In capital markets, Phyllis Korff, Jennifer Bensch, and Ashley Lott of Skadden Arps Slate Meagher & Flom LLP consider the different forms of pre-launch communications and set out guidelines for use.
In connection with US initial public offerings (IPOs), the underwriters often ask: Can we and the company engage in communications with potential investors prior to launching the roadshow? The answer is, it depends. It depends on, among other things, when the communications occur, whether the communications are oral or written, and what is included in the communications. Underwriters often desire to communicate with potential investors in advance of the formal roadshow to educate them about a particular company or industry and to receive feedback that may help the underwriters in positioning or telling the company’s “story” in the IPO.
US securities laws provide few bright line rules regarding pre-launch communications. Two rules, however, are clear in connection with a public offering: no offers to sell the securities may be made until the related registration statement has been filed with the Securities and Exchange Commission, and, even after filing the registration statement, no written offers are permitted unless made pursuant to a “statutory” prospectus meeting the requirements of Section 10(a) of the Securities Act of 1933. A Section 10(a) compliant prospectus includes, among other things, a bona fide price range, which typically is not included in the initial filing of an IPO registration statement. During this period after filing the registration statement and prior to the availability of a statutory prospectus, oral offers are permitted.
Under Section 2(a)(3) of the Securities Act, an “offer” includes “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value”. The SEC has construed the term “offer” very broadly. Accordingly, underwriters and companies should assume that any communications with potential investors during the preparation and pendency of an IPO will be viewed as an offer. Although certain types of communications are covered by “safe harbours” that protect them from being considered “offers,” these exceptions are limited, and underwriters and companies should check with counsel as to whether any particular communication may be covered by a safe harbour.
Thus, going back to the two rules, underwriters and companies should not engage in any communications with potential investors until after the registration statement is filed, and then only oral communications are permissible until a statutory prospectus is available. In addition, selective disclosure rules generally prohibit disclosure of different information to different investors. As a result, any pre-launch communications should be consistent with the information included in the registration statement relating to the IPO.
In addition to legal considerations, underwriters should consider pre-launch communications from a reputational and institutional liability management perspective, as any error could lead to a violation of the securities laws and a delay of the IPO – or worse. Such considerations include the number of potential investors approached, the status of such investors (ie, are they experienced, sophisticated investors), and the content of the communications. Set forth below are a few guidelines to help underwriters and companies stay within the confines of the US securities laws and to minimise potential reputational or other risks arising from pre-IPO launch communications.
ORAL COMMUNICATIONS ONLY
Oral communications occurring prior to launch either through in-person meetings or via conference calls with all participants able to hear one another in real time are acceptable methods of pre-IPO launch communications. Such meetings or calls may not be recorded and may not include “net roadshows” or similar recorded presentations.
Written communications that constitute offers are not permitted during this period. Examples of communications that could constitute written offers include emails and broadly distributed voicemail messages or other digitally recorded correspondence. In addition, the registration statement may not be delivered in any form, including via hyperlink, and attendees may not be directed to the registration statement, as doing so may be viewed as a use of the prospectus.
Under applicable SEC guidelines, however, PowerPoint and other slide materials that illustrate oral presentations and that originate live, in real-time to a live audience should not be considered written offers, even if transmitted through a means of graphic communication. Any presentation transmitted in such a manner should be controlled by the presenter, and the viewer should be able to view the presentation only during the live meeting or call and only in a passive manner. No printed or electronic materials may be distributed, left behind or otherwise made accessible following any such meeting.
USE THE PHONE FOR METTING COORDINATION
All logistical preparations for investor meetings, including inviting potential investors to the meeting, should be made orally though a live telephone conversation. Emails may not be sent to arrange a meeting, and best practices dictate that no voicemail messages be left for such purpose or for any other purpose in connection with pre-IPO launch communications. No written materials of any kind may be sent in advance of any meeting, whether via email or otherwise.
STICK TO THE REGISTRATION STATEMENT FOR CONTENT
Information that has already been publicly disclosed may be discussed, explained or presented so long as it is consistent with what has been disclosed in the registration statement. Non-public information, including financial forecasts and projections, should not be discussed. Because pre-launch communications are intended to be informational in nature, and not part of the selling effort, presenters should refrain from discussing any views on the valuation of the company or price targets. However, valuation methodology may be discussed to the extent such discussions are factual and balanced, as well as consistent with the information contained in the registration statement, and feedback from potential investors regarding valuation may be received but not solicited.
Neither the underwriters nor the company should solicit indications of interest or engage in any book-building activities in connection with pre-launch meetings, and no orders should be solicited or taken.
HAVE COUNSEL REVIEW ALL MATERIALS IN ADVANCE
Any talking points or other intended communications with attendees should be prepared and reviewed by counsel in advance of any investor meetings to ensure that the information to be provided is limited to and consistent with the information contained in the registration statement. Although oral communications are permitted, they are subject to the same anti-fraud rules that prohibit false or misleading statements in the prospectus filed with the SEC. Any final procedures for engaging in pre-IPO launch communications should be cleared through counsel by the company and the underwriters.
CONSIDER LIMITING ATTENDEES
Although there are no specific limitations on the number or type of potential investors who may be approached or may attend meetings, consideration should be given to limiting the number and status of those approached or attend meetings for liability management purposes. Depending upon the company and the offering, underwriters may consider limiting the aggregate number of investors approached to between 10 and 25 “qualified institutional buyers,” as defined under the Securities Act, and those attending any particular meeting to just a handful. Circumstances of a particular transaction may warrant approaching more investors or investors with a lesser status, but underwriters may want to refrain from including investors that do not qualify as “institutional accredited investors” within the meaning of the securities laws. Research analysts should not be permitted to attend any such sessions, and the underwriters should maintain a record of which investors are approached.
ADD A DISCLAIMER
At the beginning of every pre-IPO launch meeting, a representative of one of the underwriters should deliver a disclaimer statement that touches on a few key points, including that: the IPO has not been launched; the current meeting is an opportunity for the underwriters to introduce the company’s management team and allow them to give an overview of the company; there are certain policy guidelines that make the current meeting different than a roadshow, including the lack of written materials; and neither the company nor the underwriters are offering securities, soliciting orders or discussing the price range at this time.
Pre-IPO launch communications can be a useful tool in the IPO process. Following these simple guidelines can help underwriters and companies avoid the attendant pitfalls and stay on track for a successful public debut.