The marketing process


The marketing process
After the registration statement is filed with the SEC, the

lead underwriter begins the process of forming a group, or
syndicate, of underwriting firms that agree to participate
in the offering. The syndicate is formed to obtain a broad
distribution of the stock and to provide a balance between
institutional and retail investors. The primary forms of
underwriting are the firm commitment, best-efforts and
Dutch auction process, with the firm commitment being by
far the most common. In a firm commitment underwriting,
the underwriters bear the risk of selling the shares, while in
a best-efforts, process the underwriters are not responsible
for any unsold shares. In a Dutch auction, the price is
determined through a bidding process with the price of the
shares set at the highest price that will result in the entire
offering being sold. As firm commitment underwriting
accounts for the vast majority of IPOs, we have focused on
this type of offering in this publication.
In a firm commitment underwriting, the syndicate members
participate with the lead underwriter in assuming the risk
of selling the stock. The lead underwriter usually purchases
the largest portion of the shares offered and brings into
the group enough members to purchase the remainder.
Each member makes a commitment to purchase a certain
number of shares. When the SEC review process has
reached a point that the company and the lead underwriter
are sufficiently comfortable to print the red herring, the
salespeople for the firms in the syndicate begin letting their
clients know about the offering and furnishing them with
copies of the preliminary prospectus. The syndicate may
also include selling group members who are dealers that
agree to purchase a specific number of shares at the public
offering price less a selling concession. These selling group
members do not share all the potential liabilities under
the securities laws with the underwriters and, as a result,
receive less compensation.
Selling the shares is really a group effort. The lead
underwriter “builds the book,” keeping track of the
outstanding indications of interest. Some participating
underwriters may actually sell two or three times their
commitment, and others may sell none. The company’s
participation in the roadshow is the single most important
vehicle for building momentum for the offering. If
momentum is strong, the lead underwriter’s “book” may
reflect demand that significantly exceeds the size of the
offering. This is good, as it allows for some inevitable
slippage in actual orders (from the number of indications
of interest) and provides for continuing demand in the
secondary market. Because the underwriting agreement
is not signed, the lead underwriter and the syndicate
members know how strong the demand is for the stock
before they are legally committed to purchase shares
from the company. So, as a practical matter, their risks in
selling the shares are limited. After pricing occurs and the
underwriting agreement is signed, the underwriters will be
required to purchase the full amount of their commitment
(except under very limited circumstances).
As indicated previously, the underwriters have a good
sense of how many shares can be sold before they enter
into the underwriting agreement. Although the preliminary
prospectus indicates the anticipated number of shares to
be sold and the expected price range, the underwriters find
out during the quiet period just how acceptable that price
and offering size are to investors. Both factors may change
before a registration statement becomes effective.
If your underwriters have done a thorough job, any changes
during this period will generally reflect only changes in
market conditions. Throughout the registration process, a
series of pricing discussions are likely to occur between you
and the lead underwriter to set the initial price and size of
the offering and to apprise you of any needed revisions.
The 1933 Act prohibits any public offers of a security, either
orally or in writing, before the initial filing of the registration
statement. In this context, what constitutes an offer has
been defined very broadly by the SEC and the courts. Any
publicity effort, if deemed to create a favorable attitude
toward the securities to be offered and to stimulate the



market artificially, may lead to what is called “gun jumping”
and result in possible sanctions or fines by the SEC in
addition to delaying the offering.
The JOBS Act created an important exception to this general
rule prohibiting gun jumping. An EGC or its authorized
representative may “test the waters” before or after filing
a registration statement by engaging in oral or written
communications with qualified institutional buyers (QIBs) or
institutions that are accredited investors to assess interest
in a contemplated offering. Communications to “test the
waters” will not have to be filed with the SEC as free writing
prospectuses (discussed below).
The SEC, through various releases and rules, has established
guidelines for the publication of information other than
the prospectus, both before and after the filing of the
registration statement. It is very important that everyone
in the company be aware of these guidelines. From the
time that you begin to work on the IPO process, it is
strongly recommended that all press releases and interview
requests be cleared with your legal counsel and your lead
underwriter. Your key executives should also meet with
company counsel and the lead underwriter to review what
may and may not be said publicly about the company, as
failure to comply can lead to a halt in the IPO process until
the interest that has been stimulated has cooled down.
The practical period of time covered by the guidelines
extends from 30 days prior to the filing of the registration
statement to 25 days after the effective date of the
registration statement, when broker-dealers are no longer
required to deliver a prospectus to potential investors (or
90 days if, following the IPO, the company is not listed on a
stock exchange or certain OTC markets). During this period,
any publicity release can raise questions about whether
the publicity is part of the selling effort, even if the release
contains no offer or even a mention of the company’s effort
to sell securities. Even before this period starts, there can
be problems with communications that make any reference
to the contemplated offering. In addition, if company
executives give interviews where the ultimate date of
publication is uncertain, problems can arise. In those cases,
the company must take reasonable steps within its control
to prevent further distribution of the information during
the 30-day period prior to filing the registration statement.
There have been many recent examples of companies
having difficulty with the quiet period restrictions. Most
notably, companies have granted interviews that were
published during the quiet period. This can require the
company to delay its offering until the increased publicity
surrounding the offering has dissipated, and it may require
additional filings with the SEC.
Rules promulgated by the SEC under the 1933 Act provide a
“safe harbor” for continued communications at any time by
or on behalf of a non-reporting issuer of regularly released
factual business information by the same employees
who have historically been responsible for providing such
information to persons other than investors or potential
investors. This safe harbor does not permit the publication
or dissemination of forward-looking information by
non-reporting issuers. In addition, the safe harbor does
not permit communications containing information about
a registered offering or communications released as part
of offering activities. The company should particularly not
disclose anything as to valuation or projections of future
performance. In addition, a specific rule (Rule 135) provides
a safe harbor whereby certain limited announcements
regarding a proposed public offering are deemed not to
constitute an offering. In particular, Rule 135 provides that
a notice of a proposed offering (e.g., a press release or a
written communication directed toward employees) will not
be deemed to be an offer if it states that the offering will
be made only by a prospectus and the notice contains no
more than the information specified by the rule, including

the amount of securities you propose to sell, the proposed
timing of the offering, and a brief explanation of the
manner and purpose of the offering.
Companies should also pay particular attention to what
information is on their company websites (including
any hyperlinked information). Specifically, the company
should avoid establishing a new website or expanding
its existing website, other than in a manner consistent
with past practice; avoid discussing the possibility of any
issuance or offering of securities; have internal counsel or
outside counsel review all information before it is posted
on the company’s website; review its website and remove
any incorrect factual information as soon as possible;
avoid posting “hype” regarding its anticipated financial
performance; and avoid posting or hyperlinking to thirdparty
websites or reports, if any exist. The SEC will typically
review the company website and anything included there
that contains information inconsistent with information
in the registration statement or information that could
relate to the offering may generate questions and result in
potential legal issues.
Restrictions on offers
Once you have filed the registration statement and the
quiet period begins, you are forbidden to make any
written offers, such as through sales literature regarding
the offering, except by means of the red herring
prospectus and a free writing prospectus (described
below). Oral selling efforts (conversations between the
company or its underwriters and the prospective buyers
relating to information in the prospectus) are allowed,
but you must be careful even in oral conversations. If
oral communications are taped for broadcast or placed
on a website, they can be considered a written offer in
violation of SEC rules. With the continued expansion in
use of the internet and social media, the SEC has adopted
rules to set the boundaries between oral and written
communications. Written communication is defined to
be any communication that is written, printed, a radio
or television broadcast, or a graphic communication.
Graphic communication includes all forms of electronic
media, including audio and video recordings, facsimiles,
digital storage devices, e-mail, internet websites,
computers, computer networks, or other forms of
computer data compilation. However, it does not include
a communication that at the time of the communication
originates live, in real time to a live audience, and does
not originate in recorded form or otherwise as a graphic
communication, although transmitted through graphic
means. These definitions become very important in dealing
with the roadshow (described below) and information
distributed through social networking media. As a part
of the briefing that counsel provides to officials in the
company, these rules and their application, including to
social networking sites, should be reviewed.
Free writing prospectus
To provide companies more flexibility during the offering,
in light of modern communication methods and the wide
dispersion of information, companies entering an IPO can
use what are called “free writing prospectuses” during
the quiet period after the registration statement that
contains a price range has been filed with the SEC. Free
writing prospectuses are any written communication that
constitutes an offer to sell or solicitation of an offer to buy
securities that are or will be the subject of a registration
statement, other than the statutory prospectus included
in the registration statement, or a communication after
the effective date of the registration statement that is
accompanied or preceded by a statutory prospectus.
Free writing prospectuses must include a prescribed legend
and most must be filed with the SEC. In addition, free
writing prospectuses must be accompanied or preceded
by a physical copy of the most recent statutory prospectus,
although this requirement will be satisfied, in the case of
an electronic free writing prospectus, if the latter contains
an active hyperlink to the statutory prospectus. The free
writing prospectus may contain additional information
that is not found in the registration statement, but cannot
conflict with the information found in the registration
statement. The rules pertaining to the free writing
prospectus are complicated and you should work with your
legal counsel to ensure compliance.

Also allowed are short press releases under Rule 134. Rule
134 “safe harbor” permits written communications that
include information with respect to the securities being
offered (the title, amount being offered, offering price, etc.);
proposed stock exchange listing; the type of underwriting,
names of underwriters, names of selling security holders,
and a brief description of the intended use of proceeds
of the offering, if then included in the disclosure in the
prospectus that is part of the filed registration statement;
the anticipated schedule for the offering and a description
of marketing events (including dates); and a description of
the procedures by which the underwriters will conduct the
offering. The purpose of the press release is to announce the
offering in the press and to tell interested parties where they
can obtain a copy of the prospectus.
Also allowed is a “tombstone” advertisement under Rule
134, so-called because of its formal, sparse wording,
and lack of adornment. Traditionally the tombstone
advertisement is issued after the pricing of the offering

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