IPO in the US – An introduction 

Hello and welcome to the session on initial public offerings in the United States.  My name is Iain Alexander from KPMG’s US Accounting and Reporting Group based in London.

I will primarily focus on the financial statement aspects of listing in the US but will also touch on other aspects that a company needs to consider and address in order to be a public company operating under the US Securities and Exchange Commission  - the SEC for short.  I will look at what sort of a registrant you are, which GAAP is available to you, and what needs to be filed.

So, firstly, what sort of registrant are you? – a domestic registrant, or a foreign private issuer.  Without covering all the details behind this, a foreign company is a domestic registrant if (1) more than 50% of the outstanding voting securities are owned by residents of the US AND (2) any of the following conditions are met:

-          - The majority of executive officers or directors are US citizens or residents, or

-          - More than 50% of the issuer’s assets are located in the US or

-          - The issuer’s business is administered principally in the US.

This determines the GAAP you report to the SEC under, the forms used for reporting and the timetable that applies for reporting.

Which GAAP is available? - As a Foreign Private Issuer or FPI, you have a choice of generally accepted accounting principles (or GAAP), and a company has 3 options:

1         - IFRS as issued by the IASB,

2         - US GAAP or

3         - a different local GAAP which is presented with a  reconciliation to US GAAP.

For the avoidance of doubt, if a company files financial statements under IFRS as issued by the IASB, it does not have to reconcile to US GAAP, but it must be IFRS as issued by the IASB – not a jurisdictional IFRS such as IFRS as adopted by the EU.  To date, this has been of minimal issue, except for aspects of IAS 39, but this could become a much bigger issue mainly due to different adoption dates of new IFRS standards.

The initial registration statement for an FPI is usually filed on a Form F-1 and the annual report for an FPI is filed on Form 20-F.  The filing deadline is 4 months after the year end, regardless of the size of an FPI.

In contrast, as a domestic registrant, a company must file full US GAAP financial statements using domestic forms such as Form 10-K for the annual report and Form 10-Q for quarterly reporting.  The deadlines can be as short as 60 days post year end for a 10-K and 40 days post quarter for a 10-Q.  The initial registration statement is typically filed on Form S-1.

Now, an FPI, although not required to file interim financial information, is required to ‘furnish’ on Form 6-K any information that was publicly provided in its local market – this is to make sure it is readily available to US investors.  For example,   a company that has a primary listing in the UK is required to issue 6-month interim financial statements with the London Stock Exchange.  These interims must be at least ‘furnished’ on Form 6-K with the SEC.  The term ‘furnish’ is differentiated from ‘filing’ information which has liability implications. 

Staying with the choice of GAAP, for self-marketing and peer-group reasons, we do see technology companies that would qualify for the use of IFRS or a local GAAP, with the more ‘relaxed’ reporting timetables, voluntarily adopt US GAAP and elect to furnish quarterly information to investors.

 If a company is currently operating under one GAAP but plans to file as a US public company using a different GAAP, they must plan a GAAP conversion prior to its initial registration statement. A GAAP conversion is rarely a quick exercise and should be planned carefully and in a timely fashion. 

Now, what needs to be filed?

I mentioned the types of forms a minute ago.  For the S-1 or F-1 initial registration statement, the content will include more than just financial statements.  These forms  take an enormous amount of planning, and generally include:

-           - 3 income statements and comprehensive income, statements of cash flows, changes in shareholders equity  - audited in accordance with PCAOB standards which is likely different to the standards of previous audits – impact being re-audits or top up procedures

-           - 2 balance sheets – audited

-           - Audited footnotes or all periods presented

-           - Some interim periods may be required if annual periods are out of date

-           - Historical quarterly data

-           - Management’s discussion and analysis for each of the periods presented

-           - Selected financial data for 5 years

-           - Pro forma financial information

-           - Financial statements of significant acquired  businesses and/or equity method companies

-           - Other information includes a business description, such as a capitalization table, risk factors, risk management, details of the listing, executives, compensation, etc.

The timetable for listing from inception to effectiveness varies considerably.  Typically the timescale is over 6 months, and often 12 months or more.  Preparing for an IPO ahead of time, so that you are ready to take advantage of market conditions has advantages, especially if a change of GAAP is being considered.  As part of this, consider

- which stock exchange to list on – NYSE or NASDAQ?

- who will be your advisors – banks/underwriters, SEC legal counsel, accountants – compared to a UK listing, the SEC legal counsel will be heavily involved and it is recommended they are engaged as early in the process as possible

- what is the IPO story to tell the investors?

- how ready is the company for an IPO including with regard to corporate governance, internal  controls over financial reporting, systems and processes, internal staffing availability, etc.

One thing I haven’t mentioned is Sarbanes-Oxley Section 404 which some of you may know as SOX 404.  The initial registration statement does not require management or auditor attestation for the first year.  Most registrants will require both attestations in the 2nd annual report filed after the IPO but certain filers are currently exempt from auditor attestation for the short or long-term, but not management attestation.

The last point I wanted to make is that the US government recently passed something called the JOBS act – or the Jumpstart Our Business Startup Act which was issued to promote more public listings in the US market for a new category of public equity issuer called Emerging Growth Companies or EGCs.  The key aspect is that it allows for reporting exemptions for up to 5 years for eligible entities. 

The JOBS act is discussed in a separate presentation. 

Thank you.