Prepared by Cooley LLP for Emerging Companies · 2012-10-23 · Prepared by Cooley LLP for Emerging...

IPO HandbookPrepared by Cooley LLPfor Emerging Companies

MERRILL CORPORATION

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IPO HANDBOOKPrepared byCooley LLP

for Emerging Companies

Published byMERRILL CORPORATION

St. Paul, Minnesota

The handbook is intended as a general introduction to the IPO processand it is not intended to provide legal advice as to any specific IPO; itshall not be deemed to create an attorney/client relationship betweenCooley LLP and the reader and you may not rely upon any of thestatements contained herein for purposes of any specific IPO. EachIPO is unique, and will involve complex legal issues that can only beproperly analyzed by an attorney who is retained by you to provide youwith legal advice specific to the facts and circumstances pertaining tothat IPO.

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TABLE OF CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. OVERVIEW OF INITIAL PUBLIC OFFERINGS . . . . . . . . . . . . 2

A. Why Go Public? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21. Our company needs to raise additional capital to fund our operations.

Several investment bankers and our investors have suggested that weconsider a public offering of our shares. Why should we go public? . . . 2

2. Are there other benefits associated with publicly traded shares? . . . . . . 23. What are some of the disadvantages of going public? For example, what

if the stock price doesn’t increase or the company suffers somesetbacks? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

4. We thought Congress had eliminated all of these costs and burdens fornewly public companies. Isn’t that what the JOBS Act was supposed todo? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

5. What is an ‘‘emerging growth company’’? . . . . . . . . . . . . . . . . . . . . . 46. Why would a company want to be classified as an EGC? . . . . . . . . . . 57. Won’t classification as an EGC harm the company’s public image and

marketability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58. What are the public reporting requirements? . . . . . . . . . . . . . . . . . . . 69. One of our concerns is that, once the company is public, we may lose

control of the company. Is there anything we can do to prevent that? . . 610. Once we’re public, are there any limitations applicable to how we use

or invest the money we receive? . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. The Public Offering Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71. A number of different investment banks have contacted us about doing

a public offering. How do we select the best underwriter for us? . . . . . 72. None of our management team has ever participated in the public

offering process. What can we expect regarding timing andresponsibilities? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3. What happens at the organizational meeting? . . . . . . . . . . . . . . . . . . 84. Who attends the organizational meeting? . . . . . . . . . . . . . . . . . . . . . 95. What is the role of each of these participants in the process? To start

with, what are we expected to do? . . . . . . . . . . . . . . . . . . . . . . . . . . 96. How is the price range of the stock determined? . . . . . . . . . . . . . . . . 117. How do we know how much stock to sell? . . . . . . . . . . . . . . . . . . . . 118. What if the underwriters think we need to sell more shares to achieve a

desirable public float than we want to sell? . . . . . . . . . . . . . . . . . . . . 129. Why would a stockholder want to sell in the offering? Can’t existing

stockholders sell in the open market once the company is publicwithout the liability and costs associated with the IPO? . . . . . . . . . . . . 12

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10. Is there a way to ensure that the company’s employees, suppliers orother friends have the opportunity to purchase stock in the offering? . . 12

11. How is the registration statement prepared? Who prepares it? . . . . . . . 1312. What is the difference between a registration statement and a

prospectus? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1313. We have been hearing about a type of prospectus called a ‘‘free writing

prospectus.’’ How does it differ from a regular prospectus? . . . . . . . . . 1314. A number of our material agreements, such as product licenses and

supply agreements, contain highly confidential information. When theyare filed with the SEC, will our competitors then be able to obtain thatinformation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

15. What kind of information is provided in the prospectus? . . . . . . . . . . . 1416. I understand that prospectuses must be drafted in ‘‘plain English.’’

What does that mean? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1817. What is due diligence? Who does it? . . . . . . . . . . . . . . . . . . . . . . . . 1818. Can you explain the SEC review process? . . . . . . . . . . . . . . . . . . . . . 1919. We’ve heard that some companies are submitting IPO registration

statements confidentially to the SEC. What are the advantages of thisroute? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

20. How do we respond to the SEC’s comments? . . . . . . . . . . . . . . . . . . 2021. When do we print the preliminary prospectus? What about the final

prospectus? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2122. If the company and the underwriters have already distributed the red

herring prospectus, what happens if we are required to make additionaldisclosures because of subsequent SEC comments or because facts orevents at the company have changed? . . . . . . . . . . . . . . . . . . . . . . . . 21

23. The underwriters keep referring to the ‘‘road show.’’ What is a roadshow and who pays for it? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

24. When is the stock price actually determined? When do we starttrading? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

25. How does our stock become traded on NASDAQ or the NYSE? . . . . . 2326. When do the underwriters pay us for our stock? . . . . . . . . . . . . . . . . 2427. What is the company’s liability if there is a problem with the prospectus

or a free writing prospectus? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

C. Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251. What are underwriters? What do they do? . . . . . . . . . . . . . . . . . . . . 252. Many IPO prospectuses include a long list of underwriters on the front

and back covers and in the ‘‘Underwriting’’ section. We’ve been talkingwith representatives from only two investment banking firms. Is thisunusual? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3. What are some of the factors we should consider in choosingunderwriters for our IPO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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4. What does the underwriting agreement do? . . . . . . . . . . . . . . . . . . . . 275. How are the underwriters compensated? . . . . . . . . . . . . . . . . . . . . . . 286. What are ‘‘jump ball’’ economics? . . . . . . . . . . . . . . . . . . . . . . . . . . 287. What do we need to know about restrictions on the conduct of research

analysts in an IPO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298. How is the IPO sold, how are the allocations determined, and when

will I know what the price will be? . . . . . . . . . . . . . . . . . . . . . . . . . . 309. We have heard about a different type of pricing and selling mechanism

known as a ‘‘Dutch auction.’’ What is this and what are the advantagesand disadvantages? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

10. We know that we will need to register our offering with the SEC. Willwe be required to qualify the offering with state regulators? . . . . . . . . 32

11. What other filings are the underwriters required to make in connectionwith the IPO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

II. PREPARING FOR AN IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

A. Review of the Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 331. A lot of IPO stocks seem to be priced at $10 to $20 per share. Is that a

coincidence? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332. If we have to split the company’s stock, what happens to the preferred

stock? Won’t the disclosures in the prospectus regarding ouroutstanding stock be inaccurate? . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

3. Is there anything else we should change in our capital structure beforethe IPO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4. Are there other changes to our basic corporate documents that weshould consider as part of our pre-IPO planning? . . . . . . . . . . . . . . . . 34

B. Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341. Are there any requirements regarding the composition of the board of

a public company? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342. How do the SROs define ‘‘independent’’? . . . . . . . . . . . . . . . . . . . . . 343. What types of relationships could be perceived by the board to be

material or to interfere with the exercise by a director of independentjudgment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

4. Outside of the specific exchange rules, are there other factors toconsider in evaluating the independence of directors? . . . . . . . . . . . . . 35

5. I’d like to understand more about the Oracle case. What were the factsand what does it mean for independence determinations? . . . . . . . . . . 36

6. Surely this idea — that friendship alone may impair independence —can go too far. Are there any contrary indications from the Delawarecourts? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

7. How often should the board review the independence of its members? . 378. We’ve heard that some companies have a ‘‘lead independent director’’

on their boards. What is a lead independent director? . . . . . . . . . . . . 37

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9. We now have established an audit and a compensation committee ofthe board, although, frankly, these committees have not historicallyfunctioned as separate committees. Will we need to be sure that thesecommittees act independently now? Do we need to establish othercommittees as well? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

10. Are there other requirements for committee members? . . . . . . . . . . . . 3811. What types of procedures should committees establish? . . . . . . . . . . . 3812. What authority should committees have? . . . . . . . . . . . . . . . . . . . . . 3913. What is the role of the audit committee? . . . . . . . . . . . . . . . . . . . . . 3914. Are there specific responsibilities for audit committee members? . . . . . 4015. Do audit committee members need to have any special characteristics

or expertise? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4016. What do you mean by ‘‘super independent’’? . . . . . . . . . . . . . . . . . . . 4017. What degree of financial literacy is required? . . . . . . . . . . . . . . . . . . 4118. What is an ‘‘audit committee financial expert’’? . . . . . . . . . . . . . . . . . 4119. What is the role of the compensation committee? . . . . . . . . . . . . . . . 4220. Why do we need a compensation committee? Who should serve on it? . 4221. What are the key functions of the compensation committee? . . . . . . . . 4322. Do compensation committee members need to be experts in

compensation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4323. Are there any other factors to consider in the selection of

compensation committee members? . . . . . . . . . . . . . . . . . . . . . . . . . 4324. What is the role of the nominating committee? . . . . . . . . . . . . . . . . . 4425. Why do we need a nominating committee? Who should serve on it? . . . 4426. What are the key functions of a nominating/corporate governance

committee? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

C. Reincorporation in Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451. We’ve heard that a number of companies incorporated outside of

Delaware were reincorporated in Delaware just prior to their IPOs.What are the advantages of being incorporated in Delaware? . . . . . . . 45

2. Why is Delaware corporate law widely followed? . . . . . . . . . . . . . . . . 453. Are there any disadvantages associated with incorporation in Delaware? 46

D. Stockholder Protection Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461. Why should the company adopt stockholder protection measures? What

are the principal advantages and disadvantages to adopting suchmeasures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

2. We understand that a significant number of public companies haveclassified, or staggered, boards of directors. If the company adoptedsuch a provision, how would it work and what effect might it have? . . . 48

3. How do we determine which directors should be in which class? Arethere any requirements? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

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4. What would be the effect of including cumulative voting for election ofdirectors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

5. What other types of provisions might the company implement to helpdeter undesirable takeovers and ensure continuity of the board ofdirectors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

6. What about the right of stockholders to call special meetings? . . . . . . . 497. What would be the effect of the company’s eliminating the ability of

stockholders to act by written consent following its initial publicoffering? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

8. We have heard that the company could adopt special procedures forstockholder proposals and director nominations. How would this work? . 50

9. What about votes required to amend the company’s certificate ofincorporation and bylaws and other supermajority vote requirements? . . 51

10. We understand Delaware has an anti-takeover statute. How does itwork? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

11. How does a stockholder rights plan, or ‘‘poison pill,’’ work? Whenshould the company consider adopting one? . . . . . . . . . . . . . . . . . . . 52

12. What is a dual class capital structure? How do they work and whenshould they be considered? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

E. Employee Stock Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541. We have several employee equity plans now. Will we have to change

them when we go public? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542. Should we adopt any new plans? . . . . . . . . . . . . . . . . . . . . . . . . . . . 553. Our company has always priced option grants at an exercise price that

the board determines to be the fair market value at the time of grant,taking into account a variety of factors in the company’s development.However, the projected IPO price is far higher than the most recentfair market value determination. Will we have a problem? . . . . . . . . . . 55

4. We have some outstanding loans to several of our officers in connectionwith their purchase of the company’s stock. Is that a problem? . . . . . . 56

III. PUBLICITY AND COMMUNICATIONS . . . . . . . . . . . . . . . . . . 57

A. Pre-Filing Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571. Can we issue a press release about, or otherwise publicly announce, our

proposed IPO now? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572. What are the restrictions applicable to the company during the

pre-filing period? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573. But our underwriter has set up meetings for us with some of its

institutional accounts, and we haven’t even filed yet. Won’t that violatethe rules you just described? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

4. These restrictions sound somewhat vague and difficult for us to apply.Aside from the limited exception for EGCs, are there any firmguidelines that we can rely on? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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5. Can you describe the timing safe harbor, Rule 163A? . . . . . . . . . . . . . 586. What are ‘‘reasonable steps’’? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597. Our CEO gave an interview several months ago to a well-respected

business journal, but the article has not yet been published. Do we haveto worry about potential publication during or after the 30-daypre-filing period? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

8. Can all companies use the 30-day pre-filing safe harbor? . . . . . . . . . . . 609. Can information posted on our web site before we initially file our

registration statement be construed as gun-jumping? . . . . . . . . . . . . . . 6010. What about communications that occur during the 30-day period? Will

we be able to continue our advertising or have any communicationswith the press? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

11. What is Rule 169? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6112. What are factual business communications under Rule 169? . . . . . . . . 6113. What pattern of practice is necessary to satisfy the ‘‘regularly released’’

requirement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6114. We’ve always announced new product lines via our company’s Twitter

feed. Can we still do this? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6215. We want to start releasing comparative financial analysis that we have

not previously released. Will we be able to rely on the safe harbor? . . . 6216. We have always advertised only in magazines, but just bought some

advertising space online. Our first web ads will appear shortly before wefile. Can we still rely on the safe harbor? . . . . . . . . . . . . . . . . . . . . . 62

17. We’ve issued press releases about our management changes only twicebefore. We just hired a new executive vice president of research anddevelopment, who is very well known in our industry, and we would liketo issue a press release about her. Is that enough to establish a trackrecord? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

18. In the past, our sales executives have been responsible for placing adsand other marketing activities. We now want to shift that responsibilityto a public relations employee who will also take responsibility forinvestor relations after the IPO, but we are only a few days away fromour filing. Will we still satisfy the ‘‘manner’’ requirement? . . . . . . . . . . 63

19. We understand that the information must be intended for use bypersons other than investors. One of our key customers is also aninvestor. Can we still provide that customer with product information? . 63

20. Will we still be able to use the safe harbor if we put out a new productpress release? Obviously, the release will reach some investors inaddition to our intended customer audience. . . . . . . . . . . . . . . . . . . . 63

21. What if, at a meeting, our underwriter disseminates our new productpress releases on our behalf? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

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22. Will we be protected under the safe harbor if we distribute ourpreviously released press releases at meetings our underwriters set upwith potential investors in connection with the offering? . . . . . . . . . . . 64

23. Under the safe harbor, are we permitted to mention our proposed IPOin our earnings release? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

24. Can we release projections or other forward-looking information underthe safe harbor? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

25. What happens if a communication fails to satisfy the safe harbor? . . . . 6426. Will our chief technical officer still be able to give a speech at a

scientific conference shortly before we plan to file? . . . . . . . . . . . . . . 6427. Will our CEO still be able to give a speech at an investor conference

shortly before we plan to file? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6528. What precautions should we take to prevent inappropriate

communications during the public offering process? . . . . . . . . . . . . . . 65

B. Post-Filing Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651. After we initially file the registration statement with the SEC, are we

subject to the same publicity restrictions as before we filed theregistration statement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

2. You said that, once we have filed, oral offers are permitted. In thiselectronic age, how do we distinguish oral from writtencommunications? For example, is information appearing on our website considered ‘‘written’’? Is information disseminated through socialmedia considered ‘‘written’’? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

3. What about recorded voice mail messages? . . . . . . . . . . . . . . . . . . . . 664. What if we record a web cast telephone conference call or web cast

meeting and post it on our web site? . . . . . . . . . . . . . . . . . . . . . . . . 665. Our CEO gave a live interview on TV. Since it was live, it must be

considered an oral communication, right? . . . . . . . . . . . . . . . . . . . . . 676. After we file, is there any kind of written communication we can make

that refers to our offering but is not a prospectus, with all its associatedexposure to liability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

7. Is Rule 134 available at any time? . . . . . . . . . . . . . . . . . . . . . . . . . . 678. We don’t have a price range yet in our prospectus. Does the

preliminary prospectus need to include a price range for Rule 134 to beavailable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

9. Our prospectus is widely accessible on the SEC’s web site. To satisfyRule 134, if we are soliciting offers, do we need to actually deliver apreliminary prospectus? That seems quaint in this electronic age. . . . . 68

10. What is a free writing prospectus? . . . . . . . . . . . . . . . . . . . . . . . . . . 6811. Do we need to view all written communications as offers? . . . . . . . . . . 6812. What kind of information is required in a free writing prospectus? . . . . 6913. That sounds very flexible. What’s the hitch? . . . . . . . . . . . . . . . . . . . 69

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14. What are the conditions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6915. What do we need to do to comply with the prospectus delivery

condition? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6916. Do we really need to deliver a preliminary prospectus? Won’t that limit

significantly our ability to use free writing prospectuses? . . . . . . . . . . . 6917. Once we’ve provided our preliminary prospectus to an investor, do we

need to deliver one every time we use a new free writing prospectus? . . 7018. What kind of legend is required for a free writing prospectus? . . . . . . . 7019. How do we satisfy the legend condition in a published article that is

considered a free writing prospectus? . . . . . . . . . . . . . . . . . . . . . . . . 7020. Can we include information in the free writing prospectus that is not in

our preliminary prospectus? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7021. If our free writing prospectus contains a lot of additional information,

does that imply that our preliminary prospectus is defective? . . . . . . . . 7022. Can our free writing prospectus indicate that it is not a prospectus or

an offer? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7023. Are all free writing prospectuses required to be filed with the SEC? . . . 7124. Do we need to keep copies of all free writing prospectuses? . . . . . . . . 7125. What if we fail to satisfy some of the conditions for use of free writing

prospectuses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7126. Is a free writing prospectus part of our registration statement? . . . . . . . 7127. Are all private companies that have filed registration statements eligible

to use free writing prospectuses? . . . . . . . . . . . . . . . . . . . . . . . . . . . 7128. When is eligibility determined? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7229. Will our road show be considered a free writing prospectus? . . . . . . . . 7230. Are there special rules applicable to filing of electronic road shows? . . . 7231. What is a ‘‘bona fide electronic road show’’? . . . . . . . . . . . . . . . . . . . 7232. Does it need to be identical to the other versions or address all the

same subjects? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7233. Do we need to file the slide presentation we use in our road show with

the SEC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7234. After filing our registration statement, can we include on our web site

hyperlinks to other web sites? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7335. We gave an interview for a popular magazine that will be published

shortly after we file our registration statement. Is that considered agun-jumping violation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

36. But we listened to our attorneys’ advice and did not give the author anyinformation that isn’t already in our prospectus. Do we still need tofile? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

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37. Unfortunately, an article, based on an interview of our CEO, waspublished with a significant amount of incorrect information. We’reuncomfortable filing incorrect information. Is there anything we cando? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

38. We thought that we had to provide a preliminary prospectus with allfree writing prospectuses. How do we do that where an article appearsin a newspaper? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

39. Our local newspaper published an article about our IPO, based entirelyon our preliminary prospectus and the road show we posted on our website. Do we still need to file the article even though we had noinvolvement in it? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

C. Post-Effective Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 741. After the registration statement is declared effective, are there still

restrictions on publicity and communications? . . . . . . . . . . . . . . . . . . 742. After our registration statement is declared effective, do we still need

to comply with the conditions for free writing prospectuses? . . . . . . . . 74

IV. RESPONSIBILITIES OF A PUBLIC COMPANY AND ITSDIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

A. Company Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751. We understand that we will have to report on how we used the money

from our IPO. How do we do that? . . . . . . . . . . . . . . . . . . . . . . . . . 752. What ongoing reporting requirements will we need to comply with? . . . 753. What is an Annual Report on Form 10-K and what information does it

include? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754. When must the Annual Report on Form 10-K be filed? . . . . . . . . . . . 765. What is a ‘‘large accelerated filer’’? What is an ‘‘accelerated filer’’? . . . 766. Is it possible to lose status as a large accelerated filer or an accelerated

filer? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 777. Who signs the Annual Report on Form 10-K? Is it reviewed by the

SEC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778. Are any certifications required in connection with the Form 10-K? . . . . 779. What is a Quarterly Report on Form 10-Q and what information does

it include? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7810. When must the Quarterly Report on Form 10-Q be filed? . . . . . . . . . . 7811. Who signs the Quarterly Report on Form 10-Q? . . . . . . . . . . . . . . . . 7812. What is XBRL? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7813. How will XBRL affect our financial reporting requirements? . . . . . . . . 7914. What is a Current Report on Form 8-K and what information does it

include? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7915. When must a Current Report on Form 8-K be filed? . . . . . . . . . . . . . 8016. Are we required to distribute reports to stockholders? . . . . . . . . . . . . 80

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17. How will we be affected by the proxy rules? . . . . . . . . . . . . . . . . . . . 80

B. Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821. There has been a lot of publicity about insider trading. How does that

arise? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822. What are the consequences of insider trading violations? . . . . . . . . . . . 823. Might an insider be liable for trading in the company’s securities by his

or her personal or business associates? . . . . . . . . . . . . . . . . . . . . . . . 834. Is there a way to enable executives, directors and other insiders to

trade in their company’s stock safely, when presumably they will be inpossession of material nonpublic information more often than not? . . . 83

5. Is it possible for the company to be liable for insider trading by itsemployees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

6. How can we protect the company from the adverse effects of impropertrading by its personnel? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

7. Do insiders have potential liability for trading in company stock even ifthey are not aware of any inside information? . . . . . . . . . . . . . . . . . . 85

8. What reporting requirements are insiders of public companies subjectto? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

9. What are the penalties for late filings of Section 16(a) reports? . . . . . . 86

C. Post-IPO Disclosure and Communications with Analysts . . . . . . . . . . . 861. Once the company is public, what kind of information will we have to

disclose? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 862. What information is considered ‘‘material’’? . . . . . . . . . . . . . . . . . . . 873. What is Regulation FD? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884. Can we hold an analyst conference call that complies with

Regulation FD? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 895. Will posting a press release on our web site be considered adequate

public dissemination for purposes of Regulation FD? . . . . . . . . . . . . . 896. What is the standard for disseminating material information solely

through our company web site? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897. What can we say if the company is contacted by securities analysts? . . . 908. What if an analyst provides an inaccurate projection? . . . . . . . . . . . . . 919. When is it permissible to make presentations at industry or investor

conferences? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9110. Are meetings with customers, suppliers or other members of the

business community subject to Regulation FD? . . . . . . . . . . . . . . . . . 9211. When should we comment on rumors in the marketplace about our

company? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

D. Sales of Company Stock After the IPO . . . . . . . . . . . . . . . . . . . . . . . . 931. How soon after the IPO will employees be able to sell their shares of

company stock acquired under employee plans? . . . . . . . . . . . . . . . . . 93

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2. Who is an affiliate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933. Will employees who have not exercised options be subject to any

additional restrictions on resale once they do exercise their optionsafter the IPO? What about options granted after the IPO? . . . . . . . . . 94

4. Some of our employees participated as investors in some of the roundsof venture financing. Are there any resale restrictions on restrictedstock not issued as employee stock? Do the same rules apply to venturefunds that purchased stock in those rounds? . . . . . . . . . . . . . . . . . . . 94

5. Are directors or other insiders subject to any additional restrictionswhen selling company securities? . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

E. Directors’ Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961. What duties do directors have as directors of a public company? . . . . . 962. What is the duty of care? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963. What is the duty of loyalty? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964. Is there a duty of disclosure? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975. We’ve heard some discussion about a duty of good faith. Is there such a

duty? What does it involve? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 976. What is the business judgment rule? . . . . . . . . . . . . . . . . . . . . . . . . 987. We understand that directors may have liability arising out of the IPO.

After the company goes public, are directors subject to liability forinaccuracies in periodic disclosure reports to the SEC or otherdisclosures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

F. Protection of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 991. Given the numerous sources of potential liability to public company

directors, what means are available to shield directors from suchliability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

2. May a company indemnify its directors against all liability? . . . . . . . . . 100

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INTRODUCTIONThe process of going public is exciting, exhausting and usually, for those whohave not previously had the experience, somewhat mysterious. Our goal is notto eliminate the excitement and we know we cannot eliminate the exhaustion.Rather, the purpose of this handbook is to eliminate some of the mystery fromthe process of going public.

We begin in Section I with an overview of public offerings, focusing initially onthe first step of the decision-making process — the factors to be considered indeciding whether to go public. Then, we review the public offering processthrough the stages of an initial public offering (‘‘IPO’’).

Most companies take the opportunity, prior to going public, to consider howbest to prepare the company, from a corporate standpoint, for public companystatus. Section II of the handbook presents an overview of issues relating topreparing for an IPO, including possible changes to corporate structure andcomposition of the board of directors and its committees. We next analyze theconsiderations applicable to deciding whether to reincorporate in Delaware (astep frequently taken by non-Delaware companies prior to an IPO). We alsooutline the most common stockholder protection measures adopted by publiccompanies. Finally, we address typical employee stock issues.

While communications with the press are always complex, special rules applyto publicity and communications with the press and public generally when thecompany is ‘‘in registration.’’ In Section III, we discuss publicity andcommunications issues that arise during that period.

Finally, Section IV covers a number of post-IPO issues relating to publiccompany status, including SEC filing obligations, insider trading, publicdisclosure and communications and post-IPO sales of company stock. Weconclude with a discussion of directors’ responsibilities and the actions acompany may take to provide protection from monetary liability for itsdirectors.

The handbook is intended as a general introduction to the IPO process and it is notintended to provide legal advice as to any specific IPO; it shall not be deemed tocreate an attorney/client relationship between Cooley LLP and the reader and youmay not rely upon any of the statements contained herein for purposes of anyspecific IPO. Each IPO is unique, and will involve complex legal issues that canonly be properly analyzed by an attorney who is retained by you to provide you withlegal advice specific to the facts and circumstances pertaining to that IPO.

I. OVERVIEW OF INITIAL PUBLIC OFFERINGSIn this section of the handbook, we provide you with an overview of IPOs.We discuss some of the advantages and disadvantages of going public andbeing a public company. Then, we present an overview of the process of goingpublic. Finally, we discuss underwriting and distribution of securities in apublic offering context.

A. Why Go Public?1. Our company needs to raise additional capital to fund our operations.

Several investment bankers and our investors have suggested that weconsider a public offering of our shares. Why should we go public?

Of course, there are many reasons for a company to go public. A publicoffering generally permits the company to raise capital at a higher valuationthan in a private financing, in part because the shares issued in a publicoffering are freely tradable and do not require a long-term investment.Moreover, after the IPO, companies often find that they are able to access thepublic markets more quickly and easily for subsequent offerings, so long as themarket is generally receptive and, among other things, there have been nosignificant disappointments in the company’s progress. Once the companybecomes public, those same public trading markets ultimately become availablefor the company’s existing stockholders, offering liquidity to founders, venturecapital investors and employees of the company, provided that sales of sharesacquired prior to the IPO are either registered or comply with rules discussedin Section IV, Part D.

2. Are there other benefits associated with publicly traded shares?

Publicly tradable shares are often viewed as a type of currency, almost likecash, because of their liquidity. As a result, being public may permit thecompany to make strategic acquisitions of technology or other businesses usingshares of its stock in lieu of cash. In addition, as the stock price rises, thecompany may also have the corollary benefit of favorable publicity and anenhanced public image. For employees who may receive a portion of theircompensation in stock options or other equity awards, publicly traded sharescan serve as powerful incentives, so long as the stock price continues to rise.

3. What are some of the disadvantages of going public? For example, whatif the stock price doesn’t increase or the company suffers some setbacks?

A difficult aspect of being a public company is the heightened scrutiny ofregulators, analysts and the press, as well as the expectations of public

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stockholders, all of which can add significant pressure to achieve positiveresults each quarter. This increased pressure to focus on the short term inmaking strategic corporate decisions can limit the flexibility of managementand the board in managing the company for the long term. Companies that gopublic prematurely risk disappointing stockholders and losing the confidence ofmarket analysts if they suffer performance problems, which can result in lowerstock prices, limitations on future access to the public markets and, possibly,stockholder litigation. In addition, in the current climate, the stock prices ofhigh technology or other early stage companies are typically extremely volatile,often experiencing price fluctuations unrelated to the performance ofparticular companies. Volatility can also limit the effectiveness of some typesof employee equity incentives, like employee stock purchase plans or stockoptions.

There are also significant additional costs associated with being a publiccompany, such as administrative, legal, accounting and printing expenses inconnection with disclosure documents and stockholder reports. Companieshave also reported increased costs associated with regulatory compliance sincethe adoption of the Sarbanes-Oxley Act of 2002 (‘‘SOX’’) and the Dodd-FrankWall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’), and, giventhat the SEC has not even completed its required Dodd-Frank rulemaking,costs may continue to increase. Moreover, the SEC or the stock exchanges arecontinually considering new measures, some of which could increase thecomplexity and cost of regulatory compliance and some of which could actuallyease the regulatory burden for public companies. In addition, as companiesand corporate executives become more familiar with the processes required,the initial cost increases incurred when new mandates first became effectiveoften decline over time, sometimes back to original levels.

The company may also need to hire additional management personnel,depending on the company’s current staffing, to handle the expandedreporting, investor relations and other obligations of a public company. Manycompanies that go public find that they need to engage public relations firmsor make investments in additional information technology. Compensation forexecutives and board members may also increase. In addition, corporateactions that a private company could take quickly and easily may be slow,cumbersome or even impractical to effect because of the complex regulatoryscheme surrounding solicitation of public stockholders’ votes. Information thatwas once private, such as compensation paid to the chief executive officer,chief financial officer and other highly compensated officers, becomes publicinformation, easily accessible online. Finally, directors and officers also faceincreased exposure to potential liability as a result of their fiduciaryresponsibilities to the public stockholders and their obligations to satisfy publicdisclosure requirements both in the IPO and thereafter. (See Section IV,Part E.)

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4. We thought Congress had eliminated all of these costs and burdens fornewly public companies. Isn’t that what the JOBS Act was supposed todo?

Reducing costs and burdens, rather than eliminating them entirely, might be amore accurate way to describe the impact of the ‘‘JOBS’’ Act, the deftacronym for the Jumpstart Our Business Startups Act. The JOBS Act, which wassigned into law by President Obama on April 5, 2012, was designed to increasejob creation and economic growth by improving access to the public capitalmarkets for ‘‘emerging growth companies.’’ To that end, the JOBS Actremoved some impediments to capital raising for these companies by relaxingdisclosure, governance and accounting requirements, easing the restrictions onanalyst communications and analyst participation in the public offering process,and permitting companies to ‘‘test the waters’’ by allowing IPO candidates totake preliminary steps to determine the potential level of investor interestbefore committing to the expensive and time-consuming prospectus-draftingand SEC review process.

5. What is an ‘‘emerging growth company’’?

Under the JOBS Act, an emerging growth company, or EGC, is an issuer that,for its most recently completed fiscal year, had total annual gross revenues ofless than $1 billion. A company’s status as an EGC will then continue until theearliest to occur of any of the following

• the last day of the company’s fiscal year during which its gross revenuesequal or exceed $1 billion;

• the last day of the company’s fiscal year following the fifth anniversaryof its IPO;

• the date on which the company has, during the previous three-yearperiod, issued more than $1 billion in non-convertible debt; or

• the date on which the company is deemed to be a ‘‘large acceleratedfiler,’’ generally, a company that, as of the end of a fiscal year, has beena reporting company for at least 12 months (and filed at least oneAnnual Report on Form 10-K) and whose public float at the end of itsmost recently completed second quarter had an aggregate worldwidemarket value of $700 million or more.

Importantly, the category of EGCs has only limited retroactivity: no companythat first sold equity in its IPO on or prior to December 8, 2011 can qualify asan EGC.

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6. Why would a company want to be classified as an EGC?

EGCs receive highly favored treatment under the JOBS Act. To address theconcern that some companies have been deterred from undertaking IPOsbecause of regulatory burdens (and associated costs) accompanying publiccompany status, the JOBS Act provides an ‘‘IPO on-ramp,’’ which exemptsEGCs from a number of disclosure, governance and accounting requirements.For example, IPO registration statements for EGCs will not be required toinclude more than two years of audited financial statements, as opposed to theusual requirement to include three years. EGCs will not have to comply withany new or revised financial accounting standards until the standard is likewiseapplicable to private companies, nor will they have to comply with severalpotential new accounting standards that may be adopted by the PublicCompany Accounting Oversight Board. Similarly, EGCs will not need toinclude an auditor attestation report on internal control when they file theirannual audited financial statements with the SEC. EGCs will not need tosolicit say-on-pay votes by their stockholders and will be able to comply withsome of the ‘‘scaled’’ disclosure requirements intended for smaller companies.

7. Won’t classification as an EGC harm the company’s public image andmarketability?

That remains to be seen. It’s likely that market expectations will drive EGCsto comply with at least some of the requirements applicable to non-EGCs,given that, with exceptions, EGCs may choose, on an a la carte basis, whetherto take advantage of any particular exemption or amendment for EGCs or tocomply with the requirements applicable to non-EGCs. Following passage ofthe JOBS Act, many filers were quick to take advantage of the newconfidential filing alternative. For disclosure requirements, however, potentialmarket reactions may lead an EGC to provide information that is no longermandatory. For example, will first tier investment banks, analysts orinstitutional investors expect to see a full three years of audited financialstatements (and related Management’s Discussion and Analysis of FinancialCondition and Results of Operations, or MD&A, disclosures) even though onlytwo years are legally required? Notably, the SEC has in the past attemptedvarious dual-track systems designed to alleviate reporting burdens for smallercompanies; however, the lack of market acceptance of scaled disclosure andthe companies’ inherent interest in avoiding a ‘‘small company’’ label hasdeterred many smaller companies from relying on scaled regulation.Nevertheless, it is possible that the availability of the exemption for companieswith almost $1 billion in annual revenues may remove the taint that mightotherwise discourage companies from taking full advantage of the JOBS Act’sexemptions and scaled disclosure.

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8. What are the public reporting requirements?

Public companies are required to file on a periodic basis a number of reportsand other documents (e.g., Forms 8-K, 10-K, 10-Q and proxy statements) withthe SEC, disclosing information about their business, management andfinancial results and condition. Furthermore, officers, directors and principalstockholders of a public company are required to file reports that disclose theirownership of, and transactions in, the company’s stock with the SEC.

In addition, companies that are listed on exchanges (such as NYSE Euronext(‘‘NYSE’’) or The NASDAQ Stock Market (‘‘NASDAQ’’)) must also complywith the disclosure and other requirements of these self-regulatoryorganizations (‘‘SROs’’), such as the need to issue press releases or postinformation on a company website regarding material events that occur. TheSEC and SRO disclosure rules obviously limit a public company’s ability tomaintain the kind of confidentiality about its operations typical of a privatecompany. (See Section IV, Parts A and C.)

9. One of our concerns is that, once the company is public, we may losecontrol of the company. Is there anything we can do to prevent that?

Any public company should prepare for the possibility that a raider or othercompany will take control of the company. There are, however, measures thecompany can adopt to provide adequate time and opportunity for the companyto respond appropriately to hostile takeover attempts. (These measures arediscussed in Section II, Part D.)

10. Once we’re public, are there any limitations applicable to how we use orinvest the money we receive?

Yes. First, the company is required to tell prospective investors in theprospectus how it expects to use the proceeds from the offering. While thesedisclosures are typically as general in nature as the SEC will permit to allowfor changed circumstances, companies must make a good faith effort toestimate the uses of the proceeds and to apply those funds accordingly, asappropriate. After the IPO, the company must report to the SEC in itsperiodic reports how the proceeds have been used until the proceeds havebeen exhausted.

A second restriction relates to how the company invests its funds after anoffering. The Investment Company Act of 1940 (the ‘‘1940 Act’’) regulatescompanies that are in the business of investing or trading in securities. TheSEC determines which companies are ‘‘investment companies’’ under the 1940Act, as opposed to ‘‘operating companies,’’ by looking at the nature of thecompanies’ assets and sources of income. While the rules are complex andthere are numerous exceptions, a company generally will be considered an

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‘‘investment company’’ subject to the 1940 Act if it engages in the business ofowning, holding or trading in investment securities with a value of more than40% of the value of its total assets. Investment securities basically include allsecurities other than U.S. government securities. After an offering, a companyshould carefully review its investment of the proceeds to stay clear of 1940 Actregulation.

B. The Public Offering Process.1. A number of different investment banks have contacted us about doing

a public offering. How do we select the best underwriter for us?

There are a number of factors to consider in selecting an underwriter. If thecompany does not have a preexisting relationship with an investment bank,management should consider factors such as reputation and expertise in thecompany’s particular industry, marketing strengths (including whether the bankwill sell primarily to institutional or retail customers), and the quality ofpost-public offering support, including the investment bank’s research analysts,market-making capabilities and strengths in other strategic areas (for example,mergers and acquisitions). A number of investment banks focus on workingwith companies in particular industries and are able to bring to the processspecialists with advanced degrees in the relevant field as well as businessexpertise. These skills are often critical in understanding a company’s businessand in recognizing its strengths and weaknesses. Investment banks will typicallyprovide a proposed valuation to the company. It is important to recognize thatthis valuation will change as the offering process proceeds and as theunderwriters continue their due diligence and gauge the market’s response tothe company. (See question 6.) As a result, while proposed valuation iscertainly a factor to be considered in selecting an underwriter, in most cases itshould not be determinative.

The company should also assess the underwriters’ level of commitment to thedeal and whether the underwriters have competitive offerings scheduled at thesame time as the company’s proposed offering (in which event the company’sdeal may receive less attention and may have to wait in the queue until otherdeals have been sold). In addition, management may want to talk toprospective underwriters about the composition of the potential investor groupthat they would prefer. For example, the company may prefer to allocate moreshares to institutions and other investors who are more likely to hold the stockover the long term, rather than investors that are more prone to turn theshares quickly. Management may want to quiz the bankers about any recentexperiences with ‘‘cratered deals’’ (deals that were commenced or even filedwith the SEC but were not successfully marketed). Of course, personalchemistry will always be a factor. It is critical that management have

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confidence that the underwriters will be able to tell the company’s ‘‘story,’’ todifferentiate the company from others in the field (including other clients ofthe underwriters) and to position it properly in the market. It has been typicalto select at least two investment banks to act as book-running managers, andsometimes as many as five or six banks are named on the prospectus cover.Experienced counsel can provide introductions to investment bankers and helpwith the evaluation and selection process. (See Part C.)

2. None of our management team has ever participated in the publicoffering process. What can we expect regarding timing andresponsibilities?

The ultimate responsibility for determining the timing of an offering is withthe company and, specifically, with the board of directors. However, once thegeneral scope of the timing has been determined, the underwriters willtypically prepare a time and responsibility schedule indicating key dates in theprocess and assigning responsibilities for the various tasks that must beaccomplished. A sample time and responsibility schedule is attached asExhibit A. This schedule is usually distributed at the first meeting of theworking group attended by ‘‘all hands,’’ the organizational meeting.

A typical IPO can take around 14 to 18 weeks from the organizational meetingto closing, although the length of the IPO process can vary significantly due toa number of factors, some of which are out of a company’s control(e.g., complications in the SEC review process, business issues, marketconditions, etc.). The public market for stocks in certain industries, forexample high technology, is especially volatile. While it is frequently said that agood company can complete an offering in any market, when particularmarkets are ‘‘hot,’’ many companies in that space position themselves to seekpublic capital as quickly as possible before the ‘‘market window’’ closes. Thewindow may close for any number of reasons, such as when investments bymajor institutional investors reach or exceed the proportion of the investors’portfolios intended for that industry, when other companies in that industryannounce disappointing results that make the market skittish about that space,or when political or economic events depress the market generally. Companiesthat are well prepared to move quickly are in the best position to controltiming and minimize market risk.

3. What happens at the organizational meeting?

Typically at the organizational meeting, the investment bankers (akaunderwriters), company, lawyers and accountants discuss timing, the size of theproposed offering, legal and accounting issues, the ‘‘road show’’ (see question23), due diligence and publicity matters. The underwriters will usually beinterested in understanding any stockholders’ registration rights, the price atwhich the company’s preferred stock will automatically convert into common

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stock, whether any existing stockholders should be invited to sell shares in theoffering, the status of current litigation and whether there are any outstandingclaims, whether the company plans to participate in any conferences or otherpublic meetings in the near-term, when audited financial statements for therelevant period will be available and other potential issues related to theoffering. To expedite the process, the organizational meeting is often combinedwith the first session on due diligence. (See question 17.)

A sample organizational meeting agenda is attached as Exhibit B.

4. Who attends the organizational meeting?

Typically, representatives of all of the key participants attend the meeting. Inaddition to designated members of management, these include theunderwriters, their counsel, company counsel and the company’s auditors.

5. What is the role of each of these participants in the process? To startwith, what are we expected to do?

Ultimately, the IPO is a public offering of shares of the company and, as aresult, the participation of management is critical to the process.

Management will be expected to prepare the ‘‘due diligence’’ sessions through aseries of presentations (see question 17), organize and provide data and otherdue diligence materials to the other participants, and participate in the draftingprocess by writing appropriate sections of the prospectus and reviewing draftsto ensure that the prospectus accurately reflects the company and its business.Management will also give presentations on the ‘‘road show’’ (see question23) and attend one-on-one meetings with prospective investors. Usually two orthree members of management (including the chief financial officer) assumeprimary responsibility for the offering process. The board of directors approvesthe offering, but typically a subcommittee of the board, designated as thepricing committee, approves the basic terms of the deal and negotiates theprice of the shares.

The underwriters also participate actively in the drafting and due diligenceprocesses and are responsible for the selling effort, including putting togethera group of investment banks (called the ‘‘syndicate’’), organizing the road showand marketing meetings, and coordinating other matters related to themarketing and sale of the shares. (See Part C, question 2.)

In addition to advising the company on compliance with the complex legalrequirements and other matters that may arise in connection with the IPO,company counsel coordinates the preparation of the draft prospectus andshepherds it through the group drafting sessions and the SEC review process.Company counsel also assists the company in selecting and coordinating withother participants in the process, such as the NASDAQ or NYSE

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representatives, printer, transfer agent and banknote company, and participatesin negotiation of the underwriting agreement. Typically, company counsel willreview the company’s charter documents and legal records with a view towardrecommending actions to prepare the company for its status as a publiccompany, such as stockholder protection measures. Company counsel alsoconducts due diligence on the business, addressing any legal issues that mayemerge out of the process.

If the company has separate patent or regulatory counsel, they may be asked tobe available for discussions with the working group, to review appropriatesections of the prospectus and, in many cases, to render an opinion to theunderwriters on patent-related or regulatory issues. The company shoulddetermine early in the process if an opinion will be required and the potentialcosts involved.

Underwriters’ counsel advise the underwriters on legal issues that may arise,participate on behalf of the underwriters in the drafting process, coordinatereview by the Financial Industry Regulatory Authority (‘‘FINRA’’) of theunderwriting arrangements and by state authorities of the offering underapplicable state securities laws (‘‘Blue Sky’’), prepare the underwritingagreement and conduct due diligence.

The company’s auditors conduct an audit of the company’s books and recordsand prepare financial statements that comply with SEC requirements, examinethe company’s internal control over financial reporting and identify anymaterial weaknesses or significant deficiencies, provide advice concerningaccounting issues that may arise in connection with the offering and participatein preparation of the prospectus as it relates to accounting matters, includingthe section entitled ‘‘management’s discussion and analysis of financialcondition and results of operations.’’ The auditors will usually also address anySEC comments related to accounting issues. Finally, in response to requests bythe underwriters and their counsel, the auditors prepare ‘‘comfort’’ letters(often referred to as ‘‘cold comfort’’ letters) delivered to the underwriters uponeffectiveness of the offering and at closing, which describe the procedures andscope of the auditors’ review of the prospectus.

There are a number of other parties that play roles of varying degrees ofimportance to the process. The company will need to select a financial printerthat will print the prospectuses. While the first drafts of the prospectus willgenerally be produced by company counsel, at an appropriate point,responsibility for generating revised drafts, filing the registration statement onthe SEC’s online computer database, EDGAR, and printing the prospectus willshift to a financial printer, at whose offices the final drafting sessions will beheld. The printer must be experienced, produce a high quality product and betimely, accurate and cost-effective in responding to revisions prepared by theworking group.

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The company will also need to select a transfer agent and probably a banknotecompany. The transfer agent, typically a specialized stock transfer company ora commercial bank, will assume responsibility, following the IPO, for effectingtransfers in the company’s shares and coordinating mailings to stockholders,for example, in connection with the company’s annual meeting of stockholders.The company may also select a new stock certificate to be issued to the publicstockholders after the offering. The banknote company will discuss the designof the certificate with the company and print the certificates. Today, manycompanies are electing to minimize the costs associated with the physicalissuance of stock certificates by enrolling in the Direct Registration System inwhich stock positions of stockholders are held in notational entry. Experiencedcounsel can recommend to the company appropriate financial printers, transferagents and banknote companies.

6. How is the price range of the stock determined?

The price range of the company’s stock traditionally is determined bynegotiations between the company and the underwriters, based on thevaluation of the company prepared by the underwriters. The valuation isprepared after a study of current market conditions, comparable companies inthe industry, past and projected financial performance, product or technologyposition, management team, potential for growth and new products indevelopment. It is important that the company discuss valuation at the earlieststages of the offering, including as part of the process of selecting aninvestment bank. Understanding the principles that will be applied and thecomparable companies that will be considered will help the company betterunderstand the variations in valuation that may occur as the offeringprogresses. The company should also take an active role in identifyingcomparable companies in the industry. Typically, the underwriters and thecompany will agree on a range of prices at the outset, which will be refinedbefore filing, with the exact price of the shares determined just prior tocommencement of the offering, based on the market and the reaction ofpotential purchasers to the offering. (See question 24.)

7. How do we know how much stock to sell?

The company and the underwriters will agree on the size of the offering bytaking into account the company’s capital needs, dilution to existingstockholders, the level of public ‘‘float’’ desirable to achieve an active tradingmarket and liquidity for current stockholders, market receptivity and proposedprice per share. The underwriters will also be granted an ‘‘overallotment’’option (sometimes called the ‘‘green-shoe option’’ because the Green ShoeCompany was reportedly the first issuer to provide such an option) to purchaseadditional shares at the IPO price, typically 15% of the original offering,within a specified period after the offering commences, usually 30 days. The

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option may be exercised only to cover overallotments, that is, to cover theunderwriters’ short positions where the offering has been oversold.

8. What if the underwriters think we need to sell more shares to achieve adesirable public float than we want to sell?

If the underwriters want to sell more shares than the company is willing to sell,the underwriters may invite certain stockholders to offer shares they own forresale as part of a ‘‘secondary’’ component of the offering. Moreover, somestockholders may have rights to sell shares in the offering under registrationrights agreements. These rights can usually be limited if the underwriters donot want to include selling stockholders because they believe that an offeringlimited to company shares (the ‘‘primary’’ offering) is optimal or wheremanagement or significant investors may be perceived as ‘‘bailing out’’ if theymake substantial sales.

9. Why would a stockholder want to sell in the offering? Can’t existingstockholders sell in the open market once the company is public withoutthe liability and costs associated with the IPO?

Stockholders may be able to sell their shares in the public market after theIPO, depending on the length of time they have held their shares and howthey acquired them. (See Section IV, Part D.) However, underwriters typicallyseek lock-up agreements from each stockholder, which prohibit the stockholderfrom selling shares without consent of the underwriters for a specified period(often 180 days plus an additional number of days related to the timing of thepublication of analysts’ reports) following the IPO, in order to maintain anorderly aftermarket. Even if the stockholder is not willing to sign a lock-upagreement, most agreements under which stockholders acquire their stock havea provision prohibiting the sale of stock during the first 180 days after an IPO.In addition, stockholders selling in the aftermarket bear the risk that the stockwill drop below the IPO price after the stock has been trading publicly.However, stockholders in the IPO will typically pay higher commissions, maybe required to share in some of the costs of the offering and will often havesome exposure to liability for aspects of the prospectus. These variables willdepend in part on the terms of the registration rights of the stockholders, theirrelationships to the company, as well as on negotiation of the underwritingagreement with the underwriters.

10. Is there a way to ensure that the company’s employees, suppliers orother friends have the opportunity to purchase stock in the offering?

An IPO provides an opportunity for employees to purchase company stockwhich is readily tradable in the market. Many companies encourage thesepurchases and may also want to allow customers, strategic partners, suppliersor other business partners of the company to buy stock in the offering. These

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persons can contact their brokers or one of the underwriters and buy stock aswould any member of the public. In addition, subject to compliance with SECand FINRA rules and with the internal guidelines of the underwriters, thecompany can establish a ‘‘directed shares’’ program. These programs allowcompanies to direct a portion of the offering to persons designated by thecompany. Typically, no more than five percent of the shares offered arereserved as directed shares, but occasionally offerings involve much largerprograms. Larger programs can involve disclosure to FINRA and in theprospectus including, in some cases, on the cover page of the prospectus. It isimportant to ensure that all participants strictly adhere to legal requirementsin implementing directed shares programs. Companies sometimes decide thatthe advantages of a directed share program are outweighed by the potentialrisk for unhappiness — and even animosity — among employees, customersand other business partners if the stock price declines following the IPO.

11. How is the registration statement prepared? Who prepares it?

The initial draft of the registration statement is usually prepared by thecompany and company counsel. The first draft of the business section of theprospectus is frequently prepared by the company, often with assistance fromcompany counsel. After the initial draft is prepared and circulated to theworking group, the working group will meet a number of times to revise thedocument. Through this iterative process, the working group seeks to preparea prospectus that reflects the most accurate and complete picture of thecompany and, with substantial guidance from the underwriters, to position thecompany’s securities in the market appropriately. When this process iscomplete (after usually three to six weeks), the finished registration statementis filed electronically with the SEC.

12. What is the difference between a registration statement and aprospectus?

The registration statement is the complete document filed with the SEC. Itcontains the glossy prospectus, as well as additional required information thatis publicly available but is not generally distributed to the investors. Theregistration statement will also include a number of exhibits, such as charterdocuments and agreements that the company considers material to its business.

13. We have been hearing about a type of prospectus called a ‘‘free writingprospectus.’’ How does it differ from a regular prospectus?

A free writing prospectus is a written (including electronic) communicationthat constitutes an ‘‘offer’’ of the securities, but is not a prospectus thatcomplies with statutory prospectus requirements, unlike a preliminaryprospectus, and is not considered to be part of the registration statement.While the ability to use a free writing prospectus greatly expands the nature of

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communications permitted before and during an IPO, care must be taken toensure that it is used correctly. In connection with an IPO, a free writingprospectus may be used only if it is accompanied or preceded by a preliminaryprospectus that includes a price range. In the case of an electroniccommunication, an active hyperlink to the preliminary prospectus would satisfythis delivery requirement. Generally, free writing prospectuses are required tobe filed with the SEC on the day they are first used (see Section III, Part B,questions 10-29.)

14. A number of our material agreements, such as product licenses andsupply agreements, contain highly confidential information. When theyare filed with the SEC, will our competitors then be able to obtain thatinformation?

A company must file all agreements that are material to its business (otherthan those made in the ordinary course of business) as exhibits to theregistration statement. These agreements become public information and areavailable online through EDGAR. However, when documents containinformation that the company considers confidential, the company may seek toprotect that information from public disclosure by requesting that the SECgrant confidential treatment of specified portions of the document. Therequest must be very narrowly framed, as the SEC will grant confidentialtreatment for only those specific portions disclosure of which could harm thecompany’s legitimate business interests by causing competitive injury, such aspricing terms, technical specifications and milestone payments. Confidentialtreatment, however, is not appropriate for information that is material toinvestors. A copy of the exhibit, with confidential portions carefully redacted, isfiled electronically with the SEC and is available in that form to the publicthrough EDGAR. An unredacted version of the exhibit is filed in hardcopyformat with the SEC, along with a letter requesting confidential treatment.Documents relating to third-party relationships (such as licenses, corporatepartner arrangements or joint ventures) often require special planning becausethey may require input from the third party with regard to the extent of theredactions. This process can be especially difficult where foreign parties havenot had previous experience with the U.S. securities laws. Requests forconfidential treatment for IPOs are always reviewed and commented upon bythe SEC and must be cleared with the SEC prior to effectiveness of the IPO.As a result, it is possible that delays in such clearance (for example, because ofprolonged negotiation with the SEC over the scope or duration of confidentialtreatment) could cause a delay in the offering.

15. What kind of information is provided in the prospectus?

Most of the attention of the working group is focused on preparation of theprospectus. The prospectus begins with a Summary, which presents a synopsis

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of the key elements of the prospectus. In practice, the Summary is the part ofthe prospectus most often read by prospective investors. As a result, great careis taken to craft the Summary to convey the company’s story as clearly andsuccinctly as possible. Often the Summary is one of the last sections drafted toensure that it properly captures the most important aspects of the company’sbusiness, including the risks related to the business. Sometimes the Summaryand other sections of the prospectus include a ‘‘sensitivity analysis,’’ whichdescribes the impact of a range of potential stock prices and deal sizes on theoffering, including the effect on the company’s potential use of proceeds andthe dilutive effect on stockholders and new investors.

Following the Summary is the Risk Factors section of the prospectus. Thissection is intended to alert investors to the key risks and challenges facing thecompany. The Risk Factors section should be carefully crafted to identify therisks specific to the company. In addition, the substance of the most criticalrisks described under the Risk Factors section is frequently also incorporatedinto the appropriate sections of the text of the Business section. The RiskFactors section does not usually present a balanced view of the company;rather, it highlights the risks for potential investors and serves as importantprotection for the company in the event of stockholder litigation.

The Use of Proceeds section includes a description of how the company plansto use the proceeds of the offering in its business. The company should beable to support, by projections or otherwise, the proposed uses for theproceeds and to allocate the proceeds to planned uses.

The Management’s Discussion and Analysis of Financial Condition and Results ofOperations contains an analysis of the financial statements for at least the mostrecent three fiscal years (or, if the company is an EGC, at its option, two fiscalyears (see below)) and any applicable interim periods. The analysis provides ayear-to-year and period-to-period comparison, focusing on material changesand the causes for those changes, known trends, commitments or uncertaintiesthat are reasonably likely to affect future performance, as well as unusual ornonrecurring events that could cause the historical results to be a misleadingindicator of future performance. For example, the receipt of a substantial,one-time-only license fee should be called out specifically as a factor where ithas affected one quarter but will not recur in future quarters.

This section of the prospectus has been the source of significant SEC scrutiny.In particular, the SEC has made clear that the MD&A section is intended togive the public an ‘‘opportunity to see the company through the eyes ofmanagement.’’ Thus, while ‘‘projections’’ are not required, MD&A doesrequire a forward-looking analysis of the effect of known trends, events oruncertainties on financial results and liquidity, including information that maynot be evident on the face of financial statements. SEC rules requirecompanies to provide disclosure in the related areas of liquidity and capital

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resources, including historical information on sources of cash and cashexpenditures, an evaluation of cash flows, the existence and timing of capitalexpenditure commitments, a description of expected changes in the mix andrelative costs of capital resources and an indication of which balance sheet orincome or cash flow items should be considered in assessing liquidity. Asmentioned previously, sometimes MD&A includes a ‘‘sensitivity analysis,’’which describes the impact of a range of potential stock prices and deal sizeson the offering, including the effect on the company’s liquidity and capitalresources. A company must evaluate separately its ability to meet upcomingcash requirements over both the long and short term and, where relevant to anassessment of financial condition, its cash management and risk managementpolicies. Amounts payable under contractual obligations must be presented intabular form, and any off-balance-sheet arrangements must be disclosed. Inaddition, the SEC has focused its attention on the disclosure of a company’scritical accounting estimates and assumptions and has issued interpretiveguidance asking companies to consider enhanced discussion and analysis ofthese factors.

The Business section provides a narrative description of what the company isabout, its strategy, products, or products in development, technology,manufacturing and marketing. While there are requirements with regard tocertain matters to be discussed, for the most part, this section can becustomized in terms of presentation and substance. The goal of the Businesssection is to present a coherent picture of the company, its history, strategyand goals, as well as to convey an understanding of how the companydifferentiates itself from others in the industry. Potential risks, such astechnological uncertainties or reliance on collaborative relationships, arehighlighted throughout. The final product will reflect a resolution of thetension that exists between the need to provide complete disclosure of all risksof the investment and the desire to describe the company in a manner that isattractive to investors and that does not reveal sensitive or competitiveinformation.

If the company’s products are based on complex technology, to helpprospective investors understand that technology, the Business section willfrequently include a background section designed to explain the perceivedmarket need the company is addressing and how the technology works.

Whether or not to include projected availability dates of new products istypically a subject of some debate. While many believe that disclosure of theprojected timeframe is important to effective marketing of the offering,companies must also consider the risk that the target date will not be achievedbecause of unanticipated setbacks. In that event, disclosure of the delay maybe required in the company’s subsequent offerings, quarterly or annual filingsor other disclosure documents, or possibly in a press release, disappointingboth analysts and investors and perhaps precipitating SEC comments or even

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lawsuits. This risk is exacerbated when the target dates or expectations relateto circumstances outside the company’s control, such as regulatory approval. Inmany cases, disclosure of delays in achieving target dates would not otherwisehave been required if the target date had not been disclosed initially. In anyevent, if target dates are disclosed, the company must ensure that there is areasonable basis for the claim, that it is not contradicted by other informationavailable to the company and that appropriate cautionary language is includedwith each statement. Companies must guard against overly optimisticprojections, taking into consideration the possibility of unforeseeable delays.

The Management section provides biographical information about officers anddirectors (for at least the last five years, and with regard to certain legalproceedings, the last ten years) and describes executive compensation,employee benefit plans and insider transactions. Under SEC rules, extensivedisclosure of all forms of executive and director compensation (cash andnon-cash) must follow certain prescribed tabular and narrative formats,including a ‘‘Compensation Discussion and Analysis’’ that is similar to MD&Aabove. Also included is a discussion of board committees and directorindependence.

Audited financial statements are also required, including balance sheets as ofthe end of the last two fiscal years, and statements of cash flow, stockholders’equity and income statements for the three most recent fiscal years. EGCs arenot required to include more than two years of audited financial statements, asopposed to the usual requirement to include three years, with a correspondingreduction in their MD&A disclosures. In addition, if an EGC presents onlytwo years of audited financial statements in its IPO registration statement, itmay limit the number of years of selected financial data to two years as well.

Unaudited interim financial statements are required for offerings that becomeeffective 135 days or more after the end of the most recent fiscal year. Thefinancial statements must conform to generally accepted accounting principles(‘‘GAAP’’) and to SEC accounting requirements (which are more restrictivethan GAAP in some circumstances). A company may use the occasion of itsIPO to review carefully and refine its accounting policies and practices, as wellas its financial statement presentation.

Photographs, illustrations and graphs are not required but are often included inprospectuses. Many companies often find that diagrams or illustrations assistthose readers without technical backgrounds to understand complex processes.Color photographs or illustrations add to the cost of printing and, because theyrequire additional lead time, should be considered early in the process.

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16. I understand that prospectuses must be drafted in ‘‘plain English.’’What does that mean?

The SEC requires that certain sections of the prospectus be drafted inaccordance with the SEC’s ‘‘plain English’’ rules. These rules require the useof short sentences, active voice, everyday words and clear presentations, suchas tabular and bullet point formats. In addition, under SEC rules, allinformation presented in the prospectus, even if not contained in sectionsdesignated as ‘‘plain English’’ sections, must be clear, concise andunderstandable, applying specified drafting standards throughout thedocument. These standards include requirements to avoid legal and technicalterms, glossaries, unnecessary repetition and imprecise boilerplate. Whenpossible, the prospectus should be drafted using short explanatory sentences,descriptive headings and bullet point lists.

17. What is due diligence? Who does it?

‘‘Due diligence’’ is the term used to describe the process undertaken bycompanies, underwriters and their respective counsel to verify the accuracy ofinformation contained in the prospectus, to determine whether additionalinformation should be disclosed or whether problems or risks exist that needto be addressed or disclosed, and to conduct the ‘‘legal audit’’ of thecompany’s corporate records. The company should ensure that all of itsparticipants in the offering are aware of the importance of complete candorwith the underwriters and counsel in the due diligence process. The duediligence process typically starts at the organizational meeting withpresentations on various aspects of the business (such as product strategies,finance, technology, manufacturing, marketing, etc.) by key management,typically lasting one-half to two days. The underwriters, their counsel andcompany counsel will typically ask numerous questions to understand thecompany’s business, its products (whether on the market or in development)and markets or potential markets. It is in these sessions that the company’s‘‘story’’ begins to take shape. Thereafter, due diligence is conductedthroughout the IPO process. In drafting sessions, the participants criticallyreview the disclosures made, and may sometimes even challenge management,with a view toward disclosing risks particular to the company and general tothe industry and ensuring the accuracy of the information presented. Inaddition, counsel and the underwriters will be conducting separate reviews thatmay include a study of the company’s technology and patent position,discussions with the auditors, interviews with customers and employees, reviewof environmental issues, analysis of projections, business plans and productstrategy and a review of industry publications. Counsel for the underwriterswill furnish the company with a due diligence request list that will require thecompany to supply substantial amounts of information and make its records

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available for analysis and verification. A sample due diligence list is attachedas Exhibit C.

Some of the information collected may even be used to respond to questionsfrom the SEC as part of the regulatory review process. For example, if, in theprospectus, the company claims to be a leader in its market, it may be askedto provide independent support for that contention as part of the due diligenceprocess. Even if the statement is only one of ‘‘belief’’ — for example, thecompany believes it is a leader — the company should be able to demonstratethat it has a reasonable basis for that belief, e.g., by reference to articles intrade surveys or industry publications. The information collected will also beuseful in responding if the SEC asks for support of that statement (which islikely) and may also be a part of a collection of due diligence materials knownas a ‘‘back-up book,’’ put together for the company’s benefit by companycounsel. In any event, the company should be sure that documentation in thecompany’s files supports the assertions made in the prospectus. Anyinformation known to the company that would tend to undermine thoseassertions should be brought to the attention of counsel so that the issue maybe addressed.

As part of corporate due diligence, counsel for the company and counsel forthe underwriters will be conducting a legal audit of the company’s corporaterecords, including reviewing board and stockholder minutes, charterdocuments, qualifications to do business and other matters. Informationrelated to officers, directors, principal stockholders and key employees isobtained through a questionnaire that each will be required to complete.

The due diligence process is designed to ensure that the final prospectus isaccurate and complete and, should it turn out that the company experiencesdifficulties, to provide a legal defense to the directors and underwriters in theevent a lawsuit is filed.

18. Can you explain the SEC review process?

After the registration statement is filed electronically with the SEC, it isforwarded to the branch of the SEC’s Division of Corporation Finance thatcovers the particular industry involved. There, it will be assigned to anexaminer who will review the business and legal aspects of the document, aswell as to an accounting examiner who will review the financial aspects. Theseexaminers will do a preliminary review, which will then be discussed with theirsupervisors, such as the branch chief or assistant director. Approximately30 days (or longer in some instances) after the registration statement is filedwith the SEC, the SEC will issue to the company a comment letter on theregistration statement. The letter will contain a number of comments andquestions that the SEC staff believes need to be addressed eithersupplementally or in the prospectus itself. The SEC does not comment on the

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merits of the offering. Rather, its focus is on whether there has been adequatedisclosure. For example, the SEC may ask the company to discuss in moredetail the impact of a proposed business expansion or to provide supplementalinformation to support qualitative factual assertions in the prospectusregarding the company’s expertise or innovative developments. On the whole,for companies without established products, the SEC’s primary focus isfrequently to make clear to prospective investors the limitations of thecompany’s achievements to date and the nature of the challenges that must bemet prior to commercialization of any product.

Companies respond to SEC comment letters by letter and, if necessary, byamending their registration statements. This process will continue iterativelyuntil the SEC is satisfied that all of its comments have been resolved. Both theSEC comment letters and the company’s response letters will be publiclyavailable on EDGAR no earlier than 20 business days after the effective dateof the registration statement.

The SEC reviews all IPO registration statements. The SEC may decide not toreview or to conduct a limited review of a registration statement in asubsequent offering, but this determination is within the SEC’s discretion andshould not be counted on in any offering.

19. We’ve heard that some companies are submitting IPO registrationstatements confidentially to the SEC. What are the advantages of thisroute?

EGCs are permitted to initiate the IPO process by submitting their IPOregistration statements confidentially to the SEC for initial nonpublic review bythe SEC staff. The EGC must, however, make the entire filing public at least21 days before it commences its ‘‘road show’’ (see question 23). The SECcomment letters and the EGC’s responses will be made public no earlier than20 business days after the effective date of the registration statement, in thesame manner as a non-EGC going public (see question 18, above). Thisconfidential process will allow an EGC to defer the public disclosure ofsensitive or competitive information until it is almost ready to market theoffering — and potentially to avoid the public disclosure altogether if itultimately decides not to proceed with the offering. There is no filing fee forthe confidential submission because it is technically not a ‘‘filing.’’ The filingfee is due when the registration statement is first filed publicly on EDGAR.

20. How do we respond to the SEC’s comments?

The company, through its counsel, will respond to the SEC comments by letterand, where appropriate, with changes to the prospectus, which will be filed aspart of an amendment to the registration statement. Most often, wherecompliance with an SEC comment is not burdensome or adds effective

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disclosure, the company will comply with the request even though, in somecases, the new disclosure may seem unnecessary. However, in some instances,the company will be unable to provide the requested disclosure or willotherwise disagree with the comment. In those cases, the company may contestthe comment. For example, where the comment would require disclosure ofinformation that the company believes to be uncertain or perhaps evenmisleading to investors, the company may decide to resist the SEC’s request.This comment and response process may continue through an exchange ofseveral letters, telephone calls and amendments over a period of a few days toa few weeks, depending on whether the company and the underwriters accedeto all of the SEC’s requests or decide to contest some of them. When thisprocess is complete, the company and the underwriters are in a position to askthe SEC for ‘‘acceleration’’ of the registration statement, that is, to declare theregistration statement ‘‘effective.’’

21. When do we print the preliminary prospectus? What about the finalprospectus?

To inform prospective investors about the company and the offering, theunderwriters will distribute a preliminary prospectus, often called a ‘‘redherring’’ (‘‘red’’ because a legend on the cover indicating that the prospectus ispreliminary is typically printed in red and ‘‘herring’’ because of the bad odorthat historically emanated from the ‘‘blueline’’ proof of the document that hadto be reviewed prior to clearance for printing). The preliminary prospectususually is not printed until all material SEC comments have been received andresolved and the company is ready to begin the road show.

The preliminary prospectus will omit certain information that is dependent onthe offering price and the composition of the underwriting syndicate, whichwill be determined after the underwriters have had a chance to assess theinterest in the offering. This omitted information will be included in the finalprospectus, which will be printed after the SEC declares the registrationstatement effective and the pricing committee of the board has approved theoffering price, most often within the price range disclosed in the red herring.

22. If the company and the underwriters have already distributed the redherring prospectus, what happens if we are required to make additionaldisclosures because of subsequent SEC comments or because facts orevents at the company have changed?

Notwithstanding efforts to resolve SEC comments prior to printing of thepreliminary prospectus, the SEC may continue to raise issues and will notdeclare the registration statement effective until these issues are resolved. Inaddition, facts or events at the company may change between the date ofprinting the preliminary prospectus and the completion of the offering.Because liability under the securities laws is assessed at the time an investor

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orally agrees to purchase the securities immediately after pricing (as well as atthe time of effectiveness of the registration statement), the company and theunderwriters will want to be sure that all important information relating to theoffering and the company has been conveyed to the investor prior to that time.This information may be communicated orally by the underwriters, by‘‘recirculation’’ of a revised preliminary prospectus or by e-mail or fax incompliance with the ‘‘free writing prospectus’’ rules discussed in more detailbelow. The appropriate means to convey the information will depend on thecircumstances, including the complexity and length of the disclosure, theimportance of the information, the extent to which the information is thesubject of other publicity, the time available to convey the information, theimportance of maintaining a written record of the information conveyed andthe type of investors in the offering.

23. The underwriters keep referring to the ‘‘road show.’’ What is a roadshow and who pays for it?

The road show is a series of informational meetings organized by theunderwriters at which management of the company make presentations aboutthe company, its business and its strategy to institutional investors and otherprospective purchasers of the company’s stock. These meetings are set up atselect cities across the U.S. and frequently in Europe, and typically includepresentations to large audiences of potential investors, followed by one-on-onemeetings. These presentations often include slide presentations, graphs orother materials prepared by the company or the underwriters, although hardcopies of these materials are not distributed. Frequently, an electronic versionof the road show (including a video of the presentations and slides, graphs orother materials) is posted on a website such as NetRoadshow orRetailRoadshow, where downloading of materials (other than the registrationstatement or other publicly filed materials) is strictly prohibited. The roadshow can be a grueling two to three weeks and is usually scheduled toconclude just prior to the anticipated effective date of the offering. Researchanalysts from the underwriters’ investment banking firms may not participatein or attend any road show, nor may they discuss any information relating tothe company’s offering while company personnel are present, during roadshows or otherwise.

While responsibility for the costs of the road show are subject to negotiation,the underwriters typically pay the general expenses of the road show itself,such as the cost of renting the meeting rooms, and the underwriters and thecompany will each pay the cost of their own airfare and hotel rooms.

24. When is the stock price actually determined? When do we start trading?

After the SEC review process is complete, the company and the underwriterswill request that the SEC declare the registration statement effective by

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submitting a ‘‘request for acceleration.’’ In a typical underwriting, thecompany, usually with a pricing committee of the board of directors, and theunderwriters will negotiate the price at which the stock will be sold to thepublic, usually during a conference call held after the stock market closes onthe day the registration statement is declared effective. This actual price isusually, but need not be, within the range of prices indicated on the coverpage of the preliminary prospectus. The price is determined primarily on thebasis of market conditions prevailing at the time of pricing and the demand forthe company’s stock, that is, how successful the underwriters have been inselling the stock and filling their ‘‘book’’ (which reflects non-bindingindications of interest in purchasing shares). Because the prospectivepurchasers do not make binding commitments to purchase the shares, manyinstitutions and other prospective investors will order more shares than theyactually expect to buy, hoping to secure the desired allocation. As a result, theunderwriters’ book is often oversubscribed so that it exceeds the actual numberof shares to be sold by the company, often by a factor of two or more andsometimes by factors of 20 or 25. However, the book is price sensitive, and thelevel of interest may drop off — sometimes sharply — to the extent that thestock price is set at higher levels.

To keep the pricing committee advised about demand for the offering andassist the committee in price negotiations, the managing underwriter isrequired to provide to the pricing committee regular reports of indications ofinterest from institutional investors and a report of aggregate demand fromretail investors. The underwriters will generally try to price the shares slightlybelow their target price to allow the stock room to move up in theaftermarket. Allowing investors to see some price appreciation in theaftermarket can give them confidence to hold the shares over the longer term.

Once the registration statement is effective and the deal is priced (includingthe signing of the underwriting agreement), trading in the stock willcommence, typically the morning after pricing, on the market on which thestock is listed, usually NASDAQ or the NYSE. Before the opening of trading,the syndicate sales force will frequently call customers to confirm the sales. Seequestion 9 of Part C for a discussion of the ‘‘Dutch auction’’ process and howit differs from the typical pricing process.

25. How does our stock become traded on NASDAQ or the NYSE?

To be traded on NASDAQ or the NYSE, the company must file an applicationand satisfy specified financial and corporate governance criteria of theparticular exchange. As part of its application, the company must select atrading symbol different from those already used by other companies.

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26. When do the underwriters pay us for our stock?

The underwriters pay for the shares they have purchased at the closing, whichusually occurs three business days after the date of commencement of theoffering (when the shares are first traded). The underwriters usually have30 days to exercise the ‘‘overallotment’’ option. (See question 7.)

27. What is the company’s liability if there is a problem with the prospectusor a free writing prospectus?

Securities laws regulating IPOs (and other registered public offerings ofsecurities) are geared, in large part, toward ensuring that sufficient disclosureof relevant information is made to permit potential investors to make aninformed investment decision. Under the Securities Act of 1933 (the‘‘Securities Act’’), purchasers of a company’s securities in a registered offeringhave private rights of action under Section 11 for materially false or misleadingor materially deficient disclosure in a registration statement at the time ofeffectiveness. Section 11 extends potential liability to certain persons associatedwith a registered offering of securities, including underwriters, directors, namednominees for director and certain officers who sign the registration statement.However, Section 11 liability may be avoided in some circumstances byunderwriters, directors and officers (but not by the company) if they canestablish a ‘‘due diligence defense’’ by showing that, after undertaking areasonable investigation, they reasonably believed that the statement at issuecontained in the registration statement was accurate and complete.Nevertheless, underwriters, directors and officers are often named asdefendants in Section 11 lawsuits, and even a successful defense is expensive,time-consuming and unpleasant.

Liability for materially false or misleading statements in prospectuses, freewriting prospectuses and even oral communications may also be imposed uponsellers of the securities under Section 12(a)(2) of the Securities Act. As notedabove in question 22, liability under this section is determined at the time ofthe contract of sale, when the investor makes his or her investment decision.As a result, the company and the underwriters typically take steps to ensurethat all material information has been provided to potential purchasers at thatpoint.

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C. Underwriting.1. What are underwriters? What do they do?

Underwriters are investment banks and other securities firms that agree topurchase the shares from the company and any selling stockholders at adiscounted price. They in turn sell those shares to investors at the publicoffering price. The underwriters work with the company to determine the sizeof the offering and the price of the shares and to market the offering with theultimate goal of generating high demand for the shares at favorable pricingamong a good mix of quality investors.

2. Many IPO prospectuses include a long list of underwriters on the frontand back covers and in the ‘‘Underwriting’’ section. We’ve been talkingwith representatives from only two investment banking firms. Is thisunusual?

There are different levels at which investment banks and other securities firmsparticipate in an IPO. These levels have a variety of designations that sometimesvary from deal to deal depending on the particular investment banks involvedand the number of firms in each category. The underwriting firms that are mostactively involved in the IPO process (e.g., attendance at all hands meetings anddrafting sessions, as well as participation in due diligence activities) and withwhom the company has the most direct contact are typically referred to as the‘‘lead managers.’’ Some or all of the lead managers are designated as‘‘book-running managers,’’ which means they are the most active lead managersand are primarily responsible for controlling the ‘‘book’’ of orders that is beingbuilt throughout the process of marketing the offering. While some IPOs haveonly a single book-running manager, most today include multiple book-runners,referred to as ‘‘joint book-running managers.’’ The theory is that the multiplebook-running managers will have joint responsibility for decision-making andrunning of the IPO, and the company will benefit from additional effort andadvice. The joint book-running manager structure can also be highly beneficialin marketing the IPO, especially when joint book-running managers are engagedthat have different areas of marketing focus and expertise. In addition, if jointbook-running managers are employed and one drops out of the process, there isnormally significantly less disruption than if there is a sole book-runningmanager and that investment bank drops out. Different investment banks andbankers can have very different personalities and take very different approaches.Therefore, it is important that company management set the tone forcooperation among book-running managers early on, and it is often important todelineate responsibilities among the joint book-running managers from the start(e.g., one investment bank being the primary bank driving the drafting process).Sometimes, terms like ‘‘active’’ and ‘‘passive’’ book-runners are used in the case

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where a bank desires to be designated as a book-runner but does not have thesame level of responsibility (and often, economics) as the other book-runners.

The other underwriters named on IPO prospectus covers are referred to as‘‘co-managers.’’ The level of co-manager participation on IPOs varies fromdeal to deal. For example, on some IPOs, the co-managers attend everydrafting session. On other IPOs, the co-managers are not even brought intothe underwriting group until much later in the IPO process, closer to theactual marketing of the offering. Some IPOs include a mezzanine level ofunderwriter that lies between the book-running managers and theco-managers — often referred to as the ‘‘lead co-managers.’’ In addition, theunderwriters may wish to facilitate a broader distribution by selling a portionof the offering through selected dealers that do not participate in the offeringas underwriters.

On the front cover of an IPO prospectus, the ordering of the investment banknames generally reflects the roles and economics of the various underwriters,with the roles/economics generally decreasing from left to right and from topto bottom on the cover. Investment banks with otherwise similar roles andeconomics are typically ordered alphabetically on the prospectus cover, thoughthat can vary based on factors such as the dynamics among the banks on thatparticular deal as well as company preferences. The lead managers often wantto include labels on the IPO prospectus cover showing the various designationsand sub-designations of all the underwriters, but the SEC has largely endedthis practice in connection with IPOs (though such labels are often included onfollow-on offering prospectus covers).

The investment banks need to address certain issues among themselves andwith the company up front, including:

• What are the various banks’ roles?

• What are the economics among the banks?

• Which bank’s form of underwriting agreement and lockup agreementwill be used?

• Which banks will be release agents (having the right to releaseindividuals from their lock-up obligations, etc.)?

• Which bank’s prospectus style will be used, or whether instead a‘‘neutral style’’ should be used?

3. What are some of the factors we should consider in choosingunderwriters for our IPO?

Some of the factors companies typically consider in choosing their IPOunderwriters include

• reputation;

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• familiarity with the company and its industry;

• personalities and expertise of the particular bankers seeking to work onthe transaction;

• the roles and economics the bank is seeking in connection with theIPO;

• breadth and quality of sales force and equity capital markets group;

• preliminary valuation;

• after-market support;

• the nature of the investors — retail or institutional, short- or long-termholders — to which the bank will primarily be marketing the shares;

• the quality of analyst coverage (though it cannot technically be linked tothe IPO);

• the level of priority a particular bank places on this transaction; and

• the bank’s track record for continuing to support companies post-IPO,particularly in times of difficulty.

4. What does the underwriting agreement do?

The underwriting agreement formalizes the obligations of the parties inconnection with the purchase by the underwriters and sale by the company andany selling stockholders of the stock for the IPO. The underwriting agreementis not signed until after the stock is priced, which occurs after the registrationstatement is declared effective by the SEC and the road show takes place. (SeePart B, question 24.) Although most of its terms typically will have beennegotiated ahead of time (most banks insist that the underwriting agreementbe substantially negotiated and related issues resolved before the initial filingof the registration statement), these obligations do not take effect until thislate stage of the offering. Even then, the underwriters can be relieved of theirobligations to purchase the stock at the closing based on a number ofprovisions in the underwriting agreement (for example, if a major adversefinancial event occurs — often referred to as the ‘‘market out’’ provision —between the pricing and the closing a few days later). And though theunderwriters have been spending significant time and resources working on thecompany’s IPO, contractual payment/reimbursement obligations are notformalized until this late stage in the IPO process when the underwritingagreement is signed. Other provisions contained in the underwriting agreementinclude representations and warranties by the company, closing conditions,such as the delivery of legal opinions and the accountant’s ‘‘comfort’’ letter,and indemnification provisions.

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5. How are the underwriters compensated?

Except for reimbursement of certain expenses pursuant to the underwritingagreement (e.g., for expenses incurred in making any Blue Sky or FINRAfilings discussed below), the underwriters are not directly compensated by thecompany for their services in the IPO. Instead, the underwriters receive anunderwriting discount/commission equal to a percentage of the gross proceedsreceived from the sale of the company’s stock sold in the offering. In an IPO,this commission is typically 7%, although it can be lower in very large deals.At the closing of the IPO, the company (and any selling stockholders) willreceive the proceeds from the underwriters net of this discount/commission.The aggregate discount/commission is allocated among the underwriters andother members of the selling group based on the services performed. Aportion of the total commission is reserved for the book-running managingunderwriters for their services. The other underwriters do not share in themanagement fee. Another portion of the commission is typically allocated toall underwriters participating in the syndicate based on their underwritingcommitment, which is the amount that each underwriter agreed to underwrite,as listed in the underwriting section of the prospectus. This fee is intended tocompensate the entire underwriting group for the ‘‘risk’’ of underwriting andthe cost of aftermarket stabilization. The balance of the commission, typically asignificant majority, goes to each underwriter based on the number of sharesactually sold by that underwriter. This is known as the selling commission. Theunderwriters in turn provide to dealers a portion of the selling commission.

6. What are ‘‘jump ball’’ economics?

Of the selling commission noted above, most is usually allocated for sales toinstitutional accounts. One way of allocating this portion of the salescommission is for the company and the book-running managing underwritersto agree upon a fixed split determined at the time the managing underwritersare chosen. In a fixed split, each underwriter is guaranteed a fixed portion ofthe selling concession regardless of effort. Alternatively, a ‘‘jump ball’’approach allocates the sales commission among the underwriters based on howmany shares they actually place with investors. If two underwriters have arelationship with the same institutional investor, that investor can designatethat the sales commission be allocated to the underwriter of its choice basedon factors such as its assessment of the quality of service offered by each. Thetheory behind ‘‘jump ball’’ economics is that it motivates the underwriters touse their full resources in marketing the offering because they have to ‘‘earn’’their fees by making actual sales. On the other hand, co-managers often arguethat the book-running managers control the book in such a way as to ensurethat all sales are allocated to themselves. As a result, jump ball economics arefrequently combined with a cap on the amount the book-running managers canreceive.

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7. What do we need to know about restrictions on the conduct of researchanalysts in an IPO?

The rules regarding research analysts can be tricky. For example, researchreports by analysts, especially those participating in an underwriting ofsecurities of the subject issuer, could be deemed to be ‘‘offers’’ of thosesecurities under the Securities Act and, as result, these reports have rarelybeen issued prior to completion of an offering. In addition, under the rules ofthe Financial Industry Regulatory Authority (FINRA) and the SEC,underwriters of an IPO cannot publish research for 25 days after the offering(40 days if they served as a manager or co-manager), and managers orco-managers cannot publish research within 15 days prior to or after therelease or expiration of the IPO lockup agreements (so-called ‘‘booster shot’’reports). (But see the discussion below regarding the impact of the JOBS Acton these restrictions in connection with IPOs of EGCs.) There are alsorestrictions in place prohibiting certain interactions between research analystsand investment bankers from the same firm in connection with a company’sIPO, resulting from a ‘‘global settlement’’ of many of the U.S. investmentbanks with the SEC in 2003. The restrictions were designed to addressperceived conflicts of interest involving analysts and investment bankers,particularly the perception that bankers sometimes promised their clientsfavorable research to win underwriting business, while analysts supported theirfirms’ investment banking businesses by issuing favorable research oncompanies they did not believe in. One restriction from the settlement requiresthat, when analysts do participate in IPO-related activities with the investmentbankers, such as management presentations or diligence calls, certainprocedures need to be followed to properly conduct these types of jointsessions (e.g., use of IPO underwriters’ counsel as a ‘‘chaperone’’). Given theneed to maintain separation between the research analysts and investmentbankers, often the company (and any customers, suppliers or partners who areasked to participate in diligence calls) is required to duplicate efforts toaddress these two groups separately. Similar stock exchange and FINRArestrictions also exist.

The JOBS Act requires FINRA and the SEC to roll back, in connection withIPOs of EGCs, a number of the restrictions discussed above. For EGCs, theJOBS Act relaxes restrictions on the publication by investment banks ofresearch reports about EGCs before and during a registered offering. TheJOBS Act provides that publication of a research report does not constitute anoffer of securities, even if the investment bank that publishes the research isparticipating or will participate as an underwriter in the offering. To promoteresearch coverage of EGCs, the JOBS Act also eliminates for EGCs therestrictions discussed above on publishing research following an IPO or priorto the time the IPO lockup ends. The JOBS Act also eliminates some of therestrictions discussed above prohibiting interaction between a firm’s researchanalysts and investment bankers in connection with EGCs’ IPOs. However,

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because some of the JOBS Act provisions conflict with the global settlementdiscussed above, those investment banks that are a party to the settlement willstill be subject to its requirements, regardless of the JOBS Act.

The JOBS Act exempts research reports only from being deemed an offer orprospectus under the Securities Act; it does not provide relief from potentialliability under anti-fraud provisions. As a result, the extent to which investmentbanks will embrace this relaxation in restrictions related to research reportsand research analysts remains an open question. Counsel should be consultedto understand the current environment related to these matters.

8. How is the IPO sold, how are the allocations determined, and when willI know what the price will be?

A successful IPO is one in which the proceeds to the company are maximized,the shares are sold to high quality investors and the shares trade up in theaftermarket. The process by which investors and pricing are determined iscalled ‘‘book-building.’’ This process is run by the equity capital marketspersonnel of the book-running managers and takes place while the company ismarketing its offering to investors on the road show. This is a dynamicthree-way process among underwriters, the company and investors, with thegoal of leveraging supply and demand tension to achieve a successful pricing.Initially, indications of demand and price sensitivity are solicited frominvestors. Investors are then provided with feedback on the progress of theoffering. This interaction back and forth is intended to allow fine tuning of theprice to a level at which proceeds can be maximized without resulting in a‘‘busted IPO,’’ an IPO in which the share price sinks below the offering pricein the aftermarket. A final decision on the price and size of the IPO isdetermined at the end of the road show, typically immediately aftereffectiveness of the registration statement, and is based on several factors,including:

• quality, size and price sensitivity of the book;

• valuation;

• overall market performance;

• sector performance; and

• the level of potential insider participation as sellers or buyers.

Book-running managers have complete flexibility (although subject potentiallyto the influence of the company) in allocating shares among investors, who aretiered based on multiple factors, including:

• amount of assets under management (ability to buy, build and holdlarge positions);

• sector investment history;

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• IPO investment history (whether they are long-term holders or flippers);

• size of indication of interest;

• price sensitivity; and

• timing of indication of interest (whether they are lead investors).

In addition, equity capital markets personnel typically engage in a significantamount of allocation psychology, including cutting back allocations to incentaftermarket participation and indicate an oversubscribed offering, andallocating shares in appropriate minimum sizes to protect against unloading ofpositions viewed as ‘‘too small to maintain.’’

9. We have heard about a different type of pricing and selling mechanismknown as a ‘‘Dutch auction.’’ What is this and what are the advantagesand disadvantages?

As described above in Part B, question 24, in the traditional IPO sellingprocess, investment banks take the offering on a road show to various possibleinvestors (often large institutional investors, such as mutual funds, or otherclients of the investment bank) and, on the basis of those meetings and othermarket- and issuer-specific conditions, the investment bankers recommend tothe issuer an appropriate price for the IPO. After pricing of the IPO, theunderwriters typically control the initial allotment of IPO shares to investors,who benefit from any price appreciation resulting from the increase betweenthe offer price and the open price. In theory, the Dutch auction methodeliminates the discretion of investment bankers in the pricing and distributionof IPO shares by allowing all qualified individual and institutional investors toparticipate in an auction conducted by the underwriters. A Dutch auction maybe open for several weeks before or after the effective date of a registrationstatement related to the offering, but no bids obtained in a Dutch auctionprior to effectiveness may be binding on the participants. Once the biddingconcludes, the bids are assembled and the underwriters can calculate thehighest bid price that will allow all the shares in the offering to be sold. Thisprice is referred to as the ‘‘clearing price.’’ While, theoretically, an offeringusing the Dutch auction methodology ‘‘should’’ use the clearing price as theoffering price to maximize proceeds to the issuer, in reality, the company andthe underwriters retain flexibility to, and frequently do, negotiate the actualoffering price, taking a number of economic and business factors into account,in addition to the clearing price. If the number of shares bid for exceeds thenumber of shares in the offering, the shares are usually allocated on a pro-ratabasis among the investors that bid at or above the clearing price.

From the perspective of an issuer, the online auction process offers a numberof advantages and disadvantages. Some contend, on the one hand, that theauction process is more fair, more efficient and more transparent. By limitingthe discretion of underwriters in the pricing and distribution of IPO shares, the

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auction process may allow issuers to more nearly maximize their proceeds.Some argue, on the other hand, that many investors lack the ability toefficiently price an IPO due to lack of adequate information or sophistication;as a result, they contend, the auction process may lead to poor after-marketperformance. In addition, while some believe that the auction processpromotes the allocation of shares to long-term investors, others contend thatthe auction process may result in the company’s having a less-than-idealproportion of small retail investors who may be speculators or otherwiseshort-term investors. Finally, some argue that the process, by limiting thepotential for ‘‘quick’’ returns, may present a significant obstacle to successfulmarketing of an IPO.

10. We know that we will need to register our offering with the SEC. Willwe be required to qualify the offering with state regulators?

In addition to filing with the SEC, the company is required to comply with theBlue Sky laws of each state in which shares are offered or sold. In the eventthe company qualifies for trading on an exchange, this process is greatlysimplified. Designation for trading on an exchange allows the company to relyon exemptions to avoid time-consuming ‘‘merit’’ review by state regulators and,in most cases, eliminates the need for any filing in those states. Blue Skyqualification is usually handled by underwriters’ counsel, who may prepare aBlue Sky memorandum describing any related actions taken. Fees andexpenses incurred in this process are typically paid by the company.

11. What other filings are the underwriters required to make in connectionwith the IPO?

The underwriters are required to file certain documents and provide certaininformation to FINRA to permit FINRA to determine whether theunderwriting compensation is fair. The related filing is typically prepared andperformed by underwriters’ counsel. For the most part, this process occursbehind the scenes. However, prior to the initial filing of the registrationstatement, the company, its officers, directors and 5% or greater stockholders,and anyone who acquired unregistered securities from the company in the180 days prior to the initial filing of the registration statement, need to fill outFINRA questionnaires that will allow underwriters’ counsel to prepare therequired filing. Coordinating proper completion of the required FINRAquestionnaires can sometimes be a challenging task. Moreover, specific itemspotentially impacting the assessment of the underwriters’ compensation, suchas certain prior fee arrangements between the company and any underwritercan introduce challenges to the FINRA review process.

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II. PREPARING FOR AN IPOIn this section of the handbook, we discuss considerations and possible actionsto be taken to prepare for an IPO. First, we discuss review of the corporatecharter and considerations relating to the board of directors. Next, we addressthe question of reincorporation of the company to Delaware, as well asstockholder protection measures that should be considered prior to becoming apublic company. Finally, we discuss various employee stock matters.

A. Review of the Corporate Structure.1. A lot of IPO stocks seem to be priced at $10 to $20 per share. Is that a

coincidence?

No. Although there are always notable exceptions, marketing considerationsgenerally drive the targeted stock price to be between $10 and $20 per share.To achieve an appropriate target share price range, some form of stock split orreverse stock split often is required. The underwriters will assist the companyin arriving at a proper split ratio, if necessary.

2. If we have to split the company’s stock, what happens to the preferredstock? Won’t the disclosures in the prospectus regarding our outstandingstock be inaccurate?

The company’s charter will provide that, upon the closing of the IPO pricedabove a specified threshold, and in some cases, provided that the stock istraded on a particular exchange, any preferred stock will automatically convertinto a number of shares of common stock as adjusted for the split. To reflectthe assumed conversion of the preferred stock, the information in theprospectus will be presented on a post-split basis.

3. Is there anything else we should change in our capital structure beforethe IPO?

To change its capital structure after the IPO, the company will usually have toseek stockholder approval through the more complex and time-consumingproxy solicitation process. As a result, it makes sense to review the company’scapital structure before the IPO to make sure that it is appropriate for apublic company and will be appropriate for the foreseeable future. Forexample, the company’s charter should be reviewed to ensure that thecompany has enough authorized common stock to cover the IPO, theconversion of outstanding preferred stock and employee options and that thereis a sufficiently large cushion of shares to permit further issuances of common

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stock in the foreseeable future and at least a 2-for-1 stock split. The companyshould also consider authorizing a pool of ‘‘blank check’’ preferred stock,which permits the board to determine the rights and preferences of a series offuture preferred stock without further stockholder approval. Some companiesmay also consider implementing a dual-class share structure. These structurescan vary, but most involve one class of stock having ten votes per share,typically held by founders and management, and another having one vote pershare, typically issued to the public. Some argue that this type of structureallows management to focus on growing a company after an IPO, rather thanfocusing on short-term gains, but be aware that there may be negative publicityand marketing impact associated with this structure. (See Part D, question 12,below.)

4. Are there other changes to our basic corporate documents that weshould consider as part of our pre-IPO planning?

Yes. The company’s charter and bylaws should be carefully reviewed toeliminate provisions that would be inappropriate for a public company and toadd new provisions that make sense for a public company. For example, thecompany’s charter and bylaws should be reviewed to ensure that appropriateprovisions with respect to exculpation of directors and indemnity of officersand directors are included.

B. Board of Directors.1. Are there any requirements regarding the composition of the board of a

public company?

Yes. While there are no state corporation or, except as discussed below,federal securities laws governing the composition of the board, NASDAQ andthe NYSE require that a majority of the board of the listed company be‘‘independent,’’ and that the independent directors meet periodically withoutmanagement in executive session. Because independent directors aresometimes viewed as ‘‘representing’’ the public stockholders, the underwritersmay also consider it important that there be a sufficient number of outsidedirectors on the board. The company should also confirm that each of itsexisting directors desires to remain on the board following the IPO.

2. How do the SROs define ‘‘independent’’?

Both NASDAQ and the NYSE employ different definitions of the term‘‘independence,’’ although they share some common elements. Both exchangesemploy a two-part test of independence, composed of both objective andsubjective elements. The objective element consists of a list of specificrelationships, discussed below, that automatically preclude a finding of

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independence. The subjective component requires the board to make anaffirmative determination that there are no relationships, whether or notamong those specifically enumerated, that, for NYSE-listed companies, arematerial relationships with the company and, for NASDAQ-listed companies,‘‘would interfere with the exercise of independent judgment in carrying out theresponsibilities of a director.’’

As noted above, the rules of both exchanges identify a number of relationshipsthat, if present, would constitute per se disqualifications from independentstatus. The specific criteria for director independence are complex but, underNASDAQ and NYSE standards, directors would not be consideredindependent if they (or, in some cases, their family members) are (or, in somecases, within the past three years, have been)

• employees or officers of the company;

• involved in interlocking corporate compensation committees;

• affiliated with business entities that have material business relationshipswith the company exceeding specified financial thresholds;

• employed by, or have certain relationships with, the company’s auditfirm; or

• recipients of payments from the company of more than $120,000 (otherthan compensation for board or committee service).

3. What types of relationships could be perceived by the board to bematerial or to interfere with the exercise by a director of independentjudgment?

To make a determination of independence, the board will need to review andconsider all relationships between board members and management. Inaddition to obvious business relationships, in analyzing independence, theboard should take into account personal friendships, prior businessrelationships and even ties between the CEO and the board member createdby philanthropic activities. These types of connections could interfere with, orbe perceived as interfering with, the member’s objectivity.

4. Outside of the specific exchange rules, are there other factors toconsider in evaluating the independence of directors?

Yes. Decisions of the Delaware courts regarding independence of directors arealso valuable to consider. Historically, the Delaware courts have generally heldthat personal friendship alone was insufficient to taint independence; rathersome element of ‘‘domination and control’’ or an economically consequentialrelationship was required. However, in In Re Oracle Corp. Derivative Litigation,the Delaware Chancery Court denied a motion by Oracle’s special litigation

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committee to dismiss a derivative action on the basis that there were materialissues of fact regarding whether the directors were independent. The courtheld that personal relationships alone were indeed sufficient to call intoquestion the directors’ independence.

The perception of board independence by other constituencies may also beimportant to consider. For example, Institutional Shareholder Services, Inc.(‘‘ISS’’), a proxy advisory firm, has in the past advised stockholders of acompany to vote against certain incumbent directors because ISS concludedthat their independence was tainted. In each case, the CEO had beenpermitted to participate in the early stages of identifying potential nomineesfor director, and the nominees selected each had ties with the CEO: oneserved as a director with him at a European company and three others werecustomers of his former employer during the term of his employment. ISScharged that ‘‘a CEO’s participation in the appointment of directors, especiallyif the director has a significant relationship with the CEO, can make it difficultfor such directors to be objective.’’

5. I’d like to understand more about the Oracle case. What were the factsand what does it mean for independence determinations?

In Oracle, allegations were made that the CEO and several directors hadengaged in insider trading, breaching their fiduciary duties to the company.Faced with derivative litigation concerning the matter, the company establisheda special litigation committee composed of two directors who had joined theboard subsequent to the alleged wrongdoing. As part of its investigation intothe allegations, the committee conducted extensive due diligence and produceda very lengthy report, which concluded that no wrongdoing had occurred.

Notwithstanding the apparently extensive efforts by the special committee, thecourt concluded that questions remained regarding the committee’sindependence. The question of independence turned on whether the directorswere ‘‘for any substantial reason, incapable of making a decision with only thebest interest of the corporation in mind.’’ Both committee members wereprofessors at Stanford University, and the CEO and other directors who werethe subject of the claims had important ties to Stanford, including as facultymembers or major benefactors. The court was concerned that the ‘‘thickness’’of the social and institutional connections created material considerations thatcould have taken precedence over the best interests of the company: as aresult of their relationships, the committee would have had difficulty makingthe required assessment ‘‘without pondering their own associations.’’

Although the case relates to the application of Delaware law in connectionwith special committees and subsequent courts have distinguished the specialcommittee context, many commentators believe that the court’s determinationmay have broader implications: in assessing independence, companies must

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consider all relevant circumstances, not simply economic ties or controlrelationships.

6. Surely this idea — that friendship alone may impair independence —can go too far. Are there any contrary indications from the Delawarecourts?

A case involving Martha Stewart (Beam v. Stewart) suggests that, in certaincontexts, the Delaware court may be refining its position. In that case, thecourt maintained that, to impair independence, ‘‘a relationship must be of abias-producing nature. Allegations of mere personal friendship or a mereoutside business relationship, standing alone, are insufficient to raise areasonable doubt about a director’s independence.’’ It is not clear, however,where the Delaware courts will ultimately settle on the question ofindependence. What is clear is that director independence is an area to whichboards should be especially attentive.

7. How often should the board review the independence of its members?

Although applicable rules do not specify any frequency, we recommend that, asa part of board best practices, independence qualifications be reviewed at leastannually. In addition, we also recommend that, as part of board best practices,inquiry be made of directors quarterly to determine if any events haveoccurred that may impair their independence.

8. We’ve heard that some companies have a ‘‘lead independent director’’on their boards. What is a lead independent director?

When a company’s CEO also serves as chair of the board, many corporategovernance experts suggest that the independent directors appoint a leadindependent director to help reinforce the independent functioning of theboard and to serve as an effective balance to a combined CEO/chair. A leadindependent director is often delegated a number of responsibilities, includingacting as intermediary between the CEO/chair and the other directors,collaborating with the CEO/chair to set board agendas, leading sessions of theindependent directors and setting the agenda for those sessions. In addition,companies are required by SRO rules to hold regularly scheduled executivesessions of the board where, for NYSE companies, only non-managementdirectors are present, or for NASDAQ companies, only independent directorsare present. These requirements are designed to promote open discussionsamong independent directors. For NYSE companies, a non-managementdirector must preside over each executive session. To comply with thisrequirement, a company whose chairman of the board is also the company’sCEO or president might create a ‘‘lead independent director’’ position.

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9. We now have established an audit and a compensation committee of theboard, although, frankly, these committees have not historicallyfunctioned as separate committees. Will we need to be sure that thesecommittees act independently now? Do we need to establish othercommittees as well?

Board committees are much more important for a public company and theindependence of the members of these committees is critical. Both SOX andSEC regulations promulgated under SOX impose requirements on board andcommittee members (and other ‘‘gatekeepers’’) aimed at enhancingaccountability and responsibility for financial statements and financialdisclosure, as well as ethics and corporate governance. As a result, now, morethan ever, the activities of boards and their committees are subject to intenseand detailed scrutiny. Both SEC and SRO rules require that companies haveindependent audit committees, applying an even more stringent definition ofindependence to these members. In addition, the exchanges require thatdecisions regarding executive compensation and selection of board nomineesbe made by independent directors. As a result, most companies going publicestablish or maintain, in addition to audit committees, independentcompensation and nominating/corporate governance committees, whether ornot a formal committee is required by exchange rules. In addition, somecompanies have also established other committees, such as strategic planningcommittees or risk management committees.

10. Are there other requirements for committee members?

Yes. Like any good board member, committee members must be able to asktough questions, to engage in constructive criticism, to exercise a healthyskepticism and to make the necessary time commitment. Committee membersmust have the flexibility to advocate change when current practices are leadingin the wrong direction and the fortitude to reject misguided or questionableproposals, even those proposed by the CEO. Audit committee members mustalso meet additional qualifications (see questions 15-18.)

11. What types of procedures should committees establish?

Committees should establish procedures and practices to ensure goodcommunication, sound documentation and timely execution of theirresponsibilities, including the following:

• adopt a calendar for the year, with regular committee input regardingagenda items;

• to the extent possible, provide for multiple meetings to reviewimportant matters;

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• deliver meeting materials sufficiently in advance of scheduled meetingsto allow careful review;

• schedule executive sessions of the committee, if necessary;

• record accurate minutes and promptly evaluate and return unanimouswritten consents;

• have the chair brief the full board on important matters regularly; and

• review the committee charter annually and recommend any changes tothe board of directors.

12. What authority should committees have?

Committees should adopt written charters articulating their goals,responsibilities and duties. In any event, committees should be authorized todischarge the board’s responsibilities with respect to the responsibilitiesdelegated to the committee, subject to any limitations imposed by the board.Generally, each committee should also be authorized to have full access to thecompany’s books, records and personnel, as it deems appropriate, and toretain, at the company’s expense, advice of outside experts, advisers andconsultants. Note that compensation committees are required, in selectingconsultants, legal counsel and other advisers, to take into account specificfactors that bear upon independence, although they do not need to selectconsultants, counsel or other advisers that are ‘‘independent.’’ Committeesshould also be authorized to delegate to subcommittees, as appropriate.

13. What is the role of the audit committee?

The role of the audit committee is to engage in proactive oversight of financialreporting and disclosure for the company. The Blue Ribbon Committee onImproving the Effectiveness of Corporate Audit Committees (sponsored by theNYSE and FINRA’s predecessor, NASD) describes the role of the auditcommittee as overseeing ‘‘that quality accounting policies, internal controls,and independent and objective outside auditors are in place to deter fraud,anticipate financial risks and promote accurate, high quality and timelydisclosure of financial and other material information to the board, to thepublic markets, and to shareholders.’’ Warren Buffett has observed that thefunction of the audit committee ‘‘is to hold the auditor’s feet to the fire.’’ Theaudit committee’s responsibility is to be diligent in its oversight ofmanagement, the internal auditors and the independent auditors, not to standas a guarantor of a company’s financial statements.

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14. Are there specific responsibilities for audit committee members?

Yes. In addition to the general duties described above, SOX imposed a numberof specific responsibilities, including:

• appointment, compensation and oversight of the outside auditors;

• pre-approval of all audit, review and attest engagements, as well as allnon-audit services;

• establishment of procedures for receipt, retention and treatment ofcomplaints regarding accounting, internal controls or auditing matters,including confidential, anonymous submissions by employees; and

• resolution of disagreements between management and the auditorsregarding financial reporting.

The audit committee is also frequently the board committee designated toreview and approve related-party transactions, to assist the board in theoversight of compliance with legal and regulatory requirements and to reviewpolicies with respect to risk assessment and risk management.

15. Do audit committee members need to have any special characteristics orexpertise?

Yes. Audit committee members must be ‘‘super independent’’ and financiallyliterate.

16. What do you mean by ‘‘super independent’’?

In addition to satisfying the other criteria for ‘‘independence’’ imposed by theexchanges, audit committee members must be ‘‘super independent.’’ SEC rulesprovide that, to be ‘‘super independent,’’ a director may not receive, directly orindirectly, any consulting, advisory or other compensation from the company,other than board or committee fees, and may not be affiliated with thecompany (or any of its subsidiaries), except as a board or board committeemember.

Under SEC rules, prohibited payments would include payments to spouses,minor children or stepchildren, or children or stepchildren sharing a homewith the director, as well as payments to an entity of which the auditcommittee member is a partner, member or principal or occupies a similarposition and which provides accounting, consulting, legal, investment banking,financial or other advisory or similar services to the company or any of itssubsidiaries. (Limited partners, non-managing members or those in similarpositions who play no active role in providing services to the entity areexcluded.) Ordinary course commercial business relationships between thecompany and an entity with which the director has a relationship should nottaint a director’s independence, but must be examined.

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An audit committee member may not be an ‘‘affiliated person’’ of thecompany or any of its subsidiaries. This prohibition precludes service on theaudit committee by any director who, directly or indirectly through one ormore intermediaries, controls, or is controlled by, or is under common controlwith the company. Of course, service on the company’s board is expresslyexcluded from this prohibition. Generally, ownership of voting stock could giverise to a control relationship; however, under an SEC safe harbor, ownershipof less than 10% of a company’s voting stock would not, by itself, be deemedto cause a person to control the company.

17. What degree of financial literacy is required?

Generally, NASDAQ and the NYSE require that all members must be able toread and understand financial statements, and at least one member of theaudit committee must have prior accounting or financial experience that wouldresult in the individual’s financial sophistication, such as a position as CFO or,in certain circumstances, CEO. Under SEC rules, a company must disclosewhether the board has identified at least one member of the audit committeeas an ‘‘audit committee financial expert,’’ the name of the person identifiedand whether he or she is ‘‘independent’’ as defined under the exchange rulesfor audit committee members. A person identified as an audit committeefinancial expert under the SEC rules is presumed to meet the financialsophistication or management expertise requirements of NASDAQ and theNYSE. If there is no financial expert on the audit committee, the companymust disclose that fact and explain the reasons why not.

18. What is an ‘‘audit committee financial expert’’?

SEC rules define an ‘‘audit committee financial expert’’ as a person who hasall of the following attributes

• an understanding of GAAP and financial statements;

• the ability to assess the general application of GAAP in connection withthe accounting for estimates, accruals and reserves;

• experience preparing, auditing, analyzing or evaluating financialstatements that present a breadth and level of complexity of accountingissues that are generally comparable to the breadth and complexity ofissues that can reasonably be expected to be raised by the company’sfinancial statements, or experience actively supervising one or morepersons engaged in such activities;

• an understanding of internal controls and procedures for financialreporting; and

• an understanding of audit committee functions.

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19. What is the role of the compensation committee?

The compensation committee acts on behalf of the board of directors tooversee the company’s compensation policies, plans and programs, to reviewand determine the compensation to be paid or awarded to the company’sexecutives, to review and discuss with management the company’s disclosuresunder the caption ‘‘Compensation Discussion and Analysis’’ (‘‘CD&A’’) in thecompany’s proxy and registration statements, and to provide the compensationcommittee report on executive compensation included in the company’s proxystatements. Compensation committees typically make compensationdeterminations on the basis of a variety of factors, including executive andcorporate performance, competitive conditions and compensation strategy andpolicies adopted by the company.

20. Why do we need a compensation committee? Who should serve on it?

Scrutiny of the compensation paid to public company executives has becomeparticularly intense in recent years, resulting in renewed focus on a company’scompensation committee, its composition and its deliberations. Anindependent compensation committee helps ensure that executivecompensation is the product of an objective and fair evaluation of individualand corporate performance. As a result, most public companies maintainindependent compensation committees, whether or not a formal committee isrequired by exchange rules.

Exchange rules generally require that decisions regarding executivecompensation be made by independent directors. Historically, the definition of‘‘independent’’ under these rules did not differ from the standard definition of‘‘independent’’ under the exchange rules; however, the Dodd-Frank Actmandated that the exchanges require compensation committee members tosatisfy criteria for compensation committee ‘‘super independence,’’ as definedby each exchange after taking into account prescribed relevant factors. Thesefactors include the source of compensation of the director, including anyconsulting, advisory or other compensatory fee paid by the company, andwhether the director is an affiliate of the company, a subsidiary of thecompany or an affiliate of a subsidiary. Because compensation committeemembers will be making decisions that directly affect management,consideration should also be given to whether potential committee membersare generally independent of management, as discussed above. In addition,most public companies appoint directors to the compensation committee whowill qualify as ‘‘non-employee directors’’ under the short-swing trading rulesbecause administration of a company’s employee stock plans by a committeecomposed solely of two or more non-employee directors exempts certaintransactions under those plans from the short-swing trading rules. Finally, theInternal Revenue Code (the ‘‘Code’’) provides an exception from the limitationon deductibility of compensation in excess of $1 million for qualified

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performance-based compensation paid to certain executive officers of publiccorporations if such compensation is granted by a committee of outsidedirectors. As a result, companies may also want to appoint compensationcommittee members who qualify as ‘‘outside directors.’’

21. What are the key functions of the compensation committee?

The compensation committee has a variety of functions and responsibilities,typically including the following:

• reviewing, modifying and approving compensation policies andstrategies;

• reviewing and approving corporate and individual goals relevant to thecompensation of the company’s executives;

• evaluating performance of executives in light of established goals;

• determining the nature and amount of compensation to be paid,including benefits and other perquisites, to executives and, asappropriate, other employees; and

• evaluating and making recommendations to the board regarding, andadministering, the company’s compensation plans and programs.

Some compensation committees also determine amount and types ofcompensation to be paid to directors of the company.

22. Do compensation committee members need to be experts incompensation?

No. Of course, it is certainly useful if committee members have expertise, butit is not necessary. Compensation matters can be quite complex, however, andcommittee members must be willing to make the effort to, and be capable of,understanding and evaluating the detailed mechanics of various plans andarrangements, including the costs and risks associated with a variety of possiblepayment scenarios.

23. Are there any other factors to consider in the selection of compensationcommittee members?

Yes. To add perspective and objectivity, professional diversity may be a factorin selecting members, with the goal of achieving a balance of backgrounds andexperience. Warren Buffett argues that directors ‘‘should not serve oncompensation committees unless they are themselves capable of negotiating onbehalf of owners,’’ that is, the stockholders.

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24. What is the role of the nominating committee?

Viewed narrowly, the role of nominating committees is to identify, review andevaluate individuals qualified to become board members and to select, orrecommend to the entire board, nominees for director to be submitted forelection by the stockholders. The committee also typically makesrecommendations to the entire board regarding the composition of the variousboard committees and the selection of the appropriate committee chairs. Inaddition, many companies expand the role of the nominating committee toinclude other corporate governance matters.

25. Why do we need a nominating committee? Who should serve on it?

SEC officials and other commentators have suggested that one source of priorcorporate scandals may have been incumbent management’s control of theboard: directors who owed fealty to management may have been less likely tochallenge management or may have subordinated the company’s interests tothose of management. Independent nominating committees with fair andtransparent processes and open access are viewed as a way to address thisperceived problem and, to that end, the exchanges require that directornominees be selected, or recommended to the full board for selection, byindependent directors.

Not that long ago, nominating committees were the poor orphan cousins ofthe corporate governance hierarchy: other than at large public companies,nominating committees were the exception not the norm. However, SOXeffectively re-asserted the primacy of the board in its role as overseer ofcorporate decision-making, focusing renewed attention on the processes relatedto selection and nomination of directors, and in particular, nominatingcommittees.

26. What are the key functions of a nominating/corporate governancecommittee?

The primary functions of the nominating/corporate governance committeeinclude

• identifying, reviewing and evaluating candidates, including candidatesrecommended by stockholders, to serve on the company’s board ofdirectors, taking into account applicable independence and experiencerequirements;

• selecting, or recommending to the board, candidates for nomination asdirectors, including election of new directors as well as reelection ofincumbent directors;

• overseeing board committee structure, composition and operation;

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• establishing policies and procedures to facilitate stockholdercommunications with the board;

• reviewing and assessing the performance of the board, boardcommittees and, in some cases, management;

• overseeing director education;

• developing plans for management succession; and

• developing and overseeing corporate governance guidelines and policies,including, in some cases, the company’s code of ethics.

C. Reincorporation in Delaware.1. We’ve heard that a number of companies incorporated outside of

Delaware were reincorporated in Delaware just prior to their IPOs.What are the advantages of being incorporated in Delaware?

There are a number of reasons for incorporating in Delaware. More thanone-half of all U.S. publicly traded companies and over sixty percent of theFortune 500 companies find it beneficial to conduct business as Delawarecorporations. Among the benefits to a company are the applicability of awidely followed body of corporate law interpreted by a highly respected courtsystem and access to a potentially larger pool of director candidates, in partbecause Delaware law is perceived to offer directors broad protection fromliability. In addition, Delaware law is often viewed as more receptive to variousstockholder protection measures, such as poison pills. (See Part D.)

2. Why is Delaware corporate law widely followed?

For many years Delaware has followed a policy of encouraging incorporationin that state. In furtherance of that policy, Delaware has adoptedcomprehensive and flexible corporate laws that are revised regularly to meetchanging business circumstances. The Delaware legislature is particularlysensitive to issues regarding corporate law and is especially responsive todevelopments in modern corporate law. The Delaware courts have developedconsiderable expertise in dealing with corporate issues as well as a substantialbody of case law construing Delaware’s corporate law. As a result of thesefactors, it is assumed that Delaware law would provide greater predictability ina company’s legal affairs than is presently available under the laws of mostother jurisdictions.

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3. Are there any disadvantages associated with incorporation in Delaware?

The interests of the board of directors of a company, management andaffiliated stockholders in evaluating reincorporation in Delaware may not bethe same as those of unaffiliated stockholders. Delaware law may not affordminority stockholders some of the rights and protections available under thelaws of many other states. In addition, certain measures that are frequentlyadopted in connection with or following reincorporation in Delaware maymake it more difficult for minority stockholders to elect directors andinfluence company policies. Finally, a corporation incorporated in Delawaremust also pay annual franchise taxes, which can be considerable.

If a company has a majority of its stockholders in California and meets testsrelating to its sales, payroll and property in California, the company will likelybecome a ‘‘quasi-California’’ corporation, which means that certain provisionsof California law (that are more restrictive than Delaware law) will beapplicable to the company. Companies listed on an exchange are exempt frombeing a ‘‘quasi-California’’ corporation, so most public companies do not haveto be concerned about this possibility. The more important provisions ofCalifornia law that apply to a ‘‘quasi-California’’ corporation include

• the stockholders’ right to cumulative voting for directors,

• removal of directors without cause by a vote of stockholders,

• certain restrictions on the indemnification of officers and directors, and

• certain procedural steps related to mergers.

D. Stockholder Protection Measures.1. Why should the company adopt stockholder protection measures? What

are the principal advantages and disadvantages to adopting suchmeasures?

Takeover attempts that have not been negotiated or approved by the board ofdirectors of a corporation can seriously disrupt the business and managementof the company, and may involve terms that are less favorable to all of thestockholders than would be available in a board-approved transaction. Board-approved transactions may be carefully planned and undertaken at anopportune time to obtain maximum value for the corporation and all of itsstockholders with due consideration to matters such as the recognition orpostponement of gain or loss for tax purposes, the management and businessof the acquiring corporation and maximum strategic deployment of corporateassets. Many stockholder protection measures, including classified boards, are

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designed to help deter so-called ‘‘creeping acquisitions’’ in which a person orgroup seeks to acquire

• a controlling position in a company without paying a control premiumto the selling stockholders,

• a position sufficient to exert control over the company through a proxycontest or otherwise, or

• a block of stock with a view toward attempting to promote a sale orliquidation or a repurchase by the company of the block at a premium.

Faced with a comprehensive set of stockholder protection provisions, such aperson or group would have to assess carefully its ability to control orinfluence the company.

Stockholder protection provisions can have the effect of discouraging attemptsto acquire control of a company without board approval, even though asubstantial number, and perhaps even a majority, of the company’sstockholders might believe the change of control to be in their best interests.A hostile takeover attempt may have a positive or a negative effect on thecompany and its stockholders, depending on the circumstances surrounding aparticular takeover attempt.

Some stockholder protection provisions simply make it more difficult forholders of a majority of the outstanding shares to change the composition ofthe board of directors and to remove existing management in circumstanceswhere these stockholders may be dissatisfied with the performance of theincumbent directors or otherwise desire to make changes.

In addition, companies should understand that some stockholder protectionprovisions, especially classified boards, supermajority vote requirements and‘‘poison pills’’ (see questions 2, 9 and 11), are disfavored by a number ofinstitutional stockholders, as well as proxy advisory firms, such as ISS andGlass Lewis. The importance of ISS and Glass Lewis policies and voterecommendations depends on each company’s specific stockholder base andthe percentage of the company’s stockholders that are influenced by the proxyadvisory firms’ vote recommendations. Some institutional stockholders followtheir own internal guidelines and are not influenced by the proxy advisoryfirms. Many newly public companies have a high percentage of ‘‘inside’’stockholders (stockholders who are somehow affiliated with the company otherthan solely as stockholders) and other ‘‘friendly’’ stockholders that are notinfluenced by the recommendations of proxy advisory firms.

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2. We understand that a significant number of public companies haveclassified, or staggered, boards of directors. If the company adoptedsuch a provision, how would it work and what effect might it have?

Delaware law permits, but does not require, the adoption of a classified boardof directors with staggered terms. A maximum of three classes of directors ispermitted by Delaware law, with members of one class to be elected each yearfor a maximum term of three years. If a corporation has a classified board,then a person or company attempting a hostile takeover of the corporation bytaking control of the board must win two proxy contests to take control of theboard. Because elections of directors by stockholders occur annually, thiswould typically require a hostile takeover attempt by proxy contest to occur ineach of two years if the corporation had three classes of directors. Winningjust one proxy contest can be very difficult and expensive to accomplish, andforcing a potential hostile acquiring company to undertake two proxy contestsprovides a significant deterrent to engaging in such a contest. A classifiedboard also complements a stockholder rights plan, or poison pill (see question11), because it can prevent a hostile bidder from quickly circumventing apoison pill by electing, at a single annual meeting, a majority of the board whocould then redeem or terminate the poison pill shortly following their election.

3. How do we determine which directors should be in which class? Arethere any requirements?

Delaware law allows the company’s directors to assign members to the variousclasses. Generally, the classes are, as nearly as possible, of equal size.Companies will often give consideration to factors such as the distribution ofindependent directors over the classes, as well as to potential near-termretirements from the board.

4. What would be the effect of including cumulative voting for election ofdirectors?

Delaware law permits cumulative voting, but it must be affirmatively providedfor in the certificate of incorporation. Cumulative voting allows a stockholderto accumulate the number of votes the stockholder would be permitted to castin favor of all directors and vote them for a single director or in any mannerchosen. A stockholder with a significant minority percentage of the outstandingshares may be able to elect one or more directors if voting is cumulative. Theelection of one or more directors by a disaffected or dissident minoritystockholder could be very disruptive to the management of the company’sbusiness. To minimize the possibility of this disruption, very few companiesadopt cumulative voting.

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5. What other types of provisions might the company implement to helpdeter undesirable takeovers and ensure continuity of the board ofdirectors?

One mechanism often employed to deter hostile takeovers is to limit theability of stockholders to remove directors — how limited often depends onwhich measures are permitted by state law. Many Delaware public companiesprovide in their charter documents that directors may be removed bystockholders with cause only by a majority (or a supermajority) stockholdervote and that directors cannot be removed without cause.

To further protect the integrity of the board of directors, many Delawarepublic companies provide in their certificates of incorporation that theauthorized number of directors may be changed only by resolution of theboard.

Many Delaware corporations also provide in their certificates of incorporationthat vacancies on the board resulting from death, resignation, disqualification,removal or other causes must be filled by the affirmative vote of a majority ofthe remaining directors then in office, even though less than a majority of theboard of directors, or if the board so determines, by the affirmative vote of theholders of a majority of the then-outstanding shares. Newly createddirectorships resulting from any increase in the number of directors would,unless the board determines otherwise, be filled only by the affirmative vote ofthe directors then in office, even though less than a quorum. A directorelected by the board of directors to fill a vacancy (including a vacancy createdby an increase in the board) would serve for the remainder of the full term ofthe board seat in which the vacancy occurred and until that director’s successorwas elected and qualified.

These provisions limit the ability of a hostile stockholder to take control of theboard by voting to increase the board’s size and filling the resulting vacancies.As a result, these charter provisions help prevent creeping acquisitions, ensurecontinuity of the board of directors and allow the board of directors to act in acareful, deliberative manner to make appropriate business judgments inresponse to a creeping acquisition. However, as discussed in question 1 above,the overall effect of these changes would also be to give the boardstrengthened tenure and authority, which could enable the board of directorsto resist change and otherwise temporarily thwart the desires of even amajority of stockholders.

6. What about the right of stockholders to call special meetings?

If stockholders are able to call a special meeting of stockholders, takeoverbidders could exploit stockholder meeting provisions to initiate a proxy contestby calling a special meeting. Delaware law permits a corporation to eliminate

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the right of stockholders to call a special meeting, thus removing the potentialfor an expensive proxy contest outside the context of the corporation’s annualmeeting.

7. What would be the effect of the company’s eliminating the ability ofstockholders to act by written consent following its initial publicoffering?

Under Delaware law, stockholders may act by written consent in lieu ofactually voting at a meeting of stockholders. Delaware law permits acorporation to provide in its certificate of incorporation that stockholders maynot act by written consent. While most companies retain the ability ofstockholders to act by written consent until the completion of an IPO forreasons of convenience, it is often recommended that actions by writtenconsent of stockholders be prohibited thereafter.

If the ability of stockholders to act by written consent is eliminated, acontrolling stockholder or group of stockholders could act to amend the bylawsor remove directors only at a special stockholders’ meeting (if the ability ofstockholders to call one has not been eliminated, as discussed in question 6above) or at the next annual meeting of the stockholders. In order to proposebusiness at a stockholders’ meeting, a stockholder must adhere to any noticerequirements established by the board pursuant to the bylaws, as discussed inquestion 8 below. Requiring stockholder action to be taken at a meeting helpsensure that stockholders have sufficient time to weigh the arguments presentedby both sides in connection with any contested stockholder vote. However,eliminating the ability of stockholders to act by written consent would likelylengthen the amount of time required to take any stockholder action becauseall actions must then be by vote at a meeting of stockholders which, in contrastto written consent, requires passage of a minimum notice period.

8. We have heard that the company could adopt special procedures forstockholder proposals and director nominations. How would this work?

Under Delaware law, a company may provide in its bylaws that a stockholdermust give reasonable advance notice to the company of a director nominationor a proposal for other action that the stockholder desires to present at anannual meeting of stockholders. This requirement would give the boardadequate time to evaluate a stockholder proposal, to determine how torespond and properly advise stockholders and to ensure an orderly process atthe meeting. The advance notice requirement may also include otherreasonable provisions requiring disclosure of the proponent’s ownershipinterests in the company’s securities, including hedges and other derivativeinterests, to ferret out whether there are any hidden interests or incentives.Proper director nominations and other proposals that satisfy any specialadvance notice procedures contained in the bylaws may be presented by the

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stockholder at the annual meeting, even without board approval, and thestockholder may choose to prepare its own proxy statement and solicit proxieswith respect to such matters for the annual meeting. (Stockholder proposalsintended to be included in a company’s proxy statement must be submitted inadvance to the company under SEC rules. Those rules also provide aprocedure for companies to request the SEC’s concurrence that a stockholderproposal may be excluded, on specified bases, from the proxy statement.)

9. What about votes required to amend the company’s certificate ofincorporation and bylaws and other supermajority vote requirements?

Under Delaware law, subject to any applicable contractual restrictions, thecompany’s certificate of incorporation generally can be amended uponapproval of the board and the holders of a majority of the outstanding votingstock. The bylaws may be amended either by a vote of the stockholders or, ifauthorized in the certificate of incorporation, the directors. Many Delawarepublic companies provide in their certificates of incorporation that the bylawsmay be amended by the board and may be amended by the stockholders onlyupon the vote of the holders of at least two-thirds of the company’soutstanding voting stock. The company may also require, and many publiccompanies’ charters do require, a two-thirds vote of the company’s outstandingvoting stock to change or eliminate the other protective provisions in thecertificate of incorporation discussed above.

10. We understand Delaware has an anti-takeover statute. How does itwork?

Section 203 of the Delaware General Corporation Law was enacted to limitcoercive takeovers of Delaware corporations whose securities are listed on anational securities exchange or held of record by more than 2,000 stockholders.Section 203 provides that a corporation may not engage in any businesscombination with any ‘‘interested stockholder’’ for a period of three yearsfollowing the date the stockholder became an interested stockholder, unless

• prior to the date the stockholder became an interested stockholder theboard of directors approved the business combination or the transactionthat resulted in the stockholder’s becoming an interested stockholder;

• upon consummation of the transaction that resulted in the stockholderbecoming an interested stockholder, the interested stockholder owned atleast 85% of the voting stock of the corporation; or

• the business combination is approved by the board of directors andauthorized by 662⁄3% of the outstanding voting stock that is not ownedby the interested stockholder.

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An interested stockholder is any person that owns 15% or more of theoutstanding voting stock or that is an affiliate or associate of the corporationand was the owner of 15% or more of the outstanding voting stock of thecorporation within the three-year period prior to the date of determination.Ownership of stock is defined broadly to include beneficial ownership, rights toacquire and certain arrangements for the purpose of acquiring, holding, votingor disposing of stock. A corporation may opt out of the statute in its originalcertificate of incorporation or, at any time but subject to certain limitations, byaction of its stockholders to adopt an amendment to its certificate ofincorporation or bylaws.

The statute is intended to limit abusive takeover tactics, such as the inequitythat arises when a tender offeror makes a two-tiered acquisition involving atender offer for cash at a high price for part of a target company’s shares,followed by a merger in which cash or securities with a lower value are issuedfor the remainder of the target company’s shares. Tender offers havesometimes been structured as two-tiered transactions with a substantially lowervalue at the second step for the purpose of pressuring stockholders to tendertheir shares in the initial tender offer. These practices are unfair to thestockholders, both in forcing them to make hasty decisions and in treatingsimilarly situated stockholders differently.

Section 203 also encourages companies interested in acquiring a corporation tonegotiate with the board of directors, because the requirements of the statutewill not be invoked if the acquisition is approved in advance by the board ofdirectors. In addition, in the event of a proposed acquisition of the company,the interests of the company’s stockholders would generally best be served by atransaction that results from negotiations based upon careful consideration ofthe proposed terms, such as the price to be paid minority stockholders, theform of consideration and the tax effects of the transaction. Section 203 can bedifficult to navigate in a number of circumstances, and care must be taken toavoid its inadvertent application to a stockholder.

11. How does a stockholder rights plan, or ‘‘poison pill,’’ work? Whenshould the company consider adopting one?

A stockholder rights plan may be adopted by the board of directors withoutstockholder approval. Under a typical rights plan, the company would issuerights to purchase shares of a newly designated class of preferred stock as adividend to holders of its common stock. The rights would not becomeexercisable until they are transferable separate from the common stock after aperson or group has acquired a specified percentage of the company’soutstanding shares, often 15%. Prior to that time, the rights would trade withthe common stock. If they become exercisable, the rights generally wouldentitle the holders, other than the person attempting to acquire the company,to purchase a specified amount of common stock at half the trading price. This

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would have the effect of greatly diluting the ownership percentage of thehostile acquiror. In the event of a negotiated transaction, the board wouldredeem or amend the rights to permit the transaction to proceed withouttriggering exercisability of the rights.

A rights plan is intended to encourage a possible acquiror to deal with acompany’s board of directors in any transaction, thereby enhancing the board’sability to obtain the best result for stockholders. A rights plan is adopted withthe hope (and expectation) that the rights will never become exercisable.Rights plans are not typically adopted until after a company has been publicfor some time.

Pressure from investors and proxy advisory firms has resulted in many publiccompanies letting their rights plans expire or declining to adopt new orreplacement rights plans. ISS, for example, will recommend withholding votesfrom directors on classified boards every year (or every three years if alldirectors are elected annually) following the adoption or extension of astockholder rights plan without stockholder approval until the plan is eitherterminated or submitted to stockholders for approval. As a result, the numberof public companies with rights plans has steadily fallen over the last decade.

Companies that do not have a current rights plan often consider following an‘‘on-the-shelf’’ strategy, where they do most of the preliminary work to preparefor adoption of a rights plan but do not actually adopt the rights plan. Acompany then can be prepared to adopt a rights plan quickly if the boarddetermines it to be appropriate in the context of a hostile bidder.

The validity of rights plans in a variety of situations has been confirmed byDelaware courts in recent years, including one plan where the rights weretriggered and the ownership of the acquiring person was diluted. When arights plan is challenged in court, the court will consider whether the action ofthe board in adopting, amending and maintaining the rights plans wasconsistent with the proper exercise of its fiduciary duties. Under the laws ofmost states other than Delaware, including California, the legal status of rightsplans is less certain.

12. What is a dual class capital structure? How do they work and whenshould they be considered?

Some public companies have adopted, prior to or effective upon the closing oftheir IPOs, capital structures with two or more classes of common stock. Thereare a number of variations in these dual-class capital structures, but all tend toprovide superior voting rights to one class. For example, in one commondual-class share structure, just prior to the IPO, the outstanding shares convertinto one class of stock (i.e., Class B common stock) with superior voting rights(e.g., 10 votes per share). A different class of stock with one vote per share(i.e., Class A common stock) is sold to the public in the IPO and issued after

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the IPO. Pre-IPO shares of high-vote Class B common stock are thenstructured to automatically convert to low-vote Class A common stock whensubsequently transferred, which accrues additional voting power to thosepre-IPO stockholders that retain a significant amount of their stock — typicallyfounders and management. As a result of this difference in voting rights pershare, voting control of the company can be maintained by a group ofstockholders holding as little as 10% of the outstanding common stock.

Dual-class capital structures have a history dating back decades. They havebeen popular in the cable, communications and media businesses, having beenadopted by companies such as Comcast Corporation, Liberty MediaCorporation, News Corporation and The Washington Post Company. Morerecently, these types of capital structure have been adopted by sometechnology companies. A common theme of these companies is theconcentration of share ownership in family members or a small group ofstockholders or management that are expected to remain long-term holders ofthe company’s common stock after the IPO. In that circumstance, the family orgroup would be able to retain control of a company while holding significantlyless than a majority of the economic interest in the company.

If a company wishes to consider adopting a dual-class capital structure, carefulconsideration should be given to the form it would take and to marketing andother implications for the IPO in light of potential corporate governance issuesassociated with these types of capital structures.

E. Employee Stock Matters.1. We have several employee equity plans now. Will we have to change

them when we go public?

There are several reasons why management and counsel should review thecompany’s employee plans before the IPO. First, management will need toassess the company’s current and planned needs for employee incentives. Ifmanagement foresees that the company will need to add shares to its plans,the company should consider amending its plans or adopting new plans whileit is still private and the stockholder approval process is therefore simpler.Company plans should also be reviewed to be sure that they anticipate theapplication of laws and practices that specifically affect public companies, suchas the short-swing trading rules of Section 16 (see Section IV, Part B, question7), application of insider trading policies and rules (see Section IV, Part B,question 6), certain distribution rules applicable to ‘‘specified employees’’under Section 409A of the Code, provisions applicable to option exercises andtax withholding and certain provisions necessary to comply with the

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performance-based exemption from the million dollar deductibility limit underSection 162(m) of the Code.

2. Should we adopt any new plans?

Many companies do decide to adopt new equity plans just before they gopublic. One of the most common plans adopted is an employee stock purchaseplan, which gives all employees an opportunity to buy stock at a discount(generally 85% of the lower of the fair market value at the beginning of anoffering period or at the purchase date), and on a favorable tax basis. Anemployee stock purchase plan adopted immediately prior to the IPO can haveuseful ‘‘golden handcuff’’ effects if the company’s stock price rises significantlyafter the offering.

In addition, management should also consider whether to adopt a broader typeof equity plan, sometimes called an omnibus plan, which provides for a varietyof equity-based incentives, such as restricted stock, restricted stock units andcatch-all ‘‘other stock awards,’’ as well as stock options, to provide greaterflexibility in awarding compensation. This flexibility can prove valuable giventhe price fluctuations experienced by some newly public companies and theequivalent accounting treatment for such equity-based incentives. A newomnibus plan is often used after an IPO and adopted as the continuation ofand successor to all prior plans.

Management should also consider adoption of a plan to provide options orother equity awards to directors who are not employees of the company,whether in order to attract new independent directors to the board or toprovide continuing incentives to current directors who will take on the addedresponsibility of public accountability. Typically, these plans are crafted toavoid any issue regarding self-dealing, providing for automatic grants ofoptions or other types of awards covering a predetermined number of shareson specific dates. It is becoming more common to adopt a directorcompensation policy specifying the terms of automatic grants to be madeunder the omnibus plan, but some companies still adopt separate plans thatmay be used only to grant awards to directors.

3. Our company has always priced option grants at an exercise price thatthe board determines to be the fair market value at the time of grant,taking into account a variety of factors in the company’s development.However, the projected IPO price is far higher than the most recent fairmarket value determination. Will we have a problem?

Maybe. Options granted with an exercise price that is less than the stock’s fairmarket value on the grant date will be treated as ‘‘deferred compensation’’under Section 409A of the Code and will be subject to income tax inclusion inthe year of vesting and additional taxes. To avoid this adverse treatment, prior

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to the IPO, the board should very carefully determine fair market value on aregular basis or, better yet, engage an independent valuation firm to do so.Further, options granted by companies prior to their IPOs have been examinedby the SEC as part of its review of the company’s IPO registration statement.In a number of instances, the SEC has concluded that the option exerciseprices were too low (informally known as ‘‘cheap stock’’), notwithstanding theboard’s determination of fair market value, and required the company torecognize additional compensation expense for the difference between thegrant price and the amount that the SEC deemed to be the fair market valueof the stock. This expense was then amortized over the vesting period of theoptions. The SEC review typically covered at least the 12-month periodpreceding the filing of the registration statement. The SEC has been extremelytough in this area and has, in some instances, looked back to an 18-month andeven 24-month period before the filing. If the company’s offering is imminent,management may want to anticipate hearing from the SEC on this topic andbegin now to prepare a chronology of option grants over the last year withrationales justifying the price valuations. Prices below book value (adjusted forpreferred stock liquidation preferences) may be especially difficult to justify.Companies may wish to have valuations prepared on a current basis to justifyoption prices, rather than waiting until the IPO is imminent.

4. We have some outstanding loans to several of our officers in connectionwith their purchase of the company’s stock. Is that a problem?

Maybe. SOX prohibits a public company from extending or maintaining credit,arranging for the extension of credit or renewing an extension of credit, in theform of a personal loan to any director or executive officer of the company. Asa result, personal loans to executive officers or directors must be repaid beforethe company files its registration statement with the SEC. If the borrower isunable to repay an outstanding loan, in the case of an executive officer, theboard could, in its discretion, award a bonus to assist in repayment or,alternatively, in the case of either an executive officer or director, forgive theoutstanding balance on the loan in whole or in part.

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III. PUBLICITY AND COMMUNICATIONSThis section of the handbook contains a discussion of publicity andcommunications while the company is engaging in an IPO. Violations of therestrictions imposed by the securities laws on publicity communications inconnection with a registered offering generally are referred to as‘‘gun-jumping,’’ and the term ‘‘gun-jumping provisions’’ describe the statutoryprovisions of the Securities Act and related rules that set forth theserestrictions.

A. Pre-Filing Communications.1. Can we issue a press release about, or otherwise publicly announce, our

proposed IPO now?

No (with one exception described in question 2 below). As a general matter,the securities laws impose substantial restrictions on the ability of a company‘‘in registration’’ to publicize its IPO and to communicate with its stockholders,the investment community and the public throughout the public offeringprocess. A company is typically viewed to be ‘‘in registration’’ for an IPO fromthe time it reaches an ‘‘understanding’’ about the offering with the investmentbank that will act as managing underwriter through the 25-day period followingthe effective date of the registration statement relating to the offering.

These restrictions prevent companies about to go public from conductingpublic sales campaigns that could artificially increase the price or demand forthe shares by disseminating information that has ‘‘the effect of conditioningthe public mind or arousing public interest in the issuer or its securities.’’These prohibitions also prevent companies from engaging in impermissible‘‘offers’’ of securities. However, whether publicity or other communications areinappropriate at any time depends in large part on which stage of theregistration process the company is in — the pre-filing period (including theremoteness of the anticipated filing date of the IPO registration statement),the waiting period or the quiet period.

2. What are the restrictions applicable to the company during thepre-filing period?

The pre-filing period, or the period prior to the initial filing of the IPOregistration statement with the SEC, is the period subject to the mostsignificant restrictions on communications. During this period, it is illegal forthe company to offer for sale any of the securities to be registered. An ‘‘offer’’

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is broadly defined and may include many communications that do not take theform of traditional offers.

Throughout the pre-filing period, the company will need to monitor itscommunications to ensure that they would not be considered impermissibleoffers, or ‘‘gun-jumping.’’ Gun-jumping violations, in addition to causingserious embarrassment, may result in the SEC’s delaying the company’s IPO,issuing an injunction or requiring inclusion of the improperly disclosedinformation in the prospectus, along with risk factors indicating that purchasersin the offering may have rescission rights. Except as described below, the onlypermissible communication about the offering during this period is a notice ofproposed offering, the contents of which are narrowly prescribed by securitieslaw regulations, making it rare that these notices are used in connection withIPOs.

3. But our underwriter has set up meetings for us with some of itsinstitutional accounts, and we haven’t even filed yet. Won’t that violatethe rules you just described?

If the company is an EGC, the gun-jumping restrictions are significantlyrelaxed: an EGC, and any person acting on its behalf, is permitted to ‘‘test thewaters’’ by engaging in pre-filing communications with qualified institutionalbuyers, or QIBs, and institutional accredited investors. The permittedcommunications are limited to those ‘‘to determine whether such investorsmight have an interest in a contemplated securities offering’’ and are subject toanti-fraud rules. These communications can be oral or written and can bemade either before filing a registration statement or after. As a result, IPOcandidates that qualify as EGCs can hold pre-road show or even pre-filingmeetings with key institutional accounts.

4. These restrictions sound somewhat vague and difficult for us to apply.Aside from the limited exception for EGCs, are there any firmguidelines that we can rely on?

Fortunately, yes. The SEC has adopted two safe harbors that should be helpfulin providing guidance for companies beginning the IPO process. One safeharbor, Rule 163A, hinges primarily on the timing of the communications inquestion; the other safe harbor, Rule 169, hinges primarily on the content ofthe communications.

5. Can you describe the timing safe harbor, Rule 163A?

Rule 163A provides a bright-line safe harbor for communications occurringmore than 30 days prior to the initial filing of the registration statement. (Forpurposes of this analysis, keep in mind that the SEC does not consider theconfidential submission of a draft registration statement by an EGC to be a

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‘‘filing’’ of the registration statement. See Section I, Part B, question 19.)Under the safe harbor, communications before the commencement of the30-day period will not be considered ‘‘offers’’ for purposes of the registrationrequirements of the securities laws so long as:

• the communication is made by the company or on its behalf, not by oneof the underwriters or other participants in the IPO;

• the communication does not refer to the proposed registered securitiesoffering; and

• the company takes reasonable steps within its control to prevent furtherdistribution or publication of the communication during the 30-daypre-filing period.

The SEC views these types of communications, when they occur more than30 days before the initial filing of the registration statement, to be sufficientlyremote to avoid serious risk of inappropriate conditioning of the market.

6. What are ‘‘reasonable steps’’?

The SEC has not provided any definition of reasonable steps nor is there anycase law interpreting the rule. However, the SEC has said that, while it doesnot expect companies to be able to control republication or accessing by othersof a company’s previously published press releases, companies ‘‘should be ableto control their own involvement in any subsequent redistribution orpublication.’’ As a result, companies will need to tightly control and monitor,to the extent they can, the potential redistribution or republication of theircommunications within the 30-day period (as well as in the post-filing ‘‘waitingperiod’’).

7. Our CEO gave an interview several months ago to a well-respectedbusiness journal, but the article has not yet been published. Do we haveto worry about potential publication during or after the 30-daypre-filing period?

Yes. Press interviews that are published during or after the 30-day pre-filingperiod are not protected even if the interview was actually conducted wellbefore the 30-day pre-filing period. As a result, the company should makeinquiry into the proposed publication schedule for interviews and, if the timingis inappropriate, either forego the interview or obtain a commitment from thepublisher, prior to giving the interview, to delay publication of the article. Asdiscussed below, if the article were published after the company filed itsregistration statement, the article could be a free writing prospectus, legallypermitted if the company satisfied the required conditions (although a freewriting prospectus could pose other issues for the company, such as exposureto liability for securities law violations) (see Part B, question 35, below). If the

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article is published within the 30-day pre-filing period and the article could beconsidered an ‘‘offer,’’ the company will need to consider whether to delay thefiling of its initial registration statement.

8. Can all companies use the 30-day pre-filing safe harbor?

No. Communications in connection with offerings made by registeredinvestment companies, business development companies or companies that areor were (or whose predecessors were) within the past three years, blank check,penny stock or shell companies will not be protected under the safe harbor.

9. Can information posted on our web site before we initially file ourregistration statement be construed as gun-jumping?

Yes, there is a possibility that a company will be found to have engaged ingun-jumping because of information accessible on its web site. In fact, evenlaunching a new web site or substantially augmenting an existing site can berisky. Once a company undertakes to conduct an IPO, it should review itsentire web site for potentially troubling information that could be viewed asconditioning the market for the offering. Any such information should be‘‘scrubbed’’ prior to the commencement of the 30-day pre-filing period, andany historical information (e.g., old press releases), should be appropriatelyidentified as historical, such as by archiving and dating it. The company shouldalso monitor all new information placed on the web site, particularly on theinvestor relations or company information page, since that is the informationmost likely to reach potential investors. The company should also check forany links embedded in its site. Information in linked documents could beattributed to the company and, if it might encourage investors to purchase inan upcoming offering, could create a gun-jumping problem. In addition, duringthe registration statement drafting process, the web site should be reviewed forconsistency with the related prospectus disclosure.

10. What about communications that occur during the 30-day period? Willwe be able to continue our advertising or have any communicationswith the press?

Yes. Once the 30-day pre-filing threshold has passed, companies must beconcerned with publicity and other communications that could be viewed toinappropriately condition the market, even if they do not refer to theanticipated offering. However, the company need not completely discontinueits normal public relations activities. Historically, the SEC has permitted acompany in the ordinary conduct of its business to continue any advertising itmay be engaged in consistent with past practices, send out its customaryreports to stockholders and make routine press announcements with regard tofactual business developments, so long as these activities are done in a mannerthat would not be expected to have an improper impact on the offering. The

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standard of review for press releases and other announcements will be higherduring the registration period, however, and these communications should notbe inconsistent with the disclosure that will be included in the prospectus. Acompany can continue to use its web site for conducting ‘‘business as usual,’’such as maintaining sites and posting certain information for customerinquiries, services calls, product descriptions and other ordinary coursebusiness communications. The company may not issue certain types ofinformation, such as forecasts, projections or predictions about the company’sexpected future performance, including projected product developmentmilestones, revenues, income or earnings per share, or publish opinionsconcerning value or otherwise recommend the company’s shares. In addition,the company should not significantly enhance its typical methods of publicity.These long-standing general principles are codified in a safe harbor, Rule 169,which provides some bright-line guidance in this area.

11. What is Rule 169?

Rule 169 provides a non-exclusive safe harbor from the gun-jumping provisionsfor communications by or on behalf of pre-IPO companies of regularlyreleased, factual business information that makes no reference to the proposedIPO. The information must be intended for use by persons other than in theircapacities as investors or potential investors, such as customers and suppliers.Communications approved by the company, or an agent or representative ofthe company (other than an offering participant who is an underwriter ordealer) are considered to be made by or on behalf of the company. Thisnon-exclusive safe harbor makes clear that a communication within theparameters of the safe harbor will not be viewed as a prospectus orimpermissible offer.

12. What are factual business communications under Rule 169?

Under the safe harbor, factual business communications are defined as

• factual information about the company, its business or financialdevelopments or other aspects of its business; and

• advertisements of, or other information about, the company’s productsor services.

13. What pattern of practice is necessary to satisfy the ‘‘regularly released’’requirement?

Generally, factual business information would be considered ‘‘regularlyreleased’’ if the company has previously released the same type of informationin the ordinary course of its business, if the information at issue is in factreleased in the ordinary course and the release is, in all material respects,consistent in timing (such as frequency and regularity), manner (method of

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dissemination) and form with the company’s previous releases of the same typeof information. Careful consideration must be given to whether there is anadequate track record of the type of information being released to concludethat it is consistent with the timing, manner and form of prior releases.

14. We’ve always announced new product lines via our company’s Twitterfeed. Can we still do this?

As a general matter, dissemination of company communications via socialmedia outlets can create issues for companies engaging in IPOs. Similar toother more traditional written communications, company-generated socialmedia posts, such as through Twitter or on Facebook, can constituteimpermissible gun-jumping or conditioning of the market and might bedeemed ‘‘written offers’’ of the company’s securities. And in connection withits review of a company’s IPO registration statement, the SEC often closelyscrutinizes that company’s use of websites and media outlets, including socialmedia. The Rule 169 safe harbor can apply to social media postings, however,as long as the requisite conditions are met. Therefore, it is often prudent forcompanies to seek the advice of counsel regarding ways to reduce any risksassociated with utilizing social media outlets during the IPO process, whichmay include limiting the use of forward-looking statements and focusing moreon factual business information of the type previously released in the ordinarycourse.

15. We want to start releasing comparative financial analysis that we havenot previously released. Will we be able to rely on the safe harbor?

To rely on the safe harbor, you must have a track record of releasing theparticular type of information released. As a result, companies that start torelease new types of financial information right before filing a registrationstatement for an IPO may not be able to take advantage of the safe harbor.

16. We have always advertised only in magazines, but just bought someadvertising space online. Our first web ads will appear shortly before wefile. Can we still rely on the safe harbor?

That depends. While using new technologies is not automatically outside therule, you would need to examine whether the manner and form of release isstill consistent with past practice in all material respects. As part of thatanalysis, you should compare the breadth and reach of your magazine ads withthe audience for your web ads. If the web audience is greater, which maydepend on where you advertise and the frequency with which your ad appears,you may not be able to rely comfortably on the safe harbor.

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17. We’ve issued press releases about our management changes only twicebefore. We just hired a new executive vice president of research anddevelopment, who is very well known in our industry, and we would liketo issue a press release about her. Is that enough to establish a trackrecord?

That depends. The SEC does not specify any bright line or minimum timeperiod for establishing a track record and suggests the possibility that even oneprior release might be enough, depending upon the circumstances. In addition,the rule is designed to cover releases regarding both scheduled andunscheduled or episodic types of events, so long as the information haspreviously been provided, in the same manner, taking into account the natureof the event.

18. In the past, our sales executives have been responsible for placing adsand other marketing activities. We now want to shift that responsibilityto a public relations employee who will also take responsibility forinvestor relations after the IPO, but we are only a few days away fromour filing. Will we still satisfy the ‘‘manner’’ requirement?

Probably not. The SEC has indicated that the same employees who havehistorically been responsible for providing information to customers andsuppliers must communicate the information provided in reliance upon thesafe harbor.

19. We understand that the information must be intended for use by personsother than investors. One of our key customers is also an investor. Canwe still provide that customer with product information?

Yes. The fact that a customer may also be an investor or potential investordoes not affect availability of the safe harbor, so long as the information isdirected to the customer in its capacity as a customer, not as an investor. Inthat circumstance, you should be sure that the information has the character ofpurely product information of the type that would be provided to a customer,in addition to complying with the other Rule 169 criteria.

20. Will we still be able to use the safe harbor if we put out a new productpress release? Obviously, the release will reach some investors inaddition to our intended customer audience.

Yes. A widely disseminated communication intended for a non-investoraudience that otherwise satisfies the conditions of the safe harbor will not loseprotection just because it happens to be available to investors as well. Again,you should be sure that the character of the communication reflects yourintent in addition to complying with the Rule 169 criteria.

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21. What if, at a meeting, our underwriter disseminates our new productpress releases on our behalf?

The safe harbor is not available to underwriters or offering participants otherthan the company.

22. Will we be protected under the safe harbor if we distribute ourpreviously released press releases at meetings our underwriters set upwith potential investors in connection with the offering?

No. The safe harbor is not available for communications that are part of youroffering activities.

23. Under the safe harbor, are we permitted to mention our proposed IPOin our earnings release?

No. Offering-related information is prohibited under the safe harbor.

24. Can we release projections or other forward-looking information underthe safe harbor?

No. Projections are not factual business information under Rule 169.

25. What happens if a communication fails to satisfy the safe harbor?

The communication could result in a gun-jumping violation. However, the safeharbors are not exclusive, and the communication may still be protected underlongstanding interpretive guidance.

26. Will our chief technical officer still be able to give a speech at ascientific conference shortly before we plan to file?

That depends. Difficult questions arise with regard to planned speeches orother appearances by company executives. In general, new activity for thecompany scheduled in contemplation of the IPO should be avoided prior tothe initial filing of the registration statement. However, although the facts ofeach case must be separately analyzed, where the company has a track recordof participation in similar industry conferences and the appearance is directedstrictly to industry audiences, the appearance should generally not be viewed tobe a prohibited communication, especially where the appearance has beenscheduled well in advance. The content of the presentation should still bereviewed to verify that no projections, forecasts or references to the IPO areincluded and that the content is otherwise generally within the factual businessinformation safe harbor. Moreover, written materials generally should not behanded out on behalf of the company at conferences during this time period.

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27. Will our CEO still be able to give a speech at an investor conferenceshortly before we plan to file?

No. Appearances that are directed to audiences composed of analysts,investors or press can be problematic and as a general matter should beavoided prior to the initial filing of the registration statement.

28. What precautions should we take to prevent inappropriatecommunications during the public offering process?

It is important to set up a system of internal controls to ensure proper reviewof all public disclosures throughout the period the company is ‘‘inregistration.’’ First, counsel for the company and the underwriters shouldreview all press releases and publicity to be released for publication, broadcast,distribution or web site placement when the company is ‘‘in registration.’’Second, preferably one person at the company should be assigned theresponsibility of handling all inquiries from the media, analysts, stockholders orprospective stockholders about the offering or other company matters, and thatperson should be well counseled by legal counsel regarding gun-jumping issues.Finally, it is advisable to establish a company policy prohibiting employees,officers and directors from advising about or recommending the company’ssecurities or offering their opinions or forecasts about the company or, withoutfirst consulting counsel, from providing any information about the IPO.

B. Post-Filing Communications.1. After we initially file the registration statement with the SEC, are we

subject to the same publicity restrictions as before we filed theregistration statement?

No. After the company has initially filed the registration statement and untilthe time the registration statement is declared effective by the SEC, thecompany enters a period called the ‘‘registration period’’ or ‘‘waiting period.’’Unlike the pre-filing period, during the waiting period, the company can offerits securities for sale, although it is still illegal to sell the securities. (Rememberthat the confidential submission of a draft registration statement by an EGC isnot considered a ‘‘filing’’ of a registration statement. As a result, except fortest-the-waters and any other exempt communications, ‘‘offers’’ are notpermitted until the registration statement is publicly filed. See Section I,Part B, question 19.) However, the securities may be offered only by means ofthe preliminary prospectus, through oral communications or through a freewriting prospectus (see Section I, Part B, question 13), subject to compliancewith conditions, as discussed below. Therefore, during this period, the companyneeds to be especially careful to avoid disseminating any written material,

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including through Twitter or on Facebook, that might be deemed an illegal‘‘offer’’ of securities.

It is at the latter end of this period that the company and the underwriters willconduct the IPO road show, the series of informational meetings at whichcompany presentations are made to prospective investors. Statutoryprospectuses and communications that satisfy the conditions applicable to freewriting prospectuses are the only written materials that may be distributed.While oral communications and free writing prospectuses are permitted, theanti-fraud provisions of the securities laws still apply. Companies are generallyencouraged not to stray far from the information covered in the prospectus.

2. You said that, once we have filed, oral offers are permitted. In thiselectronic age, how do we distinguish oral from writtencommunications? For example, is information appearing on our website considered ‘‘written’’? Is information disseminated through socialmedia considered ‘‘written’’?

Yes. Oral communications include direct face-to-face communications, livetelephone calls and communications that are live and in real time to liveaudiences and do not originate in recorded form. Generally, communicationsthat are not oral are considered written, including a wide range of media suchas TV and radio broadcasts, faxes, tapes, CD-ROMs, web postings, computernetworks and other forms of computer data compilation, Twitter feeds andpostings on Facebook, and almost all other electronic communications.

3. What about recorded voice mail messages?

Individual telephone voice mail messages originating from live telephone callswould be considered oral communications. By contrast, broadly disseminatedor ‘‘blast’’ voice mail messages, including recorded messages, would be viewedas written communications.

4. What if we record a web cast telephone conference call or web castmeeting and post it on our web site?

If the communications are live and in real time to live audiences, they are oralwhen they originate, regardless of whether they are simultaneously transmittedover the internet. However, if you record the calls or meeting and thenre-transmit them, whether by posting them on your web site or otherwise, there-transmissions would be considered written communications.

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5. Our CEO gave a live interview on TV. Since it was live, it must beconsidered an oral communication, right?

No. Regardless of how the TV signal was transmitted, the SEC treats TVbroadcasts as written communications.

6. After we file, is there any kind of written communication we can makethat refers to our offering but is not a prospectus, with all its associatedexposure to liability?

Yes. Rule 134 permits disclosure of limited, specified information about anoffering, including, among other information:

• factual information about the legal identity and business location of theissuer;

• the title of the securities and the amounts being offered;

• a brief indication of the general type of business of the company;

• the method of determination of the price or the bona fide estimate ofthe price range;

• a brief description of the intended use of proceeds;

• the type of underwriting;

• certain information about the underwriters;

• the anticipated schedule for the offering and a description of marketingefforts;

• certain procedural matters and the mechanics for IPO transactions, suchas account opening information; and

• statements or legends required by state law or administrativeauthorities.

Care must be taken to comply with the requirements of Rule 134, such as itslegend requirement, to take advantage of Rule 134.

7. Is Rule 134 available at any time?

No. Rule 134 is not available until a registration statement that includes apreliminary prospectus is filed. If an EGC submits its draft registrationstatement on a confidential basis, the company may not subsequently rely onthe Rule 134 safe harbor to make a public communication about its offeringuntil the registration statement is publicly filed. (See Section I, Part B,question 19.)

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8. We don’t have a price range yet in our prospectus. Does the preliminaryprospectus need to include a price range for Rule 134 to be available?

In some cases. Most of the information permitted under the Rule 134 safeharbor may be released prior to inclusion of a price range in the prospectus;however, some information, such as the price or the method of determinationof the price, would not be permitted under Rule 134 unless that informationwere also included in the preliminary prospectus. Rule 134 notices that solicitoffers or indications of interest must also be accompanied or preceded by astatutory prospectus containing a price range.

9. Our prospectus is widely accessible on the SEC’s web site. To satisfyRule 134, if we are soliciting offers, do we need to actually deliver apreliminary prospectus? That seems quaint in this electronic age.

Yes. The preliminary prospectus must actually precede or accompany theRule 134 notice. However, in an electronic notice only, the prospectus deliveryrequirement may be satisfied by inclusion of an active hyperlink to thepreliminary prospectus.

10. What is a free writing prospectus?

A ‘‘free writing prospectus’’ is a written offer outside of the statutoryprospectus that is permitted by the gun-jumping provisions, after the filing of aregistration statement, so long as specified conditions are satisfied. Free writingprospectuses offer significant flexibility with respect to content. The mostcommon use of a free writing prospectus has been to provide to potentialinvestors information about the final terms of the offering, such as price andsize, and the impact of those terms, including their effect on ‘‘Use ofProceeds,’’ ‘‘Capitalization’’ and ‘‘Dilution.’’ If the working group determinesthat this information has not otherwise been provided to potential investors,the underwriters may provide the information in a free writing prospectus toensure that, at the time investors make their investment decisions to commit topurchase the shares, they have all material information about the offering.

11. Do we need to view all written communications as offers?

No, but you will need to carefully analyze with counsel whether they might beconsidered offers, looking at all of the facts and circumstances, under thecurrent rules and long-standing interpretive guidance. Although the definitionof ‘‘offer’’ is broad, not all communications related to an offering arenecessarily offers.

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12. What kind of information is required in a free writing prospectus?

Except for a reference identifying the registration statement to which the freewriting prospectus relates and the legend discussed below, there are norequirements prescribing the contents of a free writing prospectus. With some,relatively mild, limitations discussed below, the contents of the free writingprospectus are as described: free writing.

13. That sounds very flexible. What’s the hitch?

Free writing prospectuses were designed to provide companies with asignificant level of flexibility, but require compliance with a number ofconditions to avoid gun-jumping liability. Some of the conditions will definitelylimit the use of free writing prospectuses in the context of an IPO. In addition,caution should be used in this area given the potential liability for statementscontained in free writing prospectuses.

14. What are the conditions?

The conditions relate to prospectus delivery, legends, content limitations, filingwith the SEC and record retention. In addition, as noted above, a free writingprospectus may not be used before the initial filing of the registrationstatement with the SEC.

15. What do we need to do to comply with the prospectus deliverycondition?

If a free writing prospectus was prepared by or on behalf of, or used orreferred to by, the company or any other offering participant or ifconsideration was given by the company or an offering participant for itsdissemination or if consideration is required to be disclosed under applicablelaw, a company that has a registration statement on file with the SEC for anIPO can use a free writing prospectus only if it is accompanied or preceded bythe most recent preliminary prospectus. The preliminary prospectus mustcontain a price range.

16. Do we really need to deliver a preliminary prospectus? Won’t that limitsignificantly our ability to use free writing prospectuses?

Yes, the preliminary prospectus must be physically provided. However, apreliminary prospectus will be deemed to accompany an electronic free writingprospectus — but only an electronic free writing prospectus — if the freewriting prospectus contains an active hyperlink to the preliminary prospectus.As a result, in the context of an IPO, the company may not be able to makesignificant use of broadly disseminated free writing prospectuses unless theyare electronic.

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17. Once we’ve provided our preliminary prospectus to an investor, do weneed to deliver one every time we use a new free writing prospectus?

No, there is no need to deliver an additional preliminary prospectus unlessthere have been material changes in the most recent preliminary prospectusprovided.

18. What kind of legend is required for a free writing prospectus?

The legend must be in substantially the form prescribed by the SEC. Thelegend advises investors that a registration statement and prospectus has beenfiled, urges investors to read the prospectus contained in the registrationstatement and provides a toll-free number that can be used to get a copy ofthe prospectus.

19. How do we satisfy the legend condition in a published article that isconsidered a free writing prospectus?

If the published article is filed with the SEC as a free writing prospectus andthe legend is included in the filing, the legend condition will be satisfied.

20. Can we include information in the free writing prospectus that is not inour preliminary prospectus?

Yes. Under SEC rules, you can provide information in a free writingprospectus that is in addition to that in the preliminary prospectus, so long asit does not conflict with the content in the preliminary prospectus.

21. If our free writing prospectus contains a lot of additional information,does that imply that our preliminary prospectus is defective?

Not necessarily. SEC rules make clear that a preliminary prospectus is notmaterially defective solely because it omits information that is contained in afree writing prospectus. Nevertheless, you will want to consider with counselwhether it would be advisable to include any information that could bematerial in the preliminary prospectus.

22. Can our free writing prospectus indicate that it is not a prospectus oran offer?

No. Disclaimers of responsibility, liability, accuracy, completeness or relianceby investors are expressly prohibited. Similarly prohibited are statementsdisavowing any offer or solicitation of offers to purchase securities andstatements requiring investors to read or acknowledge understanding of theregistration statement. Inclusion of prohibited disclaimers could cause a freewriting prospectus to become a gun-jumping violation.

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23. Are all free writing prospectuses required to be filed with the SEC?

No, but most will be. Generally, if the company prepares, uses or refers to afree writing prospectus, the company must file the free writing prospectus.Similarly, if an offering participant other than the company uses or refers to afree writing prospectus and distributes it in a manner that is designed to reacha broad unrestricted audience, that offering participant must file the freewriting prospectus with the SEC. There are special exceptions for mediacommunications and road shows. In addition, free writing prospectuses thatcontain no substantive changes or additions to previously filed free writingprospectuses do not need to be filed.

24. Do we need to keep copies of all free writing prospectuses?

You will need to retain, for a three-year period, copies of free writingprospectuses that are not filed with the SEC.

25. What if we fail to satisfy some of the conditions for use of free writingprospectuses?

Failure to satisfy the conditions could result in a gun-jumping violation.Fortunately, however, the SEC has provided several cure provisions that permita user to cure an unintentional or immaterial failure to satisfy a condition solong as a good faith and reasonable effort is made to comply with thecondition and the omission is rectified as soon as practicable after discovery ofthe omission. For example, if the legend condition has not been satisfied, thefree writing prospectus with the legend must be retransmitted to the sameinvestors to whom it was originally transmitted (requiring that lists ofrecipients be maintained). In the context of an IPO, however, a failure toprovide or hyperlink to an adequate prospectus (which includes a price range)cannot be ‘‘cured’’ and may result in SEC-required disclosures in theprospectus, delays in the offering and consequences to any offendingunderwriter.

26. Is a free writing prospectus part of our registration statement?

No, although it does ‘‘relate’’ to it for some purposes, such as liability underSection 12(a)(2) of the Securities Act and other anti-fraud provisions of thefederal securities laws.

27. Are all private companies that have filed registration statements eligibleto use free writing prospectuses?

No. Blank check, penny stock and shell companies are not eligible, nor arecompanies that filed for bankruptcy or insolvency, violated the anti-fraudprovisions of the federal securities laws or were subject to SEC stop ordersduring the preceding three years.

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28. When is eligibility determined?

At the time of filing of the registration statement for the IPO.

29. Will our road show be considered a free writing prospectus?

It depends. A live road show in real time to a live audience is not considered awriting (and, therefore, would not be a free writing prospectus), even if it weresimultaneously transmitted by web cast or other graphic communication.However, a road show that is recorded and posted on a web site, or otherwisedoes not originate live or in real time, would be considered an electronic roadshow, which is a written communication, and a free writing prospectus thatmust comply with all of the applicable conditions.

30. Are there special rules applicable to filing of electronic road shows?

Yes. Electronic road shows for IPOs do not need to be filed with the SEC solong as one ‘‘bona fide electronic road show’’ is made electronically availablewithout restriction to any potential investor. In that event, a copy of the roadshow must be retained for three years to satisfy the record retentionrequirements.

31. What is a ‘‘bona fide electronic road show’’?

The SEC contemplates that there may be multiple versions of road showsavailable. A bona fide electronic road show is an electronic or other graphicversion that contains a presentation by management and includes discussion ofthe same general areas of information regarding the company, managementand the securities being offered as the other graphic versions.

32. Does it need to be identical to the other versions or address all the samesubjects?

No. It does not even need to provide a Q&A segment just because there wasan opportunity for Q&A in other versions.

33. Do we need to file the slide presentation we use in our road show withthe SEC?

Generally no. Visual aids transmitted simultaneously with the road show areconsidered part of the road show itself and treated in the same way, so long asthey are transmitted in a manner designed to make them available only as partof the road show and not separately or in a separate file designed to beavailable for downloading separately.

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34. After filing our registration statement, can we include on our web sitehyperlinks to other web sites?

In most cases, it would not be advisable. If your web site has hyperlinks tothird-party web sites, the hyperlinked third-party information could beconsidered to be part of your web site. As a result, the company could beresponsible for that information. If the third-party information could beconsidered an offer, it would be deemed to be the company’s free writingprospectus.

35. We gave an interview for a popular magazine that will be publishedshortly after we file our registration statement. Is that considered agun-jumping violation?

Not necessarily. If the article is not deemed to be an offer by the company oranother offering participant, there is no related filing requirement. However, ifthe article is deemed to be a written offer, because of your participation in theinterview (compare question 39 below), the article would be a media freewriting prospectus, which must comply with the applicable free writingprospectus rules, including legending and filing of the article with the SECwithin four business days of your becoming aware of the article.

36. But we listened to our attorneys’ advice and did not give the author anyinformation that isn’t already in our prospectus. Do we still need tofile?

Not if the substance of the written communication is already on file, but thatmay be a difficult standard to achieve. (See question 20 above.)

37. Unfortunately, an article, based on an interview of our CEO, waspublished with a significant amount of incorrect information. We’reuncomfortable filing incorrect information. Is there anything we cando?

Yes. You may file correcting information, together with the media publication.However, you must be careful not to include an impermissible disclaimer.

38. We thought that we had to provide a preliminary prospectus with allfree writing prospectuses. How do we do that where an article appearsin a newspaper?

The SEC recognizes the problem and has made a special accommodation formedia publications. So long as the publication is prepared and published bymedia unaffiliated with the company or other offering participants, and neitherthe company nor any offering participant prepares or pays for the publicationof the information or its dissemination or television or radio broadcast, the

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article may be disseminated as a free writing prospectus, even though it is notaccompanied or preceded by a preliminary prospectus, without violating thegun-jumping prohibitions.

39. Our local newspaper published an article about our IPO, based entirelyon our preliminary prospectus and the road show we posted on our website. Do we still need to file the article even though we had noinvolvement in it?

No. Historically, the SEC has taken the position that as long as there was noinvolvement by the company or any other offering participant, the publicationis generally not an offer and, therefore, would not need to satisfy theconditions for a free writing prospectus.

C. Post-Effective Communications.1. After the registration statement is declared effective, are there still

restrictions on publicity and communications?

The 25-day period after effectiveness and commencement of an IPO is calledthe ‘‘quiet period.’’ During this period, sales of the shares can begin and afinal prospectus is delivered. Other written literature is permitted (more freewriting), so long as it is accompanied or preceded by a final prospectus. It isalso traditional to issue a ‘‘tombstone’’ advertisement to announce thecommencement of the sale of the securities. This tombstone advertisement isgoverned both by regulation and by custom.

Even though the offering may be complete from the company’s perspective,publicity by the company may be considered to be an inappropriate attempt toencourage the purchase of shares from dealers who are still required to delivera prospectus during this period. As a result, issuers are generally careful toremain ‘‘quiet,’’ that is, to release information only as necessary in bare factualaccounts. If, during this period, material developments do occur, it may benecessary to supplement, or ‘‘sticker,’’ the prospectus to reflect the newdevelopments or, in some cases, to file a post-effective amendment.

2. After our registration statement is declared effective, do we still need tocomply with the conditions for free writing prospectuses?

No, even if your communication amounts to a written offer, so long as yourwritten offer is accompanied or preceded by a final prospectus.

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IV. RESPONSIBILITIES OF A PUBLIC COMPANY ANDITS DIRECTORS

In this section of the handbook, we discuss many of the issues relating topublic company status, including SEC filings, insider trading, post-IPO publiccommunications and sales of company stock. We conclude with a discussion ofresponsibilities that apply specifically to directors and the protections availableto them.

A. Company Responsibilities.1. We understand that we will have to report on how we used the money

from our IPO. How do we do that?

In the company’s prospectus, the company will describe how it plans to use thenet proceeds from the sale of its shares. Under SEC rules, the company mustreport its use of proceeds from its IPO in its regular periodic reports(Forms 10-K and 10-Q — see questions 3 and 9 below.)

2. What ongoing reporting requirements will we need to comply with?

Every company that has registered securities is required to file certain reportswith the SEC. Generally, these reporting requirements apply to a company solong as its securities remain registered under the Securities Exchange Act of1934 (the ‘‘Exchange Act’’). These reports include Annual Reports onForm 10-K, Quarterly Reports on Form 10-Q and Current Reports onForm 8-K. Public companies must also comply with the SEC proxy regulationswhen soliciting a vote or consent of stockholders.

3. What is an Annual Report on Form 10-K and what information does itinclude?

The Form 10-K is an annual report filed with the SEC that provides a periodicupdate, both directly and through incorporation by reference from otherdocuments, of information about the company and its management,substantially similar to that contained in the company’s prospectus. TheForm 10-K will include a description of the company’s business for thepreceding fiscal year, risk factors, audited financial statements and a discussionby management of the financial results for the periods covered by thosefinancial statements through the MD&A, a management’s report regarding thecompany’s internal control over financial reporting, the conclusions of itsprincipal executive and principal financial officers regarding the effectivenessof the company’s disclosure controls and procedures, a disclosure regarding

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any material changes in the company’s internal control over financial reporting,and information about any unregistered sales of securities during the quarter(if not previously reported in a Form 8-K). If the company is not an EGC andis an ‘‘accelerated filer’’ or a ‘‘large accelerated filer,’’ the Form 10-K mustalso include an attestation report from the independent accountants on thecompany’s internal control over financial reporting. A management sectionsimilar to that contained in the IPO prospectus is usually incorporated byreference from the company’s annual meeting proxy statement. The companyalso must report the use of proceeds from its IPO in its first periodic report(the Form 10-K or Form 10-Q, whichever is filed first) after the effectivenessof the offering, and thereafter in each of its periodic reports until the companyhas disclosed the use of all the proceeds from the offering or disclosed thetermination of the offering, whichever is later.

4. When must the Annual Report on Form 10-K be filed?

‘‘Large accelerated filers’’ are required to file their Forms 10-K within 60 daysof their fiscal year end, while ‘‘accelerated filers’’ must file theirs within75 days of their fiscal year end. ‘‘Non-accelerated filers’’ must file theirForms 10-K within 90 days of their fiscal year end. There is no filing fee forthe Form 10-K.

5. What is a ‘‘large accelerated filer’’? What is an ‘‘accelerated filer’’?

A ‘‘large accelerated filer’’ is a company that has, as of the last business day ofthe company’s most recently completed second fiscal quarter, an aggregateworldwide public float of $700 million or more; has been subject to the filingrequirements of the Exchange Act (e.g., Forms 10-K and 10-Q) for at least12 months; has filed at least one annual report on Form 10-K; and is noteligible to use the scaled disclosure requirements for ‘‘smaller reportingcompanies’’ in its Exchange Act reports.

An ‘‘accelerated filer’’ is an issuer that has, as of the last business day of thecompany’s most recently completed second fiscal quarter, an aggregateworldwide public float of at least $75 million but less than $700 million; hasbeen subject to the filing requirements of the Exchange Act (e.g., Forms 10-Kand 10-Q) for at least 12 months; has filed at least one annual report onForm 10-K; and is not eligible to use the scaled disclosure requirements for‘‘smaller reporting companies’’ in its Exchange Act reports.

A company will need to determine whether it is a large accelerated filer or anaccelerated filer at the end of its fiscal year by determining its worldwidepublic float by reference to the last business day of its most recently completedsecond fiscal quarter. As a result, the company will be able to ascertain inadvance whether it will be a large accelerated filer or an accelerated filer atthe end of the fiscal year.

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6. Is it possible to lose status as a large accelerated filer or an acceleratedfiler?

Yes. After a company becomes a large accelerated filer, it retains that statusunless the company determines that its aggregate worldwide public float wasless than $500 million as of the last business day of the company’s mostrecently completed second fiscal quarter. In that case, the company becomeseither (i) an accelerated filer if the aggregate worldwide public float was$50 million or more, but less than $500 million, or (ii) a non-accelerated filerif the aggregate worldwide public float was less than $50 million. After acompany becomes an accelerated filer, it retains that status unless the companydetermines that the aggregate worldwide public float was less than $50 millionas of the last business day of the company’s most recently completed secondfiscal quarter. In that case, the company becomes a non-accelerated filer.

7. Who signs the Annual Report on Form 10-K? Is it reviewed by theSEC?

The Form 10-K must be signed by the company, as well as by its principalexecutive, financial and accounting officers and at least a majority of itsdirectors. The manually executed signature pages must be in hand prior tofiling, and must be kept in the company’s files for at least five years andpresented to the SEC upon its request. As a general matter, because of theparticular interest of the board of directors in carrying out its review and duediligence obligations, it is important to ensure that drafts of the Form 10-K aremade available to the directors (particularly members of the audit committee)for their review and comment at the earliest possible time. The SEC doesreview Forms 10-K (as well as other periodic reports filed with the SEC) on aregular basis. SOX mandates that the SEC review each company’s periodicreports at least once every three years.

8. Are any certifications required in connection with the Form 10-K?

Under SOX, two sets of certifications are required to be filed with periodicreports. Under Section 302, a company’s principal executive officer or officersand the principal financial officer or officers (or persons performing similarfunctions) must execute a certification that contains representations regardingthe following: review of the periodic reports; material accuracy of the periodicreports; fair presentation of financial information; design, evaluation anddisclosure of disclosure controls and procedures; and evaluation of internalcontrol over financial reporting. Under Section 906, for periodic reportscontaining financial statements, a company’s chief executive officer and chieffinancial officer must execute a certification that contains representations as tothe accuracy and completeness of the information contained in the periodicreport and compliance of the report with the Exchange Act.

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9. What is a Quarterly Report on Form 10-Q and what information does itinclude?

The Form 10-Q includes summary unaudited quarterly financial statements aswell as an MD&A discussion by management of those results. The Form 10-Qalso must include other specified information as appropriate, such asdevelopments in legal proceedings, materials changes in risk factors previouslydisclosed on the Form 10-K, disclosure regarding the conclusions of theprincipal executive and principal financial officers regarding the effectivenessof a company’s disclosure controls and procedures, disclosure regarding anymaterial changes in a company’s internal control over financial reporting,information about any unregistered sales of securities during the quarter (ifnot previously reported on Form 8-K) and information relating to the use ofproceeds from a company’s IPO.

10. When must the Quarterly Report on Form 10-Q be filed?

Each large accelerated filer and accelerated filer must file the Form 10-Qwithin 40 days after the close of each of its fiscal quarters (other than thefourth quarter, which is covered by the Form 10-K) following the IPO. Anon-accelerated filer must file its Form 10-Q within 45 days after the close ofeach of its three fiscal quarters. There is no filing fee for the Form 10-Q.

11. Who signs the Quarterly Report on Form 10-Q?

The Form 10-Q must be signed on behalf of the company by a duly authorizedofficer and by the principal financial or accounting officer. As a generalmatter, it is important to ensure that drafts of the Form 10-Q are madeavailable to the directors (particularly the members of the audit committee) fortheir review and comment at the earliest possible time. The manually executedsignature page must be in hand prior to filing and must be kept in thecompany’s files for at least five years and presented to the SEC upon itsrequest. Just as with the Form 10-K, two sets of certifications are required tobe filed with the Form 10-Q. (See question 8 above.)

12. What is XBRL?

XBRL, eXtensible Business Reporting Language, is intended to enableinvestors and analysts to better analyze data. XBRL uses data tagging toprovide more context to data through standard definitions that turn text-basedinformation, such as EDGAR filings, into documents that can be retrieved,searched and analyzed through automated means. Tags give data an identityand context that can be understood by a variety of different softwareapplications that allow the data to interface with databases, financial reportingsystems and spreadsheets.

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13. How will XBRL affect our financial reporting requirements?

Newly public companies must comply with the SEC’s XBRL rules for theirfirst Quarterly Reports on Form 10-Q. Generally, an interactive data file mustbe filed with the SEC at the same time as the report to which it relates andmust be posted on the company’s web site, if any, on the same day. Acompany filing its first quarterly report with interactive data has a 30-day graceperiod from either the filing date or the due date to file the interactive dataexhibit, whichever is earlier. Preparing XBRL-tagged financial information isvery time-consuming; 57% of respondents in a published survey indicated thatpreparing the required interactive data exhibit for their first filings took over120 hours.

14. What is a Current Report on Form 8-K and what information does itinclude?

Form 8-K is intended to supplement the standard periodic filing requirementswhen material events occur that should be brought to the prompt attention ofthe investing public. SEC rules specify certain events for which a Form 8-Kmust be filed and also permit its voluntary use for reporting other optionalmatters that the company views as material. The number of events that triggera Form 8-K filing has been significantly expanded by the SEC in an effort toimplement the SOX mandate for ‘‘real-time’’ disclosure. These events include(but are not limited to)

• entry into (or material amendment or termination of) a materialagreement;

• bankruptcy or receivership;

• a merger or acquisition;

• disclosure of results of operations and financial condition for acompleted fiscal period;

• commitment to an exit or disposal plan or a plan of termination ofemployees that is expected to result in material charges;

• concluding that a material charge for impairment to one or more assetsis required under GAAP;

• receipt of notice of delisting from an exchange;

• change of accountants;

• concluding that any previously issued annual or interim financialstatements should no longer be relied upon because of an error;

• change in control of the company;

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• election or departure of directors and certain officers and entry into (ormaterial amendment of) material compensation arrangements for suchpersons;

• amendments to charter documents;

• change of fiscal year;

• amendments to, or waivers of, the company’s code of ethics applicableto senior officers; and

• results of stockholder votes.

The 8-K rules are comprehensive and must be read carefully and inconjunction with the compliance and disclosure interpretations published bythe SEC.

15. When must a Current Report on Form 8-K be filed?

Generally, a required Form 8-K must be filed with the SEC within fourbusiness days after the occurrence of a triggering event.

16. Are we required to distribute reports to stockholders?

Under the Exchange Act, the company will be required to deliver (or makeavailable in electronic form — see question 17 below) an annual report tostockholders containing specified information, including audited financialstatements, in connection with the company’s annual proxy solicitation.Although some innovative approaches to annual reports have been devised(such as providing the financial statements and other required information asan appendix to the proxy statement or creating a glossy ‘‘wrap’’ around theForm 10-K that includes a letter to stockholders and certain other information)primarily for the purpose of saving the cost of production of the elaboratereports, many public companies still continue to furnish the standard glossyannual report to at least a portion of their stockholders.

While reports to stockholders constitute, in large part, free writing (other thanthe financial statements and the MD&A), if they contain materialmisstatements or omissions, they may subject the company to liability. Thesereports are frequently used by plaintiffs’ attorneys in securities litigation and,accordingly, should be reviewed by counsel.

17. How will we be affected by the proxy rules?

A company with a class of securities registered under the Exchange Act mustalso comply with the SEC’s proxy rules when a stockholder vote or consent issolicited by that company. Generally, the proxy rules require that a proxystatement (or a notice that a proxy statement and an annual report areavailable online), be mailed to each stockholder of record in advance of every

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stockholders’ meeting. The proxy materials provide detailed informationregarding the company, its management and the issues to be voted upon andmust satisfy specific requirements set forth in the proxy rules. In some cases,preliminary proxy materials must be filed early for possible SEC review. TheSEC staff will review the preliminary materials and may require a company tomake changes. Because of the filing and other procedural requirementsapplicable to proxy solicitations, the company should plan all meetings ofstockholders well in advance.

If the matters submitted to the stockholders are routine, the informationcontained in the proxy statement would include disclosure concerning directorsand voting procedures, as well as disclosure substantially similar to thatcontained in the ‘‘management,’’ ‘‘certain transactions’’ and ‘‘principalstockholders’’ sections of a company’s prospectus. The proxy statementrequires extensive disclosure regarding executive and director compensation,including a number of tables showing various elements of compensation, aswell as a CD&A, a discussion and analysis of the company’s policies andpractices regarding executive compensation, including the relationship ofcompensation to corporate performance, the relationship of compensation torisk and the nature of specific qualitative or quantitative performancemeasures. EGCs are permitted to provide fewer tables covering fewerexecutives and need not include a CD&A or a discussion regarding therelationship of compensation to risk. Public companies, other than EGCs, arealso required to regularly solicit say-on-pay votes by their stockholders, that is,non-binding votes to approve executive compensation as disclosed in the proxystatement. The proxy statement will also include a report by the compensationcommittee indicating whether the committee has reviewed and discussed theCD&A with management and whether, based on this review and discussion, ithas recommended to the board of directors that the CD&A be included in thecompany’s annual report on Form 10-K and its proxy statement. The proxystatement will also discuss the role of compensation consultants, if any, used byeither the compensation committee or management.

Also included in the proxy statement is an audit committee report discussingwhether the audit committee has reviewed with management and the auditorsspecified matters, including the independence of the company’s auditors andthe audited financial statements, and stating whether, based on thesediscussions, the audit committee has recommended to the board of directorsthat the audited financial statements be included in the company’s annualreport on Form 10-K. Fees paid to the company’s independent accountants foreach of the last two fiscal years must be disclosed and identified underspecified categories. The proxy statement must further disclose the auditcommittee’s policies relating to pre-approval of professional services to beperformed by its independent accountants.

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B. Insider Trading.1. There has been a lot of publicity about insider trading. How does that

arise?

‘‘Insider trading’’ refers to trading of a company’s securities by someone whohas material nonpublic information about the company, and who owes a dutyto that company and its stockholders not to use that information for personalgain. The duty may arise from employment or some other fiduciaryrelationship, such as service as a director. For purposes of this discussion, wewill refer to such a person as an ‘‘insider.’’ (For a discussion of ‘‘materiality,’’see Part C, question 2.)

If an insider is aware of material nonpublic information, he or she must either

• disclose the information (which is often impossible for a variety ofreasons),

• refrain from trading in the securities of the company, or

• subject himself or herself (and perhaps the company) to the risk of bothcivil and criminal liability.

2. What are the consequences of insider trading violations?

A person who has engaged in illegal insider trading faces both civil andcriminal penalties under federal law. Through a civil enforcement action, theSEC can recover an amount of up to three times the profit gained, or lossavoided, by the individual by reason of the trades. The U.S. Attorney caninitiate separate criminal proceedings, which may result in additional monetarypenalties and a prison term, the duration of which will be influenced by priorcriminal history and the amount involved, among other factors. In connectionwith any criminal or civil proceeding, of course, the importance of truthfulnessin dealing with government officials cannot be overstated. (Remember thatMartha Stewart was ultimately convicted not of insider trading but ofobstruction of justice stemming from charges that she misled investigators as towhy she sold her ImClone stock.)

Over the years, the SEC has increasingly attempted to obtain, either throughlitigation or negotiated settlements, orders barring subjects from future serviceas officers or directors of public companies, either permanently or for aspecified period of time. Professionals such as attorneys or accountants mayseparately face the loss of their professional licenses or of their ability topractice before the SEC. There may also be civil liability under the laws ofsome states, which require insiders to return insider trading profits to the

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company treasury. In addition, allegations of improper insider trading can giverise to, or strengthen, stockholder lawsuits.

For all these reasons, it is important that insiders use extreme caution whentrading stock or discussing material nonpublic information with non-insiders, soas to avoid even the appearance of impropriety.

3. Might an insider be liable for trading in the company’s securities by hisor her personal or business associates?

Yes. Insider trading laws not only prohibit insiders from trading in a company’ssecurities while aware of material nonpublic information, but also prohibitinsiders from ‘‘tipping,’’ that is, disclosing inside information to others whothen trade in the company’s securities for their own gain. Both the insidercommunicating the information (the ‘‘tipper’’) and the person who receives itand trades (the ‘‘tippee’’) may be civilly and criminally liable. It is notnecessary that the tipper have gained any financial advantage from the tippee’strades.

Suppose, for example, that an officer, aware of nonpublic information that hiscompany is about to be acquired, casually mentions the fact to another person(the ‘‘tippee’’). The tippee could be a family member, a business associate, ora friend. Although the officer may not intend the tippee to act on theinformation, early the next morning the tippee buys the company’s stock andprofits when the deal is announced later in the week. The tippee may be liablefor his or her own trades, and the officer may be civilly and criminally liablefor having given the tip. The officer’s civil liability alone could amount to orexceed the tippee’s trading profits, plus fines and penalties, even though theofficer never made a dime on the tippee’s trade.

4. Is there a way to enable executives, directors and other insiders to tradein their company’s stock safely, when presumably they will be inpossession of material nonpublic information more often than not?

Yes. An insider may establish a highly structured trading program thatcomplies with SEC Rule 10b5-1. If the insider abides by the requirements ofhis or her 10b5-1 trading plan (including any SEC interpretations of the rulesapplicable to these plans), he or she will have a complete defense to a federalinsider trading charge. The requirements for these plans are strict andinflexible, with the result that they may be far from an ideal financial planningtool. If an insider wishes to consider adopting a 10b5-1 trading plan, theinsider should definitely seek the assistance of counsel.

Under the rule, an insider can establish that a sale did not violate insidertrading laws if, prior to becoming aware of material nonpublic information, theinsider either entered into a binding contract to trade securities, instructed

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someone else to trade the stock for his or her account, or adopted a writtenplan for trading the securities. A plan, instruction or program will be sufficientif it specifies the amount of the securities, the price and the date of theproposed trade; includes a written formula or algorithm, including a computerprogram, for determining the amount, price and date of the transaction; orsurrenders all decision making concerning the securities to another person, solong as that person does not trade while in possession of material nonpublicinformation.

To gain the protection of this rule, an insider must forfeit the ability to managehis or her transactions or ‘‘time the market.’’ Plans that, in reality, turn out notto be binding at all — for example, plans that are designed to evade the realrestrictions of the rule, plans that are effectively negated by certain hedging orother offsetting transactions or plans that can be changed at will — will notqualify for this ‘‘safe harbor’’ and are likely to be challenged by the SEC.Adopting a defective plan may be worse than having no plan at all, since itmay provide a false sense of security.

Finally, it is important to keep in mind that the safe harbor afforded bytrading plans or programs described above may not provide adequateprotection under the laws of certain states.

5. Is it possible for the company to be liable for insider trading by itsemployees?

Although such liability is possible, historically companies have not usually beenheld liable for insider trading by employees. Nevertheless, in the event ofinsider trading by employees, companies will face collateral consequences, suchas the legal expense and the public taint associated with insider trading by itspersonnel.

Federal law extends potential liability for insider trading violations to a‘‘controlling person’’ who knew or recklessly disregarded the fact that a‘‘controlled person’’ was likely to engage in acts constituting an insider tradingviolation and failed to take appropriate steps to prevent these acts before theyoccurred. The penalties for the controlling person are substantial and canapply even if the controlled person’s trading profits are small. As a practicalmatter, however, it can be extremely difficult to establish that an employer hadadvance knowledge of an employee’s plan to violate the law. As a result,historically, the SEC has not attempted to do so frequently. Rather, it relies onthe deterrent effect of the negative publicity to the company that accompaniesnews that officers, directors or employees may have violated the law.

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6. How can we protect the company from the adverse effects of impropertrading by its personnel?

To avoid legal liability for trading by its employees, directors and consultants,either as a control person or an aider and abettor, and to minimize thefinancial and reputational costs associated with an insider trading enforcementaction, the company should adopt and take steps to enforce a written policy oninsider trading. It is important for officers and directors to train personnelroutinely, to enforce the policy and to otherwise ensure that it is observed.

An insider trading policy, accompanied by appropriate training andenforcement, protects the company in two distinct ways. First, it educatesemployees, directors and consultants on the laws of insider trading andestablishes internal procedures to safeguard against both intentional andunintentional illegal trading. Second, in the event that an employee, director orconsultant does violate the law, it reduces the risk that the company itself willhave any liability for those violations.

7. Do insiders have potential liability for trading in company stock even ifthey are not aware of any inside information?

Yes. Section 16 of the Exchange Act was designed to help prevent corporateinsiders — executive officers, directors and 10% stockholders — fromintentionally or unintentionally profiting from trades in company stock duringrelatively short periods of time. The statute provides for the automaticrecovery of any profits made by an insider on ‘‘short-swing’’ trading, which isdefined as the purchase and sale, or sale and purchase, of company stockwithin a six-month period. Section 16 of the Exchange Act requires insiders tofile forms with the SEC reporting their trading activities.

Section 16(b) is mechanically applied and liability is imposed irrespective of aninsider’s intent to use, or actual use of, inside information. Further, the reportsrequired to be filed by directors and other insiders are monitored byprofessional plaintiffs’ attorneys for indications of short-swing tradingviolations. Thus, even if a company might choose to ignore the short-swingtrading of its insiders, insiders who have violated Section 16(b) will still bepursued by plaintiffs’ attorneys in stockholder derivative suits. It should benoted that complex rules exist for the attribution to insiders of purchasesand/or sales by persons and entities related to insiders for the purposes ofSection 16(b).

8. What reporting requirements are insiders of public companies subjectto?

Section 16 insiders of public companies are subject to a number of reportingrequirements designed, among other things, to provide the investing public

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with information regarding their holdings and trading activity in theircompanies’ securities.

Section 16(a) of the Exchange Act requires each Section 16 insider of acompany involved in an IPO to file a Form 3 detailing his or her beneficialownership of the securities of that company no later than the effective date ofthe registration statement, typically at the same time that the IPO becomeseffective. A Form 4 generally must be filed within two business days followingthe execution of a transaction by the insider in the company’s securities.Finally, a Form 5 must be filed annually to report certain transactions thatwere not otherwise reportable or reported. All of these forms must be filedelectronically with the SEC on EDGAR. For purposes of these reportingrequirements, complex rules exist regarding beneficial ownership of securities,including rules relating to the beneficial ownership by general partners of theportfolio securities of their partnerships.

9. What are the penalties for late filings of Section 16(a) reports?

There are both civil remedies and criminal penalties available for enforcementof Section 16(a). The SEC has broad latitude in seeking civil money penalties.The SEC can seek monetary fines from individuals for any violation of thesecurities laws, up to the following limits:

• First tier: up to $7,500 per violation for violations of any type;

• Second tier: up to $75,000 per violation for violations involving fraud,deceit or manipulation, or deliberate or reckless disregard of the law;and

• Third tier: up to $150,000 per violation for violations that meet thesecond tier requirements, but also directly or indirectly result in, orcreate a significant risk of, substantial losses to others.

Although rare, willful violations of Section 16(a) can result in criminalpenalties with fines up to $5 million and imprisonment for up to 20 years foreach violation. In addition, the SEC requires each public company to disclosethe names and other relevant details of all delinquent filers and non-complyingpersons under Section 16(a) in its annual proxy statement and Form 10-K.

C. Post-IPO Disclosure and Communications with Analysts.1. Once the company is public, what kind of information will we have to

disclose?

While the securities laws do not impose on public companies a general duty todisclose material information at all times, that duty will arise as a result of a

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number of events or circumstances, for example, to satisfy a company’s SECreporting requirements, to satisfy obligations under listing agreements with theexchange on which the company’s securities are traded, when the company orits insiders are trading in the company’s own securities, to correct a priorstatement that the company learns was materially untrue or misleading whenmade, when a company is otherwise making public disclosure and the omissionof material information could be misleading, or to correct rumors in themarketplace that are attributable to the company (although the company isgenerally not required to respond to conjecture about the company exceptpursuant to stock exchange guidelines). A company may incur liability underRule 10b-5, the anti-fraud rule, to any person who purchases or sells thecompany’s securities in the market after the company’s issuance of amisleading proxy statement, report, press release or other communication.

In general, therefore, as a public company, the company should keep thesecurities markets and its stockholders informed of material developments,both favorable and unfavorable, concerning its affairs as those developmentsbecome ‘‘ripe’’ for disclosure. Toward that end, the company should establishand follow the practice of prompt and complete disclosure through the pressof all material developments that, if known, might reasonably be expected toinfluence the market price of the company’s shares, except where suchdisclosure may be delayed for valid business reasons or is otherwise prematureand not otherwise required by one of the principles described above. In theevent of nondisclosure for any reason, insiders should be advised againsttrading in the company’s securities until the information has been adequatelydisseminated. Generally, information will be considered adequatelydisseminated within three days of public disclosure of the information via pressrelease or the filing of a Form 8-K with the SEC. In addition, the SEC’sRegulation FD (Fair Disclosure) specifically prohibits the ‘‘selective’’ disclosureof material nonpublic information to investors, analysts and other securitiesprofessionals.

2. What information is considered ‘‘material’’?

The key to determining whether nonpublic information about a publiccompany is ‘‘material inside information’’ is whether dissemination of theinformation would likely affect the market price of the company’s securities orwould likely be considered important by investors who are considering tradingin the company’s securities. Examples of inside information that may bedeemed material include

• financial results or forecasts;

• significant research or product developments;

• proposed or pending private or public sales of debt or equity securities;

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• proposed stock splits, dividends or changes in dividend policy;

• major contract awards or cancellations;

• corporate partner relationships;

• proposed mergers, acquisitions, dispositions or tender offers;

• significant writeoffs;

• significant litigation;

• top management or control changes;

• pricing changes or discount policies;

• impending bankruptcy or receivership; or

• other important developments affecting a company’s business orsecurities.

Once the company has determined that disclosure is appropriate, it must takecare to ensure that the disclosure is accurate, does not omit essentialinformation and contains cautionary language, where appropriate. As a result,the company should select a spokesperson who must then be kept fullyinformed as to all material corporate developments. The company’s practicesshould include great care in the preparation of press releases and their reviewby counsel prior to dissemination.

3. What is Regulation FD?

Regulation FD was adopted by the SEC to respond to the practice bycompanies of selectively disclosing material nonpublic information to investors,analysts and other securities professionals before providing broaddissemination of the information to the general public. To satisfy the publicdissemination requirements of Regulation FD, a company may either furnishthe information on Form 8-K or by any other method of disclosure‘‘reasonably designed to provide broad, non-exclusionary distribution of theinformation to the public.’’ In the event that a senior official of the company(or other person who regularly communicates with investors and analysts)intentionally discloses material nonpublic information to a person in one of thespecified categories, including analysts, broker/dealers, investment advisers,investment companies or securityholders, the company is required tosimultaneously disseminate the information publicly. Disclosure is consideredintentional if the person making the disclosure either knew (or was reckless innot knowing) that the information was both material and nonpublic. In theevent that a company unintentionally discloses material nonpublic informationon a selective basis, then that information must be publicly disseminatedpromptly (within the later of 24 hours or the commencement of the next day’strading) after a senior official of the company knows (or is reckless in not

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knowing) that the information selectively disclosed was both material andnonpublic.

4. Can we hold an analyst conference call that complies withRegulation FD?

The SEC has stated that, with adequate public notice, conference calls andweb conferences that are open to all investors, as well as press conferencesopen to the media, are acceptable means of publicly disclosing information incompliance with Regulation FD. As a result, most companies have openedtheir quarterly conference calls to the public; however, it is not required thatlisteners be permitted to speak in these calls, simply that they be able to listento the discussions on the conference calls.

5. Will posting a press release on our web site be considered adequatepublic dissemination for purposes of Regulation FD?

While the SEC has provided some guidance on whether a company can use itsweb site as the sole medium for disseminating material nonpublic information(i.e., in lieu of issuing a press release through a wire service), the standard isstill an evolving one that depends largely on whether the company’s web site isa ‘‘recognized channel of distribution,’’ the nature of the company’s marketfollowing, the pattern of use of the web site by the company and the market,the nature of the information and the duration of posting to allow marketabsorption of the information. (See question 6 below.)

These guidelines are not easily satisfied, and, in most cases, web sites are notwidely used as the sole medium for disseminating material nonpublicinformation. You should consult with outside counsel to ensure that yourcompany has policies and procedures in place to conform your investorcommunications program with the requirements of Regulation FD.

6. What is the standard for disseminating material information solelythrough our company web site?

To determine whether a web site satisfies the public disseminationrequirements of Regulation FD, a company must consider three factors:

• whether its web site is a recognized channel of distribution, whichrequires an inquiry into the steps a company has taken to alert themarket to its web site, its disclosure practices and the actual use by themarket and investors of the web site;

• whether the information is posted in a manner designed to broadlyreach the market, which involves a facts-and-circumstances analysis into,among other things, efficient design of the web site, the pattern of website use by the company and the market, the steps the company has

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taken to make its web site current and accessible (e.g., use of pushtechnology), and the nature of the information; and

• whether there has been a reasonable amount of time after posting toallow absorption by the market, which involves consideration of whetherinvestors and the market have been given a sufficient amount of time toabsorb the information, such that a subsequent, selective disclosurewould not prejudice investors.

These determinations require a consideration of the particular facts andcircumstances for each company and should include the guidance of counsel.

7. What can we say if the company is contacted by securities analysts?

Once the company is public, securities analysts from various firms will ‘‘follow’’the company, writing research reports or issuing recommendations to investors.To prepare these reports, analysts will commonly contact the company todiscuss the company’s performance and expectations for the future. Thisfunction performed by securities analysts is generally viewed by the SEC, thestock exchanges and others as an important one in keeping the publicinformed of business developments on a timely and continuous basis.Moreover, many public companies, especially smaller or recently publiccompanies, strive to maintain good relations so as to encourage analysts tocontinue to cover the company.

Discussions with analysts, however, are inherently risky. No information givento analysts is ever ‘‘off the record.’’ Casual or ill-considered disclosure toanalysts of material nonpublic information can lead to stockholder lawsuits andSEC investigations for violations of Regulation FD, securities fraud and insidertrading. As a result, speaking with analysts and the press is, at best, aprecarious process because of the inherent tension between the competingdesires of a public company to establish and maintain a positive relationshipwith the financial community while at the same time complying with legalprinciples applicable to public disclosure. This pressure is exacerbated by theimmediacy of the interview process.

While it is important to maintain good relations with the press and analysts, itis also critical to avoid violating Regulation FD through the selective disclosureof material nonpublic information. For example, if a company provides ananalyst with specific information that suggests a possible negative developmentregarding the status of a proposed new product launch, the company may havetriggered an obligation to provide that information to the public generally,even though the company might otherwise believe disclosure to be premature.In some circumstances, this obligation could also be precipitated by confirmingthe analyst’s own projected target dates or target revenues or correctinginformation about anticipated product launches in the analyst’s draft report.Similarly, the company could be considered to have ‘‘adopted’’ the analyst’s

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projections or reports as the company’s own, increasing the company’s liabilityexposure if the projection or report turns out to be incorrect. In most cases,however, it is permissible in dealing with analysts and the press to providegeneral background information that is already part of the public record orinconsequential data regarding an event or occurrence that has already beenfully disclosed in all material respects. It is also generally permissible to correctfactual mistakes in an analyst’s report regarding information that has alreadybeen publicly disclosed.

It is strongly recommended that, whenever communicating with analysts, thecompany record a journal entry or prepare a memorandum for the company’sfiles chronicling the date, time, place, participants and nature of thecommunication, along with a summary of the information discussed.

8. What if an analyst provides an inaccurate projection?

If an analyst provides an inaccurate projection regarding the company in oneof its published reports, it is generally the analyst’s assessment and not thecompany’s responsibility unless the company confirms the information orotherwise becomes ‘‘entangled’’ in the analyst’s report. The subject ofproviding guidance to analysts is an extremely complex one and companiesshould always consult carefully with counsel whenever these issues arise.Generally, the safest course is for the company not to comment on theanalyst’s internally generated projections, because there is no safe way toprovide guidance. Disclaimers, warnings and the use of generalities rather thanspecific corrections are useful to reduce risk, but any spokesperson talking toanalysts must understand that, if he or she comments on projections orforecasts, the company risks being liable if the projections or forecasts proveincorrect or if the analyst uses this information to engage in trading in thecompany’s securities before it has been released to the public.

9. When is it permissible to make presentations at industry or investorconferences?

Once the company is public, it is quite common that the company’s insiderswill be invited to make presentations at industry or investor conferences.Participation in such conferences is often a good way to increase thecompany’s profile among the investing and business community. However,making presentations at these events carries a number of risks that companiesshould consider. Many companies now web cast the presentations in order toavoid Regulation FD concerns. If the presentations are not web cast, inadvance of appearing at conferences, companies should ensure that counselreviews any prepared speeches and presentation materials that are to be usedin connection with the presentations to ensure that the information does notpresent Regulation FD concerns. Unless they are simultaneously web cast tothe public, these events are generally not considered to be ‘‘public’’ forums for

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Regulation FD purposes, and any material nonpublic information that isintended to be disclosed in these presentations should be simultaneouslypublicly disclosed in a Regulation FD-compliant manner. Companiesparticipating in web cast conferences will often issue a press release, which isthen posted on their websites, disclosing the conferences at which its executiveswill be making presentations.

Companies that are engaged in or considering commencing an offering of theirsecurities should be particularly careful when considering making presentationsat industry or investor conferences. As described in Section III, a companythat is ‘‘in registration’’ must be careful about ‘‘conditioning the public mind orarousing public interest’’ in the company or its securities.

10. Are meetings with customers, suppliers or other members of thebusiness community subject to Regulation FD?

As noted above, Regulation FD applies only to communications made toinvestors, analysts and other securities professionals. Nevertheless, cautionshould be taken in informal meetings with customers, suppliers and othermembers of the business community not to make inadvertent disclosure ofnonpublic information that might be considered material. The SEC has statedthat the anti-fraud provisions of the federal securities laws apply to allcompany statements that can be expected to reach investors and tradingmarkets, not just SEC filings or press releases.

11. When should we comment on rumors in the marketplace about ourcompany?

Rumors often swirl regarding public companies and their securities. In theinternet age, rumors are often transmitted and re-transmitted under theprotection of anonymity and without much effort at verification. Companiesmay justifiably feel the need to respond to these rumors, and in some cases,may be required to do so under the exchange rules. However, in an attempt toavoid selective, premature or misleading disclosure problems, many companiesobserve a consistent ‘‘no comment’’ policy with respect to certain materialundisclosed corporate developments, such as strategic planning, projections orforecasts, mergers or acquisitions or fluctuations in the company’s share priceor trading volume. Companies should be aware that statements such as ‘‘Wedon’t know why our stock price has gone up’’ or ‘‘We are not involved in anymaterial strategic transaction’’ are not equivalent to ‘‘No comment.’’ Suchresponses could subject the company to potential liability for issuing false ormisleading public statements. The company should always consult with counselto determine if a press release is appropriate when material developmentsoccur that may require disclosure through formal mechanisms, or if thecompany becomes aware of rumors circulating in the marketplace.

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D. Sales of Company Stock After the IPO.1. How soon after the IPO will employees be able to sell their shares of

company stock acquired under employee plans?

All shares of company stock acquired prior to the IPO (including commonstock issued upon conversion of the company’s preferred stock and commonstock issued to employees) are considered ‘‘restricted securities’’ under thefederal securities laws, which means that they may not be sold in the openmarket unless certain conditions are satisfied.

Typically, employee shares are issued prior to the IPO under Rule 701 underthe Securities Act. That rule permits employees who are not affiliates (andhave not been affiliates for the preceding three months) of the company toresell shares they acquired under written compensatory plans 90 days after theIPO (subject to any contractual obligations described below). Employee sharesheld by affiliates of the company may also be sold 90 days after the IPO underRule 701, but a number of additional requirements would apply. (Seequestion 3.)

Persons who are not affiliates, and who have not been affiliates in thepreceding three months, who paid cash for their shares and have held them formore than one year would be able to sell their shares immediately after theIPO under Rule 144 under the Securities Act without the need to comply withany requirements, other than any contractual obligations such as lock-upagreements (described below).

Many stockholders, including many employees, will be required to sign lock-upagreements with the underwriters that will restrict their ability to sell anyshares for a specified time period following the IPO, generally 180 days (plusup to an additional number of days related to the timing and publication ofanalysts’ reports). (See Section I, Part B, question 9.) These provisions willrestrict those stockholders from selling their shares even if they have satisfiedthe Rule 701 or Rule 144 requirements.

2. Who is an affiliate?

An ‘‘affiliate’’ of a company is a person who ‘‘directly, or indirectly throughone or more intermediaries, controls, or is controlled by, or is under commoncontrol with, such issuer.’’ Directors, executive officers and significantstockholders of a company are generally considered to be affiliates of thatcompany. However, there are other relationships that could result in adetermination of affiliate status. Any determination of affiliate status shouldinvolve counsel and be conducted on a case-by-case basis.

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3. Will employees who have not exercised options be subject to anyadditional restrictions on resale once they do exercise their options afterthe IPO? What about options granted after the IPO?

No. Shares issuable upon exercise of options that were outstanding prior to theIPO may be exercised and sold under Rule 701 as described above. However,sales by affiliates of restricted stock acquired under Rule 701 must satisfy all ofthe conditions of Rule 144, other than the holding period requirement, to fallwithin the Rule 144 safe harbor.

After the IPO, the company will usually file a special registration statementcreated specifically for employee stock (an ‘‘S-8’’). Shares issued under the S-8will be freely tradable (although, once again, affiliates will need to comply withadditional requirements).

4. Some of our employees participated as investors in some of the roundsof venture financing. Are there any resale restrictions on restricted stocknot issued as employee stock? Do the same rules apply to venture fundsthat purchased stock in those rounds?

Restricted stock not issued under employee plans or for compensatorypurposes, such as common stock issued upon conversion of preferred stockpurchased in a financing, must generally be resold in compliance with therequirements of Rule 144, regardless of who acquired the stock. Rule 144provides a safe harbor that allows persons who are reselling stock acquiredfrom the issuer to avoid being deemed ‘‘underwriters,’’ as that term is broadlydefined under the securities laws. While Rule 144 is not an exclusive safeharbor, compliance with its requirements ensures a stockholder that his or hersale of shares is exempt from registration under the securities laws.

For sales by affiliates, Rule 144 requires that

• the portfolio company be, and have been for 90 days preceding the sale,a reporting company under the Exchange Act;

• the portfolio company have filed all of its SEC public disclosuredocuments, and have submitted and posted all required interactive datafiles, during the 12 months preceding the sale (or for any shorter periodthat the company was subject to the reporting requirements);

• at least six months have elapsed from the date of acquisition of therestricted stock from the issuer (or from an affiliate of the issuer);

• the sale be made in an unsolicited broker’s transaction, directly with amarket maker or in a ‘‘riskless principal’’ transaction;

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• the sale, together with all other sales of the same class of securities bythat person in the prior three months, not exceed the greater of:

• 1% of the outstanding shares of the company, or

• the average weekly trading volume of the stock for the fourcalendar weeks preceding the filing of the notice described belowor, if no notice be required, the date of receipt by the broker ofthe execution order or the date of execution directly with a marketmaker; and

• if the number of securities to be sold by the affiliate under Rule 144during a three-month period exceeds 5,000 shares or the aggregate salesprice exceeds $50,000, a Form 144 be filed with the SEC, andtransmitted to the exchange, on placement of the order to sell.

As noted above, persons who are not affiliates (and who have not beenaffiliates at any time in the past three months) may sell their restricted stockimmediately after the IPO (subject to any contractual obligations) withoutcompliance with any of the requirements of Rule 144 discussed above so longas one year has elapsed from the date of acquisition of the shares from theissuer (or an affiliate of the issuer). In addition, if at least six months haveelapsed (but less than a year), non-affiliates may resell the restricted stockunder Rule 144 if the portfolio company is, and has been for 90 dayspreceding the sale, a reporting company under the Exchange Act;, has filed allrequired SEC public disclosure documents; and has submitted and posted allrequired interactive data files during the 12 months preceding the sale (or forany shorter period that the company was subject to the reportingrequirements).

5. Are directors or other insiders subject to any additional restrictionswhen selling company securities?

Stock held by affiliates that is not restricted stock, such as stock bought on theopen market, is often referred to as ‘‘control stock.’’ Affiliates who want totake advantage of the safe harbor in Rule 144 must always comply with therule’s requirements, regardless of whether they are reselling restricted stock orcontrol stock. However, control stock acquired on the open market does nothave to meet the holding period requirement. All other requirements ofRule 144 must still be satisfied to fall within the safe harbor.

It should be noted that complex attribution rules exist for sales by persons andentities related to affiliates for the purposes of Rule 144. As mentionedpreviously, determinations of affiliate status should be made on a case-by-casebasis and should involve the assistance of counsel.

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E. Directors’ Responsibilities.1. What duties do directors have as directors of a public company?

Because of directors’ fiduciary relationships both to the company and to thecompany’s stockholders, directors are bound, in their dealings with both, bystate law duties of loyalty and care. These duties are applicable to directors ofall companies, whether public or private. From time to time, courts andcommentators have discussed other less-established duties, such as the duty ofgood faith and the duty of candor.

2. What is the duty of care?

The duty of care generally requires directors to manage the company’s affairsin good faith in a manner reasonably believed to be in the best interests of thecompany and with such care, including reasonable inquiry, as an ordinarilyprudent person in a like position would exercise under similar circumstances.Generally, the duty of care includes, for example, the responsibility to exercisediligence and pay careful attention to the affairs of the corporation, to makeinformed decisions, to use care in monitoring activities of the company and itsagents and to make reasonable inquiry. In fulfilling this duty, directors mayreasonably rely on information from agents and advisors as to matters thedirectors reasonably believe to be within their areas of professional expertiseor competence. This right is not, however, without limitation; courts havesecond-guessed some directors’ reliance on experts’ advice, such as reliance onfairness opinions, where the court believed that the directors had reason toquestion the advice, especially in light of their particular professionalbackgrounds.

3. What is the duty of loyalty?

The duty of loyalty is the duty to place the best interests of the companyahead of any personal interests of the director. Actions by directors are subjectto challenge for violation of the duty of loyalty when directors engage inself-dealing, misappropriate corporate opportunities for their own purposes orotherwise use their position of trust and confidence to further their privateinterests. Of course, some transactions involving conflicts may ultimately bebeneficial to the company. As a result, director conflict transactions are notnecessarily prohibited, but instead are typically subject to a special type ofscrutiny, including non-judicial corporate processes, such as special board orstockholder votes. In any event, directors must not allow conflicting orinconsistent personal interests to compromise their primary loyalty to theinterests of the company. If a director has a personal financial interest in atransaction, such as a merger with a company of which the director is anofficer, the director should recuse himself or herself from the decision to

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engage in the transaction, unless there are no directors without a financialinterest in the transaction. In some cases, the board should submit atransaction or compensation or benefits plan to the unaffiliated stockholdersfor approval or ratification to minimize judicial scrutiny and potential liability.

4. Is there a duty of disclosure?

The duty of disclosure, also known as the duty of candor, is not a separateduty, but stems from both the duties of care and loyalty. This duty obligates adirector to reasonably ensure that all material information is disclosed to otherdirectors and stockholders involved in the process of decision-making and thatthe information provided is truthful, frank and not misleading.

5. We’ve heard some discussion about a duty of good faith. Is there such aduty? What does it involve?

While some courts and commentators have treated the obligation to act ingood faith as a separate fiduciary duty of directors, in Stone v. Ritter, theDelaware Supreme Court made clear that, under Delaware law, therequirement to act in good faith is encompassed in the duty of loyalty. In thatcase the court stated that ‘‘[t]he obligation to act in good faith does notestablish an independent fiduciary duty that stands on the same footing as theduties of care and loyalty.’’ Instead, a director who fails to act in good faithbreaches his or her duty of loyalty because ‘‘[a] director cannot act loyallytowards the corporation unless she acts in the good faith belief that her actionsare in the corporation’s best interest.’’

In an earlier case, In Re the Walt Disney Company Derivative Litigation, theDelaware Supreme described two categories of conduct that, in its view,constitute a failure to act in good faith. The first and most culpable category,subjective bad faith, is shown by conduct motivated by an actual intent to doharm or involving a knowing violation of law. The second category includesintentional dereliction of duty or conscious disregard for the director’sresponsibilities. In contrast, the Court viewed conduct that involved only thelack of due care — conduct that constitutes only gross negligence without anymalevolent intent — to clearly not constitute bad faith; the misconduct mustbe more culpable than simple inattention or failure to be informed of all factsmaterial to the decision. The Delaware Supreme Court cited with approval thelower court’s articulation of examples of failure to act in good faith:

• where the fiduciary intentionally acts with a purpose other than that ofadvancing the best interests of the corporation;

• where the fiduciary acts with the intent to violate applicable positivelaw; or

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• where the fiduciary fails to act in the face of a known duty to act,demonstrating a conscious disregard for his or her own duties.

Directors who do not act in good faith will not be afforded the protection ofthe business judgment rule and may also be precluded from receivingindemnification, face difficulties with respect to directors’ and officers’ liabilityinsurance coverage and fail to receive the protection of exculpatory provisionstypically contained in corporate charters (see Part F, question 1).

6. What is the business judgment rule?

Typically, in making determinations on behalf of the company, boards andmost board committees are accorded broad discretion by the courts under thejudicially created ‘‘business judgment rule.’’ That is, courts will generally deferto the business judgment of directors and provide protection from liability forthose directors even if, in retrospect, the directors’ decision ultimately provesto be an unfortunate one, so long as the decision satisfies certain conditions.The decision must be made

• in good faith for a rational purpose and in the belief that it is in thebest interests of the company,

• with due care on an informed basis, and

• by directors who have no personal interest in the matter.

Some transactions, such as mergers or business combinations involving achange of control, are automatically subject to a heightened standard ofjudicial scrutiny. In these cases, the board needs to make sure that itestablishes a suitable decision-making process, which includes expert advice onsubstantive issues relating to the transaction under consideration as well as onthe board’s fiduciary duties. Ultimately, the board is responsible fordetermining whether its actions are consistent with its fiduciary duties; itcannot delegate this determination to legal counsel or other advisors.

As a result of the application of the business judgment rule, directorstraditionally have not been liable for any unfavorable outcomes of theircorporate decision-making. With respect to inadequate director oversight offraud and other illegal conduct, recent Delaware court decisions have erodedthese judicial protections, or at least rendered them less predictable.Nonetheless, other Delaware decisions have reaffirmed the high threshold thebusiness judgment rule imposes to protect the decisions and judgments madeby directors of Delaware companies, particularly in connection with businessrisk.

98

7. We understand that directors may have liability arising out of the IPO.After the company goes public, are directors subject to liability forinaccuracies in periodic disclosure reports to the SEC or otherdisclosures?

Companies and their officers and directors are subject to the risk of damageclaims for securities fraud under federal and state ‘‘anti-fraud’’ rules if theircurrent, quarterly or annual disclosures to the SEC and the public areinaccurate in any material way. Similarly, the securities laws make it unlawfulfor any person to solicit proxies in contravention of the rules and regulationsof the SEC. In this context, directors may be held liable if they knew, or in theexercise of due diligence should have known, that a proxy solicitation issued ontheir behalf contained material, false or misleading statements, or materialomissions. For example, in proxy solicitations for the election of directors,failure to adequately disclose transactions involving material self-dealing bydirectors, or similar conflict-of-interest situations, could give rise to liability.(This situation could also result in a breach of the duty of disclosure, describedabove. See question 4.)

Beyond these required disclosures, it is also possible to incur liability forsecurities fraud even where the rules are less prescriptive regarding the natureand extent of disclosures. For example, press releases, reports to stockholdersor other communications that could be expected to reach investors and tradingmarkets (including private conversations with analysts or investors) could befound to violate the anti-fraud rules if they contain material misstatements oromissions.

In addition, any individual, including a director, who is responsible for aviolation of Regulation FD (see Section IV, Part C, above), can be subject toan SEC enforcement action as either a ‘‘cause’’ of the violation or as an ‘‘aiderand abettor.’’

F. Protection of Directors.1. Given the numerous sources of potential liability to public company

directors, what means are available to shield directors from suchliability?

Congress enacted the Private Securities Litigation Reform Act in 1995 toprotect directors from liability for statements in press releases and certainsecurities filings relating to future events or future financial performance whenactual results turn out to be different from those predicted. To benefit fromthe statute’s protection, companies must identify forward-looking statements

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and disclose tailored, cautionary statements or risk factors that may causeactual results to differ materially from the forward-looking statements.

Several other means of shielding directors from personal, monetary liabilityhave evolved. Under the laws of most states, companies are given broad andflexible powers to indemnify directors who are made parties to proceedingsand incur liability by reason of their status as directors. In addition, companiescan provide for indemnification of their directors in their corporate chartersand bylaws or pursuant to separate indemnification agreements. Thesedocuments may mandate indemnification and advancement of defenseexpenses if certain standards are met, subject to any terms and conditionsimposed and potential reimbursement in certain circumstances.

In addition, under Delaware law, companies may include a provision in theircharters eliminating directors’ personal liability for monetary damages forbreaches of fiduciary duty. This provision does not limit or eliminate liabilityfor breaches of the duty of loyalty, acts or omissions not in good faith orinvolving intentional misconduct or knowing violation of law, or authorizationof unlawful dividends or other payments or transactions from which thedirector derived an improper personal benefit. Likewise, the provision does notapply to other violations, such as violations of the securities laws.

Most companies secure directors’ and officers’ liability insurance prior tocompletion of an IPO or consider increasing the company’s current coverageas a private company. Company counsel can provide names of brokers activein this area as well as advice on standard and non-standard exclusions fromcoverage.

Insurance, indemnification and charter provisions and the use of the forward-looking cautionary statements cannot preclude entirely the unpleasant andtime-consuming process of being sued. However, these tools may substantiallyreduce the likelihood that a director will face personal monetary liability.

2. May a company indemnify its directors against all liability?

In most cases, indemnification and insurance are unavailable for short-swingtrading, certain breaches of fiduciary duties and violations of the anti-fraudlaws. In addition, the SEC has taken the position that indemnification ofofficers and directors for liabilities arising in connection with violations of theSecurities Act, such as those arising in the context of a public offering ofsecurities, is contrary to public policy and therefore unenforceable. As a result,in the registration statement for an IPO, a company will be required to agreeto submit any such claim for indemnification of securities law violations to anappropriate court for final determination.

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EXHIBIT A

SAMPLE INITIAL PUBLIC OFFERINGTIME AND RESPONSIBILITY SCHEDULE

High-Tech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CompanyRepresentatives of the Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . UWCooley LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CooleyUnderwriters’ Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UCAuditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AU

INITIAL PUBLIC OFFERINGTIME AND RESPONSIBILITY SCHEDULE

Date Action Responsibility

Week 1 (1) Due diligence:• Review certificate of Cooley, UC

incorporation, bylaws andmaterial agreements

• Review corporate records Cooley(2) Begin preparation of the following:

• Registration Statement All• Directors’ and Officers’ and 5% Cooley

Stockholders Questionnaires• Resolutions for board of Cooley

directors meeting• Underwriting documents UC• Blue Sky Memorandum Cooley

(3) Organizational meeting and due Alldiligence sessions

(4) Determine whether Company is an CooleyEGC

Week 2 (1) If Company is an EGC, determine Company, UW,whether Registration Statement Cooley, UCwill be submitted for confidentialreview by the SEC staff (ifconfidential submission is planned,items identified below with an ‘‘*’’generally will be completed closerto the date when the RegistrationStatement is actually filed)

A-1


(2) Begin process to select form of Companystock certificates and banknotecompany

(3) Begin process to select Transfer CompanyAgent and Registrar

(4) Begin process to select Printer Company(5) Begin readying all exhibits for Company, Cooley

electronic transmission(6) Meeting with auditors to conduct UW, Cooley, UC,

accounting due diligence AU(7) Preparation of Underwriting UC

Agreement and related documents(8) Preparation of application for Company, Cooley

listing of shares on NASDAQ (orNYSE)

(9) Distribute first draft of CooleyRegistration Statement to workinggroup

(10) Drafting session and continued due Alldiligence

(11) Determine whether confidential Company, Cooleytreatment will be requested for anyof the exhibits filed with the SEC

Week 3 (1) Prepare requests for confidential Cooleytreatment (if required)

(2) Select form of stock certificates Companyand banknote company

(3) Select Transfer Agent and CompanyRegistrar

(4) Select Printer Company(5) Continue legal and bankers due Cooley, UC, UW

diligence(6) Distribute drafts of Underwriting UC

Agreement and related documents(7) Apply for listing of shares on Company, Cooley

NASDAQ(8) Distribute second draft of Cooley

Registration Statement to workinggroup

(9) Drafting session All

Week 4 (1) Continue legal and bankers due Cooley, UC, UWdiligence

A-2


(2) Negotiate Underwriting Agreement Cooley, UCand related documents, includinglegal opinions

(3) Distribute third draft of CooleyRegistration Statement to workinggroup

(4) Drafting session All

Week 5 (1) Continue legal and bankers due Cooley, UC, UWdiligence

(2) Distribute revised draft of CooleyRegistration Statement to workinggroup

(3) Drafting session All(4) Distribute revised draft of Cooley

Registration Statement to workinggroup and printer

Week 6 (1) Drafting sessions and continued Cooley, UC, UWdue diligence at printer

(2) Receive Officers’ and Directors’ Company, Cooleyand 5% Stockholders’Questionnaires; furnish copies toUC

(3) Obtain signature pages for CompanyRegistration Statement fromdirectors and officers

(4) Prepare transmittal letters to UWsyndicate; provide mailinginstructions and labels to printer*

(5) Board meeting to adopt resolutions Company, Cooleyto authorize offering, appoint aPricing Committee, authorizeexecution and filing / confidentialsubmission (if applicable) ofRegistration Statement,amendments and related matters

(6) Draft filing press release UW(7) Wire registration fee to SEC Company

account*(8) Prepare transmittal letter to SEC Cooley(9) Electronically file or submit Company, Cooley

confidential draft RegistrationStatement with SEC

A-3


(10) Issue press release announcing Company, UWfiling*

(11) File Blue Sky applications (if UCrequired)*

(12) File Form 8-A Registration Company, CooleyStatement to register shares under1934 Act*

(13) File Underwriting Agreement, UCRegistration Statement andcertified check with FINRA*

During Waiting Period (1) Discuss proposed syndicate listwith Company

(2) Contact SEC to determineanticipated review period

(3) Prepare Form(s) S-8 for filing withSEC

Week 7 (1) Preparation of road show at the Company, UWCompany

(2) Complete Blue Sky review and UCapplications

Week 8 Finalize road show at UW Company, UW

Remainder of schedule depends on timing of SEC comments (typically 30 days or longer)and market conditions.

Beginning with the date (1) Prepare amendment to Allof receipt of SEC Registration Statement andcomments response to SEC comments (more

than one amendment may berequired depending on the extentof the comments, cheap stockissues and whether or not theCompany is objecting to certaincomments)

(2) If Registration Statement was Cooleypreviously submitted forconfidential review to the SEC,publicly file the draft RegistrationStatement through EDGAR withthe SEC (at least 21 days prior toplanned road show)

(3) Receive NASDAQ approval Company, Cooley

A-4


(4) Finalize Underwriting Agreement Cooley, UCand related documents, includinglegal opinions

(5) Print preliminary prospectus for Printerdistribution

(6) Conduct domestic and Company, UWinternational road show (may notbe less than 21 days afterRegistration Statement filed withthe SEC if previously subject toconfidential review pursuant to theJOBS Act)

(7) Request acceleration of Cooley, UWRegistration Statement

(8) Prepare letter regarding UWdistribution of preliminaryprospectus

(9) Contact NASDAQ regarding Cooleyplanned effective date

(10) Prepare closing documents (legal Cooley, UWopinion, officers’ certificate, etc.)

Effective Date (1) Registration Statement declared SECeffective

(2) Form 8-A registration declared SECeffective

(3) File Form(s) S-8 Cooley(4) Meeting at printer to prepare All

430A/424(b) prospectus(5) Deliver comfort letter to UW AU

Afternoon of Effective (1) Determine public offering price Company, UWDate — after market (2) Sign Underwriting Agreement Company, UWclosesOffering Date (1) Commence public offering UW

(2) Release wires to underwriters and UWdealers

(3) Issue press release Company, UW(4) Print final prospectus Printer(5) Mail 430A/424(b) prospectus to Cooley

SEC(6) Publish tombstone advertisement UW(7) Mail final prospectus to FINRA UC

and advise Blue Skycommissioners, where required

A-5


(8) Distribute final documents to UWsyndicate

(9) Distribute Closing Memorandum UC(10) Finalize legal opinions, certificates, Cooley, UC, AU

bring-down comfort letter andother closing documents

Offering Date + Preliminary Closing All2 Business Days

Offering Date + Closing All3 Business Days

Closing Date + 25 days Quiet Period Company, UW

A-6

EXHIBIT BSAMPLE AGENDA FOR

ORGANIZATIONAL MEETING

I. Review and Complete Working Group List

II. Review Time ScheduleA. SEC review periodB. Drafting sessions and due diligenceC. Stockholder communications

1. piggyback rights2. proposed lock-up

D. Board of directors’ meetingsE. Filing/offering timingF. Road showG. Preparing exhibits for electronic filingH. Other lead-time items

III. Discuss Proposed OfferingA. Size of offeringB. Primary and secondary componentsC. Determine whether to submit the Registration Statement to the

SEC on a confidential basisD. General discussion of use of proceedsE. Overallotment optionF. Review existing stockholder list

1. registration rights2. Rule 144 and Rule 701 stock

G. Number of shares authorized (stock split)H. Lock-up agreementI. Distribution objectivesJ. Directed sharesK. Possibility of confidential treatment being requested

IV. Review Legal IssuesA. EGC statusB. Outstanding claimsC. Loan agreement restrictions or other consents needed to offer the

sharesD. Board and committee composition

1. determine ‘‘independence’’ of directors and audit andcompensation committee members for SEC and SROrequirements

2. determine ‘‘financial expert’’ for audit committee3. discuss establishment and composition of other committees

(strategic planning, public policy)

B-1

E. Reincorporation or other antitakeover considerationsF. Board Meetings

1. preparation of resolutions and appropriate boardauthorizations

2. filing registration statement3. officers’, directors’ and principal stockholders’ questionnaires4. pricing committee

G. Disclosure of confidential agreementsH. Related party and certain transactions disclosures. Outstanding

loans to officersI. Required stockholder approvalsJ. Expert opinions

V. Discuss Financial and Accounting MattersA. Audited financialsB. Availability of quarterly financialsC. Comfort letterD. Management lettersE. Any special accounting issues

VI. Discuss Publicity PolicyA. Pre-filing, post-filing/pre-effective, post-offering periodsB. Pending newspaper/magazine articles to be publishedC. Other corporate announcementsD. Filing press release(s)E. Scrubbing website

VII. Discuss Printing of DocumentsA. Selection of printer and banknote companyB. Use of color, picturesC. Volume requirements

VIII. Due Diligence ReviewA. Management interviewsB. References for customer/supplier due diligenceC. Detailed competitive analysisD. Projected financials (revenues, earnings, backlog)E. Methodology and models for financial planningF. Product brochures, trade press, other public relations materials

IX. Discuss Form and Contents of Registration Statement

X. Discuss Road Show Presentation

XI. Legal Due Diligence/Review of Corporate Records

B-2

EXHIBIT C

SAMPLE DUE DILIGENCE CHECKLIST

The documents and materials itemized below constitute a preliminary duediligence list of materials which the underwriters are likely to request forreview with respect to the Company and its subsidiaries and other affiliates.

I. GENERAL CORPORATE

A. Basic corporate documents for the Company and anysubsidiaries.1. Articles/Certificate of Incorporation, including

amendments.2. Bylaws, including amendments.3. Minutes of all meetings of directors, committees of

directors and stockholders, including copies of notices ofall such meetings where written notices were given, andcopies of all Written Consents.

4. List of states and foreign countries where qualified to dobusiness.

5. A list of all states and foreign countries where theCompany operates its business or maintains inventory,owns or leases property or has employees, agents orindependent contractors with approximate size, number ofemployees and a description of services performed at eachlocation.

6. A list of all current officers and directors of the Company.7. Business Plans.

B. Previous issuances of common stock, preferred stock, warrants,options, debentures, bonds or any other securities.1. A capitalization schedule setting forth the number of

authorized, issued, outstanding and treasury shares of eachclass of securities for the Company.

2. Schedules setting forth all issuances or grants of stock andoptions by the Company, listing the names and addressesof the issuees or grantees, the amounts issued or granted,the dates of the issuances or grants and the considerationreceived by the Company in each case.

3. Lists of all current record and beneficial owners of stockfor the Company, including addresses, number of sharesowned and certificate number.

4. Same information as specified in (B)(3) above for holdersof any other outstanding securities.

C-1

5. List of all options and warrants currently outstanding,including names and addresses of option and warrantholders, the number of options and warrants held by each,the exercise price, expiration date, vesting schedule andnumber of shares vested and unvested.

6. Samples of stock certificates, warrants, options, certificatesand any other outstanding securities.

7. Copies of any voting trust, stockholder or other similaragreement covering any portion of the Company’s shares.

8. All material written communications with stockholderssince inception.

9. Stock option plans and forms of option agreements whichhave been used.

10. Copies of all agreements and instruments granting optionsor warrants or other rights to purchase shares of capitalstock of the Company.

11. Stock purchase agreements which have been used for salesof any equity.

12. Copies of all offering circulars, private placementmemoranda and prospectuses relating to the offer or saleof the capital stock or debt of the Company.

13. Any other agreements relating to sales of securities of theCompany, including Buy-Sell and Right of First RefusalAgreements.

14. Copies of all agreements and instruments containingrestrictions on transfer, encumbrances upon, or otherrestrictions with respect to, the capital stock of theCompany.

15. Permits or other state or federal securities law filings forissuance or transfer of Company’s securities.

16. Any other agreements relating to registration rights.17. Other employee stock plans of any sort.

C. Material contracts, agreements, information and literature ofthe Company.1. List of major suppliers, distributors and manufacturers.2. List of major customers and revenues received from each

such customer for the last three fiscal years and forecastfor the current fiscal year.

3. Description of any significant customer relationshipterminated or suspended within the last three years.

C-2

4. Percentage of sales contributed by each major product forthe last three fiscal years and forecast for the current fiscalyear.

5. New products which are expected to be introduced in thenext two years and forecast revenues for these products.

6. Any material studies relating to products.7. Contracts with major distributors, including, without

limitation, all agreements with warehouse distributors.8. Contracts with major customers.9. Sample contracts with other customers.10. Contracts with major suppliers or manufacturers.11. Sample contracts with other suppliers or manufacturers.12. Insurance policies.13. Partnership agreements.14. Joint venture agreements.15. Research and development agreements.16. Technical cooperation agreements.17. Permits and distributorship agreements.18. Import/export licenses.19. Copies of all agreements currently in force and a

description of all transactions within the last five yearsbetween the Company on the one hand and persons whowere or are directors or officers of the Company or thedirect or indirect owners of more than 5% of the capitalstock of the Company (or their affiliates or familymembers).

20. Product literature distributed or to be distributed to thepublic.

21. Advertising and marketing literature.22. Other material contracts outstanding.23. All documentation relating to product acquisitions.24. List of current (or likely future) competitors.25. Current notices, consents, information requests, permits,

licenses, approvals and certificates of authority fromfederal, state and local authorities held or required to beheld by the Company.

26. Product warranties.

II. LOAN DOCUMENTS

A. A copy of all documents and agreements, includingamendments, renewal letters, and notices, evidencingoutstanding borrowings of the Company.

C-3

B. Copies of all documents and agreements evidencing othermaterial financial arrangements of the Company, includinglendings, sale and lease back arrangements, capitalized leases,inventory financing agreements, construction loans, mortgages,real estate and other material installment purchases, materialequipment leases, etc.

C. Copies of all documents and agreements evidencing othermaterial financial arrangements of the Company, includinglendings, sale and lease back arrangements, capitalized leases,inventory financing agreements, construction loans, mortgages,real estate and other material installment purchases, materialequipment leases, etc.

D. Copies and description of all loan transactions, evidences of anyindebtedness and other obligations of and to the Company to,or from, any affiliate, stockholder, officer, director or employee.

E. A list and copies of guarantees and indemnity undertakingsentered into by the Company.

III. PROPERTIES

A. Title reports for any real property owned by the Company.B. Documentation regarding the purchase or transfer of real

property of the Company.C. All documents purporting to create liens, mortgages, security

agreements, pledges, charges or other encumbrances on real orpersonal property against material assets of the Company.

D. All Uniform Commercial Code financing statements filed.E. Lease agreements for offices and other facilities of the

Company.

IV. ENVIRONMENTAL

A. Environmental or safety studies, audits, assessments or reportsprepared by, for or in the possession of the Company andcitations, notices, orders or requests relating to mattersinvolving the Company.

B. Agreements pursuant to which the Company is obligated tomake any payment for environmental clean-up or compliance oris obligated to indemnify any other party for the cost of suchclean-up or compliance.

C. Other documents, records and logs not specifically identifiedabove that relate to potential or alleged violations,investigations, litigation or responsibility under any applicableenvironmental laws.

C-4

D. Chemical and/or hazardous materials usage records, including alisting of all chemicals used and any Hazardous MaterialsManagement Plans, Emergency and Hazardous Chemicalinventory forms and documents concerning the EmergencyPlanning and Community Right-to-Know Act.

V. INTELLECTUAL PROPERTY

A. List of patents or pending applications (both domestic andforeign) of the Company.

B. Trademarks/servicemarks, trademark/servicemark registrations orpending applications of the Company.

C. List of trade names of the Company.D. Copyrights, copyright registrations or pending applications of

the Company.E. License agreements of the Company.F. A schedule of all intellectual property licensed to the Company

and used in or relating to the business of the Company.G. A schedule of all intellectual property licensed by the Company.H. License and technology transfer agreements and other

agreements of the Company regarding technology withfounders, corporate partners or other parties.

I. Proprietary Information and Inventions agreements withemployees of the Company.

J. Royalty agreements of the Company.

VI. ACQUISITION DOCUMENTS

A. Agreements re divestiture of assets of the Company.B. Stock purchase agreements of the Company.C. Acquisition agreements of the Company.D. Asset purchase agreements of the Company.E. Documentation of merger with any predecessor corporations.F. All material documents relating to any major acquisition,

disposition, reorganization or other extraordinary corporateevent of material significance to the Company.

G. A description of all planned acquisitions and dispositions by theCompany.

H. Agreements re sales to government entities of the Company.

VII. SEC INFORMATION OF THE COMPANY

A. All SEC filings and material correspondence

C-5

B. A list and copies of any third party information used, or to beused, as source material in citations to any of the Company’sSEC documents.

VIII. LITIGATION, ASSESSMENTS OR CLAIMS

A. Copies of documentation and pleadings relating to any lawsuit.B. Settlement documents.C. A description and copies of all outstanding orders and

judgments of any court or other administrative or regulatorybody or arbitrator binding upon the Company.

D. Correspondence, memoranda and notes concerning any disputewith suppliers, competitors or customers regarding any claim foran amount in excess of $10,000, or any claim or potential claimas to the licensing or use of technology.

E. Correspondence with auditors regarding threatened or pendinglitigation, assessments or claims.

F. Correspondence, memoranda and notes concerning UnitedStates government contract violations.

G. Correspondence, memoranda and notes concerning inquiriesfrom federal or state tax authorities.

H. Correspondence, memoranda and notes concerning inquiriesfrom federal or state occupational safety and hazard officials.

I. Correspondence, memoranda and notes concerning any claim orpotential claim involving the prior employment of, or inventionsof, any employee or consultant of the Company.

J. Correspondence, memoranda and notes concerning inquiriesfrom federal or state authorities regarding equal opportunitiesviolations.

K. Correspondence, memoranda and notes concerning warrantyclaims.

L. Correspondence, memoranda and notes concerning inquiriesfrom federal or state officials regarding consumer product safetymatters.

M. Correspondence, memoranda and notes concerning inquiriesfrom federal or state environmental officials.

N. Correspondence, memoranda and notes concerning inquiriesfrom federal authorities regarding antitrust matters.

O. Correspondence, memoranda and notes concerning inquiriesfrom federal or state agencies regarding compliance with anyother law, rule or regulation.

C-6

P. Correspondence, memoranda and notes concerning anylitigation involving a key supplier, distributor or customer thatmay have a material impact on the Company.

Q. Attorneys’ opinion letters to auditors in connection with audits.R. Attorneys’ letters to management on status of lawsuits.

IX. EMPLOYEE DOCUMENTATION

A. Organization chart, indicating the number of employees bydepartment and functional area.

B. Employment contracts, agreements with consultants, orindependent contractors and commissions arrangements.

C. Indemnification agreements with directors and officers for theCompany.

D. Management incentive or bonus plans for the Company.E. Correspondence, memoranda and notes concerning labor or

employment disputes.F. Correspondence, memoranda and notes concerning any pending

or threatened work stoppage(s).G. Collective bargaining agreements, if any.H. Employment, confidentiality, noncompetition or any similar

agreements with employees including noncompetition or anysimilar agreements between any key employee and an employerother than the Company.

I. Copies of all severance plans and summary plan descriptions.J. Copies of all employee pension benefit plan documents

(including pension, profit-sharing, 401(k) and retirement plans)and related agreements (including adoption agreements, trustagreements, summary plan descriptions and annuity contracts).

K. Copies of IRS determination letters for employee pensionbenefit plans.

L. Copies of all employee welfare benefit plan documents(including health, cafeteria, long-term and short-term disability,and life insurance plans) and summary plan descriptions.

M. Copies of Form 5500’s (the annual return/report filed with theIRS) for all ERISA plans.

N. Copies of COBRA notices and election forms (if applicable),specifically: (a) notice upon commencement of participation inhealth plan; (b) qualifying event notice; and (c) qualifying eventelection form.

O. Documentation regarding whether health plan is insured orself-funded.

C-7

P. Documentation regarding any employer maintained retireehealth benefits.

X. AUDIT DOCUMENTATION

A. Management letters from auditors concerning internalaccounting controls in connection with all audits since inception.

B. All letters that have been sent to the Company in connectionwith all audits since 1990.

C. Description of any change in accounting policy or procedureduring the past five years.

XI. FINANCIAL DOCUMENTATION

A. Copies of all audited and unaudited financial statements of theCompany for the past five fiscal years.

B. A description of and reason for all recent material changes inaccountants, accounting methods or principles.

C. Tax returns for the last five fiscal years.D. List of banks or other lenders with which Company has a

financial relationship (briefly describe nature of relationship —lines of credit, etc.).

E. Most recent projected financial and cash flow statements.F. Any off balance sheet liabilities.

XII. MISCELLANEOUS

A. Analyses of the Company or their industries prepared byinvestment bankers, engineers, management consultants,accountants or others, including marketing studies, creditreports and other types of reports, financial or otherwise.

B. All significant recent management, marketing, sales or similarreports or memoranda relating to broad aspects of the business,operations or products of the Company.

C. All press releases issued by the Company during prior fiveyears.

D. Any other documents or information which, in your judgment,are significant business of the Company or which should beconsidered and reviewed in making disclosures regarding thebusiness and financial condition of the Company to prospectiveinvestors.

C-8

SUMMARY IPO TIMELINE

16 weeks before Effective Date Organizational meeting and duediligence sessions

Draft of registration statementdistributed

15 - 11 weeks before Effective Date All hands drafting sessions, continueddue diligence

10 weeks before Effective Date All hands drafting session at financialprinter

File registration statement with SEC(via EDGAR) or submit registrationstatement on a confidential basis toSEC

5 weeks before Effective Date Receive and respond to SECcomments

File registration statement with SEC(via EDGAR) if previously submittedon a confidential basis

Print and distribute preliminaryprospectus

3 weeks before Effective Date Receive and respond to additionalSEC comments

Print and distribute preliminaryprospectus

2 weeks before Effective Date Conduct road show

Effective Date Registration statement declaredeffective by the SEC

Afternoon of Effective Date (after Pricing of the offering sharesmarket close)

Day after Effective Date Trading of offering shares commences(‘‘Trading Date’’)

2 business days after Trading Date Preliminary closing

3 business days after Trading Date Closing(‘‘T + 3’’)

Merrill DataSite®Merrill DataSite is the industry-leading virtual data room (VDR) that empowers cost-effective information sharing and collaboration between and within organizations. With DataSite, documents and data are instantaneously accessible any time of day from anywhere in the world both inside and outside firewalls.

This transformation of traditional paper-based data into a secure, centralized virtual data room, enables the entire IPO team to easily and securely comb through online materials in order to assess critical information and collaborate on the review process, yielding faster, more efficient drafting of all SEC-required documentation.

And with second-to-none security, including the industry’s only ISO 27001 certification, DataSite is the ideal solution for exchanging and managing extremely confidential, proprietary or regulated data.

Merrill Dimensions™ eNewsletterThe Merrill Dimensions eNewsletter provides regular updates and industry news briefs on topics related to:

• Securitiesregulationanddisclosure• FinancialreportingincludingXBRL• FASB• GAAPandIFRSaccounting• Investorrelations• Sarbanes-OxleyandDodd-Frankconcerns• SECenforcement• Corporategovernance• Directors’duties• Taxationrelatedtodisclosureanddealmaking• Globalmarketsregulation• Corporatelaw

To receive a complimentary copy of Merrill Dimensions, simply register at www.merrillcorp.com/XBRL

Merrill Corporation U.S. Offices

MERRILL CORPORATION

Irvine, CA 949.252.9449

West Los Angeles, CA 310.407.0999

Los Angeles, CA 213.253.5900

Palo Alto, CA 650.493.1400

San Diego, CA 858.623.0300

San Francisco, CA 415.357.4300

Denver, CO 303.572.3889

Washington, DC 202.331.2424

Atlanta,GA 404.237.0038

Chicago, IL 312.786.6300

Boston, MA 617.535.1500

Troy, MI 248.524.0210

St. Paul, MN 651.646.4501

Minneapolis, MN 612.338.1181

New York, NY 212.620.5600

Philadelphia, PA 215.246.0404

Dallas,TX 214.754.2100

Houston,TX 713.650.9640

Seattle, WA 206.623.5606

Corporate HeadquartersOne Merrill CircleSt. Paul, MN 55108800.688.4400www.merrillcorp.com

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