4.1 Overview
An IPO commonly occurs as the initial sale of equity or debt securities to the public by a private company that registers its securities on Form S-1. However, there are other situations in which debt or equity securities can be initially registered with the SEC, such as transactions involving (1) the exchange of private debt securities for debt securities registered on a Form S-4, (2) the registration of shares that are used to pay for the acquisition of a target on a Form S-4 in a merger, (3) the registration of currently outstanding equity securities (e.g., in secondary offerings), and (4) the distribution of shares in a spin-off transaction performed by a public company (typically on a Form 10).
In recent years, apart from undertaking the traditional IPOs or
other financing activities, many private operating companies have merged with SPACs
to raise capital. A SPAC is a newly formed company that raises cash in an IPO and
uses that cash or the equity of the SPAC, or both, to fund the acquisition of a
private operating company (the “target”). After a SPAC merges with a target, the
target’s financial statements become those of the combined public company.
Therefore, a target will need to devote a considerable amount of time and resources
to technical accounting and reporting matters. Since a SPAC’s shareholders are
required to vote on the transaction, the SPAC may file either (1) a proxy statement
on Schedule 14A or (2) a combined proxy and registration statement on Form S-4.
These documents must include the target’s financial statements, which are expected
to comply with public-company GAAP disclosure requirements as well as SEC rules and
requirements. The financial statement requirements and review of a
proxy/registration statement are largely consistent with the requirements and review
for a traditional IPO. Therefore, the discussion below related to IPO registration
statements may also apply to SPAC transactions.
Once submitted to or filed with the SEC, an IPO registration statement is
processed and reviewed by the Division staff. A company can generally expect the
staff to complete its initial review and furnish the first set of comments within 30
calendar days. While the number of comments issued during the initial review can
vary substantially, a registrant may expect, on the basis of a sample of recent
IPOs, approximately 23 comments.1 Upon receiving such comments, the company would respond to each of them and
reflect requested edits, as well as any other updates, in an amended IPO
registration statement, which the SEC will also review. After the initial filing,
the SEC’s review time can vary significantly but typically is within two weeks. A
company can expect several rounds of comment letters with follow-up questions on
responses to original comments as well as additional comments on new information
included in the registration statement. For additional information about the IPO
registration statement process, see Deloitte’s Roadmap Initial Public Offerings.
The SEC staff’s review of the initial registration statement is typically comprehensive, covering reporting, accounting, and legal issues. In addition, the SEC staff’s comments often focus on the following reporting topics (most of which are further discussed in Section 3.2):
- Registrant financial statement issues, including predecessor reporting (Regulation S-X, Rule 3-01).
- Significant business acquisitions (Regulation S-X, Rule 3-05).
- Investments in equity method investees (Regulation S-X, Rule 3-09).
- Guarantors of registered securities (Regulation S-X, Rules 3-10 and 13-01).
- Restrictions on dividends or net assets (Regulation S-X, Rules 4-08(e), 5-04, and 12-04).
- Pro forma financial information (Regulation S-X, Article 11).
It is also common for the SEC staff to comment on IPO registration statements to
address accounting and disclosure topics such as (1) complex equity instruments (see
Sections 2.4 and
2.8); (2)
share-based compensation, including equity securities issued as compensation in
periods before an IPO (commonly referred to as “cheap stock” considerations) (see
Section 2.21); (3)
revenue recognition (see Section
2.18); (4) MD&A (see Section 3.1); and (5) non-GAAP measures and
metrics (see Section
3.4). In addition, the SEC staff comments on certain issues that are
more specific to IPO registration statements; such issues are discussed in this
chapter.
The SEC also frequently comments on the need for expanded
disclosures about the actual and expected impact of recent emerging issues. For
example, comment letters have focused on the need for expanded disclosures about the
impacts of the COVID-19 pandemic, supply-chain disruptions, inflationary pressures,
rising interest rates, Russia’s invasion of Ukraine, risks related to international
operations, and environmental issues such as climate change. Recently, the SEC staff
has also issued more comments asking registrants to provide and expand on required
disclosures related to risks associated with operations in China (see Section 5.3 for further discussion of China-based
operating companies). To further assist registrants, the Division has released
several sample comment letters regarding some of the emerging issues. See Section 3.3.2 for further
information.
Footnotes
1
In a randomly selected sample comprising 50 IPOs completed
within the 12-month period ended July 31, 2023, registrants received an
average of 23 comments during the initial review of their respective
registration statements filed or draft registration statements submitted,
with numbers ranging from a handful of comments to 37 comments.