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.

Health Check on Emerging Growth Companies: PCAOB Reports High Incidence of Material Weaknesses

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

 

 

 

A new white paper from the Public Company Accounting Oversight Board (PCAOB) and an April increase in qualifying revenue limits have put emerging growth companies (EGCs) in the news recently.

The EGC designation, established under the Jumpstart Our Business Startups (JOBS) Act of 2012, makes it easier for small and growing businesses — specifically those on track for an initial public offering — to attract investors and access capital by relaxing regulatory requirements and cutting some red tape. There are a number of benefits to a registrant being classified as an EGC – see Protiviti’s Guide to Public Company Transformation for what they are.

The original law established a revenue cap of $1 billion for a company to qualify as an EGC, but provided for that cap to be adjusted every five years for inflation. The Securities and Exchange Commission (SEC) made the first adjustment in April 2017, raising the revenue cap to $1.07 billion.

Another provision of the JOBS act was a mandate for the PCAOB to report via white papers, semiannually, on the extent to which EGCs actually benefitted from regulatory relief, and any unintended consequences stemming from the more permissive environment. The purpose of the PCAOB’s white papers is to provide general data about EGCs to inform the analysis contained in PCAOB rulemaking releases regarding the impact of applying new standards to the audits of EGCs.

The latest white paper, published in March 2017, found that of 1,951 companies reporting as EGCs in the 18 months prior to the reporting period, more than half (51 percent), received an explanatory paragraph in their most recent auditor’s report expressing substantial doubt about the company’s ability to continue as a going concern. Equally important, within that group of 1,951 EGC filers, 1,262 provided a management report on internal control over financial reporting in their most recent annual filing, and 47 percent – nearly one-half of all EGC filers – reported material weaknesses.

Protiviti explores the findings in the PCAOB’s March white paper at length in a recent Flash Report, but I wanted to highlight a few of the takeaways here.

First and foremost, while certain regulatory exemptions and benefits may be attractive, they do not mean that EGCs should accept or minimize issues surrounding potential findings of material weaknesses. These deficiencies in internal control over financial reporting may undermine a company’s reputation and reduce company value, to say the least.

The risk is real and should be addressed proactively. Protiviti has developed a financial reporting risk profile (FRRP) to identify financial reporting issues in advance and manage them to avoid potential financial restatements.

An effective FRRP focuses on six areas: accounting principle selection and application, estimation processes, related-party transactions, business transaction and data variability, sensitivity analysis, and measurement and planning. The underlying objective is to identify the most likely areas of potential misstatements and apply the appropriate oversight and control.

Second, EGCs should take the steps necessary to document key business processes so that these processes are well-defined and repeatable, reducing reliance on ad hoc activity by key employees. These processes may include a fair amount of financial reporting; related policies and activities, such as those that aid in the preparation of financial schedules for external auditors in the support of audits; filings; executive compensation; and employee benefits. Pre-public companies should design and implement a process for documenting conclusions on reporting and accounting matters.

Internal controls and documentation are critical because they minimize the risk of material weaknesses in the organization’s financial reporting. Consider the effects of just one material weakness: erosion of shareholder confidence, potential share price reduction, a fair amount of distraction throughout the organization, reduced brand quality, and significant remediation costs.

The high incidence of material weaknesses among EGCs is disappointing but, in many cases, generally preventable. It is important not to wait until the first auditor attestation to address potential issues. Many of the preventive measures – governance protocols, fraud controls, internal controls over financial reporting – should be in place prior to the company’s first public filing (e.g., 10Q filings, 302/906 certifications), and others should be in place prior to the initial management assertion on the effectiveness of internal control over financial reporting, as required by Sarbanes-Oxley Section 404(a). If these areas have not been addressed and the first public filing is upcoming, the organization should prepare itself by putting in place a robust remediation program. See the Protiviti Flash Report for additional points and information.

 

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.

So You’ve Gone Public – What’s Next?

Steve HobbsBy Steve Hobbs, Managing Director
Public Company Transformation

 

 

Once a company is public, the event is often celebrated and the organization emits a collective sigh of relief. But then the next daunting question looms: “What’s next?” Recently, I had the opportunity to discuss this very topic on a podcast with my colleague Andrea Spinelli, a director in our Business Performance Improvement practice. The key aspects of a post-IPO environment, which we discuss in more detail during the podcast, include:

  • Transition from “project” to “process.” Now that the pre-IPO scramble is in the past, companies need to focus on designing, operating or enhancing processes within the organization to meet the financial reporting and other requirements for public companies.
  • Forecast the business. Forecasting can be a fairly complicated and difficult process that is often overlooked when a company is considering its IPO readiness – but it is something public companies are expected to do competently.
  • Invest in technology. There is a higher expectation for increased capability maturity from a public company. This expectation runs throughout the organization and includes the technology automation required to manage the business. Manual processes, for example, are more prone to error and create data and other integrity risks, and technology is key to minimizing those risks.

The podcast discussion provides insight on these points and more, and is of interest to both pre- and post-IPO companies. I urge you to listen at the link below when you have time, and send us a comment if you like.

Podcast: So You’ve Gone Public – What’s Next?

 

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.

Four Things to Know Before Your IPO

It is common sense than an uncertain global economy slows IPO activity, and yet, the IPO pipeline is at near-record levels.

In the U.S. market alone, there were more than 270 IPOs priced in 2014, up 23 percent from the prior year. And total proceeds raised reached more than $85 billion, an increase of 55 percent compared with 2013.

My colleague Steve Hobbs, managing director of Protiviti’s Public Company Transformation solution, says that 2014 was one of the strongest IPO years in the last decade, fueled by legislation such as the JOBS Act, which was enacted in 2012 to help ease regulatory burdens on emerging growth companies.

The IPO appeal is immense. But what companies don’t know about the process can drive an offering off the rails in a hurry. Last November, Protiviti held a nationwide webinar highlighting key challenges and offering tips to help companies avoid common missteps. Some highlights from the discussion:

Challenge #1 – Investor Relations: Many companies underestimate the amount and intensity of preparation required, especially regarding the growing demand for transparency from regulators and shareholders.

Just how much is required? For Barracuda Networks, provider of cloud-connected security and storage solutions, the time from IPO process launch to its first public call in January 2014 spanned eight months.

The journey to public company readiness involves a complex array of tasks, deadlines and focal points that require significant time, effort and attention throughout the organization.

Among the many tasks Barracuda tackled: scheduling organizational meetings to educate management on operational metrics; staging a “test-the-waters roadshow” to meet with prospective investors and obtain their feedback; and even holding a full mock earnings call with syndicated analysts to practice interacting with the investment community.

Challenge #2 – Tone at the Top: Setting the proper tone at the top to encourage “buy-in” is a top priority.

Public companies operate in a fishbowl of public disclosure and regulatory compliance. Finance, at the center of IPO preparations, is usually well-prepared by the end of the process, however, establishing a positive tone for compliance throughout the company is the job of executive management.

Another one of my colleagues, Gordon Tucker, managing director and leader of Protiviti’s Technology, Media and Communication Industry practice, recommends promoting compliance infrastructure not just as a system of controls, but as a tool for growth and scalability.

Challenge #3 – Documentation: Establishing documented policies and procedures is critical for expansion.

Beyond the initial buy-in, Tucker also emphasizes the importance of developing and documenting processes to ensure consistency and sustainability across the organization. If you want to be able to scale, new hires should be able to handle transactions according to well established and documented procedures.

Challenge #4 – IT Infrastructure: It is critical to properly assess the organization’s IT readiness.

An organization’s ability to conduct accurate, timely and effective financial reporting and regulatory compliance hinges on the strength of its applications and systems infrastructure. The topics that need to be addressed in this arena include selection and implementation of an ERP system and scaling of IT processes and governance. And during a time when cyberattacks routinely make headlines, it is imperative to evaluate IT security and privacy.

When Protiviti meets with pre-IPO companies’ executive teams, we ask the CFO:

  • Do you know what assets you are trying to secure?
  • Is there somebody in your organization who is responsible for securing the enterprise?
  • Would you know if you were breached? And if you were, would you be prepared to respond in a timely manner?

If the answer to any of those questions is ”No,” then it’s probably time to take a look at the IT systems from a security perspective.

The four points above underscore certain of the key challenges of successfully executing an IPO. But they also show where proper preparation can boost the odds in your favor.

And I’ve only skimmed the surface here. For a more thorough analysis, check out the online version of our November 18 webinar entitled “It’s What You Don’t Know That Can Affect Your IPO.”

Jim DeLoach