What should companies be thinking about if considering a US listing?

17 October, 2014

The US capital markets continue to be an attractive destination for companies looking to raise capital. For companies serious about going public in the US- the time to prepare is now. PwC can help you navigate through this unique transformational event.

We sat down with Richard Sola, Director in PwC's Capital Markets and Accounting Advisory Services practice, to get his observations on the US capital markets and insight as to what companies can do to prepare for a successful IPO in the US.

Interview with Richard Sola, Director in PwC's Capital Markets and Accounting Advisory Services practice:

Why do the US capital markets continue to be such an attractive destination for new IPOs?

Richard Sola: IPO activity in the US saw a surge in 2013 that has continued through the second quarter of 2014- both from a volume and value perspective. In fact, the second quarter of 2014 saw the highest quarterly deal volume since the fourth quarter of 2007. In light of the current macro economic conditions, new equity offerings in the US have proven to be an attractive opportunity for investors searching for yield in an otherwise sluggish global economy. The one day and 90 day IPO returns have continued to outperform the broader stock markets. Volatility, as measured by the VIX, a so called "investor fear gauge", has remained low, thereby keeping the IPO window open for an extended period of time. A third but very important contributing factor is the impact of the JOBS Act. The JOBS Act was enacted in 2012 with the objective of providing easier and broader access to the US capital markets for smaller companies- generally those with less than $1 billion in revenues. The Jobs Act provides relief from a number of financial reporting and disclosure requirements that would otherwise be applicable to a company going public in the US. The reduced requirements have generated a flurry of IPO activity in the US with new issuers qualifying as "emerging growth companies" representing a significant majority of all IPO activity.

Let's talk a little more about the JOBS Act. What benefits are available to companies listing in the US and does the relief extend to companies that are not domiciled in the United States?

Sola: First off, to be clear, the relief provided for under the JOBS Act is available to any company seeking to list in the US regardless of whether they are domiciled in the US or non-US domiciled companies that qualify as a "foreign private issuer" under the US securities laws. While the legislation provides for a number of reduced filing and reporting requirements, we have seen the following provisions as the ones most often leveraged by companies that qualify as an an emerging growth company ("EGC"):

  • Annual audited financial statements of the issuer: The SEC regulations applicable to a non-EGC require the inclusion of audited financial statements that contain two years of balance sheet and three years of operations, cash flows and changes in equity. That third year is often a challenge for companies, especially those that are in an earlier stage in their development or have changed ownership during their operating history. The JOBS Act allows an EGC to present audited financial statements that contain only two years of operations, cash flows and changes in equity along side the two balance sheets. While companies can choose to include the full three years of audited financial statements if available and/or helpful in telling the company's "equity story", the ability to omit the third year can reduce costs and time necessary to prepare for the IPO.
  • Confidential filing with the SEC: Prior to the JOBS Act, the full contents of the registration statement filed with the SEC were made publicly available for any one to access as soon as it was filed. Under the JOBS Act, companies can submit its registration documents confidentially with the SEC and keep such documents from being available to the public until such a time as the Company commits to commencing the marketing phase of the IPO. There are really no obvious downside to submitting confidentially. It is low risk and allows companies to get the SEC to review their registration statement without having to disclose financial and other sensitive business data to competitors, peers, etc. Once the IPO is completed, all filings made with the SEC will become publicly available; however, if the IPO is abandoned or put on hold, those filings remain out of the public eye.
  • Auditor attestation on internal control over financial reporting: The Sarbanes-Oxley Act of 2002 provides that the external auditor of a public company issue an opinion on the design and operating effectiveness of a company's internal control over financial reporting ("ICFR"). For a new public company that does not qualify as an EGC, that attestation requirement generally begins with the filing of its second annual report with the SEC. However, under the JOBS Act, the auditor attestation on ICFR can be deferred for a period of up to 5 years provided that the company continues to qualify as an EGC. While this is an attractive benefit of the JOBS Act for a company seeking to go public in the US, management teams should keep in mind that this relief only applies to the auditor attestation on ICFR. Management's own assessment of and reporting on its ICFR is not impacted by the JOBS Act. and the company would need to include its own report on ICFR beginning with its second annual report filed with the SEC.

What advice would you give to a company thinking about or beginning to plan for an IPO in the US?

Sola: Embarking on an IPO is among the most challenging and most rewarding transactions that an organization can undertake. Planning, executing, and managing an IPO is a complex task for any organization, especially for its management team. The better prepared a company is, the more efficient and less costly the process can be. In our experience, a successful US IPO will include the following key characteristics:

  • Ensure a strong IPO leadership. An IPO leader needs to be able to marshal resources within the organization, be empowered to make decisions (or get immediate access to decision makers), and know when to rely on and to push back on key advisors.
  • Perform a thorough IPO readiness assessment. It is critical that a company identify "big-picture" issues early on in the process, establish a plan for addressing any gaps identified and set a realistic timetable based on its offering’s strategic objectives, specific business issues, as well as the time needed to prepare registration information and the preparation needed to operate as a public company.
  • Establish a strong project management function. An organization should ensure initial and robust issue identification, establish a plan, monitor progress, understand interdependencies between work streams, and encourage communication among project team members.
  • Ensure a multi-disciplinary approach to the IPO preparation. This approach involves all areas within the organization. The organization needs to appoint key advisors early (underwriters, lawyers, auditors, advisory accountants and tax advisors).
  • Ramp up staff strength early. There will be significant demand on the company's key resources throughout the IPO process. The company should strike the right balance between internal and external resources to ensure appropriate knowledge retention after the registration is complete, while enabling management to focus on running the business.
  • Determine the IPO structure at the beginning of the process. Changing the structure or key transaction dynamics midstream can cause significant delays as the legal, tax, and financial reporting implications are identified and resolved.
  • Consider the offering's marketing implications. A company should consider the offering’s marketing implications of all key decisions early and ensure their buy-in throughout the working group. It should not automatically gravitate to one market, and should consider the potential value differences, reporting and legal obligations, and risk assessment of each market and geography.
  • Prepare the organization to operate as a public company. The organization needs to commence a parallel work stream at the start of the registration process, including the consideration of corporate governance, internal controls, compensation strategy, investor relations and internal audit.
  • Understand the impact of major organizational changes. A company needs to understand the impact that changes such as system upgrades and historical and potential acquisitions can have on the IPO timing.
  • Build a finance organization that can meet the needs of a public company. Review the financial close process. A company needs to ensure that the business can prepare and forecast timely and accurate financial information immediately upon completing the IPO.

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