SEC Expands JOBS Act Registration Filing Provisions to All Companies

By Charles Soranno, Managing Director
Financial Reporting Compliance and Internal Audit

 

 

Good news for companies that are planning or considering an initial public offering (IPO): The confidential IPO review period, created in 2012 to assist emerging growth companies, is now available to any company considering a public offering, regardless of size. The June decision by the U.S. Securities and Exchange Commission (SEC), effective July 10, 2017, is the first major policy move by new SEC chairman Walter J. Clayton.

Prior to July 10, only smaller companies (defined as those with less than $1.07 billion in annual revenue) were allowed to confidentially file draft registration statements for SEC review before their public offerings. The Jumpstart Our Business Start-Ups (JOBS) Act was created to stimulate the economy by making it easier for these so-called “emerging growth” companies to expand through IPOs. The confidential review period was intended to protect sensitive information required under SEC registration requirements from the competitive threat of premature public scrutiny and to allow companies to consider other exit options at the same time as pursuing an IPO.

There has been some debate as to whether the limited confidentiality period — which expires 15 days prior to the effective date of the public offering — is an effective incentive. Some analysts have also complained that the provision shortens the time they have to perform their own due diligence before a stock hits the market. The SEC, however, says that allowing companies to handle IPO preliminaries in secrecy provides companies more time to plan their offerings and protects them from market fluctuations that can adversely affect companies at a vulnerable time, as well as allows them multiple exit options. The SEC provided these answers for submitting draft registrations under the new rules.

Although the impact of the SEC’s action has yet to be determined, generally speaking, the extension of the confidential review process seems like a great opportunity for companies looking for some kind of exit. As to whether it will succeed in its stated goal, that will depend on a number of factors, including economic conditions, sector timing, industry attractiveness and the individual company’s value proposition.

With all this said, it is also important to note that the extension of confidentially does not change the substance of what pre-public companies have to do to prepare for an IPO. Planning to become a public company is time-consuming and complex, whether done in confidentiality or not. Much of that complexity is due to the numerous legal and technical requirements that must be addressed prior to an IPO. But a substantial — and often overlooked — aspect of public company readiness involves transforming organizational functions and processes.

Protiviti’s Guide to Public Company Transformation, 3rd Edition is an excellent resource for any company that wishes to review the key steps to achieving public company readiness. For starters, our guide recommends that companies establish a baseline of policies and procedures and develop a plan for bringing those critical elements in line with the heightened expectations for a public company. Specifically, our guide recommends that companies:

  • Develop a baseline of appropriate accounting, operational and regulatory policies and procedures
  • Take stock of the maturity of key processes
  • Develop a baseline for the financial close and forecasting capabilities
  • Address skills gap and other organizational changes
  • Perform a risk assessment and initial scoping for Sarbanes-Oxley readiness and compliance
  • Assess the IT environment and consider the specifications of the right ERP system (if required)
  • Establish a program management office to address incremental work streams and competing initiatives

This checklist just scratches the surface. For a more substantive analysis download the guide, or register to watch the archived version of our webinar, “It’s What You Don’t Know That Can Affect Your IPO.”

At the end of the day, while this move by the SEC is good news, there’s still a lot of work that companies have to do to prepare for an IPO. The links above should provide a good starting point.

“Carpe Diem”: Oilfield Services Companies Eye the IPO Market

 

 

By Tyler Chase, Managing Director
Energy and Utilities Industry Leader

and Steve Hobbs, Managing Director
Public Company Transformation

 

Despite the recent downward trend in oil prices, the oil and gas industry overall is feeling optimistic, as evidenced by increased rig counts and production levels. Both are signs that the industry is on the rebound after a downturn that has persisted for well over two years. Renewed confidence and optimism about future growth have many companies in the sector thinking about pursuing an initial public offering (IPO). Among them: fast-growing and capital-hungry oilfield services providers.

These service businesses play an important role in supporting the oil and gas industry. They provide innovative technology, manufacturing of critical equipment, and services that allow oil and gas companies to enhance their existing infrastructure and processes so they can produce more at less cost.

The recent volatility in the oil and gas market hit oilfield services providers hard. In 2015 and 2016, many were burdened with significant debt and selling their services at a discount just to survive; several companies ended up filing for bankruptcy.

Now, less than a year after that dark period, oilfield services providers are driving IPO activity in the energy sector — outpacing exploration and production companies. Many of these private equity-backed companies have been waiting for conditions in the industry and capital markets to improve so they can execute an IPO as their forward strategy. Others are looking to an IPO as a way to raise much needed capital fast, to fuel growth and innovation.

What many oilfield services providers learn in exploring the IPO idea is that they simply aren’t prepared to make the leap. One reason is that these firms lack maturity in their business processes, and have limited alignment with GAAP accounting and insufficient infrastructure and personnel to support expansion. They are, essentially, startups. And like any startup or other fast-growing private company in any other sector, oilfield services providers must achieve a certain level of “readiness” before attempting to go public.

These firms are also at risk of making a mistake common among other businesses with IPO aspirations: underestimating the amount of time and personnel required to address the demands of a public company transformation. These pre-public companies must address six primary infrastructure elements on their journey to IPO readiness, including:

  • Corporate policies: These include governance, financial reporting and company policies, such as human resource and marketing policies. Like most startups, oilfield services providers are so focused on delivering their technology and services and trying to grow their market that they don’t spend enough time on essential back-office infrastructure for the business, such as creating formal policies. Structure and documentation are needed not only for compliance purposes, but also to help the company communicate to everyone, from investors to current employees and potential hires, how it operates, what its values are, and more — a basic expectation from an IPO candidate.
  • Corporate processes: Financial reporting processes are just one example of corporate processes that many oilfield services providers will need to upgrade substantially and standardize before going public. For instance, documentation about business agreements is likely inadequate because of the informality with which these service companies often approach deals — confirming terms with perhaps little more than a handshake. So, firms preparing to go public need to start moving now to formalize their agreements with business partners and create an appropriate paper trail. Many accounting and financial planning and analysis forecasting processes will also need to be augmented and automated because manual practices are error-prone and time-consuming.
  • People and organization: Any company that wants to go public needs a well-structured and experienced leadership team. The IPO process places huge demands on senior executives — especially the CEO and CFO, who will need to spend much of their time on the road meeting with analysts and potential investors. Once the IPO ball starts rolling, these executives won’t be able to focus much on everyday business needs. There needs to be a strong team in place, especially in the accounting/finance organization, to help guide the company in their absence, address external auditor considerations, and meet SEC filing deadlines on time.
  • Systems and data: Pre-IPO companies frequently report that their IT departments are a major area of focus during their readiness effort. IT general controls that pertain to Sarbanes-Oxley Act compliance and data security and privacy strategies and policies are just two key areas within IT that oilfield services providers will need to pay special attention to as they lay the groundwork for a public offering. A critical risk within the realm of IT system compliance is addressing the organization’s lack of segregation of duties (SoD) and the need for comprehensive monitoring of access for all critical business IT systems. It’s imperative for management to be directly involved in the SoD design process to clearly shape the roles and duties of personnel within the company prior to an IPO. Data security and privacy can be particularly wide in scope, including everything from cybersecurity policies to business continuity management planning.
  • Management reports (e.g., on internal control over financial reporting) and methodologies (e.g., for the offering price, for financial controls, significant accounting estimates) round out the six primary elements. Oilfield services providers must ensure they have them covered — and implement a sustainable infrastructure and strong organizational capabilities as well — before pursuing an IPO.

Addressing all the above is a complex and resource-intensive endeavor, and likely will require expert assistance on many fronts. This fact is not to dissuade oilfield services companies from seizing opportunities in the current oil and gas market.  But seizing the opportunity is one thing; managing the newly public company in the weeks and months following the IPO in a manner that is consistent with the expectations of regulators and shareholders and the company’s own executives’ vision is quite another. At issue here is sustaining confidence with regulators and shareholders. According to our experience across a wide variety of sectors, covering the six elements of infrastructure above in a thoughtful, proactive manner is a vital process in moving to the next stage successfully.

The IPO Market Appears to Be Heating-up – Are You IPO-Ready?

By Steve Hobbs, Managing Director
Public Company Transformation

 

 

 

If the past month is any indication, the lull of 2016 is in the rear view mirror and we’re headed into an uptick in the IPO market. As more well-known and highly anticipated companies are going public, there are rumors of who might be next. With that said, history has shown the public offering windows opens and close quickly, and in order to take advantage of a healthy market, when IPOs tend to fare best, companies must be prepared when the market is ready. Below are several points on getting a company IPO-ready:

Prioritize. When the market is hot, it’s easy to want to ride the wave. But, trying to skip ahead or take shortcuts could put an IPO at risk. Conversely, shifting full focus to IPO readiness activities can cause the day-to-day business to suffer. In cases like this, working with partners to help prioritize activities and plan the IPO can be a good decision as it frees up time for management to focus on the business while keeping all strategic initiatives in sight.

Set the tone.  As every C-suite executive knows, major transformations, like launching an IPO and operating in the public realm, require a great deal of both internal and external communication. Public companies operate in a fishbowl of disclosure and regulatory compliance. Therefore, executives need to set a positive tone early on to ensure that every single person in an organization – not just the functions at the center of an IPO – is aware and supportive of the process. The executive team must promote a compliance infrastructure not just as a system of controls, but as a tool for growth and scalability.

Scale your infrastructure. The internal infrastructure of the company must be able to support and withstand the transformation requirements of going public. With new requirements and regulations, companies need to review their financial reporting applications and systems to identify and correct scalability issues.

Think cybersecurity. IT security should not be an afterthought to growth. Organizations need to scrutinize their IT systems for readiness and security, particularly when selecting and implementing an enterprise resource planning (ERP) system. We now hear almost daily of major cyberattacks against public companies. When customer data and/or company IP are at risk or actually compromised, shareholders and regulators take notice.

Learn from others. The basic requirements for transforming a company from private to public rarely change. A new legislation or new requirements might pop up but, at the end of day, every CEO who has taken their company public has a similar story to tell – one of hard work, sleepless nights and serious commitment to the goal. It’s important to take the time to hear these stories from the frontlines, understand what CEOs and CFOs say they wish they had done differently, what they could have avoided, or what wasn’t worth the trouble. To this end, I invite you to join us at our upcoming webinar with executive Vice President and CFO of GOGO, Norm Smagley, who will be sharing his stories from the frontlines.

To learn more, also check out our IPO FAQ guide, available for a free download here.

Managing Your Organization’s Culture During Rapid Growth

Charles Soranno - MD New Jersey

By Charles Soranno, Managing Director
Financial Reporting Compliance and Internal Audit

 

 

Early in December 2016, I had the pleasure of leading an in-depth webinar exploring how fast-growing companies can prepare for challenges related to changes in their culture and talent requirements, particularly when ramping up for an IPO or following one.

I was joined by Carmela Krantz, Vice President of Human Resource at WideOrbit; Danielle Soucek, Director of Insight Product at Equilar; and Michael Waxman-Lenz, CFO at Undertone. Together, we provided analysis and guidance on how to create the right team, scale for growth, benchmark against peers and competitors, and develop a public company mindset.

As companies implement their growth plans in the new year, it’s worth revisiting a few of the big ideas that emerged from the event.

Building the Right Team – Recognize the Influences
An organization’s ownership structure, its industry dynamics, and whether it has a domestic or global presence shape its culture and need for certain skillsets. Challenges typically emerge when companies bring in new investors, prepare to launch an IPO, add locations, or significantly expand their employee base.

Ownership has a tremendous impact on what the right team looks like, for example. A closely held startup may not have formal financial reporting requirements, but as it attracts institutional capital or registers for a public offering, more specialization and structure is required as expectations and demands change. Institutional investors likely will be less forgiving of reporting errors than founders working in a close-knit setting, and companies that execute their IPOs have to meet strict Securities and Exchange Commission (SEC) regulatory, compliance and reporting requirements. Will free-thinking, entrepreneurial-oriented individuals who were involved in virtually all aspects of a startup’s early development be able to not just perform, but thrive, in this more regimented operating environment?

Scale for Growth
Maintaining robust and consistent communications and formal communication protocols (especially for public companies) between an organization’s leaders and its workforce – even to the point of “over communicating” – is perhaps the most important strategy human resources (HR) can promote when employment rosters are expanding by the dozens each month. Letting employees know how they fulfill a company’s mission during times of rapid change keeps them plugged-in, motivated and contributing to desired business outcomes.

Staying ahead of the recruiting battle is another critical step HR can take. Human resource managers and recruiters must work closely with the C-suite to better understand the dynamics of the growing company and the mindset – not just skillset – required to make new hires successful. Also, by keeping employees informed of open positions and using referral incentives, HR can make all employees recruiters. This strategy can help fill jobs more quickly and often nets candidates of a certain caliber that have a higher chance for success.

Benchmark Growth
Compensation practices change dramatically after a company prepares for and ultimately completes an IPO, typically moving from less structured to more formal, documented programs designed to secure and retain talent. The scrutiny, by the SEC and others, of publicly available post-IPO executive compensation data requires organizations to balance shareholder interests with rewarding executives fairly.

One of the best ways to strike that balance begins with defining the talent market by selecting a peer group survey or collecting proxy data, or by combining both methods. Many companies utilize compensation consultants that can provide the data. Often, the advisors also understand how less tangible factors, such as management philosophy and individual performance, may influence pay packages.

Get a Head Start
While an IPO may be the last thought on the minds of executives running rapidly growing companies, especially early-stage companies, operating as if an transaction is imminent can make organizations more attractive and valuable when investors begin to take interest. Steps companies can take in that direction include developing a solid IT and finance infrastructure, assembling superb finance and operations teams, establishing excellent corporate governance, and developing a public company mindset among employees.

Of these initiatives, developing sustainable and scalable IT infrastructure and strong finance and accounting teams are among the most critical. However, infrastructure also encompasses making sure a company’s organizational chart is balanced and determining whether special technical or general needs should be outsourced. Organizations also need to be aware of pitfalls that could derail the development of a transaction-ready public company mentality. Underestimating the effort required not just before, but also after the IPO, is chief among them.

Learn More
Rapidly growing companies face a number of challenges as they transition from freewheeling entrepreneurial startups to more structured, efficient and mature operations. By preparing for headwinds associated with changing cultures, they can put themselves in a better position for success. Listen to the recorded webinar for a deeper dive into the ideas discussed here.

Is Your Company Private? The SEC Still Has Advice for You.

Steve HobbsBy Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

At Protiviti, we routinely counsel private companies that a good governance and control structure is a sound business strategy for any company, and particularly for fast-growth companies with outside investors. If you don’t believe us, just ask the Securities and Exchange Commission (SEC).

Recently, SEC chair Mary Jo White gave a speech at Stanford University, directly addressing private companies. “Being a private company comes with serious obligations to investors and the markets,” White said. “For the new and evolving markets to be successful, all investors need confidence that they are being treated fairly and that the full range of risks are transparently disclosed.”

She went on to say, “Some of the principles that characterize public companies – transparency with investors, controls on financial reporting, strong corporate governance – have applicability and relevance to private companies, especially those pre-IPO companies that aspire to go public, and should not be overlooked or avoided, whether or not mandated by federal law or a SEC regulation.”

So, what are those pre-IPO “musts” that private companies should do now to create good governance and control structure? It comes down to two key pieces of advice:

  • Start early. Understanding the timeline of events and transformation in an IPO process is key. We recommend certain tasks be done prior to an IPO. Such tasks include evaluating the internal control and governance environments and identifying areas of risk as well as areas for improvement.
  • Know the potential issues before they arise. There are a number of issues that companies typically face during the first year of being public. If you plan properly, you can address most of these issues prior to the IPO, and then identify and address the rest as they evolve. Examples include lack of internal buy-in or understanding of the importance of proper controls, minimally documented policies and procedures, and internal control gaps.

Finally, I blogged not long ago about our latest Guide to Public Company Transformation. It contains a wealth of information, in a helpful Q&A format. It’s a good way to take care of the second point I make here – knowing the issues. The early start, that’s up to you.

Guide to Public Company Transformation Answers What You Always Wanted to Know About the IPO and Beyond

Steve Hobbs 2

By Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

If you’re preparing to take your company public, you surely know you have a lot of new reporting and legal requirements to meet, and that your organization will require a number of changes. You may also know that you will need help in this process, or at least some good guidance.

The latest edition of Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions, released last month, offers just such guidance. It’s a comprehensive and helpfully organized 55-page reference that organizations can use to find an answer to just about every question during the exhilarating and exhausting time surrounding an initial public offering (IPO) – from when is the best time to go public to how to make sure transformation efforts, including Sarbanes-Oxley (SOX) compliance, are maintained in the post-IPO period.

An IPO frequently requires a complete company transformation. Newly public companies may need to upgrade their financial reporting processes, information technology (IT) environments, as well as their governance, risk and compliance (GRC) capabilities. They will need to meet and maintain compliance with SOX and other financial reporting requirements, none of which are easy or straightforward.

While ringing the bell is perhaps the most exciting moment in an IPO journey, the actual transformation work behind the scenes is just beginning. Once listed on the exchange, the company needs to continue to evolve its functions, transforming itself into a business that meets and reports on an entirely different set of public and regulatory expectations. It’s a lengthy, complicated process, and mistakes can be time-consuming and costly.

To lessen the burden and increase the chance of success during this transformation, the new edition of the guide places a greater focus on the post-IPO period – in other words, we look beyond the IPO itself to ensure that companies know what’s needed to become – and stay – scalable and fully compliant in the future. This change in focus is reflected throughout the guide, as well as in the guide’s title − we’ve replaced the word “readiness” with “transformation” to indicate what an IPO truly is.

Other new or updated areas in the third edition of the FAQ guide include:

  • A section on developing an executable strategy and action plan prioritization map; this replaces prioritization maps used in previous editions.
  • Updated information on current laws, including the Jumpstart Our Business Startups (JOBS) Act and the Fixing America’s Surface Transportation (FAST) Act.
  • Updates about revenue recognition, including updated accounting standards from the Financial Accounting Standards Board (FASB). That includes a specific update, Revenue from Contracts with Customers, and the FASB’s recently issued new standard on accounting for leases.
  • A discussion about accurate forecasting and budgeting.
  • Updates on IT policy and process-related evaluations and activities.
  • A discussion about data security and privacy strategies and policies.
  • An update on the costs of becoming a public company, and an overview of the largest cost components.

Last but not least, it’s been our goal to make this guide as user-friendly as possible so that executives and managers can continue to consult it at every step of the process – let us know what you think in the comments.

And we will continue this conversation on April 26, in a webinar on the challenges faced by growing companies. You can register here.

IT Controls for Tech Startups? Yes, It’s Possible.

Steve Hobbsby Steve Hobbs, Managing Director
Leader of Protiviti’s Public Company Readiness Practice

 

 

 

For cutting-edge tech companies focused on not just staying ahead of but shaping the technological curve, compliance issues are hardly a top priority. In fact, it is common for these companies to treat the subject with disdain, and view it as running counter to a tech startup’s innovative, entrepreneurial and fast-paced culture.

Placing compliance on the back burner, however, can be costly, especially as a company grows its customer base or considers an initial public offering (IPO). A lack of IT controls not only could disrupt filing deadlines and cause headaches at audit time, it can also turn away cloud providers’ customers who themselves have to prove the presence of controls to their auditors.

Consider this:

  • Public companies are required to establish effective IT general control (ITGC) frameworks to comply with the Sarbanes-Oxley Act. This includes areas such as change management, data quality/governance and disaster recovery.
  • Cloud and other service providers increasingly are being asked to provide Statement on Controls (SOC) reports for the IT general control frameworks associated with their customer-facing systems environments.
  • The Public Company Accounting Oversight Board (PCAOB) and the new COSO framework have introduced requirements for financial controls assessment and increased scrutiny of ITGC frameworks and IT risk management.

In the face of these demands, what is a tech startup to do? Many find themselves halting development activities and backtracking to provide adequate evidence of approvals and other controls to audit teams. This is a time-consuming and disruptive process that can cause frustration and, in the end, may still fail to satisfy external auditors and customers.

A better approach is to move away from traditional control checklists and templates to a more flexible ITGC framework compatible with innovative software development practices. By matching the controls environment to their non-traditional business practices instead of vice versa, tech companies can strengthen controls and achieve compliance objectives without compromising flexibility, speed, drive and ingenuity.

Two strategies towards building this new framework are process rationalization and agile activity alignment.

  • Process rationalization: Companies can reduce process redundancy (rationalize processes) by aggregating similar but unconnected processes used by different teams under common control activities, which leads to more centralized controls and reduced time in applying them. This is especially true in areas such as software development and access management.
  • Agile activity alignment: In agile software development, approvals could be shifted to the end of each development iteration rather than at every sequential development phase. This ensures control while cutting down on administrative effort that doesn’t contribute to the production of quality software.

Is your company feeling the pressure to put better ITGC controls in place? Asking the following questions should help you get started:

  • What systems and processes are in scope for the purpose of your compliance audits (SOX or SOC)?
  • What areas are in need of additional controls?
  • What existing activities can be used to mitigate key risks?
  • What alternative approaches can be used to mitigate key risks?
  • What is the future-state vision for your controls framework (generating a backlog of improvements, leveraging automated activities, etc.)?

Customers demand speed, agility and assurance, and regulators demand formalized controls. Emerging tech firms can meet these demands without hampering their speed and innovation using out-of-the-box thinking and the approach we outlined here.

What control challenges does your tech company face? Let us know in the comments.