Post on 16-Feb-2022
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We will be following a fictional company,
Biobotanical Therapeutics, through its life cycle:
1. Taking the company public
2. Producing required periodic reports
3. Going through a possible M&A transaction
4. Ceasing to be a publically traded company
Agenda
About Our Company3
Biobotanical Therapeutics is a
California based pharmaceutical company.
While currently privately held, it would like
to expand its research and development as
well as hire new scientists to address strong
customer demand for its products.
About Our Company4
The money needed by the company is more
than its existing investors can provide.
Biobotanical Therapeutics decides that
its best course of action is to go public.
The company’s management must first
find an investment banker who will agree
to underwrite the offering.
Morgan Stanley agrees to underwrite the
deal for Biobotanical Therapeutics.
About Our Company5
Going Public
• It is now time to file an S-1 (Registration Statement).
• This document gives potential investors details
about the company and the offering.
• This offering must comply with the Securities Act
of 1933, which governs security offerings.
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“Truth in securities law”
• Provides investors with all material information concerning all securities offered
for public sale.
• Prohibits misrepresentation, deceit, and other fraud in the sale of securities.
• Prohibits any security from being offered or sold to the public unless it is
registered with the SEC or is exempt from registration.
The Securities Act of 19339
• Provides disclosure of material facts about the
company and the securities it proposes to sell.
• Requires accuracy of the facts.
• Enables investors to make a realistic appraisal
of the company.
• The first filing is also known as the “red herring.”
Purpose of Registration Statement10
Registrations MUST include:11
• A description of the company’s properties and business.
• A description of the security to be offered for sale and its relationship to the company’s
other capital securities.
• Information about the management of the company and their compensation arrangements.
• Financial statements audited by an independent public accountant.
• A discussion of financial condition and operating results by management.
Who must file…12
• US and foreign companies or governmental issuers
who sell securities in the US securities markets.
• However…there are certain exceptions:
- Offerings restricted to residents of the state where the
issuing company is organized and doing business.
- Securities of municipal, state, federal, and charitable
institutions.
- Offerings of “small business investment companies”
made in compliance with SEC regulations.
Registration Statement Composition13
Part I Information required in the
Prospectus includes:
- Risk Factors
- Use of Proceeds
- Description of the Company’s Business
- Financial Statements
- Plan of Distribution
- Description of Securities to be Registered
Part II Information not required in the
Prospectus includes:
- #13: Other Expenses of Issuance & Distribution
- #14: Indemnification of Directors & Officers
- #15: Recent Sales of Unregistered Securities
- #16: Exhibits & Financial Statements Schedules
- #17: Undertakings
Note:
- Depth of disclosure varies from company to company.
- Prospective Investors are given entire S-1 EXCEPT front page and Part II.
Risks14
The risks associated with investing in a
Registered Securities Offering:
There is no guarantee to
the accuracy of the facts.
It does not protect against the
sale of stock in risky, poorly
managed, or unprofitable
companies.
Registration does not
imply that the SEC
approves of the issue.
SEC Staff Review17
• The SEC may request that the company make
minor changes or disclose additional information.
• The company will need to submit at least one
amended filing.
• Must also directly respond to the SEC’s comments.
• The comments of the SEC will become
publicly available.
Road Show20
• Issuer presentation of securities to potential buyers.
• Management travels across the country
(sometimes internationally) to meet with prospects.
• Intended to generate excitement and interest
in the issuance or IPO to follow.
Setting the Price21
• The investment bank sells the shares to the money managers.
• Deducts its fee (typically 7% in an IPO).
• Gives the rest to the company going public
(to be sold to public).
Corporate Reporting23
• Public companies must file annual and other periodic reports
to update the information contained in their original filings.
• They must send these reports to shareholders upon
request and make them available on their website.
“The Exchange Act” / “The ’34 Act”
• Requires that investors have access to current financials and other pertinent
company information on a regular basis.
• Regulates corporate reporting, proxy solicitation, takeover bids and tender
offers (Williams Act), insider trading and registration of exchanges,
associations and broker dealers.
The Securities Act of 193324
Common forms required under “The ‘34 Act”
• Forms 3,4,5 - Director/officer/owner
disclosure forms
• 10-K - Annual report
• 10-Q - Quarterly report
• 8-K - Announce major events
• DEF 14A - Definitive proxy statement
Securities Exchange Act of 193425
• 20-F - Registration Statement/Annual
report for foreign issuers
• 40-F - Canadian annual report (10-K)
In Depth: Form 10-K26
1. Filed annually within a
specified time period after the
end of the fiscal year.
(Filer timetables differ due to
“status”…“large accelerated”,
accelerated” etc.)
2. Contains:
• A synopsis of a company’s
past, present, and
future activities.
• Audited financial reports.
• A comprehensive list of
material agreements in
effect at the time of the filing.
In Depth: Form 10-K27
• Annual financial statements must be audited.
• Lists the title of all listed securities and their exchange on the
cover, also the number and class of securities outstanding.
• It is a uniform disclosure document.
• It is the baseline document for finding past contracts
and agreements incorporated by reference.
In Depth: Form 10-Q28
1. Filed 3 times per year.
2. Contains unaudited
financial information.
3. Used to discuss the
company’s financial
standings in an ongoing
manner.
In Depth: Form 8-K29
1. The purpose of the 8-K is to
disclose an “extraordinary
event” that occurs between
reporting periods.
2. It is to be filed or furnished
within 4 business days after
the triggering event for
most items.
3. It is structured with 9
sections and 32 items.
4. Issuers may file a single
Form 8-K to disclose one
or more required items.
In Depth: Proxy Statement32
1. Sent to all shareholders
with the issues that will be
voted on at the annual
meeting.
2. Contains a voting ballot in
case a shareholder is
unable to attend.
3. Discloses all material facts.
4. Gives shareholders an
opportunity to vote “yes” or
“no” on important corporate
issues.
Rule 14a-8 of “The ‘34 Act”
• A shareholder can submit a Proxy proposal if the shareholder
has continuously held at least $2000 in market value or 1% of a
company’s securities (whichever is less) for at least one year by
the date of submitting the proposal.
• The company can attempt to exclude these proposals from the
Proxy. It must have its counsel send a request to the SEC in the
form of a No-Action Letter with the reason for exclusion.
The Securities Act of 193334
In Depth: No-Action Letter35
An SEC letter indicating that no
civil or criminal action will be taken
against an individual engaging in
a particular activity.
Sent in response to a written
request for clarification when the
legality of the activity in question
is not well-established.
• The economy has entered a recession and the
price of the company’s stock has gone down.
• Demands for these products and services fall
sharply as Biobotanical Therapeutics begins
to experience financial difficulties.
• Plans are made to issue a press release
announcing a large loss in profits for the year.
Profit Loss38
• The SEC investigates a member of Biobotanical
Therapeutics’ board of directors. Knowing that the
share price would drop as a result of the press
release, the board member sold a large percentage
of their shares prior to the announcement.
• This is considered illegal insider trading.
• The board member is forced to resign.
Insider Trading39
• Buying or selling a security while in possession of
material nonpublic information about the security.
• This falls under Rule 10b5-1.
• Material information may include, but is not limited to:
- An impending takeover
- Introduction of a new product
- Appointment of a key executive
- Bankruptcy
- Any activity that could have either a positive or negative
effect on the firm’s stock price
Illegal Insider Trading40
• When corporate insiders (officers, directors, and employees) buy and sell stock in their
own companies.
• Section 16: All officers, directors, and beneficial owners of a company that own more than
10 percent of its registered equity securities must file an initial report with the SEC (Form 3)
showing their holdings.
• They must file a report for any transaction in which there was a change in the holdings.
(Form 4)
• An annual statement of changes in beneficial ownership must also be filed. (Form 5)
Legal Insider Trading41
• The drastic drop of share price, along with the insider
trading scandal, have caused a mass selling of
Biobotanical Therapeutics stock by its shareholders.
• The company wants to try to stay in business but is
forced to declare bankruptcy under Chapter 11.
Bankruptcy42
Bankruptcy Options43
Try to reorganize in an effort to deal
with crippling debt (Chapter 11)
Cease all business activities
(Chapter 7)
• Companies who plan to make an attempt to
reorganize their corporate structure and seek
out solutions to their debt.
• Most publicly traded companies will file under
Chapter 11 because it will allow them to stay in
business and control the bankruptcy process.
Why Chapter 11?44
• A private company steps in; offering to
purchase most of the assets of Biobotanical
Therapeutics.
• The Board of Directors see no other option and
reluctantly agree.
• After the deal is completed, Biobotanical
Therapeutics decides that it would be in its
best interest to terminate its registration.
• This is done on Form 15.
Getting Acquired46
In Depth: Form 1547
1. Also known as: “Certificate
and Notice of Termination
of Registration”
2. Used to revoke the
registration of a company