Life as a public company

Once your registration statement becomes effective, the company is required to file certain periodic reports under the Securities Act of 1934 (1934 Act). The most common reports required to be filed with the SEC in compliance with the 1934 Act are as follows:

• Form 10-K: Must be filed annually after the company’s fiscal year-end. Form 10-K is designed to update the disclosures in your registration statement and, accordingly, includes the latest audited financial statements and a somewhat condensed version of the information disclosed in Form S-1. The Form 10-K is like a mini prospectus and is not a “form” to be filled out.
• Form 10-Q: Must be filed quarterly after the conclusion of each of the first three fiscal quarters. This report principally contains unaudited, condensed quarterly financial statements, MD&A and if needed, disclosure of certain specific reportable events. This report need not be filed for the fourth fiscal quarter.
• Form 8-K: Must be filed within four business days of certain events, including entry into or termination of a material definitive agreement; bankruptcy; acquisition or disposition of a significant amount of assets not in the ordinary course of business; public release of earnings information; creation or acceleration of a direct financial obligation or an obligation under an off-balance sheet arrangement; commitment to an exit or disposal plan; material impairments; material modifications to rights of security holders; changes in independent accountants; financial statement restatements; changes in control; departure or appointment of directors or principal officers; amendments to articles of incorporation or bylaws; temporary suspension of trading under employee benefit plans; and amendments to the company’s code of ethics.
• Other: There are various other reports that must be filed with the SEC, including reports on stock ownership changes by certain individuals and other forms. As the need arises, your securities counsel can review the requirements with you and discuss the impact of future reporting.

It is important that the company makes every effort to meet all the due dates for these periodic reports. Failure to do so could result in adverse consequences for the company.

The above forms are required primarily as a result of filing a Form S-1 with the SEC. If your filing was made pursuant to the smaller reporting company rules, the report requirements are the same as those above; however, the smaller reporting company can elect to use certain modified disclosure and financial statement requirements. Similarly, a company that qualifies as an emerging growth company can elect to use certain modified disclosure requirements. Your securities counsel or accountant can advise you on these issues.

Management of public companies must evaluate the effectiveness of internal control over financial reporting. Management’s assessment of internal control over financial reporting must be included in the annual report. Accelerated filers and large accelerated filers, as defined, also must provide the registered public accounting firm’s attestation report on management’s assessment of internal control over financial reporting in the annual report. In addition, each quarterly report must disclose the effectiveness of the registrant’s disclosure controls and procedures and changes in internal control over financial reporting.

There are select events during the life of a public company that require a vote by the shareholders. Examples of such events are the election of directors and approval of major acquisitions or divestitures.

When matters require a vote by the shareholders, it is usually not practical to assemble all the shareholders. The process of voting on company matters by shareholders is usually accomplished through the proxy system. The company will solicit from the shareholders the authority to vote their shares at a meeting. The SEC’s proxy rules specify the content of the proxy statements that are used in the solicitation process. The proposed proxy statement must be filed with the SEC a certain number of days prior to the date that the proxy materials will be distributed to shareholders. In addition to a proxy statement, the company is required to send a copy of its annual report to each shareholder in connection with an annual or special meeting. The SEC specifies the content of the annual report, but it is generally consistent with the financial statement disclosures required in Form 10-K.

The 1934 Act requires each officer, director and holder of more than a specified percentage of any class of equity security (insiders) to file a report with the SEC before the IPO becomes effective. This report discloses all beneficial holdings of equity securities of the company. Once the form is filed, any change in the reporting person’s beneficial holdings occurring during any calendar month must be reported on another form within two business days of the transaction.

Insiders also are subject to the “short swing profits” rules of the SEC. These provisions require that any profits realized by insiders on the purchase and/or sale of the company’s equity securities within a six-month period must be turned over to the company. This provision applies regardless of whether the reporting person’s trading was based on material inside information, or whether such person’s trading losses exceeded trading profits. If the company does not sue to recover those profits, any shareholder may do so on behalf of the company. The SEC’s antifraud provisions impose an affirmative obligation on company insiders to disclose material nonpublic information before participating in securities transactions.

The registration process and the subsequent life in the public eye open up a new source of potential legal concerns and litigation. Under the various securities acts, management can be liable for inadequately disclosing a matter that is deemed significant to an investor. The principal executive officer and principal financial officer have a fiduciary responsibility to sign a certification in each Form 10-Q and Form 10-K. The certification addresses the fair presentation of the financial statements and other information in the report, and the company’s evaluation of the effectiveness of its internal control over financial reporting.

In addition, liability can arise if management acts upon insider information to either sell or buy its own company’s stock. Finally, inadequate or improper reporting subsequent to completion of the offering also can lead to liability. As a result of this expanded liability exposure, it is critical that management conducts all of its activities with a view toward its fiduciary responsibilities to its shareholders, rather than its own gain.

The use of an outside board of directors will help carry out this fiduciary responsibility, especially if transactions affecting insiders are required to be approved by a majority of the outside directors. The liability exposure resulting from the public company environment sometimes can deter qualified outside individuals from serving on a public company’s board of directors. To mitigate this concern, you might want to check with your insurance carrier about obtaining directors’ and officers’ liability insurance.