Many entrepreneurs dream about taking their company public through an initial public offering (IPO). Whether you issue securities in a public offering under the Securities Act of 1933 or register the company's securities under the Securities Exchange Act of 1934 (Exchange Act), your company will inherit public company disclosure requirements. Before becoming a public company, you need to understand these public disclosure requirements and how they will affect your business.
Securities Act Reporting Obligations
After your company's Securities Act registration statement becomes effective, the Exchange Act requires you to file periodic reports with the SEC. The filing obligation continues at least until the end of the fiscal year in which your registration statement becomes effective. From that point on, your filing obligations continue unless one of the following conditions occurs:
- your company has fewer than 300 shareholders of the class of securities offered; or
- your company has fewer than 500 shareholders of the class of securities offered and less than $10 million in total assets for each of the three prior fiscal years.
The Exchange Act requires your company to file information with the SEC about:
- its business operations;
- its officers, directors, and certain shareholders, including compensation packages and transactions between the company and managers;
- material risks to the company's continuing operations, including lawsuits, and now even the board's risk oversight activities and the risks presented by climate change
- the financial condition of the business, including financial statements that independent certified public accountant has audited; and
- its competitive posture and the terms of significant contracts.
This information becomes publicly available after you file your reports with the SEC. As with Securities Act filings, small business issuers may use alternative forms and Regulation S-B, the integrated disclosure system for small business issuers under the Exchange Act. The SEC has interpreted a "small business issuer" to be a company with revenues of less than $25,000,000 and whose public float (the aggregate market value of the outstanding voting and non-voting common equity held by non-affiliates) does not exceed $25,000,000.
Exchange Act Registration
Even if your company has not registered a securities offering under the Securities Act, it must file an Exchange Act registration statement if:
- it has more than $10 million total assets and a class of equity securities with 500 or more shareholders; or
- it lists its securities on a stock exchange.
Exchange Act Periodic Reports
When your company registers securities under the Exchange Act, it must file the same annual, periodic, and current reports that are required due to Securities Act registration. This obligation continues so long as the reporting conditions outlined above obtain. If your company's securities are traded on a stock exchange, the company must continue filing the reports as long as the securities trade on the exchange, even if your company does not meet the reporting conditions.
On top of the categories described above, your company must also file public information regarding:
- proxy statements for shareholder votes on corporate matters,
- ownership of more than five percent of the company's shares by a person, and
- tender offers in takeover attempts.
Conclusion
Public companies must comply with ongoing disclosure requirements. These requirements can change how your company operates and relates to investors. Even if your company is not large and famous, it will be subject to greater transparency and public scrutiny. And, yes, complying with these reporting requirements will take time and cost money. The key is to get good advice about what to include in your SEC disclosures.
There are benefits to going public too, and we will discuss the benefits in a future post.
Twitter: @DougYPark
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