IV. Guidance Applicable to Initial Public Offerings

 If a planned distribution to owners (whether declared or not, whether to be paid from proceeds or not) is not reflected in the latest balance sheet but would be significant relative to reported equity, a pro forma balance reflecting the distribution (but not giving effect to the offering proceeds) should be presented along side the historical balance sheet in the filing. (See SAB Topic 1.B.3.)

 Generally, the historical balance sheet or statement of operations should not be revised to reflect conversions or term modifications of outstanding securities that become effective after the latest balance sheet date presented in the filing, although pro forma data presented along side of the historical statements (as discussed below) may be necessary. However, if the registrant and its independent accountants elect to present a modification or conversion as if it had occurred at the date of the latest balance sheet (with no adjustment to earlier periods), the staff ordinarily will not object unless the original instrument legally accrues interest or dividends or accretes toward redemption value after that balance sheet date, or if the terms of the conversion do not confirm the historical carrying value at the latest balance sheet as current value.

 In order to facilitate an initial public offering by some companies, underwriters have requested certain promoter/shareholder groups (or all shareholders of a closely held company) to place their shares in escrow, with subsequent release of the shares contingent upon the registrant's attainment of certain performance-based goals. Although these shares are legally outstanding and are reported as such on the face of the balance sheet, the staff considers the escrowed shares to be "contingent shares" for purposes of calculating earnings per share under SFAS 128. In addition, the staff views the placement of shares in escrow as a recapitalization by promoters similar to a reverse stock split. The agreement to release the shares upon the achievement of certain criteria is presumed by the staff to be a separate compensatory arrangement between the registrant and the promoters. Accordingly, the fair value of the shares at the time they are released from escrow should be recognized as a charge to income in that period. However, the arrangement is not presumed to be compensatory if the shares are released to a person who has had no relationship to the registrant other than as a shareholder (for example, is not an officer, director, employee, consultant or contractor), and that person is not expected to have any other relationship to the company in the future.

 Rule 3-05 of Regulation S-X and Item 310 of Regulation S-B identify the financial statements of businesses recently acquired or likely to be acquired that must be included in a registration statement. In some cases involving IPOs, strict application of the rule is problematic or results in provision of financial statements that are clearly not material. Registrants preparing an IPO should consider the applicability of Staff Accounting Bulletin 80 (Topic 1:J). SAB 80 is an interpretation of Rule 3-05 for application in the case of initial public offerings involving businesses that have been built by the aggregation of discrete businesses that remain substantially intact after acquisition. The SAB permits the registrant to consider the significance of recently acquired and to be acquired companies based on pro forma financial statements for the registrant's most recently completed fiscal year. The pro forma financial statements assume all businesses to have been acquired at the beginning of that fiscal year (for income tests) and at the end of the fiscal year (for asset and investment tests). Under the provisions of SAB 80, the registrant may exclude pre-acquisition financial statements of businesses not included for at least nine months in the registrant's audited financial statements to the extent that the sum of their highest significance levels is less than 10%. Pre-acquisition financial statements of businesses not included for at least 21 months may be excluded to the extent that the sum of their highest significance levels is less than 20%. Pre-acquisition financial statements of businesses not included in the registrant's audited financial statements for at least 33 months may be excluded to the extent that the sum of their highest significance levels is less than 40%. SAB 80 was not impacted by the recent revisions to Rule 3-05.