472 Making Key Strategic Decisions
effect in 20 days, but in practice the company requests and the SEC will grant
“acceleration,” which permits the immediate offering of the stock pursuant
to the final prospectus. The prospectus is printed in large numbers for distri-
bution to investors, without the “red herring” legend on the front cover which
had indicated that the prospectus was subject to change. The prospectus is
now final.
At the same time that the company’s registration statement under the Se-
curities Act of 1933 has become effective, permitting the initial sale of the
company’s stock, the SEC also has permitted to become effective a filing made
by the company under the Securities Exchange Act of 1934, which statute es-
tablishes the rules for subsequent trading of the shares on the part of the pur-
chasers who obtain company stock in the IPO.
It is only at this time that the company and the two managing under writ-
ers will sign the under writing agreement by which the under writers agree to
purchase the company’s shares. The agreement had been filed as an exhibit
with the registration statement and had been approved by the NASD, but until
the SEC has granted its approval of the registration statement the under writ-
ers have not been contractually bound to purchase the shares. Even now, in the
brief period of time it will take for the under writers to effect the going public
transaction, the underwriting agreement contains a series of “market out” pro-
visions which permit the under writers, over the next few days, to decline to
move forward with the IPO in the event material and unexpected changes
occur in the financial markets.
The under writers and the selected dealers now are entitled to accept pay-
ment for the shares, and they sell the company’s common stock to various insti-
tutional and individual investors. Approximately one week later, a closing under
the under writing agreement occurs. Before the under writers will close, they
will require a series of assurances from the company and its advisers with re-
spect to the continuing accuracy of the contents of the registration statement.
Officers of the company will deliver certifications as to the accuracy of facts,
the attorneys for the company will give formal legal opinions with respect to
legal matters and the absence of their awareness of contrary material facts, and
the accountants will deliver a “comfort letter,” which sets forth the degree of
diligence utilized by the accountants, the materials which the accountants have
reviewed, and the conclusion that nothing has come to the attention of the ac-
countants to indicate that the financial statements are improperly prepared or
erroneous. An example of a comfort letter approved by the American Institute of
Certified Public Accountants Inc. is attached to this chapter as Appendix C.
At the closing, the company receives $33 million from the underwriters in
exchange for its stock. Vulture Partners and certain other stockholders, who
sold their shares along with the shares issued by the company, receive $4.2 mil-
lion. The underwriters retain $2.8 million, or a 7% commission. Out of its pro-
ceeds, the company pays many additional substantial expenses: several hundred
thousand dollars to each of its lawyers, its accountants, and its financial
printer, as well as the legal fees and expenses of the under writers’ attorneys.