Ipo Agreement: What Companies Must Know before Going Public

The Securities Act of 1933 requires companies to register securities before selling them publicly. The Form S-1 includes a prospectus disclosing every material fact. Material misstatements and omissions trigger strict liability under Section 11. SEC review follows filing. The company cannot proceed until the SEC declares the registration statement effective.

Securities fraud counsel evaluates the registration statement and prospectus for disclosure gaps, advises on the materiality standard applicable to specific disclosures, and represents issuers, underwriters, and directors in Securities Act enforcement proceedings and private litigation.

The SEC reviews every Form S-1 registration statement before the IPO can proceed. The SEC issues comment letters identifying disclosure deficiencies. The issuer must respond to each comment in writing. Multiple rounds of comments are common. The SEC review process typically takes 30 to 90 days from initial filing. Each comment round extends that timeline. A company that does not build SEC review time into its timeline risks missing the pricing window.

Shareholder agreements counsel manages the SEC comment letter response process, advises on the disclosure revisions required to satisfy SEC staff comments, and advises on the conditions in the underwriting agreement related to SEC effectiveness and closing.

In a firm commitment deal, underwriters buy shares at a discount and resell at the offering price. They accept the risk of an unsold deal. In a best efforts deal, underwriters act as agents without guaranteeing a sale. The over-allotment option, or greenshoe, gives underwriters the right to buy additional shares to stabilize trading. All underwriting agreements contain representations, closing conditions, and indemnification provisions.

Capital markets and securities counsel negotiates the underwriting agreement, advises on the allocation of closing conditions between the issuer and the underwriters, and advises on the over-allotment option structure and its impact on post-IPO share price stability.

Lock-up agreements restrict insiders from selling shares for 180 days after the IPO. Registration rights give pre-IPO investors the right to register shares through demand registration or piggyback rights. Investor rights agreements address board representation, information rights, and preemptive rights. These protections survive the IPO and bind the public company indefinitely.

Criminal securities and financial fraud counsel evaluates lock-up agreement provisions, advises on the conditions under which underwriters may grant lock-up waivers and the resulting disclosure obligations, and advises on the registration rights and investor rights obligations that become effective after the IPO closes.

Section 11 imposes strict liability. The due diligence defense requires defendants to demonstrate that reasonable investigation supported the belief that the registration statement was accurate. Rule 10b-5 provides a parallel antifraud remedy that requires scienter. Section 11 defendants include every person who signed the registration statement, every director, and every underwriter.

Directors and officers liability counsel advises directors and officers on their Section 11 exposure, structures the due diligence process to support the affirmative defense, and represents company executives in Securities Act class action litigation arising from alleged misstatements in IPO registration statements.

Underwriting agreements contain detailed indemnification provisions. The issuer indemnifies the underwriters against losses arising from misstatements in the registration statement. The underwriters indemnify the issuer against losses arising from information they provided for the prospectus. Contribution provisions govern how liability is allocated when indemnification is unavailable. The SEC limits the scope of permissible indemnification. An issuer that accepts an overly broad indemnification obligation may find it unenforceable at the worst possible time.

Securities fraud class action counsel evaluates the indemnification and contribution provisions in the underwriting agreement, advises on the SEC's limits on permissible indemnification, and represents issuers and underwriters in post-IPO securities class action litigation arising from registration statement liability.

The road show follows the filing of the preliminary prospectus. Pricing is set through book-building: underwriters compile investor orders to determine market demand. During the concurrent quiet period, the company cannot make public statements outside the prospectus. Quiet period violations can trigger SEC enforcement and provide a basis for securities litigation.

Business, corporate, and securities law counsel advises on the quiet period restrictions applicable to company communications, manages the pricing and closing process, and advises on the regulatory consequences of quiet period violations.

Every underwriting agreement contains a material adverse change clause. A material adverse change clause allows underwriters to terminate if a MAC occurs before closing. Underwriters also receive a comfort letter from the company's independent auditors before closing. The comfort letter confirms that the financial statements in the prospectus are accurate. An auditor who cannot provide the comfort letter can stop the deal entirely. A well-negotiated MAC clause limits that risk as much as the market will allow.

Corporate transactions counsel structures the material adverse change provisions in the underwriting agreement, advises on the scope of the comfort letter required from the company's auditors, and advises on the risk allocation between the company and the underwriters for events that occur between pricing and closing.