Regulatory Environment
Going public means mounds of paperwork! Compliance is critical and may seem complex to the uninitiated, but it’s old hat to those who do it day in and day out. Make sure you have one of those professionals on your team.

The U.S. government wants investors to make informed decisions when choosing companies in which to purchase stock. That is why it created the Securities and Exchange Commission (SEC),  a regulatory watchdog charged with stopping fraud and stock manipulation. The SEC collects and stores documents detailing the financial and operational health of domestic companies that have publicly traded stock—and foreign companies whose shares trade in US markets—and checks the quality of information provided within those forms to make sure they meet requirements. Sophisticated investors track SEC reports, studying them for clues about whether a company is worthy to invest in or not.

The Sarbanes-Oxley Act of 2002 (SOX), which was passed in the wake of Enron’s, WorldCom’s and others’ misconduct, represents the biggest change in security regulation since 1934. Most significantly it requires CEOs and CFOs to personally certify, under penalty of civil and criminal penalty for perjury, that, to the best of their knowledge, the financial statements in their company’s public filings are correct.

Required Filings
Registration statements provide investors with an understanding of the securities offered and the profitability of the company. All companies that issue securities must file these statements or qualify for an exemption.

The Annual Report (Form 10-K, which for most companies must be filed with the SEC within 90 days after the last day of the company’s fiscal year) is a comprehensive disclosure of such required information as the company’s line of business, any legal proceedings in which it is involved, market prices and dividends on shares, background descriptions of directors and officers, and executive compensation. The Form 10-K also contains audited financial statements, which generally include balance sheets as of the end of the two most recent fiscal years as well as statements of income and changes in financial position for each of the three most recent fiscal years.  This form must be signed by the company and, on behalf of the company, by its principal executive officer, its principal financial officer, its principal accounting officer, and at least a majority of the board of directors, all of whom may be held individually liable for any materially misleading statements in or omissions from the document.

For most companies, the Quarterly Report on Form 10-Q (a condensed version of the 10-K) must be filed within 45 days after the end of each of the first three quarters of the company’s fiscal year. It details the latest developments and provides insight into the direction the company plans to take. It consists of unaudited financial information for the preceding quarter and for the year-to-date period and for the corresponding periods in the prior fiscal year, plus certain non-financial information.  Like the Form 10-K, the Form 10-Q will include a narrative discussion and analysis by management of the company’s financial condition and operations.  If certain types of non-recurring events occur during the quarter, these events must be reported on the Form 10-Q as well.  The Form 10-Q must be signed on behalf of the company by a duly authorized officer and the principal financial officer or chief accounting officer.

A Current Report on Form 8-K must be filed upon the occurrence of certain events or transactions of major significance that warrant more immediate reporting than would be available through the Form 10-K or the Form 10-Q.  Events requiring disclosure on a Form 8-K include a change in control of the issuer, a material acquisition or disposition of assets, any development relating to bankruptcy or similar proceedings, or a change in the issuer’s certified public accountant.  Generally, a Form 8-K must be filed within four business days after the occurrence of these reportable events.  Issuers can also use Form 8-K to report events that are not required to be reported but that are thought to be of possible material importance to security holders.  There is no mandatory period in which to file a Form 8-K for the other materially important events under this “catch-all” item, although issuers are encouraged to file promptly after the occurrence of any such event.

Unscheduled disclosure of material information or events affecting the company is required at various times.  If the stock of the company is quoted on NASDAQ or a stock exchange (i.e., NYSE or AMEX), the policies of NASDAQ or such stock exchange require the company to release quickly to the public any news or information that might reasonably be expected to affect the market for the stock.  Further, disclosure is required where there is a duty to disclose under the federal securities laws.  Such a duty will exist, for example, when the
company is purchasing or selling its own securities.  Courts have also found a duty to disclose in a variety of other circumstances, including to clarify “leaks” in news or market rumors relating to a company for which the company may be responsible, and when a company has made a public disclosure on which traders may rely that, because of further developments, is no longer accurate.  Thus, if any material event affecting the business or prospects of the company occurs, the company should always promptly consider whether disclosure must or should be made.

SEC Regulation FD imposes rules on the communications between companies and analysts, institutional investors and shareholders.  The regulation is aimed at preventing what the SEC believed to be a pervasive practice by corporate insiders of selectively disclosing material information to market participants. In short, the regulation requires that when a company discloses material nonpublic information to an analyst, institutional investor or to a shareholder if it is reasonably foreseeable that the shareholder will trade in the company’s stock on the basis of the information, the company must also disclose that information publicly, at the same time if the original disclosure was intentional, or promptly (generally within 24 hours) if the original disclosure was not intentional.  There are exceptions for disclosure to attorneys, accountants, investment bankers and others who owe a duty of trust or confidence to the company, to persons who agree to keep the information confidential, to rating agencies and in connection with registered securities offerings.  The regulation does not apply to contact with the media.

Solicitations of proxies or consents in respect to the company’s stock are subject to the SEC’s proxy rules if the company’s stock is registered under the Securities Exchange of 1934.  These rules apply, for example, to the solicitation of proxies regarding the election of directors at each annual meeting of shareholders and at any special meeting called to consider an extraordinary transaction, such as a merger.

Each person solicited must receive a proxy statement containing the information required by the SEC.  SEC rules require that, among other things, the proxy statement disclose in detailed, tabular form the total compensation for the CEO and the four most highly compensated senior executives of the Company, including salary, bonus and any other compensation. The company’s compensation committee must issue a written report in which the committee sets forth the bases for the CEO’s compensation and the general executive compensation policies of the committee, including the relationship between corporate performance and executive compensation. The proxy statement must also contain a report of the company’s audit committee.

The proxy statement and form of proxy must be filed with the SEC on the date they are first sent or given to shareholders.  If other-than-routine annual meeting matters—such as the election of directors and approval of certain stock incentive plans—are to be acted upon, a preliminary proxy statement and form of proxy must be filed with the SEC at least 10 days prior to the date they are first sent or given to shareholders. 

The company must distribute to shareholders an annual report, which may consist of a glossy public-relations-oriented document as opposed to the Form 10-K, with or before the solicitation of proxies for the annual election of directors.  The information that must appear in the annual report to shareholders is set forth in the proxy rules.  It need not be reviewed by the SEC before distribution, although it must be sent to the SEC, usually simultaneously with its distribution to shareholders.  In some cases, it is possible to integrate into the annual report portions of the Form 10-K that is filed with the SEC.

Forms
Investors watch how ownership, purchases and sales of company stock are shifted by the company's insiders (i.e., officers, directors and shareholders who own more than 10% of the outstanding stock).

Form 3, the initial company-insider filing, discloses each insider’s ownership amounts and is due within 10 days after his/her election to office or attainment of requisite stock ownership.

Form 4, which identifies changes in ownership, is due within two business days of the change.
Form 5 is the annual clean-up report that must be filed within 45 days after the close of the company’s fiscal year to disclose such transactions as gifts of securities to charitable organizations, or nominal transactions, as well as transactions that should have been reported previously on Form 4 but were not.

Schedule 13D requires a person acquiring beneficial ownership of more than 5% of a public company’s stock to report his stock ownership to the SEC, the public company, and the applicable stock exchange.  Schedule 13D requires detailed disclosure concerning the acquirer’s ownership, his or her relationship with any other significant owners, and his or her intentions, if any, to take over the company or otherwise materially affect its affairs.  The form must be filed within 10 days after the reporting person acquires more than 5% of the company’s common stock. Amendments to the Schedule 13D must be filed promptly to reflect subsequent acquisitions or dispositions of shares of common stock.  Filings are made with the SEC, the company and the applicable stock exchange.  From management’s perspective, the filing of a Schedule 13D often provides the first notice that a hostile acquisition may be underway.
If the reporting person beneficially owns less than 20% of the company’s common stock and did not acquire the securities for the purpose of changing or influencing control of the company, then the reporting person may file on Schedule 13G. Certain broker-dealers, investment companies and investment advisers may also use Schedule 13G.