468 Making Key Strategic Decisions
One of the tasks of the organizational meeting is to determine which SEC
“Form” will be utilized in going public. The SEC has promulgated two addi-
tional forms, Form SB-1 and Form SB-2, for certain small businesses. The fi-
nancial statements for such forms are less rigorous than for Form S-1 and
require only one year of audited balance sheet and two years of audited income
statements, statements of cash f lows, and statements of stockholders’ equity.
However, because of a combination of limitation on amount of capital to
be raised and value of the company at the commencement of the process, at
the organizational meeting it is determined that SEC Form S-1 must be uti-
lized; the accountants will be required to prepare two years of audited balance
sheets and three years of audited income statements, cash f lows, and stock-
holders’ equity. (Appendix B is Securities and Exchange Commission Form
S-1, the most typical registration form for an IPO.)
Although audited information is required for only three years in Form
S-1, the accountants also will have to put together the results of operations for
a five-year comparative period (if available). Since 2001 the company has re-
ceived an audit of its financial statements, but results of operations for the ini-
tial year 2000 were prepared on a review basis only. The accountants will have
to go back and apply audit standards to this period. Since the objectives of an
audit are to obtain and evaluate evidence to corroborate management’s asser-
tions regarding its financial statements, and to express an opinion on those
financial statements, the “review” of the operating numbers will be an insuffi-
cient basis for the issuance of an audit opinion. But since Mary Manager was
assiduous in financial record keeping and since the certified public accoun-
tants are familiar with the company’s financial records and financial state-
ments, the accountants will be able to complete the audit procedure at the
same time that they are preparing the Form S-1 financial information and sup-
porting schedules in the format required by the SEC.
In preparing the registration statement, the company, the under writers,
the accountants, and the attorneys are guided by specific instructions from the
SEC. The textual content of the registration statement is controlled by SEC
Regulation S-K; the accounting content is regulated by SEC Regulation S-X.
These regulations and related pronouncements contained in the General Rules
and Regulations of the SEC, may be accessed through the SEC Web site, and
are made available to companies undergoing the IPO process through a series
of publications provided without additional charge by most financial printers.
The process of drafting the prospectus is made more complicated by ef-
forts of the SEC to clarify communication between the company and its po-
tential public investors. Since October 1998, the SEC has required that the
prospectus be drafted in “plain English” pursuant to the provisions of Rule 421
of the SEC’s General Rules and Regulations. The entire prospectus is to be
written in clear, concise, and understandable English using short sentences and
paragraphs, bullet lists, and descriptive headings without either technical or
legal jargon. The company will struggle to describe the technicalities of its
business in language that will be clear and understandable to an intelligent but