2.01  Pursuant to the Prospectus Regulation,¹ the publication of a prospectus is required in the event of an offering of securities to the public as well as in relation to the admission of securities to trading on a regulated market. As such, a typical initial public offering of shares in a company, combined with the admission to trading of such shares on a stock exchange (together referred to as an IPO), will require a prospectus to be prepared, approved, and published.

2.02  The prospectus plays a key role in the preparations for, and execution of, an IPO. As an IPO prospectus typically constitutes a company’s first public dissemination of financial and business information, the company and other parties involved in the IPO process must carefully consider the right balance between, on the one hand, drafting the IPO prospectus as a marketing document introducing the company and its business to potential investors, whilst, on the other hand, being able to use the prospectus as a disclosure document as protection against liability arising from claims from investors or others after the IPO.

(p. 20) 2.03  This chapter provides insight into a typical IPO process, highlighting key practical and legal considerations around disclosure, through the IPO prospectus and otherwise. It summarizes the different phases in an IPO process and the most important documents and parties involved, focusing on the central role of the IPO prospectus. A number of changes resulting from the enactment of the Prospectus Regulation are likely to be of particular relevance to IPO processes. The expected impact of these changes is therefore also discussed in this chapter, with reference to the other chapters in this book, where the new legislation is described in more detail and further explanations can be found.

2.04  There are a couple of reading notes to be made at the outset. As acknowledged in the recitals of the Commission Delegated Regulation supplementing the Prospectus Regulation (the CDR), ‘the content and the format of a prospectus depends on a variety of factors, including, amongst others, the type of issuer, type of security, type of issuance and the question whether or not there is an admission to trading’.² This chapter focuses on company IPOs, i.e. the initial offering, in combination with a first admission to trading, of a company’s ordinary shares on a regulated market in the EU.

2.05  The Prospectus Regulation is drawn up in the form of a regulation (and no longer as a directive) in order to achieve uniform application of the rules in the EU and to facilitate cross-border offers of securities and multiple listings on regulated markets.³ Using the framework of a regulation is also aimed at strengthening confidence in the transparency of markets across the European Union, and to reduce regulatory complexity. However, and this in particular applies in respect of IPOs, capital market practices in Member States have evolved over decades and are cemented in local practice. Consequently, IPOs conducted in the EU have, and, even after enactment of the Prospectus Regulation, will continue to have, distinct local features.

2.06  Nevertheless, a typical IPO process comprises a number of standard phases, regardless of the jurisdiction in which the company is based or the jurisdiction where the regulated market to which the company’s shares are proposed to be admitted is based. This chapter focuses on those phases and takes a ‘holistic’ approach towards the IPO process, highlighting certain specific local practices only to illustrate how they affect the key considerations around preparation of an IPO prospectus in the context of the Prospectus Regulation.

(p. 21) 2.07  Based on the foregoing, the chapter is structured along the following lines: Section II ‘Key IPO Considerations’ (para. 2.08) provides an overview of key IPO considerations, a typical IPO process, and IPO disclosure; section III ‘The IPO Prospectus’ (para. 2.39) discusses the preparation and key contents of an IPO prospectus; and section IV ‘IPO Prospectuses and the Prospectus Regulation’ (para. 2.62) discusses the potential impact of the Prospectus Regulation on IPO processes and the IPO prospectus.

2.08  There are many reasons for a company and its shareholders to pursue an IPO. For a company, the key reasons to go public typically are⁴ (i) to raise capital to finance its growth plans; (ii) to have better and continuous access to capital markets for financing purposes, including in respect of mergers and acquisitions, enabling the company to use its own shares as acquisition consideration; (iii) development of company brand and reputation, strengthened by public adherence to strict disclosure, reporting, and governance standards; (iv) extended possibilities for management and employee compensation programmes, offering employees ownership in the form of tradeable shares; (v) to increase visibility for students and employees and attract and retain talent; and (vi) to optimize the ‘gearing’ of the company (the ratio between equity and debt capital on a company’s balance sheet) for regulatory and/or commercial purposes. The key reason for shareholders to pursue an IPO is to facilitate an exit from their investment, through the IPO and/or in the secondary market after the IPO.

2.09  A company considering an IPO will also take into account the disadvantages of operating in a public environment. It will need to adhere to a large set of transparency, market abuse, corporate governance, and disclosure-related requirements, which will typically require the company to incorporate the underlying functions and processes into its organization and may require additional capacity in its workforce. The company will also need to deal with new shareholders, investors, financial media, and analysts, all with their own specific agendas, rights, and powers, through voting or economic rights, media access, or otherwise.

2.10  Consequently, the company’s liability profile changes and with the public scrutiny, the company becomes more susceptible to claims from investors and other third parties. As Franx comments,⁵ interestingly enough—especially given the potential consequences—this particular disadvantage is virtually never considered a key factor in discussions on whether or not to pursue an IPO in a European context.

(p. 22) 2.11  Connecting the IPO considerations set out above to the contents of this chapter, it is important to realize that the approach taken by the company in the IPO process in respect of disclosure—in the IPO prospectus or otherwise—will have an important impact on its life as a listed company as well. When the IPO prospectus or other communication materials include a certain level of detail in relation to, in particular, financial performance or other key performance indicators (KPIs), shareholders and the financial community in general are likely to expect the company to maintain such level of disclosure after the IPO,⁶ i.e. the IPO prospectus and related financial disclosures will set the standard for future reporting.

2.12  If practitioners were to name one aspect that is critical to the success of every single IPO, it would likely be the preparation. Companies considering an IPO will often need to spend between one and two years, or sometimes even longer, preparing for the execution of an IPO. Once in execution mode, everything will need to work out exactly according to very detailed plans and timelines, with little or no room for delay. Before reaching the implementation phase, however, a company must assess whether it is ready for an IPO. In essence, this means the company’s management and shareholders need to answer a number of strategic questions. The most important of these questions and related readiness assessments evolve around the following themes.

2.13  Listing venue: the decision where to list will depend on a number of aspects. Capital markets have become increasingly global and studies show that around 90 per cent of all companies going public will do so in the country where their main business operations and headquarters are located.⁷ Familiarity with the market, stock exchange, stakeholders, and with local corporate governance practices and regulatory requirements will play a role in taking that decision. Nevertheless, for some companies there may well be good reasons to try and pursue a listing abroad or on a particular stock exchange; for example, if peers are listed on such an exchange (e.g. tech companies on Nasdaq), because of the size and depth of a market (e.g. London, New York), if investors in the company’s industry have a preference for companies listed on such an exchange, or potentially as a result of any of the foregoing, if listing on such exchange would lead to a higher valuation of the company. Speed, complexity, and costs of the (p. 23) listing process and tax considerations are also typical factors taken into account in relation to this decision.

2.14  Offer structure: key questions to be dealt with are whether the IPO will be used to give shareholders the opportunity to sell existing shares (a secondary IPO), or whether the company needs or wants to raise capital by issuing new shares (a primary IPO), or whether it will be a combination of both. Will shares be offered to retail investors or to institutional investors only, and in which jurisdictions will the shares be offered, and what are the implications of such choices? Even though the actual choices can be made closer to execution of the IPO, a company must consider them in a timely manner in order to be able to assess the potential impact these choices may have on the timeline and process it has in mind.

2.15  Corporate governance and pre-IPO restructuring: choices will have to be made in relation to important corporate governance topics, including composition and structure of (the) board(s) and management team following the IPO, appointment of independent board members, powers and authority of the general meeting and other corporate bodies, post-IPO shareholder relations, introduction of anti-takeover measures, adherence to applicable corporate governance regimes, and putting in place remuneration plans and policies. Also, in relation to these choices, does the company or its group have to implement or undergo major pre-IPO restructurings for it to be IPO-ready (from a tax, governance, or operational perspective)?

2.16  Financial reporting: in order to meet the requirements in the Prospectus Regulation⁸ and the financial disclosure rules for public companies post-IPO, private companies must often adapt and update their financial reporting processes and related IT and internal control systems before being able to go public. The company will have to prepare its financial statements on the basis of International Financial Reporting Standards (IFRS) or equivalent standards. Where a company is used to report in accordance with local generally accepted accounting practices (GAAP), this typically requires a change of reporting, reporting lines, and auditing practices of the company, as well as an upgrade of business and risk management functions. A gap analysis needs to be performed and any identified issues assessed from an accounting perspective, but also for any implication on the company’s IT and reporting systems, business processes, and financial impact. To be able to present financial statements over a historical period on a comparable basis to IPO investors, a company should try to achieve consistency in its financial reporting early on in the process. Last but not least, the company will need to assess whether there have been any mergers and acquisitions (M&A) activities or corporate restructurings that may have an impact on its ability to present financial information on a comparative basis in the IPO and afterwards.⁹

(p. 24) 2.17  Business and strategy: the company will need a sound strategy supported by a business plan, with concrete operational, financial, and strategic elements and milestones towards and beyond the IPO. The business plan should also illustrate the need for, and upside of, pursuing an IPO, in particular in the case of a primary IPO, where the company should have a clear plan in respect of the use of proceeds from the capital raise. The strategy and underlying business plan also form the basis for the ‘equity story’ in the IPO, as explained in more detail below at para 2.23, and will be used in part to determine a valuation range and pricing of the shares in the IPO.

2.18  In practice, the most challenging aspect of an IPO for a company is to manage the execution of a ‘once-in-a-lifetime’ event whilst at the same time maintaining focus on the performance of the business, successfully managing and growing the day-to-day operations underlying the IPO.

2.19  Once the readiness analysis and efforts confirm that the company is ready to take the step and the decision has been taken by the company and its shareholders to pursue an IPO, the execution phase starts. As a rule of thumb, a typical IPO process will last around six months from the moment the execution starts to the first trading of the company’s shares. There are examples of IPOs being completed faster than that, but the process may well take longer in specific situations, in particular in the event of privatizations of what are typically businesses in regulated sectors (e.g. financial institutions, energy, infrastructure, or natural resources), or IPOs where a carve-out, spin-off, or other complex restructuring needs to be completed in order to execute the IPO.

2.20  Timing of the execution period is also essential. Taking into account market sentiment and the timing of preparation and availability of recent (interim) financial statements,¹⁰ this effectively leaves only a few windows—of a couple of weeks each—in every calendar year during which an IPO can be launched and completed.

2.21  The start of the execution phase is marked by the formal appointment of the IPO team, including one or more banks that will act as global coordinator(s) and underwriter(s),¹¹ legal counsel, auditors and, sometimes, communication specialists.¹² In some (p. 25) jurisdictions, such as the United Kingdom, it is becoming increasingly common for a company to appoint a separate financial advisor. A kick-off meeting is organized with these advisors and the internal project team.

2.22  Immediately after the kick-off meeting, a number of disclosure-related work streams will typically commence in parallel: the preparation of management presentations and due diligence sessions, preparing for—or continuing—so-called ‘early look’ or ‘pilot fishing’ meetings, preparation of the research analyst presentation, the drafting of the IPO prospectus, and the confirmation of publicity guidelines.¹³ All these processes and work streams have their own timing and dynamics.¹⁴ What they have in common is that disclosure is at their core, whereby disclosure standards¹⁵ and consistency of the information included and disclosed throughout these documents and processes is a key requirement in which the IPO prospectus plays a central role. This requirement for consistency is reflected in a specific provision in the Prospectus Regulation requiring that ‘all information disclosed in an oral or written form concerning the offer of securities to the public or the admission to trading on a regulated market, even where not for advertising purposes, shall be consistent with the information contained in the prospectus’.¹⁶

2.23  The management team will typically, either as part of the kick-off meeting or shortly afterwards, give a detailed presentation on the business to the banks and other advisors involved in the IPO. The banks and their advisors prepare a list of topics and questions that they would expect to see addressed. This presentation marks the start of building what is called the ‘equity story’, or in layman’s terms, how to sell the business to prospective investors. The equity story needs to be developed early on in the process, as it plays a critical role throughout all phases of the IPO. It typically comprises a focused description of the key elements of the business and strategy of the company and why management believes the company is well positioned to execute and capitalize on that (p. 26) strategy; in other words, why investors should buy shares in the IPO. The equity story should be supported by historical financial performance and reflect the key items of management’s business plans. Part of developing the equity story is to decide which KPIs the company will measure and monitor going forward. These KPIs will be reflected in its IPO-related presentations and other communications to the market and typically find their way into the company’s financial reporting post-IPO.

2.24  The external marketing of an IPO will typically begin with ‘early-look’ or ‘pilot fishing’ meetings. These are meetings where members of the company’s management and investment banks conduct informal meetings with large, institutional or sector-specific investors to test their appetite for the company’s IPO, i.e. whether and on what basis such investors would be interested in an IPO. These meetings may well take place in the preparation phase (to obtain support for the decision to pursue an IPO), but are typically also held in the early phases of execution of the IPO. They provide the company with the opportunity to test investor sentiment and get market feedback on the initial outline of the equity story and the guidance and KPIs that investors will require for their investment decisions. These meetings are private, and presentations are not distributed beyond such meetings. On the basis of feedback from early-look and pilot fishing sessions, the company and investment banks will fine-tune the equity story and valuation parameters. They still have the opportunity to alter and fine-tune these elements at this stage, but it is important to remain consistent on the fundamental messages as far as possible. As set out below, once reflected in the analyst presentation and IPO prospectus it will be more difficult to change these key messages.

2.25  During the IPO execution phase, generally around eight to twelve weeks after kick-off and six to eight weeks before the company announces for the first time its intention to go public by way of an ‘intention to float’ or ‘ITF’ announcement, the company’s senior management, typically comprising its management board/executive directors and heads of legal, risk, technology, and other important departments or business units, will give a day-long presentation—sometimes accompanied by a site visit—to analysts within the research division of the banks involved in the IPO, the ‘connected analysts’.

2.26  Based on the delivery and contents of this analyst presentation, the research analysts will prepare research reports on the company, its business, the proposed IPO, and the analysts’ views in respect thereof. During the preparation of their report, the research analysts will have an opportunity to submit questions to, and receive responses from, the company’s senior management. In addition, the draft research report (with valuation information redacted) will be reviewed by the company and by the company’s and the investment bank’s legal counsel for factual accuracy and consistency. The research reports will also need to comply with research guidelines drafted by the investment (p. 27) banks and their counsel, containing restrictions on the preparation, content, and distribution of research in the run-up to and after the IPO.

2.27  After their finalization, these detailed reports will be sent to the institutional client base of the relevant investment bank. This is typically done simultaneously with the ITF announcement referred to in paragraph 2.25. In practice, there is typically a period of approximately two weeks between the ITF announcement and the publication of the IPO prospectus, marking the public launch of the IPO and start of the subscription period. During the two-week interim period, the investment banks will use the research report for ‘PDIE’, or pre-deal investor education. This means the research analysts will conduct follow-up meetings with investors who received a copy of the research reports to try and receive further and final feedback ahead of the launch of the IPO, in particular in relation to valuation, so as to provide the investment banks with further insights on the pricing of the IPO. Once determined, a price range will either be included in the IPO prospectus or otherwise communicated to investors by the banks (if conducting a roadshow with qualified investors, using an unapproved ‘pathfinder’, or ‘preliminary’ prospectus): see section III ‘The IPO Prospectus’ (para. 2.39).

2.28  This also means that a large part of the potential investor base of the company is informed of the IPO, the company, and its investment case on the basis of the research reports, rather than on the basis of the IPO prospectus, typically published a few weeks later. That by itself is not necessarily a cause for concern, but it does mean that from an IPO disclosure perspective it is particularly instrumental that there is consistency between the contents of the analyst presentation and the research reports on the one hand, and the contents of the IPO prospectus and other public disclosures on the other. In the UK, this specific timing aspect of an IPO has recently led to a revision of the rules regarding the timing of disseminating information in an IPO.¹⁷

(p. 28) 2.29  By way of example of the practical considerations around this topic, the timing of the analyst presentation and of the IPO prospectus preparation means that at the time of the analyst presentation any guidance on KPIs will need to be clear, in particular where such guidance may or would qualify as a profit forecast or profit estimate.¹⁸ Depending on the overall timing of the IPO, it may well happen that the analyst presentation takes place before the competent authority has provided comments on a first filing of the IPO prospectus. Parties need to be comfortable that the comments from the competent authority will not have a bearing on the scope and contents of the analyst presentation. In practice, competent authorities are aware of these concerns and are typically willing to consider and address concerns caused by the timetable (assuming the planning is reasonable and realistic in view of the competent authority).

2.30  Immediately after the kick-off meeting, the banks will also start their due diligence efforts in order to facilitate and verify disclosure in the IPO documents. Hoevers summarizes the relevance of a due diligence process in the context of an IPO in a single paragraph as (my translation):

a process conducted by the banks, with the assistance of external experts (typically including financial and legal experts), of due and careful investigation, taking into account the specific circumstances, into the affairs of the company and its business in the broadest sense, where the results of such investigation will be reflected (as appropriate) in the IPO prospectus.¹⁹

2.31  In general terms, if an IPO prospectus is misleading, the banks may establish a so-called due diligence defence to avoid prospectus liability. Put simply, they will have to prove that they conducted a reasonable investigation in respect of—alleged—material misstatements or omissions and that, following such investigation, the banks should have had reasonable grounds to believe that at the time the prospectus was published, the statements therein were materially true and that there was no omission of any material fact.²⁰ Given that background, the due diligence performed by the underwriters will generally and in any event cover all items that need to be included in the prospectus pursuant to the Prospectus Regulation and the annexes to the CDR.

2.32  In practice, IPO due diligence (legal, commercial, and financial) commences at the kick-off meeting with the management presentation and continues throughout the IPO process up until completion of the IPO. Senior management of the company will have (p. 29) continuous involvement in this work stream, as they will be involved in initial due diligence sessions at the outset and throughout the IPO in various due diligence ‘bring down’ sessions by phone or in person, aimed at reconfirming the absence of any material due diligence developments necessitating additional disclosure at certain milestones in the process, for example at the time of the ITF announcement, publication of the IPO prospectus, pricing of the IPO, and settlement of the shares upon completion of the IPO.

2.33  At the start of the process, the kick-off and/or management presentation will disclose items of particular interest and relevance for the company, such as specific business or financial risks, management concerns, important contracts, and ongoing litigation. Typically, shortly after the management presentation, the banks and their advisors provide the company with a customary, but tailored, information request list, to ensure that, taking into account the profile, size, activities, and structure of the company, all relevant information is provided for the purposes of the banks’ due diligence review. The company will collect and make available the requested information for review by uploading them into a virtual data room. In parallel, due diligence interviews are scheduled with senior representatives of the company to further discuss relevant topics on the basis of questionnaires provided by the banks and their advisors ahead of the interviews. Relevant due diligence findings are not only reflected in the IPO prospectus (see section III ‘The IPO Prospectus’, para. 2.39 below), but will also be used to build and progress the equity story for purposes of the early-look presentation and the analyst presentation.

2.34  To ensure that all information on management and senior employees that is required to be included on the basis of the Prospectus Regulation is provided, the banks (or legal counsel) will also prepare a so-called Directors’ and Officers' (D&O) questionnaire asking board members and certain designated senior officers to confirm certain personal details necessary for inclusion in the IPO prospectus, as well as details which may be material for due diligence.²¹

2.35  Also as part of their due diligence exercise, the banks will ask for different types of comfort from the company and expert advisors. In respect of the company, in addition to the presentation, interviews, and questionnaires described above, the banks will also require the company (and the selling shareholders, as the case may be) to provide an extensive set of representations and warranties in relation to the business, its conduct of operations, and the disclosures in the IPO prospectus, to be included in the underwriting agreement. In certain jurisdictions, including the UK, the company’s board members are also required to verify that the information in the IPO prospectus is correct and complete. This is done through a verification process, whereby the accuracy of all material factual statements in the IPO prospectus is ensured through (p. 30) cross-checks against appropriate supporting materials, and, where statements of opinion or belief are included, management is requested to confirm that such opinions are reasonable.

2.36  Furthermore, the banks will ask for specific comfort from the company’s auditor involved in the IPO.²² A ‘long-form’ due diligence report may also be requested. The auditor will participate in a due diligence session with the banks and their legal counsel, in which they respond to questions on the company’s accounting controls, systems, and financial reporting. Depending on the type of company, business, and jurisdiction, an external auditor may provide the banks with a working capital report²³ supporting the company’s working capital statement in the prospectus,²⁴ and sometimes a further memorandum on the company’s internal control systems (also known as financial position and prospects procedures, or ‘FPPPs’). The auditor will also be requested to provide a customary ‘comfort letter’ that provides negative assurance in relation to the financial information included in the prospectus and by ‘circling up’ all financial numbers in the IPO prospectus, providing comfort on their accuracy by tying each of them back to their origins. Comfort levels vary from a direct link between the numbers in the IPO prospectus and the audited or reviewed financials—where the number can be traced back to the company’s audited or reviewed accounts—to a confirmation of their mathematical accuracy—where the confirmation (merely) states that certain numbers in the IPO prospectus have been added up correctly. Where the auditor is unable to provide sufficient comfort, the banks will typically ask the chief financial officer (CFO) of the company to provide comfort on the numbers as included, through a so-called CFO certificate.

2.37  From the company’s legal counsel and their own counsel, the banks will also request various legal opinions, confirming certain legal aspects in relation to, amongst other things, the company, its constitutional documents, and internal approvals in relation to the IPO, as well as the enforceability of legal documentation.

2.38  Finally, in so-called ‘144A’ IPOs, where US institutional investors are also targeted, the company’s US legal counsel and the banks’ own US counsel will typically be requested by the banks to render a so-called ‘10b-5 disclosure letter’, providing the banks with negative assurance on the contents of the IPO prospectus. Without going into too much detail, it is important to briefly explain these two concepts and their background, as they play an important role in the vast majority of European IPOs.

(p. 31)

(p. 32)

2.39  As illustrated, there are multiple disclosure documents that each play an important role in an IPO. Nevertheless, the prospectus remains the central disclosure document in any IPO. It must contain the necessary information which is material to an investor for making an informed assessment of (i) the assets and liabilities, profits and losses, financial position and prospects of the company; (ii) the rights attaching to the shares that are being offered; and (iii) the reasons for the offering and its impact on the company.²⁵ Publication of a prospectus is required in the event of an offering of securities to the public as well as upon the admission of securities to trading on a regulated market. In an IPO, this typically means that the prospectus is published upon commencement of the public offering, although in certain jurisdictions and where the offering is made to qualified investors only, an unapproved ‘pathfinder’ or 'preliminary' prospectus is published prior to the subscription and book-building period, to be followed by a prospectus approved by the relevant competent authority on pricing.

2.40  Typically, an IPO marks the first time that information in respect of a company is widely disseminated publicly, and even though the company is ultimately responsible for the publication of the prospectus and its contents, the persons responsible within the company for collecting and processing the relevant information will very likely not have much experience, if any, in dealing with such public disclosures. In practice, the preparation of the IPO prospectus is a joint effort between the company, its local and US legal counsel, its auditor, and the banks and their local and US legal counsel.

(p. 33) 2.41  The IPO prospectus tracks the requirements—in terms of contents and order—set out in the Annexes to the CDR.²⁶ In practice, parties will use the kick-off meeting to make detailed plans setting out which party will be responsible for delivery of a first draft of a prospectus chapter and by when. That typically leads to the following division of work.

2.42  The company will be responsible for preparing the framework of the prospectus, with its own local legal counsel holding the pen.

2.43  The company’s US legal counsel²⁷ will—in coordination with local legal counsel—typically prepare first drafts of the ‘Risk Factors’,²⁸ ‘Business’²⁹ (other than the ‘Strategy and strengths’ section—see below) and the ‘Operating and Financial Review’³⁰ chapters. These chapters often require the most attention from senior management and are typically therefore the first ones prepared. The other chapters, including those on ‘Management, Employees and Corporate Governance’, ‘Shareholding Structure and Related Party Transactions’ and certain ‘boilerplate’ sections are typically completed at a later stage, closer to the date of first filing with the competent authority.

2.44  Banks typically prepare a first draft of the ‘strategy and strengths’ section for the Business chapter (typically with assistance from the company and based on, or using elements of, the company's internal strategy papers). These paragraphs reflect the equity story and (p. 34) should be consistent with the other disclosure documents in which these elements play a crucial role, most notably the analyst presentation. Another chapter that is typically prepared by the banks (or sometimes an external consultant) is the ‘Industry’ chapter, which describes sector trends and developments as well as the company’s market position compared to its competitors. The information will generally come from external market research reports, either available in the market or commissioned by the company or the banks specifically for the IPO. The contents of this chapter also help frame the proposition set out in the equity story. Finally, the banks (or their legal counsel) also typically hold the pen on the contents of the ‘Plan of Distribution’ chapter, setting out key underwriting and other offer terms, and the ‘Selling and transfer restrictions’ sections.

2.45  Once first drafts of the most important chapters of the prospectus (‘Risk Factors’, ‘Business’, and ‘OFR’) have been prepared, they are discussed and progressed in drafting sessions. Drafting sessions are typically held in person and take place over the course of one or two days. Multiple drafting sessions are typically held during the course of the IPO process, often in conjunction with due diligence meetings. Drafting session participants will include representatives from the company that have in-depth knowledge and understanding of the business (for ‘Business’), the risks that the company faces or may face in the future and how it deals with those (for ‘Risk Factors’) and/or the company’s financial performance (for the ‘OFR’). Alongside the company, these sessions will be attended by the company’s US and local legal counsel, the banks and their local and US legal counsel and, sometimes, the company’s auditor. Depending on the status of the disclosure in the chapter, the drafting sessions consist of a high-level review of the relevant chapter or a more detailed page-turn and textual review, in each case to verify whether the disclosure is correct, but also to test information and underlying assumptions, and to discuss findings from due diligence to confirm whether they merit disclosure in the IPO prospectus. After each session, the company’s counsels will typically update the IPO prospectus for redistribution to the other advisors in preparation for the next drafting session or round of comments ahead of filing. This process repeats itself a number of times to arrive at a draft prospectus that is ready for first filing with the competent authority.

2.46  The IPO prospectus for an IPO by an EU-based company with admission to trading of its shares on a stock exchange (qualifying as a regulated market) in the EU must be approved by the competent authority in the Member State where the company has its (p. 35) registered office.³¹ As set out in paragraph 2.13 above, the vast majority of companies pursuing an IPO will apply for an admission to trading of its shares in the Member State where its office is registered. However, there may be good reasons for a company to seek admission in another Member State, or even outside the EU.³² Also, a company may pursue an admission to trading or listing on multiple stock exchanges, whether in parallel at the time of IPO or at a later stage, opting for a dual listing or cross-listing.³³ In each of these scenarios, different sets of rules will apply in relation to the prospectus review and approval procedures, the listing rules, and also in respect of the corporate governance regimes formally applicable or customary in each of the relevant jurisdictions. As such, the framework of applicable rules will in practice be complex and will require a timely and thorough assessment in the IPO preparation phase to avoid any delays or more substantive issues at a later stage.

2.47  Pursuant to the Prospectus Regulation, an IPO prospectus may be drawn up as a single document or in separate documents, comprising a registration document, securities note, and summary.³⁴ The format of the IPO prospectuses used in different Member States is typically driven primarily by market practice rather than by the Prospectus Regulation and related legislation. The most common approach is to publish the IPO prospectus as a single document, approved on the basis of a pricing range, with the final price and final number of shares for the IPO published and filed with the competent authority in accordance with the Prospectus Regulation.³⁵

2.48  When a first draft of the IPO prospectus is sufficiently advanced and stable, it will be filed with the competent authority for review and comments. In accordance with Article 20(3), Prospectus Regulation and similar to the approach applied under the Prospectus Directive, the competent authority must notify the company (and offeror, as the case may be) of its decision regarding the approval of the prospectus within twenty working days of the submission of the draft prospectus.³⁶

2.49  The twenty-working-day review period only applies to the initial submission of the draft prospectus. Where subsequent submissions are necessary, the review period is shortened to a maximum of ten working days.³⁷ In practice, as it is typically the first time for the competent authority to be dealing with a particular company, its business, and securities, the competent authority will, upon receipt of the first draft, take twenty business days for its review, and can even ‘stop the clock’ or simply not commence the review when it deems that the prospectus is of insufficient quality or substance. This process will repeat itself as often as is required to finalize the prospectus. The time between filing of a first draft of an IPO prospectus with the competent authority and formal approval of the prospectus varies per jurisdiction and per IPO, but is generally between eight and twelve weeks, also depending on the specific nature of the company and the offering.

2.50  The competent authority will review and approve an IPO prospectus based on the requirements of the Prospectus Regulation as well as the CDR (confirming whether all required information has been included). Approval of the IPO prospectus by the competent authority does not constitute endorsement of the merits of the offering, a confirmation of the accuracy or completeness of the information, or the authenticity of the financial information and other information presented.

2.51  Once approved, the prospectus should be made available to the public at a reasonable time in advance of, and at the latest at the beginning of, the offer to the public or the admission to trading of the securities involved. In the case of an IPO of a class of shares that is being admitted to trading on a regulated market for the first time, the prospectus (p. 37) shall be made available to the public at least six working days before the end of the offering.³⁸

2.52  Furthermore, an IPO prospectus must be published on a dedicated section of the company’s website which is easily accessible upon entering the website. The prospectus must be downloadable, printable, and in searchable electronic format.³⁹ In addition to any documents containing information incorporated by reference, any supplements, and/or final terms related to the prospectus, the Prospectus Regulation also requires companies to make available a separate copy of the summary under the same section as the IPO prospectus.⁴⁰ Access to the IPO prospectus may not be subject to the completion of a registration process, the acceptance of a disclaimer limiting legal liability, or to the payment of a fee, although warnings specifying the jurisdiction(s) in which an offer or an admission to trading is being made are permitted.

2.53  As set out in the introduction to this chapter, a typical IPO will require a prospectus to be drawn up in accordance with the Prospectus Regulation requirements. For various reasons, only a few of the extensive list of exemptions to the obligation to publish a prospectus are in practice relied upon in the context of an IPO. Nevertheless, a couple of them merit a brief discussion, given their relevance in the IPO process.⁴¹

2.54  Qualified investors:⁴² depending on the jurisdiction and the nature of the company, IPOs often include an offering to the public of the shares, i.e. a retail component,⁴³ but the geographical scope of such an offering will typically be limited to only the jurisdiction(s) where the company has its registered office and where its shares will be admitted to trading. Passporting of the IPO prospectus would mean that an offering to the public could easily be extended into additional jurisdictions, but in practice this does not occur often: the company and the banks are generally comfortable limiting the extension of the public offering (if any) to the ‘home jurisdiction’ and, for the offering (p. 38) into other jurisdictions, they will often rely on the ‘qualified investor’ or similar exemptions.⁴⁴ For the avoidance of doubt, the ‘qualified investor’ exemption is not available in relation to the admission to trading of the shares, so unless another exemption is available, an IPO prospectus will still need to be published. This regime has not changed under the Prospectus Regulation.

2.55  Takeover and (de)mergers:⁴⁵ in the case of shares offered, allotted, or to be allotted in connection with a takeover, merger, or demerger, and the admission of such shares to trading, no (IPO) prospectus is required to be prepared, provided that a document is published containing information ‘describing the transaction and its impact on the company’. In practice, this exemption is sometimes relied upon if companies are ‘IPO-ed’ immediately upon completion of a takeover or in the event of an IPO of a division or business unit of a company, typically effected through a spin-off or carve-out. Compared to the requirements to rely on the exemption under the old regime, an ‘equivalent document’ (i.e. equivalent to that of a prospectus as required under the old regime) is no longer required.⁴⁶ It remains to be seen whether the new test will mean the exemption will be more often relied upon in case of IPOs, but the requirements have become less burdensome.

2.56  Cross-listing: the Prospectus Regulation also offers an exemption relevant for cross-listings; no prospectus is required in the event of the admission to trading of shares if these are already admitted to trading on another regulated market, provided a number of conditions are met, including that those securities, or securities of the same class, have been admitted to trading on that other regulated market for more than eighteen months.⁴⁷

2.57  Growth Prospectus: the Prospectus Regulation introduces a new proportionate disclosure regime for small and medium-sized enterprises (SMEs).⁴⁸ The regime is introduced to encourage the use of capital market financing by SMEs, striking a proper balance ‘between cost-efficient access to financial markets and investor protection when calibrating the content of an EU Growth prospectus’ in a manner, in relation to the prospectus, that ‘focuses on information that is material and relevant when investing in the securities offered, and on the need to ensure proportionality between the size of the company and its fundraising needs, on the one hand, and the cost of producing a prospectus, on the other hand’.⁴⁹ Whether the regime will in practice lower the threshold (p. 39) for smaller companies to pursue an IPO will depend, amongst other things, on whether banks and investors can in practice work with the revised scope of information (also taking into account disclosure requirements outside the EU) and whether there is sufficient interest and momentum to create and maintain markets and listing venues for public SMEs.

2.58  The publication of the IPO prospectus typically (and in any event in case of an IPO with a retail offering) marks the beginning of the subscription and book-building period that lasts for approximately two weeks.⁵⁰ After that, the shares are priced and allocated on the basis of the order book, following which public trading in the shares of the company commences.⁵¹ There are two final comments to make in relation to the specific IPO disclosures during this final phase of execution of the IPO.

2.59  Roadshow presentation: during the subscription and book-building period it is customary for the senior management of the company, accompanied by representatives of the banks, to (re)visit prospective institutional investors, to introduce the company or follow up on earlier meetings. The roadshow presentation that is used for these purposes will typically be based on the early-look or pilot fishing slide deck, updated to reflect the fine-tuning of the equity story and other feedback received from investors throughout the process. As with all other communication in connection with the IPO, its contents must be consistent with that of the IPO prospectus.

2.60  Retail communication and other advertisements: depending primarily on the nature of the business of the company, IPOs may also comprise a dedicated marketing effort to retail investors, where sometimes these investors are promised a guaranteed or preferential allocation of shares in the IPO. Offering shares to retail investors, combined with (p. 40) additional, targeted marketing efforts and advertisements, increases the company’s and banks’ liability profile in relation to the IPO.⁵² The Prospectus Regulation sets out a number of specific rules in relation to such advertisements. An advertisement is now defined as a ‘communication’,⁵³ which the European Securities and Markets Authority (ESMA) has confirmed is intended to be broader in scope than ‘announcement’, which was the definition under the old regime and will now also capture oral communications, as well as written communications other than announcements. However, the communication will still only qualify as an advertisement if it meets the following tests: it should (i) relate to a specific offer of securities to the public or to an admission to trading on a regulated market; and (ii) aim to specifically promote the potential subscription or acquisition of securities. Advertisements must be clearly recognizable as such and must state that a prospectus has been or will be published in relation to the IPO and indicate where investors are or will be able to obtain it (including by adding a hyperlink in digital advertisements).

2.61  Also in relation to advertisements, the prospectus is explicitly positioned as the central disclosure document for an IPO, as ‘information contained in an advertisement shall not be inaccurate or misleading and shall be consistent with the information contained in the prospectus, where already published, or with the information required to be in the prospectus, where the prospectus is yet to be published’.⁵⁴ The Commission Delegated Regulation (EU) 2019/979 of 14 March 2019⁵⁵ provides further detailed rules implementing this approach. It states that to avoid misleading retail investors during the process of marketing an IPO, an advertisement should not purport to be the principal information document; and to avoid confusion with the prospectus, advertisements should not be inappropriately long (which could in practice impact the use of retail brochures in IPOs). In addition, the information contained in advertisements should not present an unbalanced view of the company, for example by presenting negative aspects of such information with less prominence than the positive aspects. The requirement of consistency also applies to oral or written disclosures of information on the IPO, even where not for advertising purposes. Finally, the competent authority in the Member State in which the advertisement is disseminated will have the power to exercise control over compliance with the rules for advertisements.⁵⁶ This may impact cross-border IPOs (e.g. dual or cross-listings), in particular where a (p. 41) particular competent authority applies different policies in respect of compliance with these advertising rules.

2.62  As alluded to earlier in section III.1 ‘Drafting the prospectus’ (para. 2.40), the general test for disclosure in an IPO prospectus has remain broadly unchanged under the Prospectus Regulation. It must contain the necessary information which is material to an investor for making an informed assessment of (i) the assets and liabilities, profits and losses, financial position and prospects of the company; (ii) the rights attaching to the shares that are being offered; and (iii) the reasons for the offering and its impact on the company.⁵⁷ In the final section of this chapter, certain provisions in the Prospectus Regulation are discussed that are of particular relevance for the IPO process or the IPO prospectus. The provisions are briefly summarized, along with their expected impact.

2.63  Pursuant to the Prospectus Regulation, the primary purpose of including risk factors in a prospectus is to ensure that investors make an informed assessment of such risks and thus take investment decisions in full knowledge of the facts.⁵⁸ That purpose does not differ from the approach under the Prospectus Directive. However, the introduction of more detailed, specific requirements in relation to the presentation and contents of the risk factors are likely to result in a number of changes to the disclosure practice on IPOs across the European Union, given the importance of this section and its prominent position in an IPO prospectus. How drastic or radical these changes will turn out to be in practice and in the longer term remains to be seen, but the European Commission and ESMA⁵⁹ have given concrete guidance to competent authorities, which such authorities will use when reviewing and approving risk factor sections in prospectuses after 21 July 2019. It goes beyond the scope of this chapter to discuss all changes,⁶⁰ but it is worthwhile listing the key ones and assessing their potential impact in the context of an IPO process. The Prospectus Regulation⁶¹ ‘sets the scene’ by specifying that:

2.64  In the ESMA Risk Factor Final Report, twelve specific guidelines are presented to competent authorities, presented around a number of selected themes:⁶²

Specificity

1. 1.  Establish a clear and direct link between the risk factor and the issuer/securities.

2. 2.  Avoid inclusion of risk factors that only serve as disclaimers or are too generic.

Materiality

1. 3.  Materiality of the risk factor and potential negative impact should be clear.

2. 4.  Materiality should not be compromised by mitigating language.

3. 5.  Consider including probability of occurrence vs expected magnitude of negative impact.

Corroboration

1. 6.  Materiality and specificity of the risk factor must be corroborated by the overall picture presented by the prospectus. This means a risk factor cannot be included if it relates to matters not disclosed elsewhere in the prospectus.

Presentation

1. 7.  Presentation of risk factors across categories (depending on their nature) should aid investors in navigating the risk factors section.⁶³

2. 8.  Categories should be identified via the use of appropriate headings.

3. 9.  Number of categories must be proportionate to the size/complexity of the transaction and risk to the issuer/guarantor.

4. 10.  Categories should be further divided into sub-categories in cases where subcategorisation can be justified on the basis of the particular prospectus (p. 43) but not if there is no clear/obvious need for subcategories and it compromises comprehensibility.

Focus

1. 11.  Disclosure of each risk factor is presented in a focused and concise form.

Summary

1. 12.  Where relevant, risk factors in the summary must be consistent with disclosure presentation and the order of the risk factors section in a prospectus.

2.65  The introduction of the new risk factor requirements is likely to be of particular relevance in the context of IPOs. Generally, an increase in the number and scope of discussions with competent authorities is expected (and can already be seen in practice), in particular given the clear instructions from ESMA in relation to the assessment of the new risk factor regime. Competent authorities need to adhere to these new, stricter, guidelines. IPO prospectuses, on the other hand, traditionally contain a relatively large number of risk factors, covering a broad spectrum of categories, such as company, industry, regulatory, tax and share, and stock market-related risks. In practice, these are not all explicitly tailored to the company or its business. The company to be IPO-ed typically has no (extensive) previous public risk disclosure and investors are not familiar with the company and its business, frequently resulting in a relatively long list of risk factors to ensure that all potential risks are covered. As Bloomberg puts it in context (commenting on the Lyft IPO): ‘The risk-factors section of an IPO prospectus is a bit like a transcript of a chief financial officer’s worst nightmares.’⁶⁴

2.66  Companies, with the help of their advisors, may well have to spend more time than was previously the case considering how to limit risk factors to those determined to be material and specific to the company. This is likely to impact drafting of the IPO prospectus and the timing of the approval process. Companies and competent authorities will need to reach agreement on a number of relevant questions, including:

• •  Limiting the number of risk factors: companies need to assess the risk of not including a risk that materializes following the IPO. How will investors, companies, and, potentially, judges respond if a risk factor that has not been listed in the prospectus is the reason for a claim? The consequences of making the wrong determinations are unclear and likely to differ between jurisdictions.⁶⁵

• (p. 44) •  Listing the most material risk factors first:⁶⁶ this requires an assessment of how the materiality of each risk corresponds with other risks, and on the concept of materiality itself: is a low-probability risk with a high-impact more material than a high-probability risk with a low impact? Will a company be able to apply a high–medium–low categorization? How does the chosen approach impact ongoing disclosure on risks by the company after the IPO?

• •  Link with summary: which risk factors will not make it into the summary as a result of the new requirements? Investors may only read the summary and, with the benefit of hindsight, could claim that a materialized risk should have been listed, even though the Prospectus Regulation provides companies with some comfort on this particular concern.⁶⁷

2.67  In the IPO prospectus, the company must disclose the reasons for the IPO and the contemplated use of proceeds, by specifying, where applicable, the estimated net amount of the proceeds broken into each principal intended use and presented in order of priority of such uses. The European Securities and Markets Authority considers this section as important information for investors and, in comparison to the old regime, seeks to move away from use of the term ‘general corporate purposes’ in describing the use of proceeds. The phrase may still be used, but cannot be used in all cases, and if proceeds are being raised for specific purposes these must be stated. Put simply, companies issuing for a specific purpose should include specific information, rather than general corporate purposes only.⁶⁸

2.68  The CDR also introduces criteria for the scrutiny of the consistency of the information contained in the IPO prospectus.⁶⁹ Competent authorities must, for purposes of scrutinizing the consistency of the information in a draft IPO prospectus, amongst other things, consider (i) whether any figures on the use of proceeds correspond to the amount of proceeds being raised and whether the disclosed use of proceeds is in line with the disclosed strategy of the company; and (ii) whether the working capital statement is in line with the risk factors, the auditor’s report, the use of proceeds, and the disclosed strategy of the company and how that strategy will be funded. If the (p. 45) company is aware that the anticipated proceeds of the IPO will not be sufficient to fund all the proposed uses, then it should state the amount and sources of other funds needed. Details must also be given with regard to the use of the proceeds, in particular when they are being used to acquire assets, other than in the ordinary course of business, to finance announced acquisitions of other business, or to reduce or repay indebtedness.⁷⁰

2.69  In a primary IPO (i.e. where the company will issue new shares), when preparing the ‘Use of proceeds’ section of the IPO prospectus, a company can expect greater scrutiny from the competent authority in the review thereof. In IPO practice, for purposes of the equity story underlying the IPO, a company will typically already have a fairly detailed explanation for the way it intends to use the funds raised, but the emphasis and guidance in the CDR and by ESMA will mean that the company and banks will need to carefully assess the level of detail of information to be disclosed and the connection between the ‘Use of proceeds’ disclosure and other sections in the prospectus, and ensure consistent disclosure across all IPO disclosures in this respect.

2.70  The objective of the Prospectus Regulation, as far as the summary is concerned, is to move towards a more investor-friendly summary regime through a detailed set of requirements ensuring a non-technical, concise, and comprehensible summary. A number of limitations to that effect are introduced: summaries must be prepared as a short document with a maximum length of seven sides of A4-sized paper and have a limit on listing only the fifteen most material risk factors. In addition, detailed requirements on the order and lay-out of presentation of information, including financial information, now have to be complied with.⁷¹ The Prospectus Regulation confirms that the summary of the prospectus should be a useful source of information for investors, in particular retail investors. It should be a self-contained part of the prospectus and should focus on key information that investors need in order to be able to decide which offers and admissions to trading of securities they want to study further by reviewing the prospectus as a whole to make their investment decision. The summary of the prospectus should be short, simple, and easy for investors to understand and written in plain, non-technical language, presenting the information in an easily accessible way.⁷² Finally, the Prospectus Regulation now also requires (p. 46) companies to make available a separate copy of the summary under the same section as the IPO prospectus.⁷³

2.71  A first concern triggered by the new summary requirements is that companies, in particular those going public for the first time, may find it difficult to draft a concise summary that contains all the key information for investors in light of the IPO, including financials and other company-specific information, that at the same time complies with the prescriptive disclosure requirements and size limitations. For example, companies will have to assess and discuss with the banks and advisors which risk factors will make it into the summary as a result of the new requirements limiting that number to fifteen.⁷⁴ Also, more scrutiny can be expected, from the company and the banks, but also from competent authorities, in relation to compliance with the new requirements now that the summary must be published as a stand-alone document.⁷⁵ Even though the Prospectus Regulation confirms that in principle no civil liability should be attached to any person solely on the basis of the summary (unless presented in a misleading manner),⁷⁶ in practice investors, humans after all, may well resort to reading the summary instead of the full IPO prospectus if presented with a choice on the company’s website to use either.

2.72  Historical financial information included in an IPO prospectus helps investors form an investment decision by giving an insight into the financial development of the company. Companies are able, to a large extent and with the assistance of its auditor, to ensure such information is complete, accurate, and not misleading when included in the IPO prospectus. However, the expected future performance of the company, expressed as a profit forecast or profit estimate, may well be even more relevant for an investor to know, in particular in an IPO, but for companies it is much more difficult to verify that information. In addition, its inclusion is likely to increase the liability profile of the company and the banks in relation to the IPO. Under the old prospectus regime, if a company included a profit forecast or profit estimate in the prospectus it had to include—put simply—key assumptions by management underlying the profit forecast, and a report prepared by an auditor stating that, in the opinion of the auditor, the forecast or estimate had been properly compiled and on a basis consistent with the accounting policies of the company. That process is typically fairly time-consuming and consequently, these formal requirements and the liability considerations make (p. 47) the inclusion of a profit forecast or profit estimate in an IPO prospectus uncommon in most jurisdictions. Under the Prospectus Regulation, the key change to this concept is that the requirement to prepare an auditor’s report is abolished.⁷⁷

2.73  Whether the abolishment of the requirement to prepare an auditor report will in practice lead to more profit forecasts or profit estimates being included in an IPO prospectus seems doubtful. Under the old regime, the required audit reports provided comfort to the company, the banks, and investors in an IPO. A pertinent question is whether and how the parties involved will get comfortable with only management information and assessments underlying the inclusion of a profit forecast or profit estimate, if these are no longer supported by external audit reports. The outcome may well be that, particularly in relation to an IPO, if the decision is taken to include profit forecast or profit estimate, the company, but even more so, the banks, will still request the auditors to provide private comfort in respect thereof. Whether auditors will be willing to do so if no longer formally required is a further question in that context.⁷⁸

2.74  There are various reasons for a company and its shareholders to pursue an IPO. Preparation for and execution of an IPO take time and effort. Based on market practices that go back decades and that differ per jurisdiction, IPOs have evolved into a distinct form of capital market transactions.

2.75  One of the key focus areas in the run-up and during an IPO is disclosure, whereby the IPO prospectus plays a central role. However, information is disseminated throughout the process, both before and after publication of the IPO prospectus, and to different recipients. As a result, monitoring the consistency of all IPO-related disclosures is of vital importance.

2.76  The Prospectus Regulation introduces a number of new rules that are of particular relevance for IPOs and IPO-related disclosure. In particular, the revised disclosure requirements in relation to risk factors, the description of the use of proceeds, the contents of the prospectus summary, and the inclusion of a profit forecast in an IPO prospectus are likely to have an impact on European IPO practices. How big that impact will be remains to be seen.(p. 48)