Tiếng anh chuyên ngành kế toán part 49 docx

468 Making Key Strategic Decisions One of the tasks of the organizational meeting is to determine which SEC “Form” will be utilized in going public. The SEC has promulgated two addi- tional forms, Form SB-1 and Form SB-2, for certain small businesses. The fi- nancial statements for such forms are less rigorous than for Form S-1 and require only one year of audited balance sheet and two years of audited income statements, statements of cash flows, and statements of stockholders’ equity. However, because of a combination of limitation on amount of capital to be raised and value of the company at the commencement of the process, at the organizational meeting it is determined that SEC Form S-1 must be uti- lized; the accountants will be required to prepare two years of audited balance sheets and three years of audited income statements, cash flows, and stock- holders’ equity. (Appendix B is Securities and Exchange Commission Form S-1, the most typical registration form for an IPO.) Although audited information is required for only three years in Form S-1, the accountants also will have to put together the results of operations for a five-year comparative period (if available). Since 2001 the company has re- ceived an audit of its financial statements, but results of operations for the ini- tial year 2000 were prepared on a review basis only. The accountants will have to go back and apply audit standards to this period. Since the objectives of an audit are to obtain and evaluate evidence to corroborate management’s asser- tions regarding its financial statements, and to express an opinion on those financial statements, the “review” of the operating numbers will be an insuffi- cient basis for the issuance of an audit opinion. But since Mary Manager was assiduous in financial record keeping and since the certified public accoun- tants are familiar with the company’s financial records and financial state- ments, the accountants will be able to complete the audit procedure at the same time that they are preparing the Form S-1 financial information and sup- porting schedules in the format required by the SEC. In preparing the registration statement, the company, the underwriters, the accountants, and the attorneys are guided by specific instructions from the SEC. The textual content of the registration statement is controlled by SEC Regulation S-K; the accounting content is regulated by SEC Regulation S-X. These regulations and related pronouncements contained in the General Rules and Regulations of the SEC, may be accessed through the SEC Web site, and are made available to companies undergoing the IPO process through a series of publications provided without additional charge by most financial printers. The process of drafting the prospectus is made more complicated by ef- forts of the SEC to clarify communication between the company and its po- tential public investors. Since October 1998, the SEC has required that the prospectus be drafted in “plain English” pursuant to the provisions of Rule 421 of the SEC’s General Rules and Regulations. The entire prospectus is to be written in clear, concise, and understandable English using short sentences and paragraphs, bullet lists, and descriptive headings without either technical or legal jargon. The company will struggle to describe the technicalities of its business in language that will be clear and understandable to an intelligent but 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 otherwise 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 underwriters are not ready to effect such a distribution. During the three to four weeks that it 470 Making Key Strategic Decisions typically takes for the SEC to provide both accounting and business comments on the prospectus, several things will be occurring: • The company’s accountants will work on updating financials, so they will be “fresh” (i.e., within 135 days of filing) for the anticipated amendments to the registration statement. • The company will be careful in its public utterances and in the contents of its Web site, to avoid the improper direct or implicit promotion of the company’s stock; during this waiting period generally the only writing that may be utilized to actually offer company stock for sale is the prospectus itself, and no generally ancillary writing and no inconsistent oral presentations can be made. • The comanaging underwriters will form a syndicate of additional under- writers who will agree to purchase a certain number of the IPO shares. These underwriters in turn will deal with the lowest tier of distribution, the “selected securities dealers” whose securities customers ultimately will be asked to purchase the shares. • The managing underwriters will have filed with the National Association of Securities Dealers Inc. (NASD) the following: the registration state- ment, their underwriting agreement with the company, the agreement among the underwriters themselves, and the agreement between the un- derwriters and those “selected securities dealers.” The NASD regulates compensation of underwriters, and must review the offering to declare that the consideration to be paid by the company to the underwriters is fair and reasonable. • The company will prepare the information necessary to permit the com- pany’s common stock to be quoted over the NASDAQ, on completion of the IPO. When the SEC staff issues its comment letter, a flurry of rewriting re- sults in an amended registration statement, which is combined with updated fi- nancial statements and refiled with the SEC as promptly as possible. Typically, this version of the prospectus is then printed in large numbers and distributed by the underwriters to the investment community. This distributed prospectus is typically referred to as the “red herring.” Until 1996, the SEC required that the cover of a preliminary prospectus, which was being distributed, bear in red ink a legend which advised that the prospectus was subject to change and that the SEC had not finally approved the offering. Under current practice, lan- guage to similar effect is required on the front cover and on occasion may be printed in red ink, but it need not be. At this juncture, the underwriters together with key company manage- ment embark on a “road show,” which is a key element in the marketing of an IPO. For a couple of weeks, the managing underwriters and management criss- cross the United States, and sometimes travel overseas, to hold brief meetings with underwriters, brokers, securities analysts, and significant investors to Going Public 471 present the company, discuss and answer questions concerning the prospectus, and make the company story palpable to the people whose support is essential to sell the offering. Management typically makes a highly orchestrated half hour presentation, supported by a PowerPoint or similar screen presentation. Because the company is still in the waiting period and (generally) only the prospectus can be utilized as a written presentation of the company’s prospects, no written materials are distributed. The managing underwriters had booked two and a half weeks of in-person meetings, mostly at breakfast and lunch time when securities professionals and significant investors are most available, in cities all across the United States, with a brief two-day trip to London. Perhaps the fastest evolving and most confused aspect of the going public process is the road show procedures, in light of technological advances. Road show sessions are now permitted to be accessed online with the Internet, and the SEC and the underwriting community is grappling with the ground rules for such access. At present, there are no general rules and regulations as to the types of potential investors who may participant in an Internet road show, al- though the trend seems to be toward opening road show participation to in- creasingly less sophisticated investors. It is quite possible that this trend will continue so as to open road shows to all interested parties, and if Internet road shows are open to everyone, then the in-person road show seemingly could also be fully attended. The attorneys for the underwriters have written to the SEC and obtained specific permission to permit the Internet streaming of several of the United States road shows to selected retail investors who are securities cus- tomers of the underwriting syndicate, which investors will be given a password to a Web site in order to participate. Because of the prohibition against utiliz- ing any writing other than the prospectus during this “cooling off ” period, In- ternet participants will be prohibited from downloading the PowerPoint presentation which will be made by the company management. Throughout this period, the underwriters gather indications of interest for the purchase of stock. They also receive feedback as to the proposed range of pricing, which reflects the market value that will be placed on the company and will be reflected in the per share price. In dialogue with the team, and with approval of the board of directors, just prior to final clearance from the SEC the managing underwriters fix the per share price at which company common stock will be sold in the IPO. Meanwhile, the SEC staff has reviewed the amended prospectus, and has been satisfied with the response it has received to questions it has addressed to management and to the accountants. It has indicated that the IPO can pro- ceed. Pursuant to SEC practice, the underwriters may now file a final regis- tration statement (with fresh financials if needed), which for the first time will contain the actual per share purchase price, the aggregate proceeds to the company and to selling stockholders, and the specific dollar amounts for the underwriter discount (the commission that the underwriters will receive on the sale of the shares). This “pricing amendment” by SEC regulation will take 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 underwrit- ers will sign the underwriting agreement by which the underwriters 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 underwrit- ers have not been contractually bound to purchase the shares. Even now, in the brief period of time it will take for the underwriters to effect the going public transaction, the underwriting agreement contains a series of “market out” pro- visions which permit the underwriters, 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 underwriters 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 underwriting agreement occurs. Before the underwriters 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 underwriters’ attorneys. Going Public 473 Dough.com Inc. now is a publicly held company with a couple of thousand shareholders spread throughout the United States and Britain. THE MORNING AFTER Although the infusion of over $30 million of net capital in the company is of major significance, the life of the company in public mode has drastically changed. The company’s executives and directors have taken on both new roles and serious potential liabilities. The company itself has become obligated to feed the public’s earnings appetite, and the requirements of the regulatory au- thorities for a continuous stream of accurate information. As a publicly held company with shares quoted on NASDAQ and regis- tered under the Securities Exchange Act of 1934, both the company and its ex- ecutives have further become responsible for the filing of very specific and complex reporting forms. The company itself must keep the public informed by filing within 90 days of each fiscal year-end, on Form 10-K, an extensive discussion of the com- pany’s business and financial condition. Much like a prospectus, the Form 10-K contains a description of the business, properties, and legal proceedings involv- ing the company, an MD&A (management’s discussion and analysis of financial condition and results of operations) for the three prior years, three years of audited financial statements, and a variety of other information about the com- pany’s stock, the company’s management, and (typically although not specifi- cally required by regulation) an ongoing and updated list of risk factors. Less comprehensive but equally required by regulation, the company must file within 45 days of the end of each of its fiscal quarters (except for the year-end) a quarterly report of its financial condition on Form 10-Q, and fur- thermore must file periodic reports on Form 8-K within several days after the occurrence of significant events, such as a change of control, the acquisition or disposition of significant assets, a change in the auditors, or a resignation of di- rectors because of disagreement. The company will be required by NASDAQ to provide a written annual re- port with audited financial statements to all of its stockholders. Corporate prac- tice will require the corporation to hold an annual meeting of its stockholders, generally within two or three months of the release of the annual report on Form 10-K, which will contain the financial statements for the prior year. Now that the company’s stock is widely held by a couple of thousand peo- ple in diverse locations, it is necessary for management to seek written voting authorization, through signature and return of a proxy card, by which stock- holders authorize designated members of management to vote the shares of such investors for the election of directors and for any other action to be taken at the annual meeting. Proxy regulations of the SEC will require that the com- pany send extensive written information (a “proxy statement”) to each stock- holder in advance of the annual meeting, and in connection with management’s 474 Making Key Strategic Decisions solicitation of proxies for the voting of shares. The SEC requires filing of this proxy statement and all related information at the same time they are sent to stockholders; in the event significant action beyond the typical election of di- rectors is to be voted on at the annual meeting, the SEC requires advance fil- ing of proxy materials so that the SEC staff can review and comment on such materials. The company will have to consider whether it wishes to attempt to con- duct its annual meeting online. While substantive state law controls whether a corporation can accept electronically sent proxies or electronically sent direct votes, the desire on the part of companies to communicate more completely with its stockholders will likely push the company to spend more and more time in producing online annual meetings. Now that the company is public, the company and its management can have personal liability if materially incorrect information about the company falls into the public domain. Indeed, it is the purpose of the various formal SEC filings to make sure that accurate current information is disseminated. But often events arise which call for public disclosure on the part of the company, and if the in- formation contained in such disclosure is both material and not previously con- tained in an SEC filing or other public announcement, then under SEC Regulation FD the company must make sure that contemporaneously with the making of such private disclosure there is also a broad public dissemination. The annual meeting presents particular problems in the control of com- pany information. Company officers answering questions at the annual meeting will have to stick to a recitation of previously announced material facts; in the event a decision is made to release previously nonpublic material information, or if such information inadvertently is provided, SEC regulations require prompt broad dissemination through filing of Form 8-K and through appropri- ate press releases to the public. In connection with its annual meeting, man- agement may be briefed by attorneys and PR consultants as to how to answer questions from the floor concerning company operations and finances. Indeed, separate and apart from its annual meeting, the company must generate some specific policies on the handling of material nonpublic informa- tion. Dough.com has already placed an ad in the newspaper for a director of in- vestor relations, to coordinate the need of company investors for accurate information about the company. It is likely that this function within the com- pany will grow over time and indeed likely that an outside public relations firm, experienced in the public relations and disclosure issues of public entities, will be retained. The company should anticipate adopting a constant policy of broadly disseminating public press releases about new products, and material developments in the company. Particular problems arise in connection with dealing with rumors that may circulate in the public domain. The company may decide that it will sys- tematically offer “no comment” with respect to questions about certain kinds of rumors or misinformation (whether raised at an annual meeting or at other times). Such a policy is difficult to sustain; once adopted it must be followed Going Public 475 rigorously, and if in the past the company had a practice of discussing such matters, then it cannot state “no comment” in a particular case. Additionally, rules of most Exchanges and of the NASDAQ require a company affirmatively to correct, through its own public disclosure, materially inaccurate and mis- leading rumors which circulate in the marketplace through third parties re- gardless of whatever legal ground rules may exist. The investor relations and legal advisers to the company also will now have to pay attention to the contents of the Web site, which in the past might have contained overly enthusiastic reports about the company, its potential profitability and the functionality of its products. Contents of the Web site can constitute false and misleading information upon which investors may rely to their detriment, and financial losses incurred by investors based on erroneous or dated Web site information can be recovered by lawsuit against the company and its management. In forming a public disclosure policy, the company will work closely with legal counsel. Many of its pronouncements will contain language approved by the Private Securities Litigation Reform Act of 1995 so as to establish a so- called “safe harbor” for forward-looking statements. A company and its man- agement will be insulated from liability in connection with any statement which later proves to be inaccurate, provided the statement is believed to be true when made and provided it is disclosed clearly that the anticipated future event is dependent on certain variables. The company now must deal with the common practice of announcing quarterly earnings, generally by a conference call with securities analysts (se- curities professionals who follow the company stock and write about the stock in research reports and publications). Although quarterly financial information must be filed in the Form 10-Q within 45 days of the end of the first three fis- cal quarters (or included in the annual Form 10-K within 90 days of the end of each fiscal year), it is not unusual for a company to announce its earnings by conference call or perhaps online as soon as determined. It is also during such earnings announcements that management is sometimes induced to speculate as to earning trends, and such speculation must be made carefully if it is to be protected by the “safe harbor” for forward-looking statements. The SEC is ac- tively involved in regulating the announcement of earnings in such a private forum. The practice of releasing this information only to selected securities professionals has been criticized as fundamentally unfair to the broad investing public, and regulatory changes in this practice are likely in the near future. Now that the company is public, management will be expected to an- nounce its projected sales and profits; produce results that are reasonably con- sistent with its projections; adjust those projections in midquarter if it appears that they will prove to be materially erroneous; answer questions of securities analysts in such a way that the information which is provided is both accurate and does not materially disclose previously unknown facts; and manage the en- terprise strategically with an eye toward quarter-to-quarter financial progress. The morning after the IPO closing, John Dough has already learned that there 476 Making Key Strategic Decisions will be a monthly management meeting designed to control his budget and to narrow areas of research into the development of products with short test cy- cles so as to drive forward current earnings. John Dough and Mary Manager meet for coffee a few weeks later. Each has sold a modest number of shares as part of the IPO. John has purchased a small sailboat, and Mary has made a down payment on a ski house. On paper, each is worth millions of dollars, although the remaining balance of their shares cannot now be resold because of the lockup for 180 days, and thereafter can be resold only pursuant to specific SEC regulations because they are “af- filiates” of an issuer of publicly traded securities. They have to be careful what they say to reporters, investors, and securi- ties analysts. They even have to be careful about what they say casually in con- versation with friends and relatives, lest they inadvertently leak nonpublic information which results in illegal insider trading profits. Someone who acci- dentally “tips” or leaks material information to someone who improperly profits from it is personally liable for that act. Within 10 days of the IPO, Mary and John had filed with the SEC their personal report on Form 3, disclosing the amount of company stock that each owns of record and beneficially. Mary reminds John that these forms will have to be updated periodically by filing other forms, Forms 4 and 5, with the SEC whenever there is a material change in ownership. Section 16(b) of the Securi- ties Exchange Act of 1934 will also require John and Mary to forfeit any profit they make in so-called “short swing trading”; the law requires automatic dis- gorgement of any profit made by corporate insiders who both buy and sell se- curities of their company within six calendar months as an automatic disincentive to trading by insiders based on their possible possession of mate- rial inside information. If John and Mary do go to sell their shares, they will always possess much more information than the investing public. How can they protect themselves against a claim that they abused that information by, for example, selling just before the price of the stock fell based on poor earnings or excessive warranty claims? They may be able to sell their shares of stock only in prespecified time “windows” which follow immediately and briefly after the systematic an- nouncement of public information by the company, such as immediately fol- lowing the filing of SEC Form 10-K or SEC Form 10-Q. Alternately, they may adopt a preexisting Sales Plan under SEC Rule 10b5-1, which operates like a doomsday machine: The stockholder who wishes to trade in shares of stock of his or her company will set up in advance a program for purchasing or selling stock on a certain date or at a certain price, and then the brokerage firm will effect those transactions without the insider making any specific buy or sell de- cisions at the point in time that the transaction actually occurs. Finally, John and Mary must avoid acting together in the purchase, sale or voting of stock, or joining together with others in that regard; the mere forma- tion of such a “group” with respect to the stock of the company, if involving persons owning 5% or more of the company’s stock, will trigger a requirement that such event be reported by the filing of a Form 13D with the SEC. Going Public 477 John and Mary agree that they are richer and have the opportunity to ag- gressively develop and directly market Dough-Ware, which is the reason they started Dough.com Inc. in the first place. But they are in some ways more per- sonally restricted. They’re sitting in the coffee shop, also agreeing that it is ex- citing and gratifying to be thought of as winners in the “new economy.” Then, glancing around, they lower their voices, because they want to make sure that no one can overhear their conversation. FOR FURTHER READING Arkebauer, James B., and Ron Schultz, Going Public: Everything You Need to Know to Take Your Company Public, Including Internet Direct Public Offerings (Chicago: Dearborn Trade, 1998). Blowers, Stephen C., Peter H. Griffith, and Thomas L. Milan, The Ernst & Young Guide to the IPO Value Journey (New York: John Wiley, 1999). Bloomenthal, Harold S., and Holme Roberts & Owen, Going Public Handbook (St. Paul, MN: West Group Securities Law Series, 2001). Farnham, Brian, Bill Daugherty, and Jonas Steinman, Codename Bulldog: How Iwon.com Went from the Idea to IPO (New York, John Wiley, 2000). Harmon, Steve, Zero Gravity: Riding Venture Capital from High-Tech Start-up to Breakout IPO (Princeton, NJ: Bloomberg Press, 1999). Lipman, Frederick D., The Complete Going Public Handbook: Everything You Need to Know to Turn a Private Enterprise into a Publicly Traded Company (Roseville, CA: Prima Publishing, 2000). Taulli, Tom, Investing in IPOs: New Paths to Profit with Initial Public Offerings (Princeton, NJ: Bloomberg Press, 1999). INTER NET LINKS www.sec.gov The SEC Web site, links all SEC forms, regulations, and filings made by com- panies under EDGAR. www.nasdaq.com/about Provides a going public summary, with /going_public.stm discussion of fairness in underwriting compensation. This site is maintained by NASDAQ. www.nyse.com and www.amex.com Descriptive listing of IPO shares on the New York and American Stock Ex- changes, through sites maintained by the exchanges themselves. www.iporesources.org/ipopage.html List and link a wide variety of related and www.emergencepub.com Web sites. /IPO07.going.publicwebs.htm . 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,. 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 underwriters. as to the types of potential investors who may participant in an Internet road show, al- though the trend seems to be toward opening road show participation to in- creasingly less sophisticated