Preparation of the Registration Statement

Copyright (c) 2007 Pillsbury Winthrop Shaw Pittman LLP

By Robert B. Robbins and William L. Horton and Philip L. Rothenberg

The Securities Act of 1933, as amended (the "Securities Act"), prohibits anyone from publicly selling or offering to sell any security unless that security is the subject of a registration statement that has been declared effective by the Securities and Exchange Commission (the "SEC"). n1 As a result, every company that wants to "publicly" sell its securities (a term which is very broadly defined, n2) is required to prepare and file a registration statement with the SEC.

n1 Sections 3 and 4 of the Securities Act, along with their related regulations, exempt from this registration requirement certain securities and transactions.

n2 "Security" is defined in Section 2(1) of the Securities Act as "any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a 'security,' or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."

I. Educating the Company
If the company is not already a public company, before deciding to file a registration statement (i.e. "go public"), it should weigh the benefits and costs, or consequences, of going public and being a public company.
A. Going Public
The benefits of going public are well-known:

- Shareholders receive liquidity for their holdings.

- Stock valuations may be higher.

- A public company will have enhanced ability to raise capital and to reward management with equity interests.

-	A public offering will typically raise significant capital which can be used for a variety of purposes including the retirement of existing debt.

The costs of going public are also significant and include:
 
- Underwriting discounts and commissions and other offering expenses such as legal and accounting fees, printing costs, transfer agent fees, stock exchange listing fees and blue sky expenses. (Typically, underwriting expenses are 7% of the offering price for an initial public offering (an "IPO") and 4-6% of the offering price for a secondary offering. Other expenses are likely to range from $ 400,000 to $ 800,000 for a $ 20 million IPO).

- The consumption of considerable management time to prepare the registration statement.

- The effect of disclosures that are required to be in the registration statement and that may put the company in a disadvantageous competitive position or may be embarrassing to the company, such as disclosures involving excessive management compensation and insider transactions.

B. Being Public
Being a public company also carries considerable costs, including:
 
- The burden of compliance with SEC reporting requirements, which results in increased administrative costs and responsibilities, and which mandates periodic disclosure that may be embarrassing or create a competitive disadvantage.

- An increase in the likelihood of litigation given that the adequacy of disclosure in SEC reports is often viewed in hindsight.

- Market pressures because investors in public securities tend to increase the focus on short-term results rather than long-term goals.

- Management being subject to the constant pressures of securities analysts, which increases short-term performance pressure and creates additional risks arising from incomplete or incorrect disclosures.

- The federal securities acts place restrictions on transactions in the company's stock by management and major shareholders.

- Visibility afforded by being public may make the company a more attractive acquisition target.

- The loss of managerial control that stems from the often significant increase in the size of the shareholder base and the laws that govern public companies and require shareholder approval of certain corporate actions.

C. Alternatives
Companies should consider some alternatives to a public offering of their securities before making the decision to go public. A company can be semi-public (or semi-private) and still raise significant capital through offerings pursuant to several exemptions from registration such as Rule 144A (for institutional offerings), Regulation S (for offshore offerings), Regulation A (for small offerings), Regulation D (for limited offerings) and intrastate offerings. The availability of the exemption for each of these offerings depends upon compliance with certain conditions which generally limit the marketability of the securities. As a general rule, these exempt offerings impose fewer ongoing costs and responsibilities, but will yield a lower price per unit of the security, because investors will discount the price of the securities to reflect the restrictions on transfer.
 
II. Initial Preparation
A. Selecting the Underwriter
Once a company has decided to engage in a public offering, the next step is usually to select underwriters of the offering. Securities may be offered to the public through an underwriter who buys the securities from the company and sells them to the public (a "firm commitment underwriting") or may be sold on a "best efforts" basis by the underwriter as an agent for the issuer, which means that the underwriter will use its best efforts to sell the securities but will not purchase the securities itself. In the alternative, the securities may be self-sold without an underwriter directly by the company and its agents.
For underwritten offerings, the selection of the underwriter is vital to the success of the offering. The underwriter is responsible for advice on structuring the offering, pricing the securities, and maintaining the after-market for the securities. Because the underwriter plays such an integral role in the offering process, it is rare for a company to begin preparing a registration statement prior to selecting an underwriter.
In selecting an underwriter consideration should be given to the following factors:
 
- Reputation in the investment community.

- Track record in initial public offerings (IPOs) and in the after-market trading in the stock.

- Industry expertise, which may be demonstrated by the types of transactions the underwriter is typically involved in or by whether the underwriter has a respected analyst who follows the industry.

- Possible conflicts.

- Strengths of its corporate finance and syndication departments.

- Proposed offering terms, including pricing, underwriting commissions and discounts, and any benefits sought by the underwriter such as options and warrants, rights of first refusal, etc.

- Proposed retail and institutional distribution.

- Commitment to the company's offering in terms of senior staffing and time.
In addition, it is important to assess personal interaction and trust between management and the underwriters who will actually staff the deal as the team will spend considerable time together over several months to prepare the offering. It often is helpful to solicit formal presentations from several prospective underwriters, which should include the persons from the corporate finance and syndication departments who actually will be working on the offering. It is admittedly difficult in an interview to assess responsiveness which is a key attribute. As a result, it also is advisable to check on the underwriter's performance in recent offerings with management of the companies involved.
B. Assembling the Working Group
Assembling an effective working group is essential when preparing a registration statement. The registration statement must discuss the issuer, its financial position, the risks associated with its business and securities, its goals and strategies, its industry and the rights related to the securities being offered. As a result, it is necessary to have input from a wide variety of individuals in order to assemble the information required to be included in the registration statement. The various members of the working group have differing but complementary roles. It is important that these roles be understood at the outset and that each person know what is expected of him or her and when it is expected. These roles are defined at the organizational meeting which is described below.
The typical working group involves some of the following:
 
1. Issuer -- This is the most important party in the offering process. The company issuing the securities (the "Issuer") is involved in almost all aspects of the process, including preparing the offering document, providing due diligence materials, sending executives on the Road Show and reviewing and revising various legal documents, such as the Underwriting Agreement
 
2. Issuer's Counsel -- This party takes the lead in drafting the offering document and will be involved in the due diligence process, reviewing and commenting on the Underwriting Agreement and will be responsible for filing the necessary papers to get the Issuer listed on a stock exchange or quoted on Nasdaq. Issuer's Counsel will educate the company as to its obligations during the offering (e.g., publicity during the offering, the Issuer's website, insider trading, various investor relations activities, etc.), and for an IPO, Issuer's Counsel will also be responsible for educating the Issuer as to its continuing legal reporting obligations after it becomes a public company. Issuer's Counsel will also provide a legal opinion (disclosure letter and 10b-5 opinion) at the closing of the transaction that is required as a condition to the Underwriter's obligation to purchase and pay for the securities.
 
3. Directors -- Directors of the Issuer will have to hold a board meeting where they agree to both the listing and the offering and will have to review and sign the Registration Statement.
 
4. Officers and Employees -- Officers and employees will have to partake in the due diligence process by making documents available for review and inspection, by allowing officers and other key employees to participate in management due diligence sessions in which lawyers and Underwriters find out more about the Issuer via presentations and Q&A sessions, and by reviewing and commenting on the draft Prospectus and Registration statement to ensure the accuracy of the information in it and that it does not omit any information necessary to make the information in the Registration Statement not misleading.
 
5. Selling Shareholders and Counsel -- Selling Shareholders, depending on how large a portion of the Issuer that they own, may have to sign the Underwriting Agreement if they have the ability to control the Issuer and what goes into the Registration Statement (e.g., an IPO of a wholly-owned or majority-owned subsidiary in which the parent is the Selling Shareholder) and therefore may want to review and comment on the disclosure in the Registration Statement.
 
6. Lead Manager / Managing Underwriter -- This underwriter has the ultimate control of the offering and controls all aspects of the offering, including how many shares are allocated to each co-manager, n3 the timing of the Road Show, the ultimate pricing of the deal, conducting the due diligence sessions (both documentary and management) with the Issuer, participating in the drafting sessions of the registration statement and fining investors willing to purchase the Issuer's securities.
 
7. Co-Manager / Underwriting Group -- These participants are chosen by the Lead Manager and have less responsibility than the Lead Manager, but still are responsible for their allotted amount of shares to be sold.
 
8. Selling Group -- These participants are allocated shares to sell but do not receive an underwriting fee, only a selling concession, for any shares they are allowed to sell and do sell.
 
9. Research Analysts -- Research analysts play an important role in providing coverage of public companies in a certain industry. IPO companies want to make sure that their company will be adequately covered after the IPO in order that they may be able to adequately disseminate news about their company to the public.
 
10. Underwriters' Counsel -- This party will participate extensively in both the drafting sessions and the due diligence sessions, attempting to ensure that a thorough investigation of the Issuer is made, that the Issuer and its business is understood, and that all material information about the Issuer is clearly disclosed in the offering document. In addition, Underwriters' Counsel takes the lead in drafting the Underwriting Agreement and coordinates discussions regarding the "comfort letter" among between the Managing Underwriter and the Independent Accountants. "Blue Sky" issues (i.e., state law issues), if any, are also handled by Underwriters' Counsel.
 
11. Independent Certified Public Accountants -- The outside auditing firm will audit the financial statements of the Issuer and must consent to the inclusion in the offering document of the accountant's report regarding the audited financial statements of the Issuer and any significant subsidiary that are contained in the offering document. If there are any interim financial statements included in the offering document, the accountants may conduct a limited review of such interim financial statements, in accordance with Statement of Accounting Standards No. 71 (SAS 71, now SAS 100). The accountants will also help to draft/review the MD&A n4 section, will participate in due diligence regarding financial information, and will be required to deliver a "comfort letter" to the Underwriters.

n3 Important note: The number of shares allocated to each co-manager to sell and the number of shares that appears by each managers name in the Underwriting section of the Prospectus may be different. The number of shares in the Underwriting section of the Prospectus is the number of shares that each Underwriter has agreed to sell, but the actual allocation to each Underwriter by the Lead Manager may be quite lower, if any at all.

n4 MD&A = Management's Discussion and Analysis of Financial Condition and Results of Operations. See Regulation S-K, Item 303.
 
C. Underwriting fees

	Management	Underwriting Fee	Selling Concession	
	Fee	 	 	
% of Total	20%	20%	60%	
Fees	 	 	 	
	 	 	 	
Who gets it?	Managing	Managing Underwriter	Underwriters who actually	
	Underwriter	and Co-Manager	sell the shares -- paid on a	
			per share sold basis	

D. Basic Steps in an Initial Public Offering of Securities
 
1. Submit information to NYSE (or other exchange) needed to begin listing process
 
2. Due diligence and drafting the registration statement and prospectus
 
3. Filings with the SEC, the SEC review process, and responding to SEC comments
 
4. Prepare the stock exchange listing documents
 
5. Begin to prepare the post listing SEC required disclosures, including Forms 3, 4 and 5
 
6. Print the preliminary prospectus
 
7. The "Road Show"
 
8. Acceleration request and effectiveness -- Rule 430A (Prospectus in a Registration Statement at the Time of Effectiveness), Rule 461 (Acceleration of Effective Date) and Rule 473 (Delaying Amendments)
 
9. Pricing the securities and signing the underwriting agreement

E. The Organizational Meeting
The organizational meeting is the formal starting point for the registration process. It is usually chaired by the managing underwriter and is attended by all the members of the working group. The purpose of the organizational meeting is four-fold: (i) to allocate tasks and responsibility among the working group members; (ii) to identify threshold issues and assign responsibility for addressing them, (iii) to agree upon a proposed timetable for preparation, filing with the SEC and effectiveness of the registration statement; and (iv) to plan due diligence..
1. Allocation of responsibility
In general the company and its counsel take the lead in drafting the registration statement. The underwriter and its counsel participate in the drafting, primarily in a review capacity although, depending on the relative experience levels, the underwriter and its counsel may take the drafting lead. The underwriter and its counsel prepare the various underwriting documents (underwriting agreement, agreement among underwriters, selling agreement, etc.), which in turn are reviewed by the company and its counsel. The auditors prepare the certified financial statements, review the company's unaudited financials and furnish a "cold comfort" opinion letter on certain specified financial numbers at effectiveness of the registration statement and at the closing.
2. Threshold Issues
Another purpose of the organizational meeting is to identify key threshold issues which have a bearing on successful completion of the offering. These may include such issues as the presentation of certain items in the financial statements, the exemption from registration for past security sales, the integration of the proposed offering with prior securities offerings, and the need, or desire, for confidential treatment of certain disclosures. It may be desirable to request a pre-filing conference with the staff of the SEC to resolve certain of these issues well in advance of the filing.
3. Timetable
The timetable outlines various actions which are to be performed by specified dates and indicates the person or persons who are responsible for performing them. The timetable may be divided into three main parts: the pre-filing period; the waiting period during which the SEC reviews (or decides not to review) the registration statement; and the post-effective, or selling period, which ends at the closing of the transaction. A sample timetable of a firm commitment underwriting of an IPO is appended to this outline.
4. Due Diligence
Section 11 of the Securities Act imposes strict liability upon the issuer and liability on other designated persons (i.e., persons who sign the registration statement, directors or partners, experts, underwriters and control persons) for any material misstatements or omissions in a registration statement. These persons, other than the issuer, have a defense to liability if they have conducted "a reasonable investigation resulting in reasonable grounds to believe" that the information in the registration statement is accurate. n5 This defense is commonly referred to as the "due diligence" defense. Because this defense is available, all parties participate in a due diligence effort designed to satisfy the requirements of the "reasonable investigation" standard of the defense.

n5 National Association of Securities Dealers, Inc., Special Report: Due Diligence Seminars (July 1981) ("NASD Special Report") ("'[D]ue diligence' may be construed as a standard that depends to some extent on what constitutes commonly accepted commercial practice. If you can establish that the steps taken meet the standard of trade as it presently exists, a court should not, in applying the Section 11(c) standard, hold you liable for not being duly diligent despite the fact that you missed something and there was a material omission in the registration statement").
 
5. Other issues that will often be discussed include:
 
a. Size of the offering
 
b. Participation of selling shareholders
 
c. Green shoe option
 
d. Financial statements availability/accounting issues
 
e. Comfort letter
 
f. Disclosure of confidential documents and confidential treatment requests to the SEC
 
g. Gun jumping issues, such as a discussion about the Issuer's recent public communications and future communication plans
 
h. Trying to identify critical issues, such as 40 Act issues, and assigning responsibility to trying to resolve these issues
 
i. Considering which documents (or parts thereof) the Issuer wishes to remain confidential so that the issuer and its counsel can begin to prepare confidential treatment requests for such material

F. Registration and Sales -- A 3-Step Process
 
1. First, file a registration statement with the SEC
 
2. Second, use the prospectus, which is part of the registration statement, to market (i.e., offer) the securities offering
 
a. The registration statement is almost like a dust jacket of a book, wrapping itself around the prospectus
 
3. Third, once the registration is declared "effective" by the SEC, sales can be made.

G. Basic sections of the prospectus

Section	Contents	Average	
		page length	
Prospectus Summary	This section, which appears near the front of	1 to 10	
	the Prospectus, summarizes the key aspects of	 	
	the Issuer in a few pages. This may be one of	 	
	the few sections that perspective investors	 	
	actually read and thus should provide a	 	
	balanced summary of all the key information.	 	
	 	 	
Selected Financial	This section provides selected historical	1 to 3	
Data	financial data regarding the Issuer for recent	 	
	years.	 	
	 	 	
Risk Factors	Located near the front of the Registration	8 to 20	
	Statement, this section identifies the most	 	
	important risks facing the company (i.e., what	 	
	could go wrong that could cause the	 	
	shareholders to lose much of their	 	
	investment). This section, if well	 	
	thought-out, hopefully provides the Issuer	 	
	with protection in the event of later	 	
	litigation regarding the adequacy of	 	
	disclosure in the Prospectus of certain risks.	 	
	 	 	
Use of Proceeds	This section specifically discloses how the	Less than 1	
	Issuer intends to use the proceeds from the	 	
	issuance.	 	
	 	 	
Business section	This section presents a complete and well	10 to 20	
	balanced discussion of the company and its	 	
	various operations.	 	
	 	 	
Management's	This section is intended to give investors a	15 to 25	
Discussion and	chance to look at the Issuer through the eyes	 	
Analysis of	of its management in order for investors to	 	
Financial	truly understand the Issuer's financial	 	
Condition and	results. The MD&A focuses on material events	 	
Results of	and uncertainties to the company that would	 	
Operations	cause the reported financial information not	 	
("MD&A")	necessarily to be indicative of future	 	
	operating results or financial condition.	 	
	 	 	
Financial	This is the heart of the offering document.	More than	
Statements	Investors will examine both the full fiscal	30	
	year and interim financial statements	 	
	carefully to get a true understanding of the	 	
	Issuer and its financial position.	 	

H. Content of Form S-1
 
1. Eligibility Requirements for Use of Form S-1
 
a. This form, which is used to register securities of all registrants under the 33 Act, is used when no other form is authorized or prescribed. Incorporation by reference is not allowed, and thus all of the information about the company must be in the registration statement.

2. Application of General Rules and Regulations
 
a. Drafters of the Form S-1 must pay attention to separate regulations -- Regulation C and Regulation S-K.
 
(1) Regulation C -- Reg C contains the general requirements for preparing and filing the S-1.
 
(2) Regulation S-K -- Reg S-K contains the requirements for the non-financial parts of the S-1. Described by the SEC as the "central repository of disclosure requirements" under the 33 Act and the 34 Act. By putting the non-financial requirements in Reg S-K instead of in form, it makes it easier for the SEC to update these requirements which apply to various different forms.

3. General Regulation S-K requirements
 
a. Item 10(b) of Reg S-K
 
(1) This describes the SEC's policy with respect to projections of future economic performance.
 
(2) The SEC encourages the use of projections of future economic performance "that have a reasonable basis and are presented in an appropriate format."
 
(3) Most issuers do not use projections in their IPO registration statements.
 
b. Item 10(d) of Reg S-K
 
(1) This describes "incorporation by reference" rules.
 
c. Item 10(e) of Reg S-K
 
(1) This describes the use of non-GAAP financial measures n6 in filings with the SEC.
 
(2) If non-GAAP financial measures are used in the issuer's registration statement, Item 10(e) explains what additional disclosure the SEC will require n7 as well as what disclosure of non-GAAP financial measures are prohibited. n8

4. Items 1 through Items 12 -- Part I information -- Information Required in Prospectus
 
a. Part I of the Form S-1 Registration Statement is the Prospectus, which is the offering document provided to potential investors. Part I information includes all important facts about the business operation, financial condition, management, possible risks and other information about the issuer.

5. Item 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus
 
a. Item 501 of Reg S-K.
 
(1) Registration Statement -- Must use Plain English, and should consider a Rule 473 delaying amendment
 
(2) Prospectus -- Must use Plain English and limit the outside cover page to one page
 
(a) If applicable, must disclose:
 
i) Name of the registrant
 
ii) Title and amount of the securities offered.
 
iii) Offering price of the securities
 
iv) Any securities exchange (or NASDAQ market) which lists / will list the securities offered
 
v) Cross-reference to the risk factors section, including page number where it appears
 
vi) State legends required by law
 
vii) SEC legend
 
viii) Names of lead or managing underwriter and an indication of the nature of the underwriting agreement
 
ix) Date of the prospectus
 
x) "Subject to Completion" legend for Preliminary Prospectuses

6. Item 2. Inside Front and Outside Back Cover Pages of Prospectus
 
a. Item 502 of Reg S-K. Must disclose:
 
(1) A reasonably detailed table of contents.
 
(2) A legend advising dealers of their prospectus delivery obligations.

7. Item 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges
 
a. Item 503 of Reg S-K. Must disclose:
 
(1) Prospectus summary, if useful.
 
(2) Complete mailing address and telephone number.
 
(3) A discussion of the most significant factors that make the offering speculative or risky (i.e., Risk Factors).
 
(4) If debt securities are registered -- ratio of earnings to fixed charges; If equity securities are registered -- ratio of combined fixed charges and preference dividends to earnings.

8. Item 4. Use of Proceeds
 
a. Item 504 of Reg S-K -- Must disclose the principal purposes for which the proceeds will be used.

9. Item 5. Determination of Offering Price
 
a. Item 505 of Reg S-K -- Must disclose a description of the various factors considered in determining such offering price.

10. Item 6. Dilution
 
a. Item 506 of Reg S-K -- If there is a substantial disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons, then the issuer must disclose a comparison of the public contribution under the proposed public offering and the effective cash contribution of such persons.

11. Item 7. Selling Security Holders
 
a. Item 507 of Reg S-K. -- Must disclose information regarding selling security holders, such as the name of such security holders, the amount of securities owned by such security holders and the amount offered by such security holders.

12. Item 8. Plan of Distribution
 
a. Item 508 of Reg S-K -- Must disclose:
 
(1) The name of the principal underwriters and the respective amounts underwritten.
 
(2) The amount of underwriters' compensation in tabular format.
 
(3) Any arrangement by which an underwriter can choose a board member.
 
(4) Any arrangement which indemnifies the underwriters.
 
(5) Any amount of discounts and commissions paid to dealers.
 
(6) Information with respect to discretionary accounts over which any principal underwriter intends to sell.
 
(7) Information regarding passive market making, if any, underwriters or any selling group members intend to engage.
 
(8) Any transaction by which the underwriters intend to stabilize, maintain or otherwise affect the market price of the offered securities.

13. Item 9. Description of Securities to be Registered
 
a. Item 202 of Reg S-K.
 
(1) For capital stock, must disclose various matters, including:
 
(a) Dividend rights
 
(b) Voting rights
 
(c) Classification of the Board of Directors
 
(d) Liquidation rights
 
(e) Charter or by-law provisions that would have the effect of delaying, deferring or preventing a changed in control of the registrant

14. Item 10. Interests of Named Experts and Counsel
 
a. Item 509 of Reg S-K.
 
(1) Disclosure of information describing the interests of experts named in the registration statement or counsel for the registrant, underwriters or selling security holders must be provided.
 
(2) Only must disclose information if such experts were employed on a contingent basis, would receive or had a substantial interest in the registrant or was a promoter, managing underwriter, voting trustee, director, officer or employee.

15. Regulation S-K -- This provides the principal disclosure items applicable to the content of the non-financial portions of 33 Act registration statements.
 
a. 101 -- must disclose:
 
(1) General development of the business during the past five years.
 
(2) Financial information about each segment of the issuer's business.
 
(3) A narrative description of the business of the issuer.
 
(4) Financial information based on geographic areas.
 
(5) Where the public can find additional information about the issuer.
 
b. 102 -- Must disclose a description of the principal plants, mines and other materially important physical properties of the issuer.
 
c. 103 -- Must disclose a brief description of material pending legal proceedings which the issuer or its subsidiaries is a party or which their property is subject. Ordinary routine litigation incidental to the business does not have to be disclosed.
 
d. 201 -- Must disclose:
 
(1) The principal U.S. market where the stock is being traded. If there is no established public trading market, must so state.
 
(2) The approximate number of shareholders of each class of common equity as of the latest practicable date.
 
(3) The frequency and amount of cash dividends declared by the registrant over the two most recent fiscal years.
 
(4) Information regarding securities authorized for issuance under equity compensation plans in a tabular format.
 
e. 301 -- Must disclose selected financial data in comparative columnar format for each of the last five fiscal years of the issuer and any additional fiscal years necessary to not be misleading.
 
f. 302 -- Must disclose certain quarterly financial data for each full quarter over the past two fiscal years plus any subsequent interim period required by Article 3 of Regulation S-X.
 
g. 303 --
 
(1) Must disclose, among other things, for full fiscal years:
 
(a) The issuer's financial condition, changes in financial condition and results of operations.
 
(b) Any know trends, demands, commitments, events or uncertainties reasonably likely to materially affect the issuer's liquidity
 
(c) Capital expenditures that are material.
 
(d) Unusual or infrequent events / transactions / economic changes that materially affected the amount of reported income from continuing operations.
 
(e) Known material trends in the issuer's capital resources.
 
(f) Any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income.
 
(g) Known trends or uncertainties that the issuer reasonably expects will have a material favorable or unfavorable impact on net sales and income.
 
(h) Any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the issuer's financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
(i) Tabular disclosure of contractual obligations.
 
(2) Must disclose, among other things, for interim periods:
 
(a) Material changes in financial condition from the end of the preceding fiscal year until the most recent interim balance sheet.
 
(b) Material changes in the issuer's results of operations.

16. 304  

Must disclose information regarding disagreements with the issuer's        independent accountants with respect to the issuer's accounting and financial disclosure and changes in accountants.
 
17. 305 

Must disclose quantitative and qualitative information about market risk.
 
18. 401  

       Must disclose:

a. The names and ages of all directors of the issuer, all positions and offices with the issuer held by each such person, the term of office of each director and any arrangement or understanding under which the director was chosen.
 
b. The names and ages of all executive offices of the issuer, all positions and offices with the issuer held by each such person, the term of office of the officer and any arrangement or understanding under which the officer was chosen.
 
c. The names and backgrounds of certain significant employees, such as production managers, sales manages, or research scientists, who are not executive officers but who make or are expected to make significant contributions to the business of the issuer.
 
d. The nature of any family relationship between any director, executive officer or person nominated or chosen by the issuer to become a director or executive officer.
 
e. The business experience during the past five years of each director, executive officer or significant employee.
 
f. Any other directorships held by each director.
 
g. Any involvement in legal proceedings (e.g., criminal proceedings, bankruptcy proceedings, violations of securities laws, etc.) over the past five years by a director or officer of the issuer that is material to an evaluation of such person.
 
h. Any involvement in legal proceedings by promoters and control persons.
 
i. Information regarding whether or not the issuer has an audit committee financial expert.

19. 402  

      Must disclose:
 
a. Information regarding how much compensation was awarded to, earned by or paid to certain executive officers and directors.
 
b. A summary compensation table.
 
c. An option/SAR grants table.
 
d. An aggregated option/SAR exercises and fiscal year-end option/SAR value table.
 
e. A long-term incentive plan ("LTIP") awards table.
 
f. A pension plan table or similar disclosure in narrative form.
 
g. A description of how directors are compensated.
 
h. A description of: the terms and conditions of employment contracts between the registrant and a named executive officer, and compensatory plans relating to termination of employment or change-in-control of the issuer.
 
i. Information regarding repricing of options/SARs.
 
j. Information regarding members of the compensation committee under the caption "Compensation Committee Interlocks and Insider Participation."
 
k. Information regarding the compensation committee's compensation policies applicable to the issuer's executive officers.

20. 403 

     Must disclose:
 
a. Security ownership of certain beneficial owners (more than 5% owners) and security ownership of management in tabular form.
 
b. Any arrangements which may at a subsequent date result in a change in control of the management.

21. 404 

     Must disclose:
 
a. Certain related party transactions and details regarding those transactions.
 
b. Certain business relationships between directors or nominees for director and other outside businesses or professional entities.
 
c. Certain indebtedness of management to the issuer.
 
d. Information regarding transactions with promoters.

22. Item 12. 

Disclosure of Commission Position on Indemnification for Securities Act Liabilities (See Item 510 of Reg S-K. Disclosure of the SEC's position on indemnification of directors, officers and others and a brief description of the indemnification provisions relating to these parties may have to be made per this Item 12. (See also Item 14 of the Form S-1.))
 
23. Items 13 through 17. 

Part II information -- Information Not Required in Prospectus. (Part II information, unlike Part I information, does not have to be delivered to potential investors. However, investors and others can obtain this information on www.sec.gov by viewing the Form S-1 registration statement.)
 
24. Item 13. 

Other Expenses of Issuance and Distribution (See Item 511 of Reg S-K. Must disclose a reasonably itemized statement of expenses in connection with the securities offering.)
 
25. Item 14. 

Indemnification of Directors and Officers (See Item 702 of Reg S-K. Must disclose the general effect of any law or issuer by-law under which controlling persons, directors or officers are insured or indemnified against liability incurred in his capacity of work for the issuer.)
 
26. Item 15. 

Recent Sales of Unregistered Securities (See Item 701 of Reg S-K. Must disclose information regarding recent sales of securities not registered under the 33 Act.)
 
27. Item 16. 

Exhibits and Financial Statement Schedules
 
a. See Item 601 of Reg S-K. Must disclose the exhibits required to be filed for a Form S-1 per the exhibit table. (Note 601(b) for a description of each document listed in the exhibit table in 601(a).)
 
b. Also provide financial statement schedules required by Reg S-X and Item 11(e) of the Form S-1.

28. Item 17. 

Undertakings (See Item 512 of Reg S-K. Must disclose the appropriate undertaking(s) prescribed by Item 512 of Reg S-K.)

n6 A non-GAAP financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that: excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

n7 These include: (1) a presentation of the most directly comparable financial measure calculated in accordance with GAAP, which must be of equal or greater prominence than the non-GAAP measure; (2) a reconciliation of the non-GAAP measure to the most directly comparable GAAP measure; (3) a statement regarding why management believes presenting the non-GAAP measure is useful information to investors; and (4) a statement disclosing any additional purposes for which management uses the non-GAAP measure.
n8 Item 10(e)(1)(ii) states: "A registrant must not:
 
Exclude charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures, other than the measures earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA);
 
Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;
 
Present non-GAAP financial measures on the face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes;
 
Present non-GAAP financial measures on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X (Rules 11-01 through 11-03); or
 
Use titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures."
 
I. Industry Guides
 
1. Guides for the Preparation and Filing of Registration Statements and Reports were originally adopted in 1968, and served as an expression of the policies and practices of the Division of Corporation Finance.
 
2. The guides assisted issuers and their counsel in preparing registration statements and reports, as well as the SEC staff.
 
3. In 1982, outdated or inappropriate guides were deleted, and others were centralized into its rules and regulations. Guides relating to procedural matters were incorporated into Regulation C and the general rules under the 33 Act and 34 Act, and guides relating to disclosure requirements were conformed and incorporated into Regulation S-K.
 
4. Guides setting forth disclosure guidelines applicable to specific industries, such as oil and gas and bank holding companies, were redesignated as Industry Guides and are now listed in Items 801 (33 Act Industry Guides) and 802 (34 Act Industry Guides) of Regulation S-K.

J. Form Checks
 
1. Once a first draft of the registration statement has been prepared, the preparers must check to see that all information required by the form is present.
 
2. SEC website for forms: http://www.sec.gov/about/forms/secforms.htm#1934forms

K. Regulation C 

Sets forth requirements for preparation of registration statements under the 33 Act as well as form and content of prospectuses, filing fees, effective dates, amending registration statements, etc.
 
1. General Requirements
 
a. Rule 402. Number of Copies--Binding--Signatures
 
(1) This rule details the number of copies of the registration statement that need to be filed with the SEC (However, see Regulation S-T, Rule 309) and requirements for signatures on the Registration Statement (However, see Regulation S-T, Rule 302)
 
b. Rule 404. Preparation of Registration Statement
 
(1) This rule details certain information that must be contained in, or may be omitted from, Part I and Part II of the Registration Statement.
 
(2) 404(a) -- "A registration statement shall consist of the facing sheet of the applicable form; a prospectus containing the information called for by Part I of such form; the information, list of exhibits, undertakings and signatures required to be set forth in Part II of such form; financial statements and schedules; exhibits; any other information or documents filed as part of the registration statement; and all documents or information incorporated by reference in the foregoing (whether or not required to be filed)."
 
(3) 404(c) -- "The prospectus shall contain the information called for by all of the items of Part I of the applicable form, except that unless otherwise specified, no reference need be made to inapplicable items, and negative answers to any item in Part I may be omitted. A copy of the prospectus may be filed as a part of the registration statement in lieu of furnishing the information in item-and-answer form. Wherever a copy of the prospectus is filed in lieu of information in item-and-answer form, the text of the items of the form is to be omitted from the registration statement, as well as from the prospectus, except to the extent provided in paragraph (d) of this rule."
 
(4) 404(d) -- "Where any items of a form call for information not required to be included in the prospectus, generally Part II of such form, the text of such items, including the numbers and captions thereof, together with the answers thereto shall be filed with the prospectus under cover of the facing sheet of the form as a part of the registration statement. However, the text of such items may be omitted provided the answers are so prepared as to indicate the coverage of the item without the necessity of reference to the text of the item. If any such item is inapplicable, or the answer thereto is in the negative, a statement to that effect shall be made. Any financial statements not required to be included in the prospectus shall also be filed as a part of the registration statement proper, unless incorporated by reference pursuant to Rule 411."
 
c. Rule 405. Definitions of Terms
 
(1) Provides a list of defined terms that apply to Reg C.
 
d. Rule 406. Confidential Treatment of Information Filed with the Commission
 
(1) This rule details the procedure for asking for confidential treatment for information submitted in a document required to be filed under the 33 Act. (Note 17 CFR § 200.83 for the rules applicable to confidential treatment requests for supplemental information or other information not required to be filed under the 33 Act)
 
(2) Examples of confidential treatment requests include corporate secrets, such as technical specifications (e.g., the recipe for Coca Cola or the processes or the designs of BMW engines) or specific pricing terms in contracts (i.e., how much Company A charges Company B for product C).
 
(3) Issuers should identify early in the IPO preparation process those documents (or critical parts of certain documents) that the issuer wishes to keep private and make a confidential treatment request for such material to the SEC on the same date as the initial filing of the registration statement. Confidential treatment requests are not handled by the Division of Corporation Finance and may take 30 to 40 days to complete.
 
(4) Confidential treatment requests are made in paper form. See Regulation S-T Rule 101(c)(1)(i).
 
(5) Staff Legal Bulletin No. 1 (February 28, 1997) provides useful advice as to the completion of a confidential treatment request.
 
e. Rule 408. Additional Information
 
(1) "In addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." n9
 
f. Rule 409. Information Unknown or Not Reasonably Available
 
(1) This rule states that only the information "known or reasonably available to the registrant" needs to be provided. However, this applies to information not within the registrant's possession, and the registrant is presumed to know everything about itself.
 
g. Rule 411. Incorporation by Reference
 
(1) This rule details what can and what cannot be incorporated by reference in a prospectus. (See Regulation S-T, Rule 303)
 
(2) The logic behind the idea of "incorporation by reference" in the Internet age is that as long as the information is available to investors, such as by looking at www.sec.gov, then it does not have to be repeated in each and every disclosure document.
 
h. Rule 413. Registration of Additional Securities
 
(1) This rule states that a separate registration statement is required when registering additional securities of the same class as other securities for which a registration statement is already effective.
 
i. Rule 418. Supplemental Information
 
(1) This rule allows the SEC or its staff to request supplemental information concerning the registrant, the registration statement, the distribution of the securities, market activities and underwriters' activities.
 
(2) Supplemental information provided to the SEC by the registration is not "filed" with the SEC and will not become part of the registration statement.

2. Form and Content of Prospectuses
 
a. Rule 420. Legibility of Prospectus
 
(1) This rule details, for both printed and electronic prospectuses, certain legibility requirements. (However, also see Regulation S-T, Rule 302 and Rule 308.)
 
b. Rule 421. Presentation of Information in Prospectuses
 
(1) This rule describes how the information in a prospectus may be presented, with a particular emphasis on clarity and understandability, as well as mandating plain English for certain sections of the Prospectus
 
(a) Rule 421 (a) states that the information contained in the prospectus does not have to follow the order of items or other requirements in the form so long as it is set forth in a manner which does not obscure any required information. n10
 
(b) Rule 421 (b) and 421 (d) deal with "plain English" requirements of the prospectus.
 
c. Rule 423. Date of Prospectuses
 
(1) This rule describes the date that should appear on a prospectus.
 
d. Rule 424. Filing of Prospectuses--Number of Copies
 
(1) This rule details how many copies of the prospectus must be filed with the SEC and by what date.
 
e. Rule 430. Prospectus for Use Prior to Effective Date
 
(1) This rule states that prior to the effective date a prospectus filed in a registration statement will meet the § 10 requirements for the purpose of satisfying § 5(b)(1) so long as the prospectus has substantially the information required by the 33 Act or substantially that information except for the omission of certain matters dependent on the offering price.
 
f. Rule 430A. Prospectus in a Registration Statement at the Time of Effectiveness
 
(1) This rule allows a registration statement for a cash securities offering to become effective without pricing information. The issuer is required to file a Rule 424(b) supplement prospectus containing the omitted pricing information.
 
(2) Instruction to paragraph (a) -- Deals with a decrease in the volume of securities offered or a change in the bona fide estimate of the maximum offering price range from that indicated in the prospectus declared effective. Note the 20% rule.
 
g. Rule 434. Prospectus Delivery Requirements in Firm Commitment Underwritten Offerings of Securities for Cash

3. Written Consents
 
a. Rule 436. Consents Required in Special Cases
 
(1) This rule states that written consents of experts or counsel must be filed as exhibits to the registration statement if a report or opinion of such party is quoted or summarized in the registration statement or prospectus. n11
 
b. Rule 439. Consent to Use of Material Incorporated by Reference
 
(1) This rule provides for the filing of certain required written consents.

4. Filing; Fees; Effective Date
 
a. Rule 456. Date of Filing
 
(1) This rule states that the filing date with the SEC is the date that the SEC actually receives what is filed. See Reg S-T Rules 12 and 13 for further clarification regarding electronic filings.
 
(2) Additionally, failing to pay an insignificant amount of the filing fee, if a bona fide error, does not affect the filing date.
 
b. Rule 457. Computation of Fee n12
 
(1) This rule provides details regarding the computation and payment of the filing fee. However, to obtain the current filing fee rate per $ 1 million of registered securities, look up the most recent "SEC Fee Advisory" under "press releases" at www.sec.gov.
 
c. Rule 460. Distribution of Preliminary Prospectus
 
(1) This rule states that the SEC may, when considering granting the issuer acceleration of the effective date of the registration statement, take reasonable steps to make sure that the preliminary prospectus is adequately distributed to underwriters and dealers. n13
 
d. Rule 461. Acceleration of Effective Date
 
(1) This rule details the process for requesting acceleration of the effective date of a registration statement.
 
e. Rule 462. Immediate Effectiveness of Certain Registration Statements and Post-Effective Amendments
 
(1) This rule details the four situations by which a registration statement can become effective immediately upon filing with the SEC.
 
(2) Example of a 462(b) registration of additional securities of the same class -- See Lazard's May 4, 2005 filing with the SEC
 
f. Rule 463. Report of Offering of Securities and Use of Proceeds Therefrom
 
(1) This rule states that the issuer shall report the use of proceeds from the offering in its first periodic report and thereafter until the use of all offering proceeds has been disclosed or the offer has been terminated.

n9 The idea behind Rule 408, and Rule 12b-20 under the 34 Act, is that the basic purpose of federal securities law and the disclosure system is to provide investors with full and fair disclosure of all material information necessary to make an informed investment decision. As such, specific regulations often are not precise enough to do this and therefore general, cover-all rules are necessary.

n10 This rule allows investment bankers a degree of freedom in the design of the prospectus, which is both a selling/marketing document as well as a legal document.

n11 See Section 7(a) of the 33 Act which states, in part: "If any accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, is named as having prepared or certified any part of the registration statement, or is named as having prepared or certified a report or valuation for use in connection with the registration statement, the written consent of such person shall be filed with the registration statement. If any such person is named as having prepared or certified a report or valuation (other than a public official document or statement) which is used in connection with the registration statement, but is not named as having prepared or certified such report or valuation for use in connection with the registration statement, the written consent of such person shall be filed with the registration statement unless the Commission dispenses with such filing as impracticable or as involving undue hardship on the person filing the registration statement."

n12 For information regarding payment of filing fees to the SEC, see Securities Act Rule 111 and Instruction for Wire Transfer (FEDWIRE) of SEC Filing Fees available at www.sec.gov/info/edgar/fedwire.htm.

n13 In Release No. 33-4697 the SEC stated: "Rule 460 provides that as a condition to acceleration of the effective date of a registration statement, the Commission will consider whether the persons making the offering have taken reasonable steps to make the information contained in the registration statement available to dealers who may participate in the distribution." The SEC wants to make sure that the underwriters or dealers who are selling an issuer's securities have access to the information in the prospectus in order to have a reliable source of information on which to base their recommendations, especially when there is not much information concerning the issuer.
 
L. Guidelines for Conducting Due Diligence
The due diligence review may include a review of documents including corporate organizational documents and material contracts, verification procedures, questionnaires, and interviews of management. It may also be prudent to consult third parties, such as creditors, suppliers, customers or joint venturers, regarding aspects of the company's business and operations. The following are some general guidelines for due diligence:
1. Custom Tailor Each Investigation.
Each due diligence investigation, if evaluated with the benefit of hindsight, will stand or fall on the thoroughness of the investigation in light of the particular facts and circumstances. Thus, while sample checklists may be useful in crafting a list of questions and issues for a particular offering, no checklist can substitute for thoughtful molding of the due diligence inquiry to the specific offering. Just as there is no checklist that will satisfy the duty of due diligence in all cases, there is no checklist that must rigidly be followed to prove adequacy of due diligence. n14 As the SEC staff has stated,
 
"The important point is that each subject person should evaluate the surrounding facts, including the extent of his prior relationship with the registrant, and utilize techniques of investigation appropriate to the circumstances of the offering. . . . Judicial interpretations of Section 11 have confirmed the principle that what constitutes reasonable investigation and reasonable ground for belief depends upon the circumstances of each registration. The prospect of continued flexible application of that standard by the courts should provide assurance to subject persons that they will not incur unreasonable investigative burdens." n15

n14 Except perhaps Regulation S-K, the 1933 Act registration forms and regulations, and the Securities Act Industry Guides.

n15 SEC Rel. 33-6383 (March 11, 1982), Fed. Secs. L. Rep. (CCH) P 72,328.
 
The NASD's Special Report on due diligence observed that in tailoring the scope and content of a due diligence investigation, "consideration should be given to the nature of the offering, the SEC form with which the securities are being registered, the size of the issuer, the availability of public information about the company, the issuer's operating and business history, the nature of the legal structure of the issuer . . ., the nature of the offering . . ., and the type of security being offered. . .. The underwriter. . . must analyze potential problems relating to the particular issuer and its industry. The underwriter should determine the competence of the company's inside counsel and the extent to which one can rely on the company's previous filings at the SEC." n16

n16 NASD Special Report at 10-11.
 
2. Don't adopt a formal checklist.
This principle should follow from the need to custom tailor each due diligence investigation, but there are additional reasons why it is inadvisable for a person or organization to adopt a standardized checklist for due diligence investigation. To the extent that the checklist proves to have been inadequate in a particular case, it will be difficult to establish that it was reasonable to have relied on the checklist; on the other hand, if the checklist is not strictly followed (which is likely to occur in a large number of cases), the failure to obey the checklist is persuasive evidence that the entire investigation was inadequate.
3. Counsel must be competent.
The BarChris n17 case emphasized, if the point needed to be made, that reliance on counsel is only as valuable as the quality of the counsel's services. Since the counsel acts as agent for his or her client, the client is responsible for the counsel's failures; if the lawyer conducting the due diligence investigation is inexperienced, his or her inexperience may be evidence of the lack of care of the due diligence inquiry.

n17 Escott v. BarChris Construction Corporation, 283 F.Supp. 643 (S.D.N.Y. 1968). In BarChris, the court refused to permit underwriters to rely in good faith on the negligent due diligence undertaken by its counsel, reasoning that counsel had acted as agent of the underwriters and that the underwriters, as principals, were responsible for the actions of their agents.
 
4. Work closely with the outside accountants.
A company's outside auditors often have rare access to and understanding of a company's inner workings, and are typically candid and forthcoming if asked for information. It is a common mistake to treat the role of accountants as being simply to provide certain specified tables to insert into a document, and to assume that their concerns are different from those of counsel. In fact, their concerns will substantially overlap those of counsel, and their insights will have the benefit of more rigorous examination of the company's finances.
5. Be cautious of the integrity of management.
A lawyer's instinct of loyalty to his or her client must always be accompanied by the knowledge that some clients will distort or manufacture information they give their lawyers in the mistaken belief that they will benefit from "improved" facts. Clients involved in offerings of securities are no different from other clients, and may believe that they can improve the chances of success of their offerings by concealing damaging information or manufacturing favorable information. Every lawyer (and every underwriter) must find his or her own best method for ferreting out untruths or evasions, stepping up the level of inquiry when faced with either, and convincing the client that misstatements and omissions benefit no one.
6. Where are the hidden risks?
The most obvious risks of a particular venture are usually apparent; an office building may burn down or be condemned, an oil well may be dry or may explode, causing environmental damage. The more subtle risks are harder to discern. What combination of market forces and economic conditions favor a particular enterprise, and what combination would threaten it? When real estate development was booming in the mid-1980's, it was fueled by generous tax incentives and growing demand for both office and residential properties. Soon, however, the tax incentives were cut back and the building boom that had been driven by tax considerations had produced a vast oversupply of office and residential space throughout the country. These forces are apparent in hindsight; while an offering is being undertaken, it is more difficult to analyze what economic conditions or market forces need to exist or remain in place to support the business to be conducted.
7. Update.
If a due diligence investigation was completed six weeks before the offering document is completed, it is unreasonable to expect that there has been no change in any of the items covered by the inquiry. If the closing of the offering takes place six months after the offering begins, it also is unreasonable to assume that no events have occurred that would make the statements made in the offering documents misleading as of the closing. In every case, there must be some effort to update the due diligence investigation to the dates on which final decisions are made and investments are accepted.
8. Kick the tires.
Is the apartment building (or company headquarters) really there? One lawyer was barred from practice before the SEC after giving tax opinions on tax shelter offerings for the acquisition of over fifty greenhouses to grow ornamental plants, when it developed that there was never more than one greenhouse. Appropriate due diligence cannot take place without a careful review of the issuer's business, its management, its financial statements, its material contracts and its physical property.
M. Should you keep your records?
There are at least three answers to the question whether you should retain detailed documentation and notes of the due diligence investigation and development of the offering materials.
1. Keep them.
One answer is that you should retain this information to be in the best position to provide affirmative evidence of the due diligence investigation. After all, memories fade, and people quit their jobs, move away or die. The notes and other written materials that were produced in connection with the due diligence investigation provide the best mechanism of refreshing recollections and establishing what was done.
2. Don't.
Another answer is that after an offering is completed, any materials that you keep other than the offering materials (and, many would say, a memorandum summarizing the due diligence investigation) are likely to be misused and misunderstood in any subsequent litigation. Perhaps your old notes will permit you to refresh your recollections, but the adequacy of a due diligence investigation is not established by introducing folders full of marked drafts. On the other hand, your notes, marks and questions are a rich lode of material for a plaintiff's lawyer, who will be able to exploit apparent failures to have responded to questions marked on interim drafts, or failures to follow up on questions for which there are only partial answers in the materials.
3. Compromise.
Some lawyers believe that although most work papers should be discarded, careful records should be kept of the time spent on the due diligence inquiry, the dates of meetings and who was present, and the different versions (unmarked) of the draft offering materials. Which answer is right? Unfortunately, none is. It is probably true that keeping everything more often helps the plaintiff's counsel than the defense. It might be appealing to destroy all of one's records in response to this concern, but (1) you will never destroy all of the copies of those records that were routinely circulated to the working group, or stored in your computer system's backup disk drives, and (2) you will never obtain uniformity of document destruction even within your own organization, so that the destruction of records from one offering will contrast unfavorably with the retention of records in others.
Perhaps the only realistic answer is to be careful what you say in documents that are circulated, and to exercise control if you think that other members of the working group are circulating material that would suffer from being read in hindsight. When an offering has been completed, before the files are put away, review them one last time to make sure you are not mindlessly keeping documents that are unnecessary and subject to misinterpretation. Encourage everyone in the working group to do the same, and follow up with memos to all parties asking them to confirm that they have conducted such a file review.
N. Gun-Jumping -- Pre-Offering Publicity
Once the company has reached an understanding with a lead underwriter, the company is considered to be "in registration" for purposes of the Securities Act. n18 From this time forward, company representatives must be careful that they do not disseminate projections or other information about the company which could be construed as being intended to influence prospective investors. Such dissemination is called "gun-jumping," because it involves distributing potentially investment-related information about the company before the information has been formally filed with the SEC in an approved form for distribution. The issue arises because the definition of "offer to sell" in Section 2(3) of the Securities Act is construed very broadly when a company is in registration. n19 In general, the SEC interprets this definition and Section 5(c) of the Securities Act, which prohibits offers to sell securities before a registration statement has been filed, to prohibit any public communication, whether written or oral, while the company is in registration that may have the effect of conditioning the market for the company's securities. n20

n18 Securities Act Release 33-5180 (August 16, 1971), 36 FR 16506.

n19 Section 2(3) states that "[t]he term 'offer to sell," 'offer for sale,' or 'offer' shall include every attempt of offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value."

n20 A notice that a company intends to engage in a public offering will not be deemed to be an offer to sell, provided the notice meets the requirements of Securities Act Rule 135.
 
As a result, while a company is in registration, it may not issue forecasts, projections or predictions relating to business performance, including revenues, income and earnings per share, or publish opinions concerning values of the company. If it is part of the company's customary business practices, the company may distribute factual information by:
 
- Continuing to advertise products or services.

- Sending out customary quarterly, annual or other periodic reports to stockholders.

- Continuing to make customary factual press releases.

- Responding to unsolicited factual inquiries by analysts and others.
Even if it is part of the company's business practices to distribute factual information as listed above, while in registration, any such distribution must be limited strictly to facts which are not presented with the intention of prepping the market for the company's upcoming offering, The determination whether a company has improperly distributed offering-related information is made "in the light of all the facts and circumstances surrounding each case." n21 As a result, company counsel should have the opportunity to review all external company communications while the company is in registration, including press releases, public filings and speeches to be made by company executives.

n21 Release 33-5180.

III. Preparing the Registration Statement
A. Choice of Registration Statement Form
The first step in preparing the registration statement is choosing the appropriate registration form. There are three primary forms used by U.S. companies: Form S-1, Form S-2 and Form S-3. n22 Companies that have been subject to public reporting requirements for 3 years are permitted to use Form S-2. The largest public companies are permitted to use Form S-3. Companies making their first public offering and all companies which are not eligible to use Form S-2 or S-3 are required to use Form S-1.
 
n22 Foreign private issuers use an analogous series of forms: Form F-1, Form F-2 and Form F-3. In addition to these forms, a variety of other forms apply to special types of issuers and offerings, including: Form S-4 (securities issued in connection with business combinations), Form S-8 (securities issued pursuant to employee benefit plans), Form S-11 (real estate companies), Forms SB-1 and SB-2 (small business issuers) and Form N1-A (open-end management investment companies).
 
The forms differ both in what they require to be disclosed and how the disclosure must be made. Form S-1 requires the largest amount of disclosure and requires all of the disclosure to be included directly in the registration statement. Forms S-2 and S-3 require less disclosure in the registration statement and permit the issuer to incorporate much of the disclosure by reference from the issuer's other public filings. In practice, the type of disclosure that goes into the registration statement will be determined not only by the requirements of the securities laws but also by the underwriters' needs for information to market the securities. For example, an issuer using Form S-3 is not required to include a Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") section, because that discussion is required to be included in its other public filings and is therefore incorporated by reference into the registration statement. However, underwriters will very often want to include the MD&A in the registration statement for marketing purposes even though it is not required to be there.
B. Parts of the Registration Statement
The basic sections of a registration statement are:

- Facing page of the Registration Statement.

- Prospectus (the contents of which are described below).

- Information not required to be in the prospectus, including: expenses of the offering, indemnification rights of directors and officers and undertakings by the issuer.

- Signatures and Powers of Attorneys by the required parties -- generally, a majority of the board of directors, the principal executive officer, the principal financial officer and the principal accounting officer. n23

- Consents of experts to the use of their names and opinions in the registration statement.

- Exhibits as required by the appropriate form.

n23 If the issuer is a foreign private issuer, it must also have the registration statement signed by an authorized representative in the United States. Issuers should identify their authorized representatives early in the preparation process, because if someone is not readily identifiable to act as the authorized representative, it can take time to find someone willing to subject themselves to liability under the Securities Act for signing the company's registration statement. Because the authorized representative may be liable for misstatements or omissions in the registration statement, U.S. law firms representing the issuer may not be willing to act as the authorized representative.
 
C. Selected Sections of the Prospectus
The primary disclosure section of each registration statement is the prospectus. The prospectus is the document circulated by the company and its underwriters to potential investors when they are selling the securities registered on the registration statement. The information required to be in each prospectus is set forth in the applicable registration statement form, usually by cross-referencing to SEC Regulation S-K. Certain required sections of the prospectus are described below.
1. Risk Factors
The prospectus must contain "a discussion of the most significant factors that make the offering speculative or risky." n24 These factors may include company-specific factors such as a lack of operating history at the company or recent financial difficulties, security-specific factors such as limited voting rights given to preferred stock, and industry-specific factors such as risks related to real estate investing in the case of a real estate investment trust. The SEC believes this section to be so important that the cover page of the prospectus must provide the page number on which the Risk Factors section begins, and the Risk Factors section is required to immediately follow the summary of the prospectus at the beginning of the document, or, if there is no summary, must immediately follow the cover page of the prospectus. In addition, this section, along with the prospectus cover page and any prospectus summary, must be written in accordance with the SEC's plain English guidelines. Generally, these guidelines require disclosure to be written in conversational terms, using first and second-person pronouns, active voice and eliminating specialized terms of art.

n24 Regulation S-K, Item 503.
 
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The company must discuss its "financial condition, changes in financial condition and results of operations" n25 for the years for which financial statements are included in the registration statement. n26 This section must include "any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way" and must "[d]escribe the registrant's material commitments for capital expenditures . . . and indicate the general purpose of such commitments and the anticipated source of funds needed to fulfill such commitments" and "any known material trends, favorable or unfavorable, in the registrant's capital resources." n27 In addition, the company must provide a year-to-year comparison of its results of operations. This section of the prospectus is based on the financial statements, so it cannot be completed until the financials are finalized. As a result, it is often one of the last sections of the prospectus to be completed.

n25 Regulation S-K, Item 303. See also, SEC Release No. 33-6835 (setting forth the SEC's interpretation of the disclosure required to be included in the MD&A).

n26 Generally, a registrant must provide audited balance sheets as of the end of each of its two most recent fiscal years and audited statements of income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed, or statements for such shorter periods as the registrant has been in existence. Regulation S-X, Rule 3-01(a) and Rule 3-02(a).

n27 Regulation S-K, Item 303(a)(1) and (2).
 
3. Certain Relationships and Related Transactions
The company must also disclose material relationships or transactions between the company and any of its executive officers or directors. n28 These include any transaction involving more than $ 60,000 to which the company is a party and in which any director, executive officer, greater than 5% stockholder or any of their family members had a direct or indirect material interest and any debt of any of such individuals to the company in an amount in excess of $ 60,000. The prospectus must also disclose certain material relationships between itself and any company of which a company director is the executive officer or greater than 10% stockholder. In certain cases, the SEC may require the issuer to include a separate Conflicts of Interest section in the prospectus to discuss material conflicts.

n28 Regulation S-K, Item 404.
 
4. Market Risk Disclosure
The SEC has recently started to require registration statements to include quantitative disclosure to "clarify the registrant's exposures to market risk associated with activities in derivative financial instruments, other financial instruments, and derivative commodity instruments." n29 Disclosures are only required if the company has a material exposure to any of these instruments. n30 The disclosures are required to be presented as tabular information explaining related market sensitive instruments and contract terms, sensitivity analysis disclosures or value at risk disclosures. The disclosure required is very complex, and, because registrants have only recently been required to make such disclosures, the form of disclosure is still evolving. As a result, every issuer should discuss with its accountants whether this disclosure is required so that, if the issuer has a material exposure to derivative instruments, it can identify that exposure and begin preparing the market risk disclosure sooner rather than later in the registration statement drafting process.
 
n29 Regulation S-K, Item 305, General Instructions to Paragraphs 305(a) and 305(b).

n30 Regulation S-K, Item 305, General Instructions to paragraphs 305(a) and 305(b), Instruction 5.B.iii.
 
D. Filing and Review Procedure
When the registration statement has been completed, it must be filed with the SEC using an electronic filing system known as EDGAR. n31 Usually the financial printer that is printing the company's prospectuses will serve as the filing agent for the EDGAR filing. n32 Once the registration statement has been filed, the SEC will decide whether or not to review the filing. It often takes about one week after filing for the SEC to make its review decision. If the SEC decides not to review the registration statement, the issuer can proceed with its offering on its own schedule.

n31 Foreign private issuers may file paper copies of the registration statement or may elect to file by EDGAR.

n32 Some law firms also have the capability to make EDGAR filings. However, many firms have decided not to offer EDGAR filing services due to concerns over additional liability and client relations problems that could result from filing mistakes.
 
If the SEC decides to review the filing, it has a policy of trying to give comments on a filing within 30 calendar days of receipt of the filing. Once the SEC provides comments on the registration statement, the issuer must file an amendment to the registration statement that incorporates the changes sought in the SEC's comment letter. The SEC will then review the amendment to determine whether more changes to the registration statement are needed before it can be declared effective. The SEC response time for amendments can vary from a couple of days to a few weeks, depending on the changes required in the amendment. When the SEC is satisfied that the disclosure in the registration statement complies with the requirements of the applicable form, and when the company is ready to price its securities, the company will request that the SEC declare the registration statement effective. Once the registration statement is declared effective, the issuer can sell the securities registered thereon to the public. Usually, the securities are priced and the underwriting agreement between the issuer and the underwriters is signed immediately after the registration statement is declared effective.
 
IV. Underwriting Arrangements – Pricing the Securities
The underwriter's relationship with the issuer and the pricing of the securities are defined and formalized in a series of documents which are prepared over the course of the offering but which, in a firm commitment underwriting, are executed contemporaneously with the effectiveness of the registration statement with the SEC. Prior to execution the parties are proceeding largely on good faith in the expectation of mutual financial enrichment. However, the good faith is conditional since the underwriter does not wish to commit its funds and be legally bound to purchase the securities until it has definite assurance that the offering will proceed.
A. Pricing the Offered Securities
Pricing discussions between the company and the underwriter begin at the inception of the offering and continue throughout the offering. Final pricing does not occur until the commencement of the offering. The offering price is a product of negotiation between the managing underwriter and the company as well as selling shareholders if a secondary offering is involved. In the case of an IPO, the offering price is a function of a combination of factors including earnings of the company, the trading prices of comparable companies and stock market conditions. Pricing of an IPO, however, is more of an art than a science. In the case of a secondary offering for a company with publicly traded securities, the price will be based on the market price of the securities on the day of pricing, often less a slight discount (possibly $ 0.125 per share).
The mechanics of setting the price are as follows:
 
- Pricing is often first raised in a non-binding letter of intent between the company and the underwriter or a term sheet.

- In the initial filing with the SEC it is common to include an anticipated price range.

- The final offering price in the final prospectus may be at the high or the low end of the range (or outside of the range) depending largely on the response of prospective investors during the road shows and investor meetings which precede effectiveness.

- The actual pricing usually takes place in a conference call or meeting between the managing underwriter and representatives of the company, and, if applicable, the selling shareholders. The final offering price is designed to be slightly below the anticipated selling price in the after-market.

- The agreement on the final selling price is customarily reached after the close of the market on the day the registration statement is declared effective. Each party retains the right to terminate prior to the time that the underwriting agreement becomes effective.

B. The Underwriting Documents
A number of documents formalize the relationship between the company and the underwriter. In the case of a firm commitment underwriting they customarily include the agreement among underwriters, the underwriting agreement, the selected dealers agreement, and the underwriters questionnaire and power of attorney.
The most important document is the underwriting agreement between the company, the managing underwriter and, if applicable, representatives of the selling shareholders. The typical underwriting agreement consists of the following provisions:
 
- Representations and warranties of the company which may be either detailed or general.

- Time, date and place of the closing and the method of payment for the securities.

- Conditions for the underwriters' purchase of the securities.

- Mutual indemnities and contribution.

- Covenants of the company and conditions to the underwriters' obligations.

-	Termination -- Specific events which allow the underwriter to terminate the agreement without penalty.

Appendix A
Preliminary Time Schedule for Company IPO

Company	C	Underwriter	U	
Co-Manager	CO	Company Counsel	CC	
Underwriter's Counsel	UC	Auditors	A	
Week of	Event	Primary	
		Responsibility	
Month of June	Select managing underwriter(s)	CO	
	 	 	
June 30	Organizational Meeting (timetable,	ALL	
	offering size, distribution of tasks,	 	
	selling shareholders, selection of	 	
	financial printer and banknote	 	
	company, transfer agent and	 	
	registrar, "corporate clean-up"	 	
	matters, listing on a securities	 	
	exchange, discussion of: any special	 	
	accounting problems, any anticipated	 	
	disclosure problems, anticipated NASD	 	
	or Blue Sky problems, any desired	 	
	stockholder concessions (eg,	 	
	lockups), arrangements with other	 	
	stockholders who have registration	 	
	rights, desirability of pre-filing	 	
	conferences with the SEC or Blue Sky	 	
	authorities or the NASD, any required	 	
	recapitalization of the Company)	 	
	 	 	
	Due Diligence Review	ALL	
	 	 	
July 7, July 14 and July	Drafting sessions to prepare	ALL	
21	registration statement	 	
	 	 	
	Draft underwriting documents	CC	
	 	 	
	Draft comfort letter	A	
	 	 	
	Continue due diligence	ALL	
	 	 	
Aug. 4	Final drafting session at the printer	ALL	
	 	 	
	Finalize filing documents	UC, CC	
	 	 	
	Board meeting to adopt resolutions	C	
	and approve filing of Registration	 	
	Statement	 	
	 	 	
	File registration statement with SEC	C, CC, UC	
	 	 	
Aug. 11, Aug. 18, Aug.	Prepare road show presentation	C, U, CO	
25 and Sept. 1	 	 	
	 	 	
	Target investors	U	
	 	 	
Sept. 8 and Sept. 15	Finalize road show presentation	C, U, CO	
	 	 	
	Respond to SEC comments	C, CC, U, UC	
	 	 	
	Target and set up investor meetings	U	
	 	 	
	Road show rehearsals	C, U, CO	
	 	 	
	File amended registration statement	C, CC, UC	
	with audited first quarter financials	 	
	 	 	
	Print and distribute preliminary	ALL	
	prospectus	 	
	 	 	
Sept. 22 and Sept. 29	Road show presentation to	C, U, CO	
	underwriters' sales forces	 	
	 	 	
	Road show meetings	C, U, CO	
	 	 	
Oct. 6	Pricing	C, U, CO	
	 	 	
	Prepare and distribute final	ALL	
	prospectus after registration	 	
	statement declared effective	 	
	 	 	
	Bring-down due diligence session	ALL	
	 	 	
	Auditors deliver final comfort letter	A	
	 	 	
	Closing	ALL