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 There was a Forms S-2 that was withdrawn by SOR.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 subpart 500 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, however, to certain types of shelf offerings not relevant to an initial public offering that we will discus in a subsequent assignment relating to shelf registration..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 applicable to 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 of this chapter).
Example

Item 5. Determination of Offering Price.

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

Item 6. Dilution.

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

Item 7. Selling Security Holders.

Furnish the information required by Item 507 of Regulation S-K (§229.507 of this chapter). 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 of this chapter).
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 of this chapter).
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 of this chapter). Recall that when we discussed request for acceleration in Part 9 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 include 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..
 

Basic Information Package

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 and cross-reference to more detailed discussion that you may optionally pursue at your convenience. We refer to certain collective portions of the prospectus as the basic information package (BIF) as it is is common to Forms S‑1‑2‑3 for registration under the Securities Act and Form 10 for registration under the Exchange Act, as well as to the annual report to shareholders and the Form 10‑K under the Exchange Act. The BIP includes the information the Commission regards as important to all investors. It includes the standardized financial statements  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 (, a brief description of the registrants business and certain segmental information (Rule 14a‑3; 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 for certain issuers (Item 302 of Regulation S‑K).  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 remaining 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.

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 repository of disclosure relating to off-balance sheet transactions  ( Item 303 of Regulation S‑K) and proposed repository of disclosures relating to critical accounting estimates and newly adopted accounting policies.  

See Salesforce.com (use bookmarks to go to 424(b) prospectus and table of contents to go to Management's Discussion and Analysis) Cogent, Inc.

In Depth Disclosure

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. 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. 

 See Cogent, Inc

. 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. Item 401 of Regulation S‑K. If registrant is a non‑reporting company, employees who are not executive officers, but are expected to make significant contributions to the business of the registrant are to be identified and information also given concerning their backgrounds. If officers (or significant employees of a non‑reporting company) have been employed by the registrant for less than five years, the information relating to their prior business experience should be such as to indicate the level of his professional competence. Other directorships held by any director in a reporting company should also be disclosed.

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.

The disclosures relating to transactions with include--:

(1)  Transactions with any director or executive officer, any nominee for election as a director, five percent beneficial owners of any class of voting stock, and any member of the immediate family of any of the foregoing must be disclosed if such transaction (or series of similar transactions) involved amounts in excess of $60,000. Item 404(a) of Regulation S‑K. A persons immediate family for this purpose includes the person’s spouse, parents, children, siblings, mothers- and fathers‑in‑law, sons- and daughters‑in‑law, and brothers- and sisters‑in‑law. See instruction 2 to item 404(a).

(2)  For registrants organized within the last five years and filing a registration on Form S‑1 under the Securities Act or Form 10 under the Exchange Act, disclosure must be made of prior or contemplated transactions between the promoter and the registrant. Item 404(d) of Regulation S‑K. A promoter is defined as (1) one who alone or with others who took the initiative in founding and organizing the business, or (2) who in connection with the founding and organizing of the business received for property and/or services ten percent or more of a class of securities of the issuer or ten percent or more of the proceeds from the sale of any class of securities unless such securities or proceeds were received solely as underwriting commissions or solely for property. Regulation C, Rule 405. The nature of the transaction, the name of the promoter, the nature and amount of what was received by the promoter and the consideration received by the registrant, the principle (and by whom determined) followed in valuing any asset acquired from the promoter must be described. If assets transferred by the promoter to the issuer were acquired by the promoter within two years prior to their transfer, the promoter’s cost must also be set forth. These provisions often come into play when promoters transfer assets for stock upon organization of the corporation or shortly thereafter.

(3)  Indebtedness to the issuer of any director or executive officer, of any nominee for election as a director, or of any member of the immediate family (defined as in item 404(a), see subparagraph (1) above) of such persons must be disclosed if in excess of $60,000 at any time during the fiscal year. In addition, disclosure must be made of similar indebtedness to the issuer by a corporation, organization, trust and estate in which any director or executive officer or nominee is an executive officer or partner or beneficial owner of ten percent or more of a class of equity securities (as to corporations or other organizations), or as to a trust or estate has a substantial beneficial interest or serves as a trustee or in a similar capacity. Reg. S‑K, item 404(c).  Sarbanes-Oxley now precludes a public company from making personal loans to officers or directors. Exchange Act, § 13(k), 15 U.S.C.A. § 78m(k) as added by Section 404 of Sarbanes-Oxley Act. A company going public, however, would not be subject to this provision prior to filing a registration statement; hence such loans may be outstanding at the time the registration statement is filed.