Davis Polk’s “top fives” for consumer retail IPOs

Top five items to prepare for in advance of your IPO

1. Financial statements and auditor matters

Financial statements. The preparation of financial statements and related disclosure frequently is the most time-consuming aspect of an IPO, and the item most likely to become a gating issue. In particular, SEC rules require the following in an IPO registration statement:

• Income statements covering the last three fiscal years (or the last two fiscal years, in the case of an “emerging growth company”) and balance sheets as of the end of the last two fiscal years (or the last fiscal year, in the case of an “emerging growth company”). The audit report must be in accordance with U.S. generally accepted accounting standards and must be “clean” (i.e., without any qualifications).
• Interim quarterly financial statements (which may be unaudited) for interim quarterly periods will be required if the date on which the IPO prices is 135 or more days after the date of the most recent financial statements included in the registration statement.

Certain of these financial statements can be omitted from initial draft submissions of a registration statement depending on the overall deal timing and what will be required under SEC rules when the IPO prices.

For marketing purposes if your business is revenue generating, the underwriters will likely want to include additional quarterly information for the last two fiscal years in order to present quarter-over-quarter trends and to help investors and research analysts better understand your business. The underwriters on the IPO will usually want such quarterly periods to be reviewed by your auditors, so the IPO timeline should allow for the auditors to complete those reviews.

Auditor independence. Your auditors will need to be independent under all SEC and PCAOB rules. It is important to review with your auditors whether there are any relationships that could affect their independence. The “Big 4” auditing firms have extensive controls in place to ensure that they do not inadvertently trigger independence problems for their audit clients, although mistakes occasionally happen which can cause delays and other potential issues for an IPO.

2. KPIs, TAM and Financial Model

Key performance indicators (KPIs). In addition to financial metrics, part of the story will be around KPIs for your business. Identify the KPIs that you want to be measured against, consider what your competitors publicly report and what will help tell your story, both for the IPO and as a public company. It is important to vet the calculation and review the underlying data at an early stage to ensure that it is sufficiently robust for purposes of marketing the IPO, including for historical periods to the extent you want to be able to show period-over-period trends.

Total addressable market (TAM). Compiling sufficiently robust data to support a TAM for purposes of marketing an IPO can be a time consuming and challenging process. It is important to clearly define your TAM and consider what support is available. If available data is not sufficiently robust, it may be necessary to commission a third-party study from a well-regarded industry source to support your TAM which should be done early in the IPO process to avoid delays.

Financial model. As part of the IPO process, management will provide the research analysts of the underwriters with preliminary projections and their financial model. Research analysts build upon the management model to develop their own independent financial models and views on valuation which inform the investor education they engage in with prospective investors during the IPO roadshow. It is important to begin work on financial modeling early as the ability to meet projections is key to building underwriter confidence and will be essential post-IPO.

3. Executive team

Equity compensation. You should review your existing compensation and benefit plans to determine whether changes are needed in light of an IPO and any related restructuring. Most companies adopt a new equity compensation plan in connection with the IPO. Because NYSE and Nasdaq rules require public company plans and material amendments to be approved by stockholders, you should plan to have any new equity compensation plan, or amendment to any existing equity compensation plan, approved by the company’s private stockholders before completion of the IPO.

Management team. Identify any gaps in the management team that may need to be filled prior to the IPO in order to operate effectively as a public company. It is important to start the process early and allow enough time to fill any gaps without making changes to the management team at a late stage that can be disruptive to the IPO process. As part of building public company rigor, you should consider running background checks before onboarding new management team members to avoid late stage surprises. The underwriters will also run background checks on both the management team and the board of directors in connection with the IPO so best practice would be to get in front of any diligence and disclosure issues that may arise.

Management agreements and related-person transactions. Any employment, severance, change-of-control or similar agreements and related-person transactions with executive officers and directors should be reviewed. As a public company, you will need to disclose detailed information regarding such agreements and transactions. Often there will have been a significant number of transactions with executive officers, directors, other affiliates and family members. These transactions should be examined in light of disclosure requirements and general standards of materiality.

Consideration should also be given to whether to require non-compete, non-solicitation and/or confidentiality agreements, particularly as these may be helpful in establishing the existence of safeguards against compensation practices which may otherwise be perceived as encouraging risky behavior. To be enforceable, non-competition and non-solicitation agreements must be reasonable in scope and duration. In certain states, such as California, non-compete agreements are generally void as against public policy. Confidentiality and non-disparagement covenants must be tailored to ensure that they would not be perceived to chill any potential whistleblowers.

4. Corporate governance

Applicable rules. In preparing for the IPO, you will need to consider the corporate governance requirements of the Sarbanes-Oxley Act and the related SEC rules, as well as additional corporate governance standards required by the stock exchange on which you elect to list the company’s shares.

Independent directors. Subject to the “controlled company” exception, NYSE and Nasdaq standards require that the board of directors of a listed company consist of a majority of independent directors, although IPO companies have one year from the date of listing to meet this requirement. Each of them has also established its own definition of “independent director” which lists categories of individuals and their relationships with the listed company that would make them not independent. It is recommended to run this analysis early in the process as recruitment of board members takes time.

Audit committee. The NYSE and Nasdaq standards provide that companies must have an audit committee consisting entirely of independent directors. In addition, SEC rules direct the NYSE and Nasdaq to prohibit the listing of securities of a company that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act, including that audit committee members be independent as defined by the SEC. These SEC rules are in addition to the independence and other NYSE or Nasdaq requirements.

Other board committees. Subject to the controlled-company exception, both the NYSE and Nasdaq will generally require a compensation committee comprised of independent directors, and also a nominating and corporate governance committee comprised independent directors (or alternatively, in the case of Nasdaq, nominations of directors must be determined by a majority of directors). The independence requirements are subject to certain transition periods for the first year after listing.

Timing. While the process for identifying any additional directors should be initiated early in the process, the actual effective date of director appointments may be closer in time to the IPO or at pricing. Similarly, while committee charters should be prepared and approved, they can be adopted as of pricing so as not to encumber a private company with a public company governance structure if there is a delay in timing.

Download our overview of corporate governance practices of recent U.S. IPOs for benchmarking purposes.

5. Control rights

Key considerations. Negotiating public company corporate governance terms in connection with an IPO can involve significant lead time and the input of various stakeholders. It may be helpful to have shareholders approve IPO-related governance changes at the time of a pre-IPO financing or crossover round to avoid going back to shareholders during the IPO process.

Dual class stock. Dual-class structures involve two (or more) classes of stock with equal economic rights, but unequal voting rights, allowing a stockholder or a group of stockholders to have voting control over a company disproportionate to their economic interest. In the most common formulation, one class of shares is designated as high-vote (e.g., 10 votes per share) and one class of shares is designated as low-vote (e.g., 1 vote per share). Although typically high-vote shares are held by all pre-IPO holders, it may be possible to reclassify the shares to give high-vote shares exclusively to founder(s) and/or management. High-vote shares may also carry pre-emptive rights to purchase additional high-vote shares to maintain their voting power upon the offer and sale of low-vote shares. Dual-class structures generally sunset after a set number of years and/or when high-vote holders drop below a set ownership threshold (e.g., 10%). Any dual-class structure should be tailored to your ownership and goals of the founder(s).

Board nomination rights. Board nomination rights for significant shareholders typically sunset or step down as voting power decreases (e.g., majority of the board seats if at least 50% voting power held, one-third of the board seats if at least 25% voting power held, etc.)

Shareholder consent rights. Consent / veto rights over certain corporate actions may be desired by significant shareholders or the founder(s). Any such rights granted typically sunset when holders fall below a set ownership threshold (e.g., 10% of voting power).

Download our overview of corporate governance practices of recent U.S. IPOs for benchmarking purposes.

Top five “watch outs” on your IPO

1. Financial statements issues and internal controls

Timeline for preparing financial statements. The preparation of financial statements and related disclosure frequently is the most time-consuming aspect of an IPO, and the item most likely to become a gating issue. It is important to consult with your accountants as to the time it will take to prepare all SEC-compliant financial statements.

Potential SEC areas of focus. Your accountants will be familiar with the SEC regulations and review process applicable to public offerings. It will be important to work with your accountants to identify any aspect of your financial statements that may be likely to draw the attention of the SEC’s accounting staff. The SEC staff often focuses on matters such as revenue recognition, the use of non-GAAP financial measures, stock-based compensation (see “Cheap stock issues” below) and segment reporting. You should consider whether any particular accounting issues would be worthwhile discussing, or potentially pre-clearing, with the SEC’s accounting staff. Keep in mind that your accountants (particularly in the case of the “Big 4” accounting firms) will often need to confirm with their national office any aspect of your financial statements that is likely to draw attention of the SEC’s accounting staff. Ensuring that they do so early in the IPO process can help avoid delays at a later stage.

Acquisitions and dispositions. You may also be required to include in the registration statement financial statements relating to recently acquired companies, if the size of the acquired company or acquired companies on an aggregate basis meet certain “significance” thresholds. Financial statements for private acquired companies can sometimes be challenging to produce if not obtained in connection with the acquisition. Proposed acquisition transactions that are “probable” may also require disclosure, so it is important to evaluate any proposed acquisitions within the scope of the planned IPO timeline. In the case of significant acquisition transactions that have not yet been reflected in your financial statements for a full fiscal year, a pro forma presentation showing the combined companies’ results also may be required. Similarly, a recent disposition or a disposition that is “probable” may require pro forma presentation showing the impact of the disposition. Additional financial statements or pro forma financial statements for acquisitions and dispositions can involve significant additional work and have the potential to delay an IPO process.

Internal controls over financial reporting. It will be important to ensure that your accounting and financial reporting controls and procedures are adequate to address the needs of a public reporting company in light of the requirements of the Sarbanes-Oxley Act. You should address any significant issue raised in comment letters issued to management by your accountants. If a “material weakness” is present at the time of the IPO, the underwriters will seek to do additional diligence and the registration statement will need to reflect appropriate risk factor disclosure regarding the circumstances of the material weakness and the remediation plan.

2. “Cheap stock” issues

Potential SEC “cheap stock” comments. The SEC regularly comments on the accounting treatment of equity compensation awards issued prior to the IPO, as the SEC is focused on whether awards to employees were granted at a discount to the current fair value of the company’s stock when the award was granted. The SEC is likely to require you to demonstrate that any equity compensation was granted at a value that fairly reflected the value of your equity at the time, and, if it did not, the SEC will require that your financial statements include a charge associated with the grant. You should carefully consider and document valuation factors relevant to equity compensation awards in advance of an IPO and more regularly assess fair value with the assistance of a third-party valuation consultant. This will also help minimize potential tax issues that may arise with respect to the issuance of options with exercise prices that are not considered to be at fair value.

Potential taxation under Section 409A. Section 409A of the Internal Revenue Code imposes additional taxes on compensatory stock options that are granted with an exercise price below fair market value at the time of grant. As such, if you grant any stock options prior to the IPO, you will want to make sure the exercise prices of such options are established in accordance with sound valuation practices. Section 409A also imposes other requirements on compensation that are considered non-qualified deferred compensation, so we would recommend a review of all compensatory arrangements, including employment agreements and bonus, incentive, severance and deferred compensation plans. Even currently compliant plans may require technical amendments prior to the IPO.

3. Employee equity

Consider the impact of equity awards on the IPO. Consider the impact of equity awards on the IPO capital structure, including, for example:

• Do employee awards vest upon an IPO?
• Do the award agreements provide for a customary six-month lock-up?
• Do employees have a right to sell in the IPO?
• Will employee equity trigger individual tax liability during the IPO lock-up period?

The answer to these questions may impact IPO lock-ups, and in particular any early lock-up release mechanic to the extent relevant. Any early lock-up release mechanic, in turn, requires careful planning and coordination with applicable employees to ensure that they are able to sell when their shares are released from the lock-up.

Review the form of equity awards. Careful consideration should be given to the most efficient form of equity awards in the lead-up to an IPO. For example, many private companies grant stock options, but in some cases a “full value” award (e.g., restricted stock units) may be more efficient. Full value awards can be designed with “double trigger” vesting and settlement conditions (e.g., vesting is subject to satisfaction of both service and liquidity event conditions), such that a liquidity event like an IPO does not result in acceleration or otherwise trigger a tax event by itself. Typically companies that make such a change will do so during the 12 to 18 month period prior to an IPO.

4. Due diligence, thorny disclosure issues and material contracts

Prepare for underwriter due diligence. In order to facilitate the due diligence process, you should create a comprehensive repository of corporate records, contracts and other legal and regulatory documents. Contracts should be reviewed to ensure that they are current, complete and signed by all counterparties.

Anticipate thorny disclosure issues. Unexpected disclosure issues can slow down an IPO process and potentially even impact valuation. Carefully review any actual or potential disputes, regulatory compliance, litigation, cybersecurity or data privacy incidents, product issues, consumer reviews, negative media or other similar matters with your advisors early in the process and devise a plan to ensure they are disclosed, to the extent necessary or advisable, in a thoughtful manner without impacting the IPO timeline.

Review contracts for IPO-impactful provisions. You should conduct a review of your contractual arrangements in order to determine whether any provisions need to addressed and/or navigated in connection with the IPO. Some provisions may be easily addressed (for example, by giving required notice or meeting stated conditions), while others may require you to obtain a waiver, consent or amendment and there may be some provisions that require extensive negotiation and communication with counterparties. In general, IPO impactful provisions include:

• control rights that survive the IPO, such as veto provisions, rights to appoint directors or stockholder voting agreements;
• “qualifying IPO” provisions in stockholders’ agreements requiring a minimum per-share IPO price or deal size;
• preemptive or similar rights or anti-dilution provisions triggered by issuing equity (particularly if they survive the IPO);
• rights to receive shares in the IPO or registration rights that may be triggered by the IPO (including notice requirements);
• restrictions on payment of dividends;
• non-competition clauses and other restrictions on the type of business you can enter into;
• change of control provisions; and
• provisions in financing agreements, such as credit facilities, restricting the issuance of securities, the undertaking of a public offering or the use of IPO proceeds.

Public filing of material contracts. The SEC requires that each of your material contracts be filed as exhibits to the registration statement. Material contracts should be reviewed to ensure that the filing will not violate any confidentiality agreement and to ensure that proprietary information will not be inadvertently disclosed. It is possible to obtain confidential treatment of sensitive information (such as pricing information). However, the SEC limits both in scope and in time the extent to which confidential treatment will be afforded. If confidential treatment is required, additional time for SEC review may be required. If necessary, a waiver to confidentiality provisions may need to be obtained and redactions negotiated with commercial partners. Material contracts include agreements with directors and certain executive officers of the company. It is typically helpful to inform those individuals that their agreements will be filed publicly with the SEC before the filing is made.

5. Publicity

External communications. There will be restrictions on publicity in place during an IPO process to prevent impermissible conditioning of the market (which could have significant consequences including SEC-imposed timeline delays, liability concerns and potential rescission rights for investors). Customary communications, factual announcements in the normal course of business and consistent with past practice are, however, permitted. It may be beneficial to standardize communications ahead of kicking off an IPO process to establish a track record with respect to conference attendance, press releases and other external communications, as well as establish standardized processes regarding review and vetting of external materials. This may require an upgrade of your IR functionality ahead of the IPO process.

Top five tips for a successful IPO

1. Build the right team externally

Lead underwriter and research analysts. Your underwriters will help market the deal and craft your story and their research analysts will also play an important role in helping investors understand your business model, so careful consideration should be given to the appropriate mix of leading banks in your sector. Your underwriters and their research analysts will also have views as to resolution of certain issues, particularly those relating to capital structure, stockholders’ rights or accounting issues that may affect your financial statements. Because of regulations applicable to broker-dealers as well as restrictions relating to analyst conflicts of interest, communications with research analysts may be restricted throughout the IPO process, so it is important to get to know them early and before any IPO process is underway.

Effective advisors and consultants. You will spend much time with your advisors and consultants on the IPO, so the chemistry between them and your internal teams is very important. Experience and the ability to execute an IPO efficiently is critical. But the ability of your advisors and consultants to clearly communicate to your internal team is just as vital as their experience and skill set. Carefully review your available internal resources and consider whether you need external support from advisors or consultants to help execute the IPO or assist with certain work streams (like preparing SEC compliant financial statements). And then find the right team for your IPO and get them involved in the process early to help identify longer lead team items and avoid delays at a later stage.

Legal counsel. Your legal counsel will work with you intimately throughout the IPO process. They will play a critical role in identifying potential issues, avoiding pitfalls, finding solutions and navigating the SEC review process. Experience is critical, but chemistry with your internal teams and their ability to communicate and effectively manage the IPO process is equally important. Also, remember that as the issuer you have the ability to vet counsel for the underwriters. Having a constructive, effective and experienced counsel representing the underwriters can help ensure an efficient execution of your IPO.

2. Build the right team internally

Execution team. Identify an internal IPO team that can allocate a meaningful portion of their time to the project in the early stages to work on longer lead time items, and that is prepared for a heightened workload in the final three to six months of the IPO process. Consider onboarding key members with public company experience (especially in accounting) as doing so could save you time and money on adviser fees later in the process.

Project managers. The IPO process will require a substantial time commitment from your management team. In particular, senior management representatives will be expected to participate in the due diligence meetings and in the marketing process. Many companies find it helpful to designate a project manager to attend all working group meetings and help with matters, such as following up on information requests and coordinating among company representatives.

3. Manage interdependencies in the IPO process

Make sure all your internal departments—especially legal, accounting and finance—communicate effectively in your day-to-day operations as well as in connection with the IPO process. Now is the time to implement communication channels, processes and checklists to make sure all relevant stakeholders are informed, and importantly that interdependencies and overall timelines and milestones are identified and appropriately communicated across to all relevant stakeholders.

4. Manage IPO milestones

While you should make every effort to manage to milestones in the IPO process, it is important to remember you cannot control 100% of the outcome. The IPO timeline will be subject to the SEC review process which involves a certain amount of uncertainty, and will also be subject to market windows and market conditions. Preserve flexibility where possible by completing work streams in advance of deadlines so you can take advantage of IPO windows when they arise.

5. Own your story

Great advisors are important and can help you craft your story and manage the IPO process with investors, taking into account an external perspective as well as understanding of the investor community, but don’t let them take over. At the end of the day, it is still your story … and you are best placed to tell it!

Top five tips for starting life as a public company

1. Manage communications with investors and analysts

Communications with investors and analysts. Public company communications with investors and analysts are highly regulated and can give rise to significant liability for the company and its officers and directors. Officers and directors who are authorized to speak on behalf of the company need to become thoroughly familiar with the relevant rules, including Regulation FD (regulating the disclosure of material non-public information) and Regulation G (regulating the disclosure of non-GAAP financial information).

Avoiding selective disclosure. Regulation FD provides that material information may not be disclosed selectively to securities analysts or investors, or others who may trade or recommend trading in a company’s securities. Regulation FD violations often receive wide publicity, and the SEC investigates them promptly and thoroughly. Some key points to note:

• Under some circumstances, the SEC considers the mere reaffirmation of previously announced guidance to be material information within the meaning of Regulation FD.
• If material information is inadvertently disclosed, you must disclose it to the market promptly, and in any event within 24 hours.
• Exceptions permit disclosure to persons bound by confidentiality agreements that prohibit trading based on the information, and to persons who are not acting as investors (e.g., customers and suppliers). Extreme caution should be used in relying on any Regulation FD exception.

It is important to adopt appropriate policies with respect to Regulation FD and to ensure that relevant officers and directors receive regular training with respect to Regulation FD.

Disclosing non-GAAP measures. Regulation G applies to filings, press releases and public statements that contain “non-GAAP financial measures” (e.g., adjusted EBITDA). Importantly, when you publicly release a non-GAAP financial measure, you must simultaneously release a reconciliation to the most comparable GAAP measure. Additional requirements under Regulation S-K apply with respect to non-GAAP measures included in certain SEC filings.

2. Understand applicable periodic reporting requirements

Regulatory reporting requirements. You will become subject to the reporting requirements of the federal securities laws, including the obligation to report specified current events on Form 8-K within four business days of occurrence (subject to certain exceptions), and the obligation to file quarterly reports on Form 10-Q, annual reports on Form 10-K and proxy statements on Schedule 14A.

Current reporting requirement (Form 8-K).

• Earnings releases. Any public announcement or release (including any update of an earlier announcement or release) disclosing material non-public information regarding your results of operations or financial condition for a completed quarterly or annual fiscal period must be furnished on Form 8-K. An exception permits material information discussed in the earnings call to not be filed, as long as the call takes place within 48 hours of the earnings release.
• Other reportable events. There are a range of other reportable events that can trigger a Form 8-K filing, such as entering into or terminating a material contract, completing an acquisition or disposition of assets, creating a direct financial obligation or an off-balance sheet obligation, and departures or appointments of directors or certain officers, among others. You should make sure to have in place appropriate disclosure controls and procedures to monitor developments or events that can trigger a Form 8-K filing.
• Filing deadline. Most Form 8-Ks must be filed with the SEC within four business days of a reportable event – i.e., if event occurs on Wednesday, the Form 8-K must be filed by close of business the following Tuesday.

Quarterly reporting requirement (Form 10-Q). A quarterly report on Form 10-Q must be filed with the SEC within 45 days of the end of the first three fiscal quarters. If later, an IPO company may file this form 45 days after the IPO for its first Form 10-Q. After you have been a reporting company for 12 months, this deadline will shorten to 40 days.

Annual reporting requirement (Form 10-K). An annual report on Form 10-K must be filed with the SEC within 90 days of the end of the fiscal year. After you have been a reporting company for 12 months, this deadline will shorten to 75 days and may shorten to 60 days if you achieve large accelerated filer status.

Stock exchange written affirmations. Both the NYSE and Nasdaq require periodic affirmations of compliance with their corporate governance standards. For example, if you list your common stock on the NYSE, the company and your CEO must submit an annual written affirmation to the NYSE each year within 30 days of your annual stockholders’ meeting and within 5 days of certain changes to the board of directors or its committees. In addition, the CEO must notify the NYSE of any instances of noncompliance with the NYSE’s corporate governance requirements.

3. Implement disclosure and internal controls

Maintaining and certifying disclosure controls and internal controls. Rules adopted by the SEC pursuant to the Sarbanes-Oxley Act impose requirements on public companies with respect to (1) maintaining and publicly reporting on their disclosure controls and procedures and internal control over financial reporting, and (2) requiring the CEO and CFO to personally certify as to the completeness and accuracy of the disclosure made in annual and quarterly reports and the effectiveness of disclosure and internal controls.

Management report and auditor attestation on effectiveness of internal controls. These rules also require that each reporting company provide annually a management report and an accompanying attestation report from the auditors on the effectiveness of your internal control over financial reporting. A transition period permits an IPO company to comply with the internal control reporting requirements in its second rather than its first annual report filed with the SEC. In addition, “emerging growth companies” have an exemption from the auditor attestation requirements for up to five years or until such earlier time as they no longer qualify as such.

4. Prepare for your first annual general meeting

Planning for the annual general meeting. The annual meeting allows shareholders to elect members of the board of directors and vote on any matters that may be proposed by management or other shareholders. Careful planning and coordination is necessary to execute a smooth annual meeting process (understanding key state law, SEC, stock exchange and corporate governance requirements, creating a detailed timeline with engagement from relevant third parties, including timing of board approvals, and preparing for meeting logistics).

Proxy statement filing deadline. If, as is typical, a company uses its annual proxy statement to disclose management compensation information required by Form 10-K (in lieu of providing it in Form 10-K), then the annual report and proxy must be filed with the SEC within 120 days of the end of the fiscal year. In any event it must be filed with the SEC concurrently with mailing to stockholders. Note that in some cases (e.g., if you include a management proposal seeking approval for a new equity compensation plan), then you must file a preliminary proxy 10 calendar days before you file the definitive proxy which may be subject to SEC review and comment.

“Say on pay” votes. You will be required to provide your stockholders with two advisory votes, which are non-binding, in your annual proxy statements: (1) a “say on pay” vote asking the stockholders to approve your executive compensation policies and programs as disclosed in the proxy statement and (2) a “say when on pay” vote asking the stockholders how frequently (annual, biennial or triennial) they would like a “say on pay” vote to occur.

Stockholder proposals. Your stockholders may submit proposals for inclusion in your annual proxy statement, subject to compliance with applicable procedural and substantive SEC rules. If the stockholder does not comply with the SEC’s rules, then you may be able to exclude the proposal.

5. Manage trading in your securities and related reporting

Policies on trading and reporting. The federal securities laws will restrict trading in your securities by your officers, directors and other “affiliates,” and will place reporting obligations on holders of more than 5% of your common stock. It will be important to adopt appropriate polices to manage compliance with these trading restrictions and reporting requirements.

Insider trading. Buying or selling stock on the basis of material non-public information, or tipping others who buy or sell on the basis of such information, is illegal. Officers and directors (and their immediate family members) may consider establishing Rule 10b5-1 plans for buying and selling your stock. Purchases and sales outside of Rule 10b5-1 plans should take place only in open window periods, and then only when the director or officer is not in possession of material information that has not been disclosed to the market. Both the SEC and the Financial Industry Regulatory Authority (FINRA) regularly conduct surveillance for insider trading, focusing in particular on unusual market activity before the announcement of material information (such as an earnings release or an acquisition). You should make sure to adopt robust policies with respect to insider trading in connection with the IPO.

Internal communications. Limiting internal communications in the transition to public company status can be a pain point for many companies (particularly in the retail space where sales associates may have historically had access to rolling financial information). It is advisable to conduct a review early in the process regarding how material information (e.g. financials, metrics and budgets) is disseminated and to whom and establish appropriate controls coupled with a thoughtful communication strategy to ease the transition. Access to material non-public information will restrict employees from trading securities until such information is disclosed to the market (impacting expectations of post-IPO liquidity) and a large and disperse group of “insiders” (including those who are not accustomed to such status) will be administratively complex to manage.

Resales of restricted stock under Rule 144. Stock sales by your directors, officers and affiliates, if not registered under the Securities Act, should be made through a broker pursuant to Rule 144 under the Securities Act, which imposes volume, timing, manner-of-sale and reporting requirements. The documentation and mechanics for removing restrictive legends from shares in connection with such sales can by cumbersome, so careful coordination with your transfer agent and counsel is important.

Section 16 “short-swing profits” and reporting for insiders. Directors, executive officers and 10% stockholders are subject to the “short- swing profit” prohibitions of Section 16 of the Securities Exchange Act of 1934. Section 16 applies whenever there is a sale and purchase, or purchase and sale, of stock within a six-month period. Even transactions within six months prior to the IPO by executive officers and directors may need to be reviewed to prevent inadvertent Section 16 problems—particularly if these individuals may sell or purchase shares in a secondary component of the IPO. Directors, executive officers and 10% stockholders must report their purchases and sales (including equity compensation grants and sales to cover exercise price payment and tax withholding) on Form 4 within two business days of the event. Gifts should be reported on Form 5 within 45 days of the end of the fiscal year.

Section 13 reporting by significant stockholders. Stockholders who acquire more than 5% of your common stock are required to file a Schedule 13D or a Schedule 13G with the SEC. A report on Schedule 13D is required to be filed with the SEC and submitted to the company within ten days after the reporting threshold is reached. If a material change occurs in the facts set forth in the Schedule 13D, such as an increase or decrease of one percent or more in the percentage of stock beneficially owned, an amendment disclosing the change must be filed promptly. A decrease in beneficial ownership to less than five percent is per se material and must be reported. Schedule 13G reporting, which is more limited and subject to fewer updating requirements than Schedule13D, is generally available for equity securities acquired before the company’s IPO and is general due 45 days after the calendar year end for the year in which the investor acquired ownership in the case of certain qualified institutional investors or exempt investors (e.g., pre-IPO investors), or within 10 days following the acquisition of 5% of more of your common stock in the case of passive investors.