Disclosure—Drafting, Filing and SEC Review

Full and fair disclosure of material information, enabling an investor to make an in- formed choice whether to invest in a company, is the bedrock legal principle underpinning the regulation of the U.S. securities markets. The same is true of the initial public offering process. The offering prospectus is drafted with great care and receives intense attention because it is the primary disclosure document in the IPO.

The offering prospectus is part of the registration statement and contains a detailed description of the company and its business. It serves multiple purposes. The underwrit- ers and the company use the preliminary prospectus, as it is called until near the end of the process, to market the offering to potential investors. The underwriters will also base the initial investor presentations for the road show on the disclosure in the preliminary prospectus, and the road show presentation must be consistent with the preliminary pro- spectus. Although the company tells its “story” in the preliminary prospectus, it is also the disclosure document that disgruntled investors may base a securities law claim on if it contains inaccuracies or suffers from misleading omissions.

The company files with the SEC a complete registration statement, which includes the preliminary prospectus but excludes a limited set of information relating to the final offering price per share for the IPO. Typically, the majority of the SEC’s comments on the registration statement will concern aspects of the disclosure in the prospectus.

Drafting the prospectus and the registration statement takes a tremendous and patient effort from the working group, as well as various parties whose input may be required to make the disclosure accurate and complete. Company counsel and management typically collaborate on the first draft of the registration statement during the weeks leading up to the first drafting session of the IPO working group and distribute it in advance of the first working group meeting so that members have an opportunity to read, analyze and for- mulate a response to it. The IPO working group (management, underwriters and counsel) then meets in drafting sessions to discuss, and provide comments to, the draft registration statement. The drafting sessions are usually held weekly in the beginning and then more often toward the end of the process as the time for filing of the initial registration statement with the SEC approaches. Revising the registration statement involves a substantial time commitment from the working group, who must frequently negotiate language to reconcile the sometimes countervailing goals of accurate, balanced disclosure (legal protection) and wording that will enable the underwriters to successfully convey the company’s compelling attributes to potential investors (marketing).

Once the drafting process is complete, the company files the registration statement with the SEC. The SEC reviews the business, legal, accounting and other aspects of the reg- istration statement to determine if it complies with the applicable disclosure requirements set forth in federal securities laws and regulations. The SEC provides initial written com- ments to the company approximately 30 days after receiving the registration statement. The working group then discusses proposed responses to the comments and prepares a comment response letter. The registration statement and prospectus typically are amended and re-filed to update information and reflect the changes required in response to the SEC’s comments. This comment and comment response process may go through several itera- tions before the SEC is satisfied that its concerns have been met.

Once the revisions are complete, the company is in a position to print copies of the pre- liminary prospectus contained in the registration statement for use in the marketing road show with potential investors. When the road show concludes, the company asks the SEC to declare the registration statement “effective” and the underwriters and the company agree on a price at which the company’s stock will be sold to the public. The company adds the pricing information and any other necessary updates to the prospectus (including any changes that may have resulted from the actual offering price varying from the anticipated price set forth in the preliminary prospectus). The resulting document is the final prospec- tus that the company files with the SEC.


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