Form S-1 or Reg. A+ Form 1-A Registration Statement Preparation

Gathering the Issuer, Underwriter, Auditors, and Counsel and Pricing the Offering

Once an issuer has decided upon going public and engaging in a public offering and has decided upon the security (whether it be debt, equity, preferred stock, but more often common stock) to be offered, the issuer in consultation with financial advisors will fix the relative rights and preferences. The next step is to meet with financial advisors, potential underwriters, and counsel to determine the terms of the offering including the pricing and the number of shares to be sold. After completion of the aforementioned, each of the participants in the registration statement - the issuer, counsel, auditors, and underwriter - will engage in their respective role in the joint preparation process. The underwriters will begin to become enmeshed in substantial factual investigation of the issuer’s condition; a process often referred to the underwriter’s initial due diligence. The underwriter’s investigation is to ensure that the offering is marketable and also to make sure the disclosures that are later presented are accurate. At this point the underwriter will also begin to form the underwriting syndicate.

Due Diligence Standards for All Participants in the Going Public Process

Each member of the deal team involved in or participating in the preparation of the registration statement has a duty of reasonable investigation. The highly factual nature of the due diligence standard requires nothing less than actual diligence. There is not one size fits all template for examining an issuer an their claims. Understanding an issuers risks and the types of issues that are particular to a particular issuer trigger more specific duties of reasonable investigation once those issuer specific issues have been established.

Steps Taken by Securities Counsel or Securities Lawyers Involved in the Registration Process

Counsel is first responsible for amassing information regarding the issuer’s operations. This includes a thorough factual investigation of all aspects of the business, past dealings of insiders, and affiliated. This full factual investigation includes interviews with the issuer’s key personnel and review of the issuer’s files. It is important to interview the head of each division as well as the company’s principal officers.

Counsel shall conduct document reviews that will establish a complete history of the company. Corporate minute books are a good starting point for historical investigation. There should be a review of shareholder, director, subsidiary, and affiliate minutes. Any past illegalities or significant improprieties will most likely need to be disclosed in the registration statement. An understanding of the issuers capitalization will need to be conducted during the review process. A review of the charter and bylaws as well as all loan documents, guarantees, and any other financing agreement, including long term leases, will need to be reviewed for applicable limitations and restrictions or the issuer’s future financing.

The registration statement disclosure requirements mandate a thorough analysis of the company’s business and a detailed description of divisions, departments and lines of business, and accounting practices. Counsel will need to review or inquire with all major customers and suppliers. Securities counsel will also need to review the issuer’s marketing, merchandising, and pricing methods, as well as a description of past practices. If there is a physical plant, then leases, title searches, and the like should be conducted where applicable. Such a physical review should include an examination of the issuer’s equipment and that equipment’s condition, anticipated maintenance, and potential replacement scenarios.

Counsel will need to review all copies of labor agreements, consulting agreements, employment agreements, and other similar agreements. Are any of these agreements going to expire soon? For larger enterprises, are any strikes or substantially larger labor expenses looming? If so, all or any such issues would need to be disclosed in the registration statement.

The registration statement must identify and discuss any security arrangements including pledges, assignments, and accounts receivable. If the issuer has a parent, subsidiaries, or affiliated corporations, counsel must carefully review intra-corporate, inter-subsidiary, or parent-subsidiary transactions. At times, there are potential conflicts of interests that appear such as mark-ups, supply and requirements contracts, loans, salaries, and stock ownership that should be disclosed on the registration statement.

There must be thorough review and investigation into the issuer’s management structure. Detailed resumes and biographies of each officer and director covering the last five years must be obtained. Corporate minutes are helpful in gathering information, but personal interviews are also highly recommended. Item 404 of Regulation S-K, which sets out the types of transactions and relationships between management requires a detailed description of all direct and indirect management compensation, as well as any insider transactions transactions that have occurred in the last two years. Insider transactions include loans, borrowings, transactions in the issuer’s shares, as well as contracts between insider owned or controlled companies and the issuer. Proper review and later disclosure requires securities lawyers to compile a list of the issuer’s securities held by family members, trusts, or other entities. There should be an examination and close scrutiny of all fringe benefits. All stock option plans and stock or cash bonus incentive plans should be scrutinized.

If an issuer embarks upon research and development, a proper pre-registration statement review should include a review of the issuer’s research and development activities - both in the past and any research that is contemplated to occur in the future. Issuer will eventually need to provide an explanation of accounting methods, percentage and completion method, and the stage of development.

In preparing the registration statement, the issuer should compile its operating statistics including relevant trends and ratios. There should be a description of any backlogs with respect to firm orders. There must be a complete inventory, including a breakdown by lines of business and product lines. Past tax returns should be reviewed to determine whether all taxes have been paid and whether future taxes have been properly estimated and withheld. Due diligence requires awareness of all competitors’ activities, industry trends, pricing power of the issuer and the industry, and relative strength of substitute products or services. Inquiry must be made as to whether the issuer has been in compliance with all applicable state and federal regulatory, environmental, health and safety, and labor laws.

Preparation of the issuers’s registration statement requires a thorough understanding of the issuer’s financial relationships. Banking relationships must be fully examined. Lines of credit and revolving credit agreements should be reviewed. A review of the issuer’s cash flow and source of those funds should occur. Contingent liabilities, including pending litigation, should be reviewed. Pleadings should be reviewed at a minimum by registration statement attorneys. Current financial statements should be prepared. Issuer should be prepared for a two year audit of financials given disclosure requirements.

Counsel should examine all significant contracts to which an issuer is a party. Insurance contracts should be reviewed. All patents, trademarks, and any other intellectual property should be reviewed.

All special risk factors with regard to the issuer must be discussed in the registration statement. There should be a review of all prior offerings, both public and private. All prior going public documents should be analyzed.

It is important that the prefiling investigation focus not only on the issuer’s business directly, but also on the specific disclosures issues that may arise from the terms of the securities to be covered by the registration statement. There must be compliance with all corporate law requirements of the state of incorporation, as well as any state in which the issuer is qualified to do business as a foreign Corporation. There must also be compliance with the blue sky laws of all states in which securities are to be offered. Finally, depending upon the nature of the issuers business, there may be state or federal administrative approval that must be obtained prior to the offering.

Due Diligence before the registration statement is filed

After the foregoing factual inquiries and document preparation had taken place, there are several legal tasks that must be tended to as part of the underwriting process. These will generally be performed by the issuer’s counsel in some cases by underwriters’ counsel. It is often necessary to hire special securities counsel to coordinate the offering and to supervise preparation of the registration statement. Both issuers and underwriter’s counsel will be involved in the preparation of a letter of intent between the company and the managing underwriter. The letter of intent generally will set for the number of shares to be offered, the offering price, and basic underwriting terms and provide for pre-clearance with FINRA.

Counsel will then meet with the accountants to review the financial information required for SEC filing; at this point a timetable should be established. The issuer must select a stock transfer agent.

Preparation of the Underwriter’s Agreement

Underwriter’s counsel will be preparing the underwriter’s agreement with the issuer, agreement among underwriters, and agreements for the selling group or syndicate of investment bankers conducting the underwriting. They must also prepare a questionnaire for underwriters to establish sufficient financial responsibility to bear the underwriting risk. Counsel should also assist in drafting a letter inviting participation in the underwriting group. Formally issuer’s and underwriters’ counsel need to make a survey of of all relevant blue sky laws and draft a timetable for compliance with those laws.

Filing the Registration Statement

When ready, proofs of the registration statement materials should be distributed to all counsel, the issuer’s principal officers, the accountants and the managing underwriters. The issuer’s directors should receive and review copies of the registration statement as well. Before sending or disseminating the materials to the public, the first stage of the due diligence meeting should occur. The next step would be to file the registration statement and pay the applicable fees. At this time, blue sky filings are necessary, as well as filings with FINRA. If the listing will occur on a national change, listing applications must be prepared and filed.

Post-Registration Statement Activities of the Issuer and Issuer’s Counsel

There are additional post registration statement filing activities that must occur, In addition to any work on any amendments that must be filed. The issuer may want to prepare in distribute press releases. Provisions will have to be made for stock certificates including obtaining CUSIP (Committee on Uniform Security Identification Procedures) numbers (unless the shares will be uncertified). Counsel and underwriter’s counsel will need to review the accountant’s comfort letter.

Once the registration materials are filed, the relevant administrative agencies, including the SEC, may respond with letters of comment. Counsel is responsible for reviewing SEC, FINRA, and state securities administrators’ comments. Counsel will then prepare replies and applicable amendments to be filed with the SEC, FINRA, and state securities administrators. It will often be necessary to file the delaying amendments in order to give the registrant time to respond to comments. At this point, it is time to arrange for the due diligence meeting of council, management, and underwriters, where all the filings as amended will be reviewed and scrutinized. The final underwriting agreement will not generally be signed until coordination of SEC clearance time and date and all last minute amendments such as price amendments have been filed.

Pricing the issuer’s securities

Frequently, the last step in the registration process is the pricing of the issue. In most instances, the price will be determined jointly by the underwriters and the issuer. Because of their firm commitment obligations, underwriters would generally be conservative in pricing an issue. In the case of a secondary offering where the issuers securities are already publicly traded, the price ordinarily will be determined by the closing price on the day before the offering. As an alternative to a fixed price for an offering, securities may be offered “at the market” or “at market” which means that the proceeds will be based on a fluctuating market price.

Final Amendments to the Registration Statement; Transfer Agent Instructions; Stock Certificates and Payments

After filing the final amendments and the application for acceleration with the SEC, counsel should prepare a closing memorandum. Transfer agent instructions must be distributed as must payment instructions. The final prospectus should be sent to state administrators. There should be one final review of all documents and the current status of the issuer. Usually, there is a cold comfort letter prior to the closing. The stock certificates should be checked and counted. All payments must be made in accordance with the prospectus’s description.

To learn more about the initial public offering (IPO) process email us at destiny@aigbelaw.com or call (202) 854-8386. We are available 24/7.

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The Law Offices of Destiny Aigbe | Securities & Going Public Lawyer
Destiny Aigbe, Securities Attorney
1101 Connecticut Ave NW Suite 450
Washington, DC 20036
Telephone: (202) 854-8386
Email: destiny@aigbelaw.com
https://www.aigbelaw.com

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