The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1
Going Public 469

non-technologically oriented reader. The lawyers will struggle in similar fash-
ion to convey technical information concerning the terms of the offering.
Special plain-English rules apply to the front and back cover pages, to the
summary contained in the front of the prospectus, and to the section of “risk
factors.” Risk factors are a constant feature of IPO prospectuses, and are de-
signed fully to apprise the potential investor of all pitfalls that the company
might encounter and which might cause it to falter. These risk factors generally
relate to the newness and lack of financing and operating history of the com-
pany, the experience level of management, rapid technological change for the
marketplace in which the company proposes to compete, and the superior re-
sources of the competition. These vital pages are the ones likely to be read most
carefully by the investing public, and must be reviewed particularly to make
sure that sentences are short, that the active voice is utilized, that concrete
everyday words are employed, and that complex information is contained in
tables or other wise graphically depicted.
There will be several drafting meetings in the six to eight weeks between
the organizational meeting and the filing of the first draft of a registration
statement with the SEC. During these lengthy meetings, each word of the
prospectus will be reviewed and considered, some on-the-spot rewriting will
occur, and other sections will be designated for later rewrite. Much attention
will be directed to the description of the company’s business, and to the
“MD&A” (management’s detailed discussion and analysis of its financial oper-
ations, liquidity, and capital requirements for the past three years, as well as for
the foreseeable future, if known). When all parties are confident that the de-
scription is accurate, the “preliminary prospectus” will be filed as part of the
registration statement.
Contemporaneously, filings also must be made with the regulatory agen-
cies of each state in which the IPO will be offered; state practice varies as to
the degree of substantive review that state regulators will give to a registration
statement, and in the past the severity of state review was more stringent than
SEC review; some states involved themselves in approving or disapproving the
substance of an offering (“merit review”), while SEC review typically is re-
stricted to ensuring the adequacy and completeness of the description of the
company and the attendant risks of investment.
In the case of the company, a decision has been made to apply for the
immediate right to have the shares issued in the IPO quoted for trading on
NASDAQ. By law, when IPO shares will be quoted on NASDAQ or listed on
a national securities exchange, the states’ right to insist on separate registra-
tion and review is preempted.
Now everyone waits for the SEC staff to provide comments and ask ques-
tions in a written “comment letter.” It is not typical to print and distribute to
the public the first filing of the preliminary prospectus, in part because no one
is quite sure whether the SEC will have significant comments or request sig-
nificant corrections and in part because often the managing under writers are
not ready to effect such a distribution. During the three to four weeks that it

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