Risk factors: Are the risks specific to the company and
devoid of mitigating language? The SEC also will expect to see certain risk factors relating to the issuer’s status as an EGC. Use of proceeds: Is there a specific allocation of the
proceeds among identified uses, and if funding acquisitions is a designated use, are acquisition plans identified? Selected financial data: Does the presentation of non-
GAAP financial measures comply with SEC rules? MD&A: Does the discussion address known trends,
events, commitments, demands, or uncertainties, including the impact of the economy, trends with respect to liquidity, and critical accounting estimates and policies? Business: Does the company provide support for statements about market position and other industry or comparative data? Is the disclosure free of, or does it explain, business jargon? Are the relationships with customers and suppliers, including concentration risk, clearly described? Underwriting: Is there sufficient disclosure about stabilisation activities (including naked short selling), as well as factors considered in early termination of lockups and any material relationships with the underwriters? Exhibits: Do any other contracts need to be filed based
on disclosure in the prospectus? After the SEC has provided its initial set of comments, it
is much easier to determine when the registration process is likely to be completed and the offering can be made. In most cases, the underwriters prefer to delay the offering process and to avoid distributing a preliminary prospectus until the SEC has reviewed at least the first filing and all material changes suggested by the SEC staff have been addressed.
Preparing the underwriting agreement, comfort letter and other documents During the waiting period, the company, the underwriters and their counsel, and the company’s independent auditor will negotiate a number of agreements and other documents, particularly the underwriting agreement and the auditor’s comfort letter. The underwriting agreement is the agreement pursuant
to which the company agrees to sell, and the underwriters agree to buy, the shares and then sell them to the public; until this agreement is signed, the underwriters do not have an enforceable obligation to acquire the offered shares. The underwriting agreement is not signed until the offering is priced. In the typical IPO, the underwriters will have a “firm commitment” to buy the shares once they sign the underwriting agreement.
Underwriters’ counsel will submit the underwriting
agreement, the registration statement, and other offering documents for review to the Financial Industry Regulatory Authority (Finra), which is responsible for reviewing the terms of the offering to ensure that they comply with Finra requirements. An IPO cannot proceed until the underwriting arrangement terms have been approved by Finra. In the comfort letter, the auditor affirms its independence from the issuer, and the compliance of the financial statements with applicable accounting requirements and SEC regulations. The auditor also will note period-to-period changes in certain financial items. These statements follow prescribed forms and are usually not the subject of significant negotiation. The underwriters will also usually require that the auditor undertake certain agreed-upon procedures in which it compares financial information in the prospectus (outside of the financial statements) to the issuer’s accounting records to confirm its accuracy.
Marketing the offering During the waiting period, marketing begins. Before the JOBS Act, it was the case that the only written sales materials that could be distributed during this period were the preliminary prospectus and additional materials known as “free writing prospectuses,” which must satisfy specified SEC requirements. Binding commitments cannot be made during this period. The underwriters will receive indications of interest from potential purchasers, indicating the price they would be willing to pay and the number of shares they would purchase. Once SEC comments are resolved, or it is clear that there are no material open issues, the issuer and underwriters will undertake a two- to three-week road show, during which company management will meet with prospective investors. Once SEC comments are cleared and the underwriters
have assembled indications of interest for the offered securities, the company and its counsel will request that the SEC declare the registration statement effective at a certain date and time, usually after the close of business of the US securities markets on the date scheduled for pricing the offering.
The post-effective period Once the registration statement has been declared effective and the offering has been priced, the issuer and the managing underwriters execute the underwriting agreement and the auditor delivers the final comfort letter. This occurs after pricing and before the opening of trading
JOBS Act Quick Start 29
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