IPO Securities Laws Made Simple
This is going to be a fast review just for the purposes of getting you through an initial public offering. This is not legal advice and you should consult a qualified attorney. What follows below is a only very simplified introductory summary of what you need to know.
To go public you have to register under the Securities Act of 1933. To do this, you file with the Securities and Exchange Commission. You will select a form that is suitable for your company. If you are a plain vanilla U.S. company, not a mutual fund, REIT, foreign company or something else requiring a special form, you will probably use Form S-1, the general, all-purpose registration form.
Before you go public, you will not “jump the gun” by making any public reference to your future plans to go public. You are allowed for more than 30 days prior to filing the offering with the SEC to disseminate factual business information, but not forward looking information, if you have done so regularly before in the ordinary course of business, but you may not refer to the offering. You are allowed to make limited public notices about the offering after you have filed it.
You must deliver a prospectus, or provide access to it, within two days of sale.
For 40 days following the first day of the IPOs public trading, insiders and underwriters cannot publish research reports or earnings forecasts.
Naturally, you can be held liable for investor losses if you file a false offering document. Please note well that not only misstatements are actionable, omissions to state something that would be needed to make the offering document not misleading are also actionable. Omissions count.
There is also the general case law (common law) of fraud which requires that the investor reasonably relied on a material (important) statement that was false made by a person who knew or should have known it was false and suffered loss thereby. There may also be liability in some cases for negligent misstatements.
Often ignored is such suits is the common law liability of company directors for negligence.
Rule 144 allows you to leak into the market limited quantities of unregistered securities under certain circumstances. You underwriter will want to “lock up” your stock for a period of three to six months so that you will not be dumping on his precious aftermarket by selling under Rule 144.
As a company insider, you are prohibited from short selling the company's stock.
You are prohibited from using inside (non-public) information to buy or sell the company's stock. The SEC has been vigorous in enforcing this rule. This can result in criminal charges.
Foreign Corrupt Practices Act
The SEC also enforces the FCPA, which says you cannot bribe people overseas, on public companies. They are also quite serious about this rule which can also result in criminal penalties.
Staying Out of Trouble
Document everything. Never say or write anything unless you can document it is true. Make other people sign off on their representations to you.
Keep duplicate copies of these documents in a safe place where they cannot be destroyed. Store them in such a way that you can easily access them fast.
If you suspect their might be a problem, there is – fix it immediately.
Do not use “sales puff.” An example of sales puff is “this is the best stock you can find for the money.” You cannot prove such a statement. Sales puff also sounds unprofessional in the securities industry.
Confide in your attorney. That is what he is there for and and he is used to handling sticky issues. Protect yourself.
Make full disclosure. Your underwriter is a stock salesman. He can tolerate, fix or patch over many ugly things, but if something comes out he did not know about he will not only lose the sale, he will be very angry.
Make liberal use of risk factors in the offering document. If you warned the investor, he cannot sue you for it. Most investors ignore the risk factors. Most that do not ignore them are using as an excuse to back out anyway.
You might be a defendant if . . . .
Your earnings come out badly after being hyped in the offering
You are using some bogus accounting tricks
You fail to disclose all the risk factors
You engage in illegal activity
You violate the use of proceeds given in the offering document
and use the money for something else
You failed to disclose something big