Registration Forms with Focus on Form S-1

There are five principal registration forms under the Securities Act applicable to public offerings by U.S. Issuers. Form S-1, which is available for any offering not covered by the other registration forms, generally is the appropriate registration form for companies going public. SOR includes a very significant amendment to Form S-1, but to take advantage of it a company has to have been a reporting company at least long enough to file one Annual Report on Form 10-K under the Exchange Act. We are going to focus initially on Form S-1 without the benefit of the amendment to Form S-1 as we are focusing on an initial public offering by a non-reporting company. There was a Forms S-2 that was withdrawn by SOR. Form S-3 is applicable to companies that have been public companies for a specified period of time and meet applicable requirements that permit the registration statement to incorporate information from reports filed under the Exchange Act. Recall in connection with the free writing prospectus that we determined whether issuers were subject to Rule 433(b)(1) and those subject to Rule 433(b)(2) by referencing their eligibility for certain types of offerings on Form S-3. We noted in that context, that to be eligible to use Form S-3, registrant always had to meet the registrant requirements of General Instruction I.A.--i.e. among other things, have a class of securities registered under the Exchange Act for at least 12 months and have filed all '34 Act reports timely for the preceding 12 months.  We will take a look at Form S-3 and the amended Form S-1 in connection with a follow-on offering made after the company has been a reporting company. The Commission also amended Form S-3 by adding a General Instruction I.B.6. making it available on a limited basis to smaller reporting companies. To understand Form S-3 and the amended Form S-1 we have to have a basic understanding of registration under the Exchange Act and the periodic (annual and quarterly) and current reports that reporting companies have to file under the Excange Act. The other registration forms are Form S-4 (mergers and other business combinations), Form S-8 (employee benefit plan offerings), and Form S-11 for certain types of real estate companies. We do not consider any of them except we may reference the Form S-8 in passing. The are also in most instances counterpart registration forms for foreign private issuers that we do not consider.

If we take a cursory look at Form S-1 we will note except for portions of the facing page it is not a form in the sense that you fill in the items. Rather, all the information called for other than as to the financial statements references Regulation S-K and the financial statements called for reference Regulation S-X.  Historically there have been two principal disclosure systems under the federal securities laws — (1) disclosure under the Securities Act of 1933 in connection with the public offering of securities, and (2) disclosure under the Securities Exchange Act of 1934 under the continuous disclosure system. Between January of 1980 and March of 1982 the Commission took a number of steps designed to integrate the disclosure systems under the Securities Acts into a single disclosure system. We have already considered one aspect of that integration in connection with the standardized financial statements and aging of the financial statements, the source of which is Regulation S-X. See Part 11. The other standardized items are found in Regulation S-K for all issuers including the newly created (as of February 4, 2008) smaller reporting company. Smaller reporting companies as we discuss in greater detail are allowed to use a "scaled disclosure) version of certain items of Regulation S-K.

Standard Registration Items

For our purposes, we divide Regulation S-K into three parts—standard registration items, applicable to all Securities Act registration statements; basic information items, and in-depth disclosure items. The standard registration items are all found in Part of Regulation S-K beginning with Item 501, Forepart of Registration Statement and Outside Front Cover Page of Prospectus. We should also note that the registration statement has a facing page Example; PART I, which is the information that has to be included in the prospectus, Part II (use ctrl + f to search for Part II) Example, which is information included in the registration statement that is not part of the prospectus, and (search for II-3) a signature page Example. Part II includes undertakings as (search for Item 17) Item 17   Example, and a list of exhibits and financial statements included in the filing as Item 16  Example. The required undertakings are set forth in Item 512 of Regulation S-K and depend on the nature of the offering. SOR includes an important amendment of Item 512(a), applicable to certain types of shelf offerings  that we will discus after some basics .The registration statement also has to include separately exhibits called for by Item 601 of Regulation S-K.

If we look at the cover page of Form S-1 other than the part of the form that is to be filled in we have already considered the principal components of the cover page, “Calculation of the Registration Fee”, which serves several purposes, the delaying amendment language, and the circumstances under which Rule 462 may come into play. If we turn to Item 1 of the Registration Statement it calls for the information required by Regulation S-K Item 501  and  it includes the cover page of the registration statement, which is not part of the prospectus, and the cover page of the prospectus. We have already considered a number of aspects of the cover page of the Preliminary Prospectus used in connection with an IPO; it must be only one page and much of the information is standardized. See Cover page of Cogent, Inc.

Item 2 calls for the information required by Item 502 of Regulation S-K, which specifies the content of the inside cover page and/or outside back cover page. Item 502 calls for detailed table of contents with pages and specifically notes need to reference risk factor section. Table of contents can be on the inside of the cover page or on the outside back cover page. If delivered electronically must be on the inside of the cover page.  See Table of Contents of Cogent. In addition, Item 502 required specified legend on the outside back cover page referencing the Dealers Delivery Obligation in the secondary market per our previous discussion in Part Nine. See  Infiniti Solutions. The requirement to deliver was eliminated by SOR, however, with the adoption of Rules 172 and 173 and amendments to Rule 174 provided the Rule 173 Notice was delivered as discussed in Part Nine. Item 502(b) was not amended  specifically  take into account the changes made in this respect, but continues to state "On the outside back cover page of the prospectus, advise dealers of their prospectus delivery obligation" It would be difficult, however, to find a prospectus since the adoption of SOR that does so. This requirement apparently is now applicable only in  those situations in which Rule 173 is not available (offerings by an investment company registered under the Investment Company Act.)

Item 3 calls for the information required by Item 503 of Regulation S-K, which ordinarily includes a Summary (Example) (use table of contents) following the Inside cover page and a Risk Factor section (Example) (use table of contents) following the summary. Note instructions as to both. In addition, must include the complete mailing address and telephone number of the company’s principal executive officers. Must also include ratio of earnings to fixed charges if applicable.

Note that Items 501, 502, and 503 specifically require that the information called for be furnished in plain English in conformity with Rule 421(d). Staff Legal Bulletin No 7 .

The preparation of the Risk Factors section is among the more important responsibilities of counsel preparing the prospectus. If prepared with appropriate care, is part of the insurance policy against the likelihood that there will be a Section 11 Securities private class action and against potential Section 11 liability. Since it deals in large part with the forward-looking representations express or implied in the prospectus (including those required in Management's Discussion and Analysis) it provides a potential defense under the so-called bespeaks caution doctrine and/or the Commission's Rule 175, notwithstanding the Private Securities Litigation Reform Act safe-harbor is not applicable to an IPO. We pursue potential Section 11 liability lite down the road, but cannot devote significant resources to the area as it is beyond the scope of this course. Note that Cogent, Inc., although an IPO and not entitled to the PSLRA safe-harbors (Section 28 of the Securities Act  and Section 21E of the Exchange Act) that it includes immediately following Risk Factors discussion a SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  that attempts to conform with what would be required if it had the benefit of the PSLRA safe-harbor.

Item 4. Use of Proceeds.

Furnish the information required by Item 504 of Regulation S-K (§229.504).
Example

Item 5. Determination of Offering Price.

Furnish the information required by Item 505 of Regulation S-K (§229.505).
Example

Item 6. Dilution.

Furnish the information required by Item 506 of Regulation S-K (§229.506).
Example

Item 7. Selling Security Holders.

Furnish the information required by Item 507 of Regulation S-K (§229.507)). If applicable (i.e. there are selling shareholders) the detail called for by Item is frequently combined with Item 11(m) of Form S-1, which calls for the information required by Item 403 of Regulation S-K
Example of cover page reference to selling shareholders
Example of combo under caption Principal and Selling Shareholders (use bookmark to navigate)

Item 8. Plan of Distribution.

Furnish the information required by Item 508 of Regulation S-K (§229.508).
Example (Click on Bookmark "Underwriting")

Item 10. Interests of Named Experts and Counsel.

Furnish the information required by Item 509 of Regulation S-K (§229.509 ).
Example (Click on Bookmarks "Experts" and  "Legal Matters"

Item 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.

Furnish the information required by Item 510 of Regulation S-K (§229.510. Recall that when we discussed request for acceleration in Part 6 we noted that in order to obtain acceleration Rule 461 requires that the registration statement must include the undertaking required by Item 512(h) of Regulation S-K. If that undertaking is furnished, which it must if the registrant wants to receive acceleration and has a common officer and director indemnification provision, the disclosure required by Item 510 is not applicable. Accordingly it is difficult to find an example of Item 510 disclosure. We have included an Example of the disclosure required under Item 14 of Part II of the Form S-1 registration statement relating to any agreements to indemnify and an Example of the Item 512(h) undertaking included as part of Item 17 of Part II of the Form S-1 registration statement..

Integrated Disclosure and Securities Act Registration

Preparing the remainder of the prospectus is best taught by actually working on the preparation of a registration statement, which requires several weeks of concentrated effort. We briefly summarize key aspects. We refer to certain collective portions of the prospectus as the basic information package (BIF) as it is is common to Forms S‑1/S‑3 for registration under the Securities Act and Form 10 for registration under the Exchange Act, as well as to the Glossy annual report to shareholders and the Form 10‑K under the Exchange Act. When the integrated disclosure system emerged in the early 1980s the Commission was impressed that issuers that had a certain amount of latitude as to the content of the Glossy Annual Report tended to describe developments in a more understandable and less turgid fashion than the lawyer driven ’33 Act prospectus.  The Commission in a 1997 Release citing and quoting from an earlier Release, put it this way: “When the SEC adopted the integrated disclosure system in 1982, it encouraged issuers to deliver their more readable glossy annual reports to shareholders, rather than the legalistic annual report on Form 10-K. The SEC believed that the more readable annual reports would ‘promote the goal of concise, effective communication in the Securities Act context.’”[1] You will note that the items called for in the Glossy Annual Report also are called for in the Securities Act registration statement (with some variation as to the specific aspects of Regulation S-K) and we refer to them as the basic information package (BIP) reflecting the Commission’s then view as to what was important to all investors. We shall see that the Commission's view changed over time first with respect to "small business issuers" then and now (as of February 4) replaced by the significantly larger group of registrants meeting the definition of a smaller reporting company.

 The BIP includes the information the Commission regarded as important to all investors. It includes for all companies the standardized financial statements discussed at Part 11. It includes for all, except not smaller reporting companies who can exclude it (See TABLE),  five years of comparative selected financial information (Reg. S‑K, item 301), management’s discussion and analysis (“MD&A”) of the registrant’s financial condition and results of operations (Reg. S‑K, item 303), information relating to a change in accountants during the last two fiscal years resulting from a disagreement on accounting and financial disclosure (Reg. S‑K, item 304) a brief description of the registrants business and certain segmental information (Regulation S-K, Item 101(b), (c)(1)(i) and (d) ), market and dividend information (Item 201 of Regulation S‑K), description of securities (Item 202 of Regulation S‑K), and supplementary financial information  (Item 302 of Regulation S‑K) (smaller reporting companies can exclude it, See TABLE). (Item 305 of Regulation S‑K) requires disclosure relating to market risk of derivative securities held by an issuer. Smaller reporting companies do not have to include Item 305 disclosure. See TABLE. Also in the do not have to disclose by a smaller reporting company category is Item 407(e)(4) compensation committee interlocks referenced by Item 11(l) of Form S-1.

We discussed the required financial statements and aging requirements in connection with Part 11 and advance preparation for going public. See  Cogent, Inc. Segment financial information as to products is determined by generally accepted accounting principles. Many companies have only one segment of their business. If material, segment information must also be included by geographical areas for companies that do business in other countries See Cogent, Inc.

We highlight some of the above items.

Item 301 of Regulation S‑K prescribes selected financial data which is to be presented in comparative columnar form for each of the last five fiscal years and any additional fiscal years necessary to keep the information from being misleading. The items to be included are net sales or operating revenues; income (loss) from continuing operations; income (loss) from continuing operations per common share; total assets; long term obligations and redeemable preferred stock; cash dividends declared per common share. Of course, the information has to be included for five years only if the company has five years of operations. Five years is two years more than is required for earnings statements and three years more with respect to the balance sheet items called for. Note how it is handled in the following example: Cogent, Inc. Smaller business companies do not have to furnish this information. See TABLE

The most meaningful portion of the BIP other than the financial statements is managements discussion and analysis (“MD&A”) of financial condition and results of operations. Item 303 of Regulation S‑K. The Commission had great expectations (never fully realized) that the MD&A by requiring management to reflect on the company's financial condition, change in financial conditions, and  results of operations. Focus specifically is to be on results of operations, liquidity, capital resources. The discussion and analysis should focus on events and uncertainties which “would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.” Item 303(a), Instruction 3. The investor focus sought is an “evaluation of the amounts and certainty of cash flows from operations,” and from other sources. Item 303(a), Instruction 2. Since Instruction 1 to Item 303(a) provides that the discussion shall cover the three year period covered by the financial statements, registrants generally focus on the data included as part of selected financial information.

The latest effort of the Commission to provide interpretative guidance, explains the purpose of the MD&A as follows:[1]

The purpose of MD&A is not complicated. It is to provide readers information ‘necessary to an understanding of [a company's] financial condition, changes in financial condition and results of operations.’ The MD&A requirements are intended to satisfy three principal objectives:

·         to provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management;

·         to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and

·         to provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance

The same Release includes a chronology of the many efforts of the Commission and its staff to provide guidance. The repeated giving of guidance is an indication that many registrants have difficulty in meeting the staff’s expectations. The preparation of the MD&A is an art form, requiring considerable thought and in most instances prior experience.

The Commission in the aftermath of Enron, at the risk of disclosure overload, has turned the MD&A into a financial disclosure catch all. The MD&A is now the depository of disclosure relating to off-balance sheet transactions  (Item 303 of Regulation S‑K) and as a result of Interpretative Guidance disclosures relating to critical accounting estimates and newly adopted accounting policies.  

See Salesforce.com (use table of contents to go to Management's Discussion and Analysis) Do the same for Cogent, Inc.

The Item 303 management’s discussion and analysis of financial condition and results of operations for smaller reporting companies is scaled but not greatly. A smaller reporting company does have to provide analysis for only two years as distinguished from the three years required of other registrants and, of course, will reference the Article 8 of Regulation S-X financial statements unless it chooses otherwise. Further, other registrants are required “where trend information is relevant, [to] reference to the five-year selected financial data appearing pursuant to Item 301 of Regulation S-K.”[1] Since a smaller reporting company is not required to include Section 301 selected financial information, this express instruction is not applicable. Nonetheless, since it is likely to be a year to year comparison, additional year(s) may be necessary to keep it from being misleading. The specific other Item 303 scaled disclosure provided for a smaller reporting company permits it to provide the discussion of the impact for inflation on its net sales, revenues, and income from continuing operations for two rather than three years. In addition, it is not required to include a tabular disclosure of contractual obligations.[2]

Executive compensation has taken on such significance that it is almost in a category of its own. The SEC adopted new disclo­sure requirements applicable to executive compensation in October of 1992 and in August 1993 issued another release interpreting such requirements and proposing amendments to them.[1] The proposed amendments were adopted in November 1993.[2] On August 11, 2006, the Commission adopted major new rules designed to bolster its executive compensation disclosure regime and shore up its requirements in a number of related areas such as Item 404 disclosure of related party transactions, corporate governance disclosure, and 8-K disclosure of management contracts.[3] The 2006 revisions retained the tabular approach but updated and enhanced the tables and supplemented them with narrative disclosure. In the Adopting Release, the Commission confirmed that all elements of compensation must be included in the tables, requires disclosure of total compensation in the Summary Compensation Table, and buttresses narrative disclosure requirements. Under the 2006 amendments, executive compensation disclosure falls within the following broad categories:

1.       Compensation Disclosure and Analysis[4] (“CD&A”), which is a major innovation of the new rules ;

2.       The Summary Compensation Table, the rules of which was clarified to ensure that all compensation is disclosed in the table;

3.       Grants and holdings of equity-related interests that relate to compensation or are potential sources of future gains ;

4.       Recent realizations on these interests, such as through vesting of restricted stock or the exercise of options; and

5.       Director compensation disclosure, which was significantly expanded.

The Grants of Plan-Based Awards Table[5] is intended to supplement the Summary Compensation Table, and contains information formerly in the Long-Term Incentive Plan Awards Table (in addition to information concerning performance-based stock, option and similar awards).[6] The Grants of Plan-Based Awards Table supersedes and replaces the Option/SAR Grants in Last Fiscal Year Table from the prior rules. The Outstanding Equity Awards at Fiscal Year-End Table and Option Exercises and Stock Vested Table superseded the Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Table required by prior Item 402(d). In an extension to prior law, the new Option Exercises and Stock Vested Table as its name implies covers stock vesting. The Commission also revised significantly its rules governing disclosure of post-employment compensation. Specifically the Commission eliminated the Pension Plan Table required by prior Item 402(f)(1)(i) and replaced it with the Pension Benefits Table required by Item 402(h)(2). The Commission also amended requirements relating to termination or change of control.

Smaller reporting companies have to disclose considerably less information than other issuers. A smaller reporting company does have to include the Summary Compensation Table, the Director’s compensation Table, and an Outstanding Equity Awards at Fiscal Year-End Table. The Summary Compensation Table, which is designed to encompass the compensation in all categories in addition to salary and bonus including stock and option awards, results in reflecting the total compensation earned for the year. As stated, “[t]his Item requires clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers.”[1] The table of a smaller reporting company, however, has to cover only the last and preceding fiscal year[2] in contrast to three years required of other issuers.[3] A smaller reporting company has to include the required information for the principal executive officer (PEO) and the issuer’s two most highly compensated executive officers other than the PEO who were serving as such at fiscal year end, and up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at fiscal year end.[4] In contrast, other issuers have to include the information for the PEO, the principal financial officer (PFO), the registrant’s three most highly compensated executive officers other than the PEO and PFO who were serving as executive officers at the end of the last completed fiscal year; and up to two additional individuals for whom disclosure would have been provided pursuant but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last completed fiscal year,

A smaller reporting company does not include four tables that are included by other registrants-- Grants of Plan-Based Awards Table[5]; Option exercises and stock vested table[6]; Pension Benefits Table,[7] and Non-qualified Deferred Compensation Table.[8]. Most significantly, smaller reporting companies do not have to include the Compensation Discussion and Analysis (CD&A) or the related compensation committee report The CD&A is a narrative disclosure that is in­tended to put into context the compensation disclosure provided else­where.[9]

                                        

In Depth Disclosure (See TABLE)

What we have referred to as in depth disclosure requires disclosure of the company's business, description of properties, extensive disclosure relating to transactions with management, disclosure of legal proceedings, extensive disclosure relating to executive compensation, among other things. In addition to disclosure relating to business that we included as part of the BIP, Item 11 of Form S-1 calls for (a) Information required by Item 101 of Regulation S‑K, description of business; (b) Information required by Item 102 of Regulation S‑K, description of property; (c) Information required by Item 103 of Regulation S‑K, legal proceedings. requires disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, and the details of such proceedings.

The information called by Item 101 of Regulation S‑K is extensive and includes the general development of the business over the past five years, a narrative description of the business covering items items (i) through (xiii) with principal products produced and/or services provided, the number of employees, the extent to which the business is dependent on a single or few customers, and much much more. The Regulation S-K, Item 101 description of business disclosures for a smaller reporting company are set forth separately in Item 101(h).[1] The general description of the business in some respects is similar to that of other registrants although it is for three years or such shorter period that it has been in business whereas on for other registrants it is for five years or such shorter period that it has been in business. It includes (as does that of other registrants), the form and year of organization; principal products and/or services; source and availability of raw materials; any bankruptcy, receivership or similar proceedings; any material reclassification, merger, or purchase of assets; number of employees; significant patents, trademarks, franchises, and the like.[2] Other registrants have to report considerable other information including much of it by industry and geographical segments. Other registrants must report for each of three fiscal years “revenues from external customers, a measure of profit or loss and total assets” by segments as determined in accordance with GAAP.[3] Other registrants must report external revenues for each of three fiscal years for its country of domicile, all foreign countries in the aggregate, and for any individual company if material.[4]  Disclosures required of other registrants include the dollar amount of backlog believed to be firm as of a recent date and a comparable date of the preceding fiscal year;[5] the amount of such backlog it reasonably expects to fill the current year;[6] estimated amount spent on research and development, if material, during each of last three fiscal years;[7] the dependence of a segment on a single or a few customers.[8] See Cogent, Inc

Item 102 of Regulation S‑K requires disclosure of location and general character of the principal plants, mines and other materially important physical properties; hold held if not owned in fee and whether subject to any major encumbrance.  

.Management and transactions with management

The names and ages of each executive officer and director must be listed, together with all positions with the registrant held by such person, his term as an officer and/or director and the period during which he has served as such, an account of each such person's business experience during the past five years, any arrangement with another person (who must be named) pursuant to which such persons have been selected to act as an officer and/or director, and any family relationships among the officers and directors. The Regulation S-K Item 404 "transactions with related persons, promoters and certain control persons,” is the one Regulation S-K Item that a smaller reporting company must follow the disclosure applicable to a smaller reporting company. It is also the one Regulation S-K item that may require more disclosure than it would be be required to include if it could choose to file as a registrant that is not a smaller reporting company. Regulation S-K 404(a) calls for transactions with related persons since the beginning of the registrant’s last fiscal year and any currently proposed transaction if the amount involved exceeds $120,000.[1] Item 404(a) then specifies the details to be disclosed with respect to such transactions. Item 404(a) has to be included in the Form 10-K annual report[2] and the proxy statement relating to the annual meeting of shareholders.[3] Item 404(d) provides that a smaller reporting company “must provide” the information called for by this subparagraph. Item 404(d)(1) provides that a smaller reporting company is to provide the information called for by Item 404(a) if the amount of the transaction “exceeds the lesser of $120,000 or one percent of the average of the smaller reporting company's total assets at year end for the last two completed fiscal years.”[4] If one percent of the company’s average total assets at the end of the applicable year is less than $120,000, a smaller reporting company may have to disclose transactions that other registrants would not. In addition, Instruction 2 to Item 404(d) provides that a smaller reporting company is to provide the information called for by Item 404(a) for the year preceding as well as the last fiscal year. Item 404(d)(3) requires a smaller reporting company to include a list of all parents showing the basis of control and percentage of voting stock owned by its immediate parent.  A smaller reporting company, however, does not have to include the information called for by Item 404(b), which requires other registrants to describe “policies and procedures for the review, approval, or ratification of any transaction required to be reported under paragraph (a) of this Item.” Item 404(d) also requires a smaller reporting company to include the information called for by Item 404(c), but that information is applicable to registration on Form S-1 under the Securities Act (or Form 10 under the Exchange Act) and we discuss it below in the context of registration on Form S-1.

 Disclosure must also be made with respect to certain legal proceedings occurring within the past five years relating to officers and/or directors if material to evaluation of their ability or integrity. Item 401(f) of Regulation S‑K. Proceedings which may require disclosure include bankruptcy (personally or business related), conviction of any crime or being subject to a pending criminal proceeding (other than traffic violations), injunctive proceedings in which the officer or director was enjoined from engaging in certain specified activities (including any violation of federal or state securities laws), administrative proceedings barring or suspending such person for more than 60 days from engaging in various specified activities (including the purchase or sale of any security), and a civil proceeding in which such person was found to have violated federal or state securities laws.