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The IPO process
customs developed in prior IPOs. Against
this background, there is some limited
scope for innovations in organization
or presentation based on the particular
circumstances or investment thesis of the
company.
The balance of this chapter discusses
some of the major elements of the
prospectus for a U.S. domestic issuer that
is not an EGC, but space does not permit
an exhaustive review. For information
about prospectus requirements for an
EGC, see Chapter 4, and for certain
differences applicable to a foreign private
issuer, see Chapter 9.5.
Prospectus drafting style: Under
the SEC’s rules, all information in a
prospectus must be presented “in a clear,
concise and understandable manner,”
and the cover page, back page, summary
section and risk factors section must
follow “plain English principles.” In its
rules and elsewhere, the SEC has fleshed
out what these requirements mean,
including such features of good expository
writing as short sentences; definite,
concrete, everyday language; use of the
active voice; no legal jargon; no double
negatives; and tabular and bullet point
presentations.
More generally, prospectus drafting
should avoid bullish rhetoric and “puffery”
by using neutral language, being balanced
and complete and avoiding any factual
statements that cannot be substantiated.
An overly cautious approach is not
necessarily desirable either, and wholesale
repetition of risks and qualifications is
unnecessary. Discussions of the business
outlook, or of the company’s future
performance, must be handled with
particular care. These kinds of “forwardlooking
statements” are usually necessary,
but they are limited in scope to limit
potential disclosure liability. They must
be carefully worded so that descriptions
of the company’s beliefs and expectations
will not be mistaken for statements
of fact, and they are accompanied by
discussions of the factors that could cause
actual outcomes to differ from those
anticipated.
Summary “box”: The prospectus must
include a summary. This is typically
presented with a border around the
margins of each page and is consequently
often referred to simply as the “box.” It
usually describes the offering and briefly
describes the company, with a focus on its
most distinctive features. The summary
description of the company is usually
treated as the most important part of
the prospectus from a marketing point
of view.
Financial information: A typical IPO
prospectus provides the most important
financial information three times.
These requirements are discussed in
detail in Section 2.2. The prospectus
must include audited financial
statements and, depending on the age
of the audited financial statements,
unaudited interim financial statements.
It must also include selected financial
information covering five full years, if
the company has been in existence that
long. There is also summary financial
information in the summary box. In
the selected financial information
and the summary, information from
the financial statements is often
accompanied by other key statistics
about the company’s operations or
performance.
The prospectus must also include a
capitalization table. This summarizes the
company’s capitalization as of a recent
date and shows how the capital structure
will be affected by the IPO and the
application of the IPO proceeds.
Risk factors: A prospectus must set
forth under the caption “Risk factors,”
right after the summary box, the most
significant factors that make the offering
speculative or risky. It should include
a discussion of the most significant
risk factors for the company, not an
exhaustive list of every conceivable risk.
The discussion should be concise and well
organized, with headings that adequately
communicate each risk described, and
should avoid boilerplate.
Business of the company: The business
section of the prospectus sets forth
a straightforward discussion of the
company’s business and operations.
This section usually begins with a
brief overview and continues with a
presentation of the company’s distinctive
features, often described as its strengths
and its strategy. This section then goes
on to describe the business in full. The
SEC’s forms provide broad guidance
on how to describe the company’s
business, but most of the content of the
discussion is based on common sense
and on a review of what other comparable
companies have covered. The forms
specifically contemplate the following
topics:
• principal products produced and
services rendered and methods of
distribution;
• sources and availability of raw
materials;
• 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
is among the most important sections
of the prospectus. It takes its name from
the beginning of the cumbersome title
used in the SEC’s rules, “Management’s
Discussion and Analysis of Financial
Condition and Results of Operations.”
(The corresponding item for a foreign
private issuer is called “Operating and
Financial Review and Prospects” but is
still referred to as MD&A.)
MD&A serves to provide investors
with the information necessary to
understand the company’s financial
condition, changes in financial
condition and results of operations.
Complementing the financial statements,
the MD&A explains the company’s
performance and its financing to
investors “as seen through the eyes of
management” (as the SEC has put it). In
addition to discussing performance in
past periods, the MD&A must address
any known ways in which future
performance could differ and identify
trends and uncertainties that may
affect the company going forward. It
should discuss each segment separately
if material to an understanding of the
business as a whole.
36 NYSE IPO Guide