
the implementation in the filing. Often a<br />
prefiling conference leads to an exchange<br />
of letters to document the precise<br />
contours of the staff’s guidance.<br />
The first filing of the registration<br />
statement in an IPO is typically a “quiet<br />
filing,” meaning that the preliminary<br />
prospectus, although publicly available,<br />
is not actually sent to investors. It may<br />
omit the price range, but if so it must be<br />
amended to include a price range before<br />
the marketing can begin. Only after the<br />
SEC comment process is complete (or<br />
nearly so) does the marketing of the<br />
offering begin, using the preliminary<br />
prospectus included in the most recent<br />
amendment of the registration statement.<br />
The declaration of effectiveness<br />
is not actually required until the<br />
34 NYSE IPO Guide