Tag Archives: IPO

IPO’s – Getting Ready and Keeping Up

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By: George M. Wilson & Carol A. Stacey

If you are contemplating an IPO or advising companies in this process, PLI’s “Securities Offerings 2017: A Public Offering: How it is Done” will provide you with valuable knowledge and how-to tools about the IPO process. The program simulates an offering from start to finish, builds a foundation in the law and SEC guidance, and walks through each step in the process. The program is on March 3, 2017 and you can learn more here.

The program also includes up to 2 hours of ethics credit (see program page on www.pli.edu for credit by state).

Keeping up with the IPO Market – An IPO Resource Update

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Last December the US Government passed the Fixing America’s Surface Transportation Act or FAST Act……um, wait, isn’t this an SEC Reporting Blog? Well, as frequently happens when a “must pass” bill is in the legislative process congress members and senators add many amendments that are unrelated to the original bill. One of those ride-along areas in the FAST Act turns out to be SEC reporting related.

Several of the provisions relate to Emerging Growth Companies and their path through the IPO process. Others relate to disclosure effectiveness and improving the reporting system. Check the last section of this post and you can read a summary of these legislative changes.

Congress tinkering with the IPO process raises the question, just what is the state of the IPO market?

One great resource that provides a weekly update about the IPO market with details by industry and other factors is PWC’s weekly newsletter “Capital Markets Watch”. You can find the current and past issues at:

www.pwc.com/us/en/deals/publications/ipo-watch-weekly.html

The IPO market here in the US was fairly strong last year. That said, uncertainty and market volatility have a strong impact on IPO demand and given this year’s start in the capital markets it is difficult to predict how IPO’s will fare this year. One thing for sure, it will be interesting to watch!

One of the things you learn as you watch the ebb and flow of IPO’s is that there is a clear seasonal pattern in this market, which companies should allow for in their planning. Fall is usually a strong period in this market. Which means it is important to begin the process early in the year.

If you are in the process of considering an IPO, PLI has a wealth of resources. Our treatise “Initial Public Offerings: A Practical Guide to Going Public” will help you build a thorough understanding of the process. You can learn about it at:

www.pli.edu/Content/Treatise/Initial_Public_Offerings_A_Practical_Guide/_/N-4lZ1z12nwi?fromsearch=false&ID=158941

Our full-day conference “Securities Offerings 2016: A Public Offering: How It Is Done”, which will be on March 11 this year, is a good deep-dive into the process. The program will be presented live in New York and is available via webcast also. You can learn all about the program at:

www.pli.edu/Content/Seminar/Securities_Offerings_2016_A_Public_Offering/_/N-4kZ1z11hzm?fromsearch=false&ID=259900

Lastly, here is a brief summary of the major SEC related provisions of the FAST Act.

This Act:

Updates certain provisions of the Jumpstart Our Business Startups Act (JOBS Act), and

Requires the SEC to review and update certain SEC reporting requirements.

The Act’s goal is to make capital raising by smaller companies easier. Some of the changes are self implementing and will take effect immediately, others will require SEC rulemaking.

Under the original provisions of the JOBS Act a company could lose EGC status during the IPO process. This would happen for example if revenues exceeded $1 billion before the effective date of a registration statement. The FAST Act allows a company in the IPO process to “lock in” its EGC status. This status will last for up to one year after the company fails to qualify as an EGC. In this case a company will be treated as an EGC through its IPO date, or one year after it ceases to meet the EGC criteria, whichever is earlier. This provision is effective immediately.

The original provisions of the JOBS Act require that all confidential submissions be made public at least 21 days before marketing the company’s stock. The FAST Act changes this to 15 days before marketing, or effectiveness if there isn’t a road show. (Typically marketing begins with the road show.)   This provision is effective immediately.

Under the FAST Act an EGC may omit financial information from a confidential submission or public filing if the company reasonably believes that it will not be required under the rules when the registration statement is declared effective. For example, prior year F/S would not be required if a company believes they will not be required when the registration statement is declared effective. This could be true for certain interim information also. The SEC has already considered extending this provision to all companies.

The Act also requires the SEC to amend its rules to allow a summary page in Form 10-K. Each item should include a cross-reference to where the relevant information is included in the annual report.  This may be a hyperlink. While the SEC is required to do this within 180 days a company could actually do this now.

The Act also requires the SEC to review and amend Regulation S-K to provide additional scaling or eliminate requirements for accelerated filers, EGCs, SRCs and other smaller issuers to reduce reporting burdens while still providing all material information to investors. This review is also designed to remove redundant, outdated or unnecessary disclosures for all issuers. The SEC is required to do this within 180 days

The Act requires a second S-K study to be done in conjunction with the SEC’s:

Investor Advisory Committee and

Advisory Committee on Small and Emerging Companies

The focus of this review is to:

Modernize and simplify requirements

Reduce costs and burdens

Still provide all material information to investors

 

This review should:

Emphasize a “company-by-company” disclosure model

Reduce boilerplate language

Maintain completeness

Provide for comparability across companies

Evaluate methods of information delivery and presentation

Explore methods for reducing repetition and the disclosure of immaterial information

The SEC must complete the study and issue a report to Congress including detailed recommendations with 360 days and then propose rules 360 days after the first study is issued.

The FAST Also includes a new exemption for private companies, Section 4(a)(7) of the Securities Act, which will provide for private re-sales of restricted securities. Purchasers will have to be accredited investors and general solicitation and advertising will not be permitted.

The FAST Act also provides for forward incorporation in Forms S-1 and F-1 by smaller reporting companies. This will obviate the need to file prospectus supplements or post-effective amendments.

Savings & loan holding companies now have the same registration thresholds as banks and bank holding companies.

The SEC has already update some JOBS Act FAQs and has even discussed broadening some of the provisions.

There is a lot here, and if you would like to learn more about the FAST Act we have a recorded program with details at:

www.pli.edu/Content/OnDemand/FAST_Act_Securities_Law_Provisions/_/N-4nZ1z10zk8?fromsearch=false&ID=276456

As always, your thoughts and questions are welcome!

 

Debt Versus Equity – More on Ratchets

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On November 3 we blogged about debt versus equity issues and how in late stage financings investors were demanding price adjustment and conversion rate adjustment features such as ratchet provisions. In essence this was to protect late round investors if the valuations they used for their investment was substantially higher than the IPO valuation.

As you may have been following, Square has just completed their IPO. Here is an excerpt from Square’s stockholder’s equity note in their financial statements:

The initial conversion price for the convertible preferred stock is $0.21627 for the Series A preferred stock, $0.71977 for the Series B-1 preferred stock, $0.95369 for the Series B-2 preferred stock, $5.79817 for the Series C preferred stock, $11.014 for the Series D preferred stock, and $15.46345 for the Series E preferred stock. In the event the Company issues shares of additional stock, subject to customary exceptions, after the preferred stock original issue date without consideration or for a consideration per share less than the initial conversion price in effect immediately prior to such issuance, then and in each such event the conversion price shall be reduced to a price equal to such conversion price multiplied by the following fraction:

the numerator of which is equal to the deemed number of shares of common stock outstanding plus the number of shares of common stock, that the aggregate consideration received by the Company for the total number of additional shares of common stock so issued would purchase at the conversion price immediately prior to such issuance; and

the denominator of which is equal to the deemed number of shares of common stock outstanding immediately prior to such issuance plus the deemed number of additional shares of common stock so issued.

Series E preferred stock contains a provision for the adjustment of conversion price upon a public offering. In the event of such offering, in which the price per share of the Company’s common stock is less than $18.55614 (adjusted for stock splits, stock dividends, etc.), then the then-existing conversion price for the Series E preferred stock shall be adjusted so that, as of immediately prior to the completion of such public offering, each share of Series E preferred stock shall convert into (A) the number of shares of common stock issuable on conversion of such share of Series E preferred stock; and (B) an additional number of shares of common stock equal to (x) the difference between $18.55614 and the public offering price, (y) divided by the public offering share price.

The language above is not very easy to understand, but there are various price adjustment features and the instruments that have them were entered into at various points in time, including some later stage investments. So, the debt versus equity issues is present.

Square’s IPO priced at $9, (actually below the expected price range, but the company did get a nice day one price rise on the exchange) so Square will have to make up shares to these later stage investors. This is a simple example where late stage financing valuations were higher than the IPO price.

Here are two links to information about the transaction. Buzzfeed has a nice summary of the deal at:

www.buzzfeed.com/williamalden/square-valued-at-29-billion-in-ipo-short-of-expectations?utm_medium=email&utm_campaign=News+-+1119+Thursday&utm_content=News+-+1119+Thursday+CID_8ba44ca9bcced29cacc07f7e086f01c4&utm_source=BuzzFeed%20Newsletters&utm_term=.uxrLvq8pj#.amezg5KWJ
Here is a WSJ article where the WSJ somehow wanted to call this ratchet a “penalty”:

blogs.wsj.com/digits/2015/11/18/square-pays-93-million-penalty-to-some-investors-in-ipo/

As always, your thoughts and comments are welcome!

 

 

P.S. And, just in case this is relevant to you, here is a link to our new workshop “Debt vs. Equity Accounting for Complex Financial Instruments”. This new case-driven workshop will be presented five times next year.

www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z11c8lZ4k?ID=262917

Comment of the Week – Debt Versus Equity Issues on the Rise?

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The genesis of this post is actually a panel discussion from PLI’s 47th Annual Institute on Securities Regulation. This program is one of our major events in the CLE world. The roster of speakers is amazing, starting with a keynote address from Chair White and featuring so many SEC alums, current staffers and industry professionals that an SEC geek simply can’t resist the program.

Anyway, on the first day of the conference the first panel discussed capital market “health” in the current environment. One of the market developments they discussed was financing rounds companies complete shortly before an IPO. In the current environment more and more late round investors are demanding “price protection”. This “price protection” includes instruments like warrants with adjustable prices (ratchets or down-rounds) and preferred stock with adjustable conversions options.

(The staff does write comments about these kinds of instruments, and we have a few examples below.)

It turns out that sometimes the valuations used for these private placements shortly before an IPO don’t follow through to the valuations in the IPO. So the late round investors ask for price protection so they won’t seem to have overpaid shortly before an IPO. (This dovetails very nicely with the recent discussion in the financial press about how valuations for “unicorn” companies may be overstated in the current tech world.)

This is exactly the kind of price protection that has been common in emerging companies that have been far from the IPO process, and it is these kinds of instruments that have been the cause of so many restatements.

If you have ever attended any of our Midyear, Annual or Mid-Sized and Smaller Company SEC Reporting & FASB Forums you are familiar with the continuously updated list of restatement issues we discuss at those conferences. For the last seven years, the number one cause of restatements by public companies has been debt versus equity accounting. Instruments such as warrants with repricing provisions combined with the convoluted, complex accounting guidance in this area have caused more restatements than any other issue.

Being one of the few accountants in the Institute on Securities Regulation it was fascinating listening to the lawyers discuss these complex instruments. The discussion of disclosures that should surround these complex instruments and their unique features was deep and rich. No one however mentioned the accounting issues that they create, and the risk of restatement that goes along with this accounting complexity.

It was a great reminder that as accounting professionals we need to be on the watch for this issue and when we see it raise the accounting issues and assure they are dealt with effectively. This is one of the times when communication between finance, legal and accounting professionals is crucial.

If you would like to review an example of the accounting these instruments create, one of the participants on the panel was from BOX, a successful IPO which had this exact situation. In their first Form 10-K and their S-1 you can find a derivative liability on their balance sheet and a related fair value adjustment in their income statement related to redeemable preferred stock warrants they issued which were derivatives. You can find their Form 10-K at:

www.boxinvestorrelations.com/sec-filings

And, last, here are a couple of example comments. All of this really emphasizes the need to be aware of this issue and build the skills to recognize the issue and deal with it effectively.

It appears the exchangeable senior notes issued in August 2014 contain redemption features. Provide us your analysis that supports your conclusion that none of the redemption features are required to be bifurcated in accordance with ASC 815-15. Specifically address whether the debt involves a substantial discount in accordance with ASC 815-15-25-40 through [25-43].

We note your disclosure that the 1.25% Notes contain an embedded cash conversion option and that you have determined that this option is a derivative financial instrument that is required to be separated from the notes. Please provide us with the details of your analysis in determining that this conversion option should be accounted for separately as a derivative and refer to the specific accounting literature you relied on.

As always, your thoughts and comments are welcome!

P.S. And, just in case this is relevant to you, here is a link to our new workshop “Debt vs. Equity Accounting for Complex Financial Instruments”. This new case-driven workshop will be presented five times next year.

www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z11c8lZ4k?ID=262917

 

Planning on an IPO?

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One of the great things going on in the economy right now is the increase in IPO activity. Working with a company through the IPO process is one of the most challenging and rewarding experiences SEC reporting professionals can have. It is always a huge learning process, and since no two deals are ever exactly the same, also very exciting!

Companies have to do significant preparation to be ready for an IPO, and the IPO process itself can be all consuming. Both these phases of the project are only prelude to all the additional work as a public company. With so much change involved, training and preparation are crucial.

To help with all the phases of the IPO process we offer a variety of courses through PLI’s Corporate and Securities practice area. You can check this area out on our webpage, www.pli.edu .

For near-term IPO training we are offering our “How to Prepare an Initial Public Offering” program on April 10. You can attend live in New York City at our conference center or participate via webcast. You can learn more at:

www.pli.edu/Content/Seminar/How_to_Prepare_an_Initial_Public_Offering/_/N-4kZ1z129o6?fromsearch=false&ID=224973

As always, your thoughts, comments and questions are welcome!