Hire a Big Four firm before the eleventh hour. Management at a company held in a private-equity portfolio must be ready to capitalize on a temporary market window, if the portfolio owners decide the window means an IPO would be more profitable than an M&A transaction. Attorneys Alexander Lynch and Michael Hickey suggest several steps management can take to be prepared for the eventuality. These steps include:
- Retain a Big Four accounting firm or another of the few large national firms, since investment banks generally prefer
and might even require—that the audit and the comfort letter come from a national firm. A last-minute switch from a
smaller firm could result in an expensive financial restatement or a change in accounting policy, causing the IPO to miss the market window.
- Have audits conducted under the standards from the Public Company Accounting and Oversight Board (PCAOB), as required by the SEC for IPOs, not the laxer standards from the American Institute of Certified Public Accountants (AICPA), which private companies often follow. To obviate the need to replace the auditors in mid-IPO or obtain an SEC waiver, verify that they meet the PCAOB’s independence standards.
- Prepare interim financials that include what numerous underwriters recommend: eight or more quarters of P&L data for the IPO prospectus.
- Submit interim information to the auditors for review under AICPA’s Statement on Accounting Standards No. 100.
- If the financials for any acquired business must appear in the prospectus, negotiate for rights to the required historical financial data.
- Assess the method of aggregating and reporting data about the company’s reporting segments (i.e., lines of business and operations in different geographic regions) on the website, in public disclosure, and to chief decisionmakers. That method should match how the company wishes to present the data in the prospectus.
- Learn how competitors that have already gone public report financial line items, non-GAAP information and other key measures of performance (such as EBIDTA), and MD&A; then consider adopting their practices now.
- Ascertain whether the IPO’s effect on company ownership could activate change-in-control provisions and, in turn, events of default under credit agreements or repurchase obligations under bond indentures. If so, obtain a waiver in advance of the IPO.
- Make sure no agreements limit stock issuances or uses of IPO proceeds.
- Find out whether material agreements may be filed as exhibits to the registration statement, with or without consent or notice. To a limited extent, the SEC will permit the redaction of such agreement information as trade secrets, as well as commercial and financial data that give the company a competitive edge.
- If the Sarbanes-Oxley Act would ban loans already made to directors and executive officers, give them sufficient time before the registration statement is filed to repay or refinance.
Be wary of equity awards. The SEC might decide that equity awards to employees in the 12 to 18 months before an IPO were unjustifiably issued at values too far below the IPO price. Should that occur, the SEC could impose a compensation expense (thereby lowering earnings), require a financial restatement, and regard the employees as having received taxable income. To prevent these problems, the authors advise management to get independent valuations by qualified appraisers before issuing equity awards during the crucial period, and to prepare a thorough description of a well-designed system for setting their value.
- Issue equity awards within a registration exemption, which most often will be SEC Rule 701.
- Consider eliminating equity awards that have performance-based vesting. They often vest during or soon after an IPO, so that the company must have withholding obligations and the holders will face tax consequences.
Watch out for activities that may condition the market. Be aware that the IPO’s formal start will greatly restrict public communications. The limits go beyond securities offers and can be counterintuitive. And, limits aside, it is not advisable to publicize the IPO or the accompanying financial projections. The dangers range from the risk of violating a securities law to conditioning the market by raising expectations that might not be met.
Abstracted from: Keeping The IPO Door Open
By Alexander Lynch and Michael Hickey
Weil Gotshal & Manges, New York NY
Insights: Corporate & Securities Law Advisor
Vol. 33, No. 3, Pgs. 3-8
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