On the Radar
Initial Public Offerings
The past 12 months have been marked by the highest level of initial public offerings
(IPOs) in recent history. In a “traditional” IPO, a private company becomes public
by selling its equity in a formal underwritten offering. Although such an offering
has historically been the most common way to raise public capital, 2020 was a
record-breaking year for special-purpose acquisition companies (SPACs) and this
trend has continued in 2021. Many private operating companies have continued to
merge with SPACs to raise capital rather than undertaking traditional IPOs or using
other financing alternatives. Direct listings have also become more frequent.
Companies can also go public by registering debt securities, distributing shares in
a spin-off transaction, or registering securities issued by real estate investment
trusts (REITs).
Before a company commences a public offering of securities, it must file a
registration statement with the SEC under the applicable securities laws. Both the
form used to file the registration statement and the filing and review process will
depend on the nature of the offering. Companies undertaking a traditional IPO can
voluntarily submit a draft registration statement to the SEC staff for confidential,
nonpublic review. The ability to file confidentially is a significant benefit
because it allows companies to keep potentially sensitive information from customers
or competitors until later in the IPO process. Confidential initial submissions are
subsequently filed publicly no later than 15 days before (1) a roadshow or (2) the
requested effective date of the registration statement if no roadshow is
planned.
Once submitted to or filed with the SEC, a registration statement is reviewed by the
staff of the SEC’s Division of Corporation Finance, which will generally complete
its initial review and furnish its first set of comments within 30 calendar days.
The company then responds to each of the staff’s comments and reflects edits to the
draft registration statement in an amended filing, which the staff will also review.
A company can expect several rounds of comment letters containing follow-up
questions on responses to original comments as well as additional comments on new
information included in the amended registration statement. After the initial
review, subsequent comments are typically furnished within two weeks. For more
information about typical SEC staff comments, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry
Insights.
Identifying the Required Financial Statements
A company must determine what financial statements are required in the
registration statement. While this determination may appear straightforward,
additional complexities may arise because a company may first need to determine
the legal entity that will become the SEC registrant. For example:
- A company may succeed to substantially all of the business of another entity (or the “predecessor”) for which financial statements are required.
- A company may be a carved-out entity that previously existed only as a subset of a larger parent entity or may be a combination of individual entities joined to form a larger public company.
- A company, a subsidiary, or a subset of subsidiaries may issue securities, guarantee securities, or otherwise have dividend restrictions that trigger requirements for the inclusion of separate financial statements or financial statement schedules in the IPO registration statement.
Further, a registrant may need to consider whether separate
financial statements or pro forma financial information is required for
“significant” business acquisitions, dispositions, or equity method investments.
The SEC recently issued a final
rule amending the financial statement requirements related
to acquisitions and dispositions as well as the requirements related to pro
forma financial information. The final rule offers significant relief for IPOs
since, among other changes, companies undertaking an IPO are no longer required
to evaluate acquisitions that occurred before the most recent full fiscal year.
See Deloitte’s June 2, 2020, Heads Up for more information about the final
rule.
Moreover, the SEC recently amended portions of Regulation S-K
that govern public-company disclosure requirements for information outside the
financial statements. See Deloitte’s September 3, 2020, and November 24, 2020, Heads Up newsletters for more
information.
The financial statement periods to be included in the IPO registration statement
depend on the company’s characteristics and the timing of the document’s
submission. Smaller reporting companies (SRCs) and emerging growth companies
(EGCs) generally have the option of presenting only two years of audited annual
financial statements in a traditional IPO, while all other entities must present
three years. Further, under SEC regulations, the financial statements in an IPO
must meet certain age requirements as of each registration-statement filing date
as well as when the registration is declared effective; otherwise, the financial
statements will be considered “stale.” In general, the financial statements in
an IPO filing must not be more than 134 days old (i.e., the gap between the date
of filing or effectiveness and the date of the latest balance sheet cannot be
more than 134 days). However, third-quarter financial statements are considered
timely through the 45th day after the most recent fiscal year-end, after which
the audited financial statements for the most recent fiscal year are required.
Thus, a company that fails to file a registration statement before one of these
critical cut-off dates will be required to include additional financial
statement periods in the registration statement; in such cases, there may be a
significant delay in the company’s preferred IPO timeline.
A Public Entity’s Application of U.S. GAAP and SEC Regulations
Certain provisions of U.S. GAAP for public entities differ from those for
nonpublic entities. Notably, public business entities (PBEs) are generally
required to adopt new accounting standards before private companies. Although
companies that meet the EGC criteria can elect to use private-company adoption
dates for new accounting standards, other entities (i.e., non-EGCs) undertaking
an IPO typically must use public-company adoption dates for all accounting
standards.
In addition, a company undertaking an IPO must present financial
statements that are consistent with public-entity accounting principles and must
comply with the disclosure requirements for public entities for all periods
presented. The following are examples (not all-inclusive) of topics for which
the accounting principles or disclosures may apply to public entities but do not
apply to nonpublic entities.
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Earnings per share.
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Segment reporting.
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Temporary equity classification of redeemable securities.
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Certain income-tax-related disclosures.
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Certain disclosures related to pensions and other postretirement benefits.
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Disclosure of the date through which subsequent events are evaluated.
Once a company is considered a PBE (even if it
qualifies as an EGC and elects to use
private-company adoption dates), it is no longer
permitted to apply private-company accounting
alternatives, such as the amortization of goodwill.
Therefore, any previously elected private-company
alternatives would need to be retrospectively
eliminated from the company’s historical financial
statements before such statements can be included in
its registration statement.
Further, public entities are subject to various SEC rules and regulations that
may affect the financial statements and related disclosures (e.g., the
additional disclosure requirements of Regulation S-X). Some of these
requirements are broadly applicable, and some apply only to entities in certain
industries. Therefore, a nonpublic entity’s previously issued financial
statements will typically need to be revised for all periods presented to
reflect the additional SEC disclosure requirements. However, an entity that
meets the SRC criteria may be eligible to apply scaled disclosure requirements.
SRCs generally do not have to apply the disclosure provisions of Regulation S-X
in their entirety except when specified.
Audit Considerations for Public Companies
Audits of private companies are subject to AICPA auditing standards. However,
auditors of issuers undertaking an IPO must apply PCAOB auditing standards and
will need to perform additional procedures and issue a new auditor’s report that
refers to these standards. Note that in a filing submitted for
confidential review to the SEC, the auditor’s report will typically
refer to both AICPA and PCAOB auditing standards.
Because the SEC’s and PCAOB’s independence rules are generally more restrictive
than the AICPA’s, both the auditor and management, with oversight from the audit
committee, need to determine whether (1) there is possible noncompliance with
the SEC’s and PCAOB’s independence rules or (2) there are conflicts of interest
before the entity undertakes an IPO.
Post-IPO Periodic Financial Reporting and Internal Control Requirements
After a registration statement is declared effective, a company is required to
file quarterly reports on Form 10-Q and annual reports on Form 10-K. As a public
company, a registrant must also file a current report on Form 8-K that discloses
various material events that occur between its periodic reports.
A public company will need to address two types of controls and procedures in its
post-IPO filings with the SEC:
-
Internal control over financial reporting (ICFR) — ICFR refers to procedures a company performs to reasonably ensure compliance with its policies related to preparing financial statements in accordance with U.S. GAAP and Regulation S-X. Management must annually file a report on the effectiveness of its ICFR. Moreover, non-EGC accelerated and large accelerated filers must generally include an auditor’s attestation report on the effectiveness of ICFR in their annual reports. However, all new public companies can apply a phase-in exception under which management’s report and the auditor’s attestation are not required before the second annual report (i.e., until a registrant has been required to file or has filed a Form 10-K for the prior fiscal year). Certain additional exceptions may also apply.
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Disclosure controls and procedures — These are a broader set of controls that largely encompass ICFR and are designed to provide assurance that information that the registrant must disclose in reports that it files or submits under the Securities Exchange Act of 1934 (the “1934 Act”) is recorded, processed, summarized, and reported within the periods specified.
Companies also must continue to comply, on a quarterly basis, with reporting
requirements related to material changes to ICFR and disclosure controls and
procedures. In addition, in quarterly and annual reports, the registrant’s
principal executive and principal financial officer (typically the CEO and CFO)
must file certifications prescribed by Sections 302 and 906 of the
Sarbanes-Oxley Act.
SPAC Transactions
As discussed above, the number of SPAC and IPO transactions has
increased significantly during 2020 and 2021. Management should be aware of the
differences between a traditional IPO and a SPAC transaction from a financial
reporting and auditing perspective. The table below outlines the areas of
potential differences between the two types of transactions.
Key Differences Between Traditional IPOs and SPAC
Transactions
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Financial statement periods required in the registration
statement/proxy statement
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The ability to confidentially submit the registration
statement/proxy statement
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The requirement to include pro forma information
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The potential requirement to include prospective
financial information
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The timing of the initial periodic reporting obligation
after the IPO or SPAC transaction
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The reporting requirements related to ICFR
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Deloitte’s Roadmap Initial Public Offerings
addresses financial reporting, accounting, and auditing
considerations to help companies navigate challenges
related to preparing an IPO registration statement and
ultimately going public. Entities should also consider
Deloitte’s October 2, 2020 (last updated September 14,
2021), Financial Reporting Alert for
guidance on entering into a SPAC transaction as an
alternative to undertaking a traditional IPO.
Contacts
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John Wilde
Partner
Deloitte &
Touche LLP
+1 415 783
6613
|
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Previn Waas
Partner
Deloitte &
Touche LLP
+1 408 704
4083
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